Suspicious Endorsed/Third-Party Checks Negotiated Abroad

In Issue 6 of The SAR Activity Review ? Trends, Tips & Issues, information was provided about monetary instruments negotiated abroad by suspected money launderers or other criminals and then cleared through international cash letters.17 FinCEN is continuing to study these activities to identify and report vulnerabilities in the international cash letter process. The information that follows describe another type of instrument cleared through cash letters and used in money laundering schemes: the endorsed/third-party check.

An endorsed/third-party check is a check payable to someone other than the drawer who in turn transfers the check to a third party by endorsing the back of the instrument by writing ?pay to the order of? to name a new holder. This action transfers the instrument to a new holder who has the same legal rights as the endorser. The new holder of the instrument is then free to negotiate the check themselves, either by endorsing the check and depositing it into an account, or by exchanging it for cash at a financial institution (bank, money services business, hawala or other type of alternative remittance or underground banking system, etc.) The Uniform Commercial Code allows the transfer of one check to a new owner any number of times.

Many individuals, small businesses, and even some large enterprises have legitimate reasons for using third-party checks for their transactions, particularly in parts of the world where the financial services infrastructure is not as developed as it is in the United States and where there is high demand for the U.S. dollar. At the same time, there is a potential for abuse. Endorsed third-party checks have been used to commit fraud, money laundering, tax evasion and other criminal offenses in the United States and abroad. For example, such checks are commonly used in the black market peso exchange and in other currency black markets in the Middle East, Africa, and the Americas. Such practices are commonly encountered in cases that involve a range of criminal activities. For these reasons, as well as the risk of non-payment, the practice of accepting endorsed/third-party checks is avoided by many financial institutions overseas and even discouraged or disallowed in some jurisdictions. Similarly, when money exchange companies or other financial institutions accept endorsed checks, they often charge a commission of three to five percent to cover the risk of non-payment. In other cases, third-party checks may be accepted for collection only, which delays the payment for several business days.

Suspicious Activity Report narratives have indicated that U.S.-dollar third-party checks are being presented to banks located overseas, even though both the payee and payer appear unconnected to the area where these checks appear. Once negotiated, though, the checks become part of the international cash letter package sent to correspondent banks in the United States. Some of these third-party checks negotiated abroad and sent through the cash letter process might indicate one or more of the following crimes:

money laundering;
black market currency deals;
payment for smuggled or diverted goods;
tax evasion;
unlicensed/unregistered hawala/informal fund transfer business or settlement;
terrorist financing;
fraud; or
bribery/corrupt payments

It is a common practice of financial institutions to flag transactions that make little or no commercial or economic sense. Regulatory authorities encourage this practice as part of a risk-based Bank Secrecy Act compliance program. This does not mean that a single flag proves that illegal activity has been committed, facilitated or covered up through particular checks. Instead, flags alert bank officials and regulators that something may be wrong and that they should exercise due diligence to ensure that their institution does not facilitate illegal activity and does not increase the possibility of reputational, financial or legal risks. In such instances, customer identification programs and banking business rules are particularly useful to avoid these risks.

To assist financial institution employees in preventing and reporting illegal transactions, a non-exhaustive list of possible indicators of endorsed/third-party check abuse is listed below as a guideline. These are some of the suspicious activities identified in Suspicious Activity Report filings for endorsed/third party checks negotiated abroad:

Checks payable to payees with no local connection to the city, area, or country where the checks were cashed or deposited (i.e., not payable to a person, organization or business with a local residence, office or business address);
Checks for unusually large amounts (i.e. certain threshold amounts, such as $50,000), especially when they appear unrelated to a particular business;
Business checks from a bank based in a jurisdiction different from the residence of the payer where there is no apparent connection between the issuer and beneficiary of the check (e.g., an importer in South America pays an exporter in Europe or the United States with a check drawn in the Middle East);
Checks written for amounts just below the currency reporting requirement limits ($10,000), which are then cashed out;
Checks from a source flagged for previously submitting problematic instruments (e.g., forged signatures, stolen checks, fraudulently obtained checks, suspected money laundering, terrorist finance or other financial crime connected checks);
Checks that appear to have no legitimate commercial purpose;
Multiple endorsed/third-party checks used for the settlement of a single purchase or transaction;
Checks in foreign currency deposited in jurisdictions/areas known to be vulnerable to abuse;
Checks on which more than one type of handwriting appears for the original item (e.g., one for the amount and another for the date or payee);
Checks in the same name made payable to the same payee, but with different signatures on each check;
Checks made out to different payees, but bearing the same handwriting endorsing them;
Checks with the payee line left blank;
Deposits of multiple endorsed/third-party checks; or Checks dated five or six months before the deposit date.

Excerpted from SAR Activity Review Issue 7, page 11