WorldCity Business Magazine

(5-e) Miami Tradenumbers 2007: Gaming the tradenumbers

by Karen-Janine Cohen

As in the best detective novels, it was the details and discrepancies that led John Zdanowicz to uncover evidence of shady dealing. One such example: $29.35 razors purchased from Panama when the going price for similar imported products was about 9 cents.

Zdanowitz is a business professor not a crime investigator but, for over a decade, he has been a key player in documenting how trade can be subverted to disguise money moving from country to country often to bypass taxes and tariffs but also to launder money, as criminals look for ways to bring ill-gotten funds into the legitimate market.

In the early 90s, Zdanowicz, now director of the Jerome Bain Real Estate Institute at Florida International Universitys graduate business school, began studying pricing of imported and exported goods.

After sharing his thoughts with experts in the anti-money laundering field, he began looking at his data in a new way and understanding why some prices were way off. Money that is moved from the United States to foreign countries shields that money from both government scrutiny and taxes, he said.

Zdanowicz, now an expert in the anti-money laundering field, calculates that 6 -7 percent of U.S. imports and exports are mis-priced. That is, the prices for goods and services dont conform to market prices. His latest figures, for 2006, indicate that as much as $189 billion moved out of the U.S. in 2006 as a result of underpriced exports and over-priced imports. Last years numbers have not yet been analyzed.

Still, said Zdanowicz, those figures have increased since the late 90s when his calculations showed about 3 percent or 4 percent of trade goods were mis-priced. Zdanowicz, who releases annual numbers on his website www.InternationalTradeAlert.com, cautioned that his calculations dont distinguish legal transfer-pricing tax strategies that take place among subsidiaries of multinational corporations from schemes deliberately employed to move funds incognito from one country to another.

What was once Zdanowicz own esoteric specialty has now become a mainstream and routine focus of moneylaundering specialists. Pricing has come under increased scrutiny since the September 11 terrorist attacks as the government began racking all possible terrorist financing routes. People realized that money can be moved across borders in abnormal pricing and trade, Zdanowicz said.

That changed the whole focus on pricing. In 2005, U.S. financial regulators got together and collectively addressed the issue of banks paying closer attention to pricing when financing customers import and export transactions.

Mis-pricing is fairly straightforward. You can undervalue U.S. exports or overvalue U.S. imports. Both operations move money out of the United States, explained Zdanowicz. Lets say that someone wants to move ill-gained profits from the United States into Colombia. Cooking stoves could be purchased in the U.S. for $500 each, exported and invoiced at $75 apiece and then resold at their market price of $500 in Colombia. Under this scheme, if a company were to export 1,000 cooking stoves, the operation would result in a net transfer of $425,000 to the Colombian importer. Other real-world examples include machine guns exported to France for the price of $364 when their real cost is more than $2,000.

Zdanowicz has developed a program on his website to track the market price of virtually every product. The program is designed to help law enforcement and Customs arms of governments, as well as to banks, accounting firms and insurance companies, monitor pricing discrepancies. It is now in the beta-testing phase.

But mis-pricing in international trade doesnt always mean underlying illegal activity. It can also be used by people trying to pry funds out of their home country to avoid foreign exchange controls or taxes.

One example Zdanowicz gives involves a Venezuela resident moving capital into the United States. He under-invoices a shipment of 100 gizmos from Venezuela at 10 cents a unit when they are actually worth $100 each. He ships them to a relative in Miami who sells them for their true worth. With each sale, $99.90 moves from Venezuela to Miami.

Whether or not the under-pricing of imports or the overpricing of exports is done to conceal illicit activities, the U.S. government now expects banks which provide trade financing to importers and exporters to monitor prices of those goods more closely.

And that is a huge burden for banks, said Sepideh Behram, senior compliance counsel at the Washington, D.C.-based American Bankers Associations Center for Regulatory Compliance. For starters, she said, it can be tough to figure out the market price of an item that may sell for more in Los Angeles than in Chicago. Whats more, she said, bankers feel that the language in the guidelines lacks precision. The guidelines were developed by the Federal Financial Institutions Examination Council, a group comprised of the different agencies that oversee financial institutions.

For example, the guidelines say that banks should look for obvious over- or under-pricing. Our institutions often question what is obvious, Behram said. And the guidelines translate into more paperwork as well. Trade finance is always a risky area to deal with, she said. But the level of documentation you have to put around your customer is astounding.

Regions Bank vice president David Schwartz, who heads the banks international compliance section and who also serves as president of the Florida International Bankers Association, said it is ironic that the government collects the very same trade data it expects banks to find on their own. And even so, government data may not take into account commodity price fluctuations on the international market. The difficulty for banks is that the price could be one thing if you are importing a barrel of oil from Russia and something else if you are importing a barrel of oil from
Venezuela, he said.

Schwartz said that the next version of the guidelines, expected in 2009, could address banks concerns that regulators are well aware of. Meanwhile, importers and exporters also know that the government and banks are more closely scrutinizing prices said Mitchell Fuerst, a Miami attorney and managing partner of Fuerst Humphrey Ittleman, whose practice focuses on regulatory compliance.

The government went into a more serious investigatory mode when it came to export declarations, he said. Businesses involved in trade must take care to know who their customers are, he said, and watch for odd transactions such as the person buying the goods being different from the one who pays for them.

Still, pricing is not as heavily scrutinized as are other transactions, noted Thomas Cash, executive managing director of the Latin American and Caribbean business intelligence division at investigations firm Kroll, based in Miami. Whats more, he said, mis-pricing of international trade is too slow and intricate to be a heavy favorite of big-time criminals, such as terrorists or major drug operators.

It is not extremely fast and not extremely efficient when you want to move money for illegal gains and you want to move large amounts of money, said Cash. Its a lot quicker, he added, to fly the money out of the country in a private plane. One recently uncovered scheme, Cash said, featured
drug dealers packing cash into the walls of Mexico-bound tractor-trailers.

Yet international transfer pricing is likely to continue to draw scrutiny as governments worldwide try to bring more transparency to traditional banking transactions. If you clamp down on other areas of money laundering, money laundering finds a new venue, said Zdanowicz.

It remains to be seen what effect the guidelines will have on mis-pricing. Many unknowns remain. Murkiness still clouds who is actually mis-pricing imports and exports and why. The banking guidelines will bring only so much clarity.

Banks will only pick up on suspicious activity when trade financing in involved, but many importers and exporters dont need a letter of credit to complete a trade deal, Zdanowicz noted.

Yet if regulators bear down on the banks and the banks increase their due diligence, trade-based money laundering should decrease, said Zdanowicz.

Still, that will require an induistry-wide crackdown. No bank is going to do this analysis if a competitor doesnt do the same thing, he said. But that could change in a flash. The first big [trade-based] money laundering case against a bank will see banks get on the bandwagon.