May 24, 2012
Anonymous U.S. Shell Companies Facilitating Wildlife Crime, Arms Trafficking, Drug Smuggling, and Terrorist Financing – Explains GFI’s Tom Cardamone in Written Testimony Submitted to Committee
GFI Managing Director Tom Cardamone testified before the U.S. Senate Committee on Foreign Relations on May 24, 2014 at a hearing titled “Ivory and Insecurity: The Global Implications of Poaching in Africa.”
GFI also issued a media advisory about the hearing which is available here.
Mr. Cardamone’s full testimony is available for download as a PDF here. It can also be reviewed on Scribd (below).
The full text of his testimony is additionally available in HTML format below.
Written Testimony Before the
United States Senate
Committee on Foreign Relations
Global Financial Integrity
Ivory and Insecurity:
The Global Implications of Poaching in Africa
May 24, 2012
Thank you Mr. Chairman, Ranking Member Lugar, and members of the Committee.
I appreciate the opportunity to appear before you today to make the connection between illegal wildlife trafficking and national, as well as global, security. Global Financial Integrity is a Washington, DC-based research organization that is focused on the secrecy inherent in the global financial system and the facilitating role it plays in tax evasion, money laundering, and corruption and the threat it poses to the security of all nations.
Ivory poaching, like all forms of illegal wildlife trade, is a profitable business. Indeed, the U.S. State Department estimates the market price of poached ivory at $400 per pound. Global Financial Integrity recently estimated the global value of the illicit trade in all forms of wildlife, excluding fishing, at between $7.8 and $10 billion. In recent years, organized crime syndicates, militias, and even terrorist elements have taken notice of the profits that can be made in the illegal trafficking of wildlife, generating an alarming up-tick in the scale of the industry and posing serious national security concerns for the United States and our partners.
Low Risks, High Profits
In comparison to other forms of transnational crime, the risks and penalties associated with the illegal poaching and trafficking of wildlife are small. In many countries, poachers and traffickers face little more than a small fine and a couple of months in prison if caught, while penalties for drug trafficking can result in the death penalty.
On the other hand, rhino horn can now rival cocaine and gold in value by weight, making it an extremely lucrative business in which to engage.
In the wake of the September 11, 2001, terrorist attacks on the United States, actions taken by Congress and the Administration to target terrorist financing nearly eliminated the proliferation of shell banks and decapitated Al Qaeda’s central command. This has forced the cash-starved organization and its affiliates to look for new sources of funding. Al Qaeda affiliates can no longer count on Al Qaeda central command to finance their operations; they must raise most of their funding on their own. The illicit trafficking of wildlife appears to be one of the ways a number of Al Qaeda affiliates have chosen to raise money to fund their operations.
Media reports indicate that two Bangladesh-based, Islamic terrorist groups affiliated with Al Qaeda, Jama’atul Mujahideen Bangladesh (JMB) and Harkat-ul-Jihad-al-Islami (HuJI), are raising funds for their operations via the illegal poaching of ivory, tiger pelts, and Rhino horns, among other things, in the Kaziranga jungle in northeastern India.
Last year, The Independent on Sunday, the British newspaper, and Vanity Fair separately reported that there is evidence that Al Shabaab, a Somali Islamist group with ties to Al Qaeda, has connections to the illicit poaching and trafficking of both ivory and rhino horn.,
Armed Groups, Militants and Insurgents
Several militias, armed groups, and insurgent groups have reportedly profited from illicitly poaching and trafficking wildlife in Africa and elsewhere.
Central and East Africa are home to wildlife populations, active smuggling and poaching operations, and ongoing conflicts. In some cases these converge. During its years of war with Northern Sudan, the Sudan People’s Liberation Army of what is now South Sudan is alleged to have poached “elephants with grenades and rocket-propeller guns.”
Sudanese militias, including the Janjaweed, are also reported to have engaged in the poaching of ivory for profit in Chad, Kenya, and elsewhere. , Further east, Somalia’s lack of governance makes it the perfect ground for smuggling of all kinds, and Somali poachers are allegedly engaged in significant poaching operations in Kenya.
In the war-torn Democratic Republic of Congo, the Congolese Army, the Rwandan Democratic Liberation Forces (FDLR) which led the Rwandan genocide in the 1990s, and the National Congress for the Defense of the People (CNDP) are all accused of participating in poaching in UN and INTERPOL reports.
Additionally, the Congressional Research Service (CRS) reports that Angola’s National Union for the Total Independence of Angola (UNITA) and the Mozambican National Resistance (RENAMO) were two more “militia or insurgent groups that were allegedly involved in wildlife trafficking” during conflicts in those countries.
Links to Drug Cartels
There are also possible ties between the illegal wildlife trade and drug traffickers. According to the CRS, much anecdotal evidence suggests that animal traffickers utilize similar smuggling routes as drug traffickers, particularly in Central and South America. The report stated the following:
“The United Nations reports that members of the former Cali drug cartel in Colombia and Mexican drug dealers have also allegedly smuggled mixed shipments of drugs and wildlife products into the United States. According to the Brazilian National Network Against the Trafficking of Wild Animals (RENCTAS), 40% of an estimated 400 criminal rings smuggling animals were also involved in other criminal activities, especially drug trafficking. The CITES Secretariat has also reported that combinations of parrots and drugs have been smuggled together from Cote d’Ivoire to Israel.”
Further, the former Medellin drug cartel was allegedly involved in the illegal trade of rare birds.
Shell Companies and Animal Trafficking
As organized crime, militias, and terrorist entities have become more involved in the illegal trade of wildlife in recent years, the use of sophisticated money laundering schemes to move their profits and shield the organizations from detection and prosecution are routinely detected. Illegally poached ivory from some 300 Zambian elephants was discovered by Singapore customs officials in 2002, and “investigations revealed a complex network of shell companies and pseudonyms used in procuring the ivory.” Not surprisingly, as of 2010, eight years after the ivory was confiscated, “no significant members of the network have been prosecuted.”
Likewise, an illegal shipment of elephant tusks was discovered in 2006 by Honk Kong customs officials, and INTERPOL indicates the paper trail led to another “interlocking web of shell companies.”
Further, the UN Secretary General noted in 2003 the high level of corruption, the involvement of organized crime and the heavy use of shell companies in the illegal trade of caviar. The Secretary General wrote the following:
“The caviar business exhibits most of the indicators of involvement of organized crime elucidated above. The level of violence and corruption are high, the trade is very well organized, there are numerous front companies, the schemes for circumventing restrictions are sophisticated and sometimes involve the use of intermediary jurisdictions, there are multiple shipments and the trade reaps large rewards that are either integrated with legitimate profits by front companies or used to acquire luxury goods.”
Moreover, the Secretariat of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) has highlighted “the establishment and use of fake or ‘front’ companies to distribute and market wildlife products” and noted that “various forms of wildlife crime lend themselves to money-laundering activities and, thus, will attract the involvement of organized criminal groups.”
Organized Crime’s Use of Shell Companies
The use of anonymous shell companies, often layered via multiple jurisdictions, is one of the most effective tools available to money launderers and organized criminals, obscuring the money trail and impeding law enforcement investigations. They are frequently used not just by wildlife traffickers, but also by American and foreign terrorists, narco-traffickers, arms dealers, corrupt foreign officials, tax evaders, rogue states, and other criminals, to easily launder their money.
Anonymous shell companies are utilized by the arms dealers who supply animal traffickers, militants and terrorists with weaponry. They are used by the corrupt public official who accepts kickbacks and bribes into his or her offshore account in order to look the other way as poachers illegally pillage their country’s natural resources. They are used by terrorists looking to clandestinely move their money around the world to finance their heinous crimes. They are used by rogue regimes, like Iran and North Korea, to circumvent international sanctions. They are used by drug traffickers like those in Mexico who have killed 50,000 people in their country in just the past six years.  Finally, they are used by tax evaders, who cost the developing world an estimated $1 trillion per year in illicit outflows. ,
Shell Companies in the U.S.
Unfortunately, lax regulation and disparate state statutes make the United States a breeding ground for anonymous shell corporations. It is estimated that nearly 2 million companies are established in the U.S. each year, and the vast majority of those companies are not required to provide any information—neither names nor addresses—about the beneficial owners of the firms. And by “beneficial owner” I am referring to a person, rather than a law firm or agent, which controls or benefits financially from the activities of the incorporated entity. This lack of information means that shell companies with hidden owners are opaque to law enforcement and tax authorities. It also means that when illegal activity is suspected, an investigation often run into dead-ends.
The Threat to U.S. National Security
Of course, this situation is ripe for exploitation by foreign and domestic terrorists, drug cartels, arms dealers, foreign kleptocrats, tax evaders and traffickers of all stripes. While most shell companies are likely to be involved in legitimate business, U.S. national security is left to chance because of our inability to tell the difference between an LLC created by a dentist in Texas from one set up by a government entity in Tehran.
Indeed, only after a long and expensive investigation was it discovered that the true owners of the property located at 650 Fifth Avenue in New York were, in fact, Iranian citizens who represented Bank Melli, the National Bank of Iran. The reason the investigation was delayed was that the individuals hid behind a partnership, which had, as one of its components, a shell company formed in New York which itself was controlled by an anonymous company set up in the island of Jersey.
Moreover, Viktor Bout, the so-called “Merchant of Death,” who provided arms to the Taliban, the FARC and to child soldiers in Sierra Leone, controlled at least a dozen shell corporations, which were registered in Texas, Florida, and Delaware. With benign-sounding names such as the “Central African Development Fund” or “Daytona Pools,” Bout was able to outwit and outrun law enforcement for decades until his recent arrest and conviction. 
Further, a recent report from the World Bank revealed that the United States was the locale of choice for corrupt foreign politicians establishing offshore shell companies to launder their money and gain access to the international financial system.
Non-Compliance: Money Laundering Lapses
It is also important to ensure that, when good laws are in place to counter money laundering, financial institutions are complying with the law. Recent reports have raised concerns that this may not be the case.
A recent study from the British government revealed that 75% of U.K. banks were not sufficiently complying with anti-money laundering (AML) regulations. There is no reason to believe the situation is any different at American banks. Indeed, major American banks have been found to be in violation of their due diligence requirements in recent years. In 2010, the U.S. Attorney prosecuting Wachovia for AML failures stated, “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations by laundering at least $110 million in drug proceeds.”
Last month, Citibank was fined by the Office of the Comptroller of the Currency “for failing to comply with a federal law that requires banks to establish protections against money-laundering,” and a special report by Reuters earlier this month alleged that HSBC’s U.S. subsidiary, HSBC Bank USA, was guilty of “apparent anti-money laundering lapses of extraordinary breadth.” The report claims that the “bank understaffed its anti-money laundering compliance division and hired ‘gullible, poorly trained, and otherwise incompetent personnel,’” it claims that HSBC USA “maintained accounts with ‘high risk’ affiliates such as ‘casas de cambios’ – Mexican foreign-exchange dealers – widely suspected of laundering drug-trafficking proceeds,” and it states that “in some instances, ‘management intentionally decided’ not to review alerts of suspicious activity.”
This shows a clear disregard for the law among many U.S. and international banks, and, although we live in a climate of fiscal austerity, it is important to ensure that U.S. financial regulators have the staff, funding, and resources necessary to adequately ensure compliance with the law. Congress should use its authority to increase the budgets of the nation’s financial watchdogs to make certain that they can do their jobs effectively.
As a member of the Financial Accountability and Corporate Transparency Coalition, Global Financial Integrity sent a letter to U.S. Treasury Secretary Geithner in September, asking him to conduct a study, as the U.K. has done, to determine how well U.S. banks are complying with their AML obligations. We have yet to have a response to that letter from anyone in the administration.
While there is no silver bullet in the effort to curtail the ability of rebel and militant groups, as well as criminal and terrorist entities, to launder illicit funds garnered from ivory trafficking and other crimes, Congress has an important role to play to address the problem. Senate bill 1483, the Incorporation Transparency and Law Enforcement Assistance Act, is bi-partisan legislation that would require companies to divulge the person or persons who own the firm and would require states to establish registries with this information, which could be accessed by law enforcement and tax authorities.
The burdens that this legislation would impose on the states are minimal, while the benefits to national security are significant. No longer would the likes of Viktor Bout or the National Bank of Iran be able to forestall investigations by shielding their activities behind multiple layers of shell companies.
While this legislation has some way to go before passage, it should be noted that it is heartily supported by the Department of Justice as well as the Treasury and Homeland Security departments. Additionally, the Obama Administration has included beneficial ownership as a core commitment of its Open Government Partnership Action Plan. Several law enforcement organizations also endorse the bill, including the Federal Law Enforcement Officers Association, the Fraternal Order of Police, and the Society of Former Special Agents of the F.B.I.
The Global Impact
Of course, one may question how a pending bill in Congress can have an impact on ivory poaching or other wildlife trafficking. As Assistant Secretary of State William Brownfield pointed out in February, “terrorist and insurgent groups have evolved into criminal entrepreneurs . . . engaging in illicit activities to finance their operations.” Organized criminal networks that do not have political agendas are even more pervasive and often just as violent. The way these groups are able to hide, launder, and funnel illicit funds is through layers of nominee trusts, partnerships, shell companies, numbered bank accounts, and other entities for which little, if any, information is known. By implementing the Incorporation Transparency and Law Enforcement Assistance Act, not only will the nation’s security be stronger, but the United States will have secured the moral high ground needed to encourage its allies to consider beneficial ownership registries as a new global norm.
For example, this past February, the Financial Action Task Force (FATF) in Paris concluded a review of its international anti-money laundering provisions. While great progress was made in some areas, FATF did not strengthen its rules on anonymous corporate vehicles. The new standards do not require the disclosure of the true beneficial owners of corporate entities when they are formed, leaving it instead as an option for each member state to decide. This was a lost opportunity to address a major loophole used by many criminal entities. A strong incorporation transparency law would indicate the U.S. commitment to solving this problem.
Additionally, the G8 nations have a mandate to coordinate efforts related to terrorist financing, money laundering and corruption. A subset of the G8 called the Roma/Lyon Group, which is comprised of law enforcement, intelligence and justice ministry experts, is specifically tasked with addressing terrorist financing, trafficking, and transnational crime. This group could be an effective advocate for global efforts to establish corporate registries. The benefit of a U.S. law requiring these registries is that it would have a clear influence on the future agenda of this group.
The primary point I would like to make today is that the mechanisms in the global financial system that permit laundering of illegal ivory proceeds and funneling of money to rebel groups are the same mechanisms used by Viktor Bout, drug cartels, and terrorist groups. Shell companies, secret bank accounts, and a host of other opaque entities create a structure that facilitates trafficking of all types, and adversely impacts U.S. national security and supports rebel groups. Addressing this challenge by creating corporate registries should be a priority for Congress.
Thank you again for this opportunity to address the Committee. I look forward to your questions.
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