Money laundering taints wine trade

Bucolic regions in the south of France represent the newest frontier for law enforcement and intelligence officials searching for dirty funds. Since 2008, thousands of people with alleged criminal connections have reportedly arrived in southwest France from eastern Europe, Hong Kong and mainland China to snap up vineyards to launder their money. European and Asian officials must take steps and curb this trend, including establishing trade transparency units to combat trade fraud.

In its latest annual report, the French anti-money-laundering unit, Tracfin, singled out Chinese, Russians and Ukrainians who buy vineyards, voicing concern that they might be using this type of investment to clean their ill-gotten gains. According to wine analysts, Chinese purchasers are one of the largest groups of vineyard owners in France and have been purchasing so many estates in the Bordeaux region that the local Chamber of Commerce reportedly has a help desk specifically for them.

Chinese nationals own as many as 50 wine estates and vineyards in the region, and there are reports of Chinese purchases in Burgundy. Russian investors are following suit, but according to wine experts, they prefer the Cognac region.

Global Financial Integrity, a respected organisation in Washington that monitors money laundering, reports a significant amount of illicit money leaving China and Russia, which partially explains these types of investments. According to its estimates, between 2000 and 2011 nearly US$4 trillion left China's economy, principally for tax evasion purposes, and between 1994 and 2011 over US$200 billion flowed out of Russia.

The vast majority of this tainted money was moved using trade-based money laundering schemes. According to Global Financial Integrity, developing countries are losing about US$100 billion every year to trade mispricing, which represents approximately 4.4 per cent of the developing world's total government revenue.

Typically, trade-based money laundering schemes involve invoice fraud and trade manipulation, principally via misrepresentation of price, quantity or quality of imports or exports. Specific tactics include over-invoicing, under-invoicing, double invoicing, and false invoicing. With these methods, large amounts of money can be moved while avoiding taxes, tariffs and customs duties, greatly complicating law enforcement efforts to follow the financial trail.

Purchasing vineyards is an excellent method to launder money. Reports have emerged of prospective vineyard owners in France offering to pay in cash, which should throw up a red flag. Moreover, the price of wine is never fixed; it is easy to over- or under-invoice. Paying in cash is not atypical; and perhaps best of all, it has all the trappings of high society.

According to Tracfin, foreign investors are buying wineries through multiple holding companies and complex legal structures involving tax havens and jurisdictions known for money-laundering. Often a legal French company is established whose shareholders include foreign shell companies, making it almost impossible to determine who actually owns the company or what the source of their money is.

What can be done to stop this trade abuse and money laundering? To their credit, the Chinese and Russian governments have begun to take money laundering more seriously and have increased efforts to curb illicit finance. China has now raised the issue of money laundering to the "national strategic level" in order to stop the massive flow of funds out of the country, according to Li Dongrong, deputy governor of the People's Bank of China.

In addition, on July 1 Russia's Vladimir Nechaev became president of the Financial Action Task Force, the pre-eminent international organisation combating money laundering and terrorism finance.

However, the law enforcement and intelligence community can do much more, including cross-border sharing of intelligence on companies, individuals and financial institutions facilitating these types of investments.

The issue of wineries speaks to a larger problem. Few jurisdictions worldwide have done much to counter this type of laundering, and even the Financial Action Task Force has failed to issue an international standard or guidance on it.

The most effective way of combating trade-based money laundering is to actively monitor export and import records of a commodity traded between two countries. Allowing for some recognised variables, the data should match, and any wide discrepancies could indicate trade fraud or corruption. Such anomalies could also be the back door to underground remittance systems and informal value transfer systems used by both money launderers and terrorists.

A number of countries - including several Latin American countries, the Philippines, and the US - have created trade transparency units and compare data in order to pursue those who abuse trade to launder the proceeds of crime. Ultimately, a global network should be created for data exchange between countries. France, China and the Ukraine should also create trade transparency units and start pursuing money-laundering suspects.

In addition, the Financial Action Task Force should issue a report on wineries and the methods employed to abuse the international financial sector. France's wine country is probably not alone; in all likelihood, well-known wine regions throughout the world, including in the US, Spain, New Zealand and Argentina, are being abused for illicit purposes.

Countries would be wise to get serious about sharing financial intelligence, bilaterally and via traditional international channels.

Wineries represent the tip of the iceberg when it comes to abuse of the international financial sector. Just as the financial system has become global, so too has the threat posed by tainted money. In confronting this threat, the system is only as strong as its weakest link.

Avi Jorisch is a senior fellow at the American Foreign Policy Council and a former US Treasury official