On Sept. 26, the Financial Crimes Enforcement Network (FinCEN) signed a geographic targeting order (GTO) on businesses within the L.A. Fashion District. The GTO requires all businesses within the geographic area, “including their agents, subsidiaries and franchises,” to comply with additional reporting and record-keeping obligations for 180 days from when the order goes into effect. The GTO comes on the heels of a major law enforcement operation that revealed money-laundering activities in the L.A. Fashion District were tied to the Black Market Peso Exchange, or trade-based money laundering.
Early in the morning of Sept. 10, a law enforcement operation affectionately called the “Fashion Police” carried out search warrants for 50 small businesses within the L.A. Fashion District. The operation was conducted because Mexican drug cartels were suspected of using fashion-related businesses in Los Angeles for money-laundering activities, also known as the Black Market Peso Exchange.
Through this form of money laundering, a drug trafficker works with a middleman (in this case, businesses within the L.A. Fashion District) to use proceeds from their drug trade activities to purchase goods in the United States for Mexican importers. After receiving the goods, the importer sells them in Mexican markets and gives the proceeds to the Mexican cartels, minus a commission. This process effectively imports and cleans drug proceeds from U.S. dollars into Mexican pesos. As part of the sting operation, nine individuals were arrested and $90 million was seized, $70 million of which was in cash.
The GTO, which went into effect on Oct. 9, requires all covered businesses within the L.A. Fashion District to report cash transactions (or related transactions in a 24-hour period) in excess of $3,000. Failure to comply with the GTO could lead to criminal charges. Small businesses under the GTO will need to complete a FinCEN Form 8300 through the Bank Secrecy Act’s e-filing system.
The temporary requirements will assist law enforcement in stopping the Mexican drug cartels from laundering their illicit proceeds out of the United States. It will also help gather information to understand how large of an issue money laundering is in the area.
The following types of businesses are considered to be “covered businesses” by the FinCEN GTO:
- Garment and textile stores
- Transportation companies
- Travel agencies
- Perfume stores
- Electronics stores (including those that only sell cell phones)
- Shoe stores
- Flower/silk supply stores
- Beauty supply stores
- Stores bearing “import” or “export” in their name
Analyst Comments on Money Laundering
FinCEN is using the GTO to make a statement to businesses in the district that they are under surveillance. Due to their failure to report cash transactions in excess of $10,000, they are now required to report cash transactions in excess of $3,000. Authorities hope that these actions will help to stop the trafficking of illicit drug proceeds through business trade.
On the one hand, the GTO is very broad and places additional reporting requirements on businesses that have been abiding by the law; on the other, taking such a wide scope may reveal activities they were not aware of.
Financial Crime Prevention Strategist, IBM Security
Brooke Satti Charles is a Financial Crime Prevention Strategist within IBM Security. Her career has been focused on research and reporting of fraud, money la...