Fighting trade-based money laundering

Fighting trade-based money laundering
Fighting trade-based money laundering

Trade-based money laundering exploits the international trade system with the intention of transferring value and obscuring the true origins of illicit wealth.

Trade-based schemes vary in complexity. But usually they involve the misrepresentation of the price, quantity, or quality of imports or exports as they transit across borders or through supply chains. Financial institutions may become implicated in trade-based schemes when they settle, facilitate, or finance international trade transactions. This could be done, for example, through the processing of wire transfers, provision of trade finance, and issuance of letters of credit and guarantees.

Trade-based laundering is known to be growing in both volume and global reach. Although it’s widely recognized as one of the most common manifestations of international money laundering, trade-based laundering appears to be less understood among academics and policymakers than traditional forms of money laundering through the international banking system and bulk cash smuggling.

Complexities of this method

The potential is vast for criminal organizations and terrorist groups to exploit the international trade system with relatively low risk of detection. Key traits of international trade have made it both attractive and vulnerable to illicit exploitation.

For instance, the enormous volume of trade flows can obscure individual transactions and provides abundant opportunity for criminal organizations to transfer value across borders. There can also be a complexity associated with foreign exchange transactions—which can involve multiple transactions—and recourse to diverse financing arrangements.

Posing additional challenges are the complexity that can arise from the practice of comingling illicit funds with the cash flows of legitimate business and the limited recourse to verification procedures or programs to exchange customs data between countries. Most customs agencies have limited resources available to detect illegal trade transactions.

This leaves much of the detection to the private sector, using software and related approaches. As money launderers exploit legitimate trade finance activities to launder ill-gotten funds, anti-money-laundering/counter terrorist finance profiling systems can help keep an open eye to all suspicious activities related to this economic sector.

Let’s review examples of some suspicious activities banks must watch for.

Multiple trade-based laundering methods

Money laundering through over- and under-invoicing of goods and services is one of the most commonly used methods for laundering funds across borders.

By invoicing a product or service below market value, an exporter can shift funds to the importer because the payment to the exporter is less than the value that the importer receives when the goods are sold at market value.

Similarly, by invoicing a product or service at a price higher than market value, the exporter transfers value from the importer. That’s because the payment to the exporter is greater than the value the importer receives when the product or service is sold at market value.

Both types of transactions generally require collusion by both parties and can have significant tax implications.

Also, complex products and products that travel through supply chains are more apt to be used in these types of over- and under-invoicing activities because they complicate the ability of customs officials to determine the true market value of such goods and services.

The United States is combating trade-based laundering in a number of ways and finding first and foremost the use of specialized systems that have predefined and flexible rules and scenarios work well to monitor suspicious activities. These types of systems detect and counter different types of suspicious activities. For instance, customers who deal with trade finance activities can be grouped and targeted by these special rules and scenarios.

Another gambit used is multiple invoicing of particular goods or services. By providing multiple invoices for the same transaction, a money launderer or terrorist financier can justify multiple payments for the same goods or services. In addition, by using a number of financial institutions to make these multiple payments, a money launderer or terrorist financier can increase the level of complexity of the transaction and complicate efforts at detection.

If the transaction is detected, a launderer can offer a number of plausible explanations that compound difficulties in detecting the activities.

In addition to these invoicing manipulations, there are other manipulation approaches that can occur. Instead of gaming the payments side directly, criminals may engage in over-and under-shipments of goods and services. The money launderer can misstate the quantity of goods and services that are exported or imported.

In fact, the exporters and importers can collude in not shipping any goods at all—but they still proceed with processing the necessary shipping and customs documents. Financial institutions may be unaware that these “phantom” transactions are occurring.

Another variation: Falsely describing goods and services where money launderers at the same time misstate the quality or the type of product or service being traded. Such a misstatement creates a discrepancy between the value of a product that is stated on the shipment or customs forms and what is actually shipped.

How automation can help

Critical differentiators to look for when evaluating risk-based approaches entail the use of automatic integration of customer risk scores with actual transactional behavior. This approach needs to incorporate a flexible and advanced customer/account risk scoring functionality; a customer/accounts grouping and peer grouping capability; a suspected connections application; and an advanced rules and scenarios library that covers all suspicious financial business and activities.

Banks must also be able to adhere to the changing regulations and laws in international transactions through easy-to-configure rules. An automated and customizable detection and case workflow needs to have escalation and delegation options. A system that can perform background checks through leveraging partnership with the recognized data providers can help.

Having a comprehensive inventory of information is key. Institutions’ investigators need easy access to all data that is already in the core banking system, along with other extra information registered in the bank’s Know Your Customer application—data which may not be available in the core banking system. Users must be able to easily extract any search results in the form of a report and be able to generate a wide variety of reports based on any filtering criteria needed.

How private sector can help stop proliferation

Engagement and partnerships with the private sector to prevent proliferation of the practices described is the most critical element to success—and should be the first line of defense against trade-based laundering.

There are some national and international initiatives to come up with new methodologies and techniques to help and engage the private sector to stop proliferation through their supply chains and financial activities.

Many initiatives including laws, regulations, and best practices from national and international governments and non-governmental bodies have been raised recently. Naturally, with these initiatives, the awareness of all economic sectors and related entities has been fortified and developed. The reason behind this is mainly escalated terrorist financing, proliferation, and money laundering trends globally.

All economic sectors and business activities should be covered with these laws, best practices, awareness campaigns, and guidance, as they may be implicated unintentionally—whether directly or indirectly—in facilitating those proliferation attempts. Also, governments should facilitate and enable implementation of non-proliferation programs and compliance implementation.

The main objective of this global trend is to protect international trade from being exploited by money launderers and other criminals. Financial institutions and firms involved in logistics and the supply chain can help governments stop proliferation by installing effective compliance frameworks and monitoring programs.

Compliance with laws, rules, and regulations are not enough. Governments must develop means of effectivity working with the private sector. This may include facilitating the sharing of information and inquiries with other related entities such as competitors and governments through solid partnerships.

Using advanced intelligence tools and trustworthy and reliable sources of information can be very useful as well, especially for background checks on customers and related parties. Public/private partnerships will contribute to more efficient anti-proliferation efforts, including attempts to stop financing of weapons of mass destruction.

Devastating results of trade-based laundering

Beyond the motive of laundering, these criminal activities can impact legitimate trade.

Trade-based money laundering can have a more destructive impact on legitimate commerce than other money laundering schemes. While trade-based laundering appears to be less understood than traditional forms of money laundering through the international banking system, the volume of global trade and the value of such transactions can result in substantial consequences for international commerce and government revenue.

ICE HSI (U.S. Immigration and Customers Enforcment/Homeland Security Investigations) has stated that transnational criminal organizations may dump imported goods purchased with illicit proceeds at a discount into a market just to expedite the money laundering process. This below-market pricing is a cost of doing business for the money launderer and puts legitimate businesses at a competitive disadvantage.

Such acts can create a barrier to entrepreneurship, crowding out legitimate economic activity. It also robs governments of tax revenue due to the sale of underpriced goods, and reduced duties collected on undervalued imports and fraudulent cargo manifests.

About the author

Hasan Zebdeh, CAMS, is senior product development manager, compliance at EastNets. Hasan Zebdeh has almost ten years of banking, compliance, and financial crime prevention experience. He also served as a regional regulatory compliance assistant for the United Nations.

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