US law enforcement strategies to combat organized crime threats to financial institutions

Author:Thomas P. Ott
Position:Criminal Division, Organized Crime and Racketeering Section, US Department of Justice, Washington, DC, USA

Purpose – This paper seeks to identify the internal threats posed to financial institutions by international organized crime (IOC) groups, and outline relevant law enforcement strategies. Design/methodology/approach – Case studies and historical data from several US law enforcement agencies were relied on to identify the IOC threats, and to provide a subjective description of a... (see full summary)


In 2008, a spotlight was cast upon perhaps the most notorious “enemy insider” of our time – Bernie Madoff, the Chairman of a prominent Wall Street investment firm, and a former Chairman of the NASDAQ Stock Exchange. Over a period spanning at least 15 years, Madoff operated a Ponzi scheme responsible for bilking investors of billions of dollars1. His fraud devastated individual lives around the world, and further weakened public confidence in our financial institutions at a time of economic crisis ( Frank et al., 2009 ). Yet, the impact of international organized crime (IOC) groups – due to their inherent conspiratorial nature and reliance on violence and the corruption of gatekeepers – pose an even greater threat to the stability and integrity of our financial institutions.

The evolving threat

Historically, the greatest organized crime threat to the USA has been the Italian-American Mafia, also known as La Cosa Nostra (LCN). For decades, the corrupt influence of the LCN plagued various sectors of the US economy. In 1969, the US Congress found that organized crime, especially the LCN, posed “a new threat to the American economic system” because of its “extensive infiltration of legitimate business.”2 Likewise, the President's Commission on Organized Crime (PCOC) expressed concern in 1984 that the money-laundering activities of the LCN and other organized criminal groups had become a significant threat, stating that the members of the commission had “become increasingly dismayed by the virtual impunity with which organized criminal enterprises and their members and affiliates launder the proceeds of their illegal activities through financial institutions in this country and abroad 3”. Such findings gave rise to the adoption of several new tools and strategies to assist law enforcement's efforts to combat organized crime4. After years of persistent multi-agency investigations and prosecutions, the organized crime program proved to be extremely successful – mobsters were indicted, convicted and imprisoned, their assets were seized, and ultimately, the LCN was severely weakened5.

While the LCN remains a threat in certain US cities6, IOC groups have steadily emerged over the past two decades to pose new, and continually evolving, threats to the USA and its foreign partners. The International Crime Threat Assessment published by the White House in December 2000 observed that:

The dynamics of globalization […] particularly the reduction of barriers to movement of people, goods, and financial transactions across borders, have enabled international organized crime groups to expand both their global reach and criminal business interests. International organized crime groups are able to operate increasingly outside traditional parameters, take quick advantage of new opportunities, and move more readily into new geographic areas.

Since the end of the Cold War, organized crime groups from Russia, China, Italy, Nigeria and Japan have increased their international presence and worldwide networks or have become involved in more transnational criminal activities. Most of the world's major international organized crime groups are present in the USA Executive Office of the President, 2000 .

More recently, the US Attorney General further described the breadth of the threat, stating that:

[T]he United States faces a new and more modern threat, from international organized crime. We can't ignore criminal syndicates in other countries on the naive assumption that they are a danger only in their homeland, whether it is located in Eurasia, Africa, or anywhere else. International organized crime poses a greater challenge to law enforcement than did the traditional [Italian-American] Mafia, in many respects. And the geographical source of the threat is not the only difference. The degree of sophistication is also markedly different ( Mukasey, 2008 ).

Organized criminal networks operating globally have become increasingly sophisticated in penetrating financial systems, manipulating securities and commodities markets, harnessing cyberspace to perpetrate high-tech crimes, and carrying out numerous other schemes that exploit our financial institutions, and threaten the national security of the USA7. IOC in its highest form is far removed from the streets. These groups are highly sophisticated, have billions of dollars at their disposal, are highly educated, and employ some of the world's best accountants, lawyers, bankers and lobbyists8. Moreover, as they have become more advanced in their criminal operations, IOC groups have also adapted to the realities and opportunities of globalization, and have evolved from traditional hierarchical structures toward looser networks that are more flexible, mobile, and elusive ( US Department of Justice, 2008 ).

Money laundering: corrupt insiders and intermediaries

International organized criminals transfer billions of dollars of illicit funds annually through the US financial system ( Executive Office of the President, 2000, p. 52 )9. These criminals have demonstrated an extraordinary ability to overcome stringent anti-money-laundering controls to move illicit funds through financial institutions while disguising the source and ownership of the funds. To continue this practice, these criminal groups seek to corrupt financial insiders and intermediaries globally ( Lacey and George, 2003 ).

Financial institutions often have “enemy insiders” who compromise the system by knowingly facilitating money-laundering schemes or who are themselves involved in the schemes. Likewise, IOC groups routinely receive the assistance of business professionals to conceal the source and ownership of illicit funds by layering transactions through the formation of shell companies10, and other mechanisms needed to promote the laundering of funds.

The Bank of China scandals provide a vivid illustration of internal corruption. In 2001, the Office of the Comptroller of the Currency, a unit of the US Treasury Department involved in bank supervision, levied a $20 million fine on the Bank of China's New York branch for misconduct involving questionable lending and business practices which were designed to provide preferential treatment to customers who had personal ties to certain bank employees and managers ( Rosenthal, 2001 ). Only a few years later, a separate US criminal investigation led to the conviction in 2008 of three former managers of the Bank of China's Kaiping sub-branch on charges of RICO, money laundering, international transportation of stolen property, as well as passport and visa fraud. Evidence presented during the trial established that the former managers were members of a criminal enterprise, which operated globally as part of an elaborate scheme responsible for the laundering of more than $485 million embezzled from the Bank of China over a 13-year period. The former bank managers created a number of shell corporations in Hong Kong and funneled the bank's stolen money into these companies, as well as numerous personal bank and investment accounts. Assisted by other members of the enterprise, the former bank managers then laundered the proceeds through financial institutions and casinos in the USA11.

The Bank of New York (BNY) case is another example of money-laundering schemes involving corrupt insiders and intermediaries12. In 2000, Lucy Edwards, a BNY'S Vice President, along with her husband, Peter Berlin – both Russian émigrés and naturalized US citizens – were convicted of charges involving money laundering, operating an unlawful banking and money transmitting business, and aiding and abetting Russian banks in conducting unlicensed banking activities in the USA. During the three-and-a-half years, Edwards and Berlin were involved in the illegal operation, approximately $7 billion flowed through the BNY accounts they had established to third-party transferees around the world. Berlin and Edwards teamed in their illegal scheme with two Moscow-based banks that offered to move money for clients without regard to the source or ownership of the funds. Access was gained to electronic banking software, which allowed Russian banking collaborators to make thousands of wire transfers on their own ( Lacey and George, 2003 ; US Department of Justice, 2008, pp. 272-3 ).

A similar case is that of Garri Grigorian, a Russian national living in the USA who helped launder more than $130 million on behalf of the Moscow-based Intellect Bank and its customers, through bank accounts in Sandy, Utah13. Grigorian and his co-conspirators set up two US shell companies and then opened multiple bank accounts for those companies in Utah. Once those accounts were opened, Intellect Bank used them to conduct US dollar wire transfers on behalf of their clients. In total, there were more than 5,000 of these wire transfers in a little more than two years.

Criminals have evolved in recent years to a more complicated version of the same money-laundering scheme. The current trend for criminals and their intermediaries who establish shell corporations in the USA is to open bank accounts for those corporations in offshore jurisdictions where customer identification requirements may be less rigorous. However, these corporations are still able to gain access to the US financial system if the foreign bank has a correspondent account at a US financial institution. On the surface, it appears as though wire transfers are being made to further foreign trade with a US...

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