Cash Based Businesses Still Exist

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Cash Based Businesses Still Exist

I was recently monitoring an online conversation on an AML Compliance blog between bankers with the following stated dilemma:

“Client is a tobacco broker and continually deposits approximately USD $1 million per week with us 80% or better in cash. We have checked him out and performed enhanced due diligence and we are still concerned about the volume of cash. What am I to think?”

Response:

“Well if you don’t feel comfortable with this, it might just be money laundering from street crimes or drugs.” (aka If it walks like a duck and quacks like a duck……yada yada yada)

I ‐ the lurker (and your editor) ‐ thought the question to be quite sincere and the answer to be harsh and flippant. So I took it upon myself to learn more about tobacco wholesaling business. I called many wholesalers in that city (whereby all of them are licensed and easy to find) and was surprised to speak to over 80% of those business owners. It seems that the margin in this line of business is only a few percent, and that in addition to collecting for the goods sold‐ the tobacco ‐ the wholesaler must also collect the taxes on the product at time of sale. Sometimes the tax amount collected can be from 300% to 800% of the cost of the goods, and must be paid to the government either daily or weekly. The bank may hold for funds available from a payment by check from 3 to 10 days. This lock on both the broker’s funds and the tax payments can cause the tobacco brokers to miss their deadline to make such tax payments and face penalties that are as high a 100%. Taxes are paid by the wholesaler ACH ‐ no checks accepted. Thus, there is a very strong set of incentives for the tobacco wholesaler to just receive payments in cash. While ACH would be great to get from the buyers ‐ any dispute ‐ any dispute of those funds will wreak havoc.

I posted the results of my research to the blog and got a very nice email from the woman who posted the original question, asking if I would be willing to document the research and send it to her, for a fee, for inclusion in the client file of her tobacco wholesaler.

The lesson here is that you just can’t sit at your desk or computer terminal and opine on a given business model ‐ one must get off their duff and do real research, in order to obtain the facts involved in a given case or circumstance. Remember what happens when you ‘ass u me’…

A good deed rewarded for a small amount of due diligence investigation to avoid jumping to conclusions. If you could benefit from assistance with due diligence issues in your organization, perhaps we can help?

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