How to Launder Money Through Marine Vessels

Written By: Geoff Kreller, CRCM, CERP

The best investigators catch criminals by thinking like one. It’s not known whether these masterminds have their own associations, conferences and webinars, but it feels like their ”industry” is incredibly sophisticated and coordinated in targeting weak points, high-reward/low-risk opportunities, and paths of least resistance to facilitate their illicit activities.

In the emerging era of artificial intelligence and automated algorithms, we might be losing the inherent ability to feel when something just isn’t right at a time where that sensation might be needed most.

While not an exhaustive list, we have provided a list of examples (not to perpetuate the next generation of money launderers and criminals) to highlight cases where a manual review might be warranted.

1.       The vessel’s purchase price is significantly lower than the estimated value.

If someone wanted to transfer $200,000 worth of drugs (or needed a payment for some other illicit activity) and their counterparty had a vessel valued at $500,000, they could sell that vessel for $300,000 and leverage the remaining equity as payment for the illegal transaction. The sale of the vessel looks like any other transfer of title to another party (and one that looks like a great deal for the boat buyer), however, the sale of the vessel masks the true exchange in the transaction.

2.       The vessel’s purchase price is significantly higher than the estimated value.

Flipping the first example around, someone could trade a $500,000 vessel and $200,000 worth of illicit goods for $700,000. The sale otherwise looks normal (and one that looks like a great deal for the boat seller), however, this type of exchange could also mask an underlying transaction.

The boat seller could use the proceeds to pay off the boat, and their illegal activity is compensated through the remaining sale amount.

3.       The vessel’s loan is paid off by one or more non-affiliated third parties.

In addition to identifying cases where the vessel is being chartered inappropriately (which may be prohibited by a lender’s loan agreement), third party payments from non-affiliated persons and accounts should be reviewed to determine the relationship between those parties and/or the reason for those payments.

Third party payments could indicate the loan was actually made to a straw buyer and an unknown owner is making the payments on (and/or have control of) the vessel.

Third party payments can also present a way to launder money back to a cartel with proceeds from the sale of illicit goods, cleaning the money through the repayment of the loan and future sale of the asset.

4.       The vessel has transferred ownership multiple times in the last 12 months.

Boat owners often keep their vessel for 10 years or more, though that can range significantly between 3 and 20 years depending on a variety of factors[1]. Quick vessel ownership transfers (or “flips”) should draw additional scrutiny and due diligence, including the actual condition, value and existence of the vessel itself.

Faster turnover could be an attempt to make cash look legitimate by buying and selling large assets or could represent a designed tactic to inflate the asset’s value.

5.       The buyer’s profile does not match the vessel and/or lifestyle.

It’s possible for a 25-year old first-time boat buyer with no experience out on the water to buy a $2 million yacht, but it might be worth conducting additional due diligence to understand the nature of the transaction. These reviews may include income verification, asset verification (including recent large transfers for down payments or liquidity), vessel verification (a physical survey from an independent party), or employment verification.

Inconsistencies and the buyer’s resistance to participate in verification measures should be scrutinized. If a prospective borrower balks at signing an IRS 4506-T (which allows an institution to retrieve the actual tax filings for the last four years), or a bank’s authorization to release information, it may be prudent to walk away from the transaction.

It’s important to note that straw buying/selling can also be used by boat dealers who need to give the appearance that inventory is moving to ensure that their floor plan lending stays available.

Summary

Automated algorithms and models do not have the instinct to recognize when a transaction is too good to be true and instead require specific programming and logical rules to flag transactions for further analysis and review. The examples above are very real – they happen within every major asset market from real estate to art – and they do not represent an exhaustive list of the ways someone could facilitate illegal activity through such a sale.

To protect your business and the marine industry, it’s crucial that your employees recognize how boat sales and lending could be leveraged to launder money from illicit activity, and to escalate transactions that feel off, even if they can’t quite put their finger on why.

Follow NAQF and Geoff Kreller on LinkedIn for additional insights. For more information on how NAQF can help your organization with anti-money laundering or fraud training, contact us at contact@naqf.org.

Article References

[1] https://www.boatbrands.org/average-length-of-boat-ownership/