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Beneath the seemingly ordinary surface of global commerce, criminals have created an underground world of complex schemes, where legitimate business transactions serve as a smokescreen for their illicit activities. How can anti-money laundering experts stop the flow of illegal funds into the world of commerce?
Over the years, anti-money laundering controls have increased, but criminals are finding new ways to continue their fraudulent activities. One of the most common methods is to exploit loopholes in trade-based money laundering.
The growth of the global economy has made international trade an attractive sector for moving illicit funds via trade-based financial transactions. What's more, this method is not easy to detect by the relevant authorities, given the complexity of the movements and schemes used by criminals.
What is commercial money laundering?
Trade Based Money Laundering (TBML) refers to the process of concealing illicit products via commercial transactions in order to make them legal. TBML exploits loopholes in the international system to move funds and goods and integrate them into the global financial system.
Criminals generally use 3 steps to achieve this. First, the criminal introduces the proceeds of his illegal activities into the legal financial system. This can be done by over-invoicing to create an "artificial profit". Gambling or currency exchanges are also used to deposit money into the financial system in a less suspicious way.
Next, the criminal separates the illicit funds from their source by creating a series of transactions to conceal the owner of the funds (via false invoices, shell companies...). Its purpose is to place distance between the funds and its source.
The final step in the process is to integrate the laundered money into the global financial system. They can then invest the money without the relevant authorities noticing.
How do criminals use trade-based money laundering?
In 2006, the FATF described trade-based money laundering as one of the three main methods used by criminal organizations to move money in order to conceal its origin and introduce it into the legal financial world.
What's more, the complexity of international trading systems, or the involvement of several parties and jurisdictions (from high-risk countries) in particular, make controls against money laundering and the financing of terrorism more complicated, to the benefit of criminals. For all these high-risk countries (Iran, North Korea, Myanmar), the FATF calls on all members to step up surveillance and take countermeasures to protect the international financial system.
For example : The Black Market Peso Exchange is a more complex TBML scheme used in Central and South America by cartels to launder drug money generated in the USA. It is a trade-based money-laundering system that converts drug dollars into local Latin American currencies.
Criminals also take advantage of the world's free trade zones (3,000 in 135 countries) to launder the proceeds of crime and finance terrorism, given the relaxation of controls in these areas. These are designated geographical areas benefiting from special regulatory and tax treatment for certain trade-related goods and services.
What are some examples of trade-based money laundering?
Here are just a few examples:
1
Over- or under-billing : when you notice a difference between the price of the merchandise and the actual market price. Examples: 10 pairs of men's underwear for US$350 and a grenade for only US$42. Trade-based money laundering can be achieved by misrepresenting the price, quantity or quality of imports or exports.
2
Shell companies : the aim is to conceal the origin and destination of funds in TBML schemes. They are used to reduce the transparency of ownership in the transaction.
3
Multiple billing : multiple invoices for the same merchandise. Example: person A sells goods to person B. A will issue several invoices for the same goods to B. The money launderer can then make several payments and attach the invoices as proof.
4
Ghost expedition : the 2 parties agree to settle the documents indicating that the goods have been sold and the payments made, but in reality no goods have been dispatched.
5
Funnel accounts : is an individual or corporate account in one geographical area that receives multiple cash deposits, often for amounts below the cash reporting threshold, and from which funds are withdrawn in a different geographical area, with little time elapsing between deposits and withdrawals. These accounts are used by individuals seeking to move illicit proceeds following restrictions on US currency. The use of "funnel" accounts and TBML is a money laundering problem for both the US and Mexican governments.
What can be done to combat TBML?
To combat trade-based money laundering, companies need to increase their border and customs measures and regulations. They must also strengthen their KYC and AML processes to restrict commercial sectors where criminals are more likely to operate.
Trade compliance can mitigate criminal practices. Banks are increasingly asking their customers for supporting documents. Customers must be able to provide information on their supply chain and a series of documents if they do not want to get into trouble with their financial institution.
The sharing of information between different organizations is also fundamental to the dismantling of criminal associations. The FATF has already published several articles to help financial institutions deal with this scourge. The FATF has issued a list of warning signs, particularly in the management of cross-border transactions.
Here are a few cases in point:
Shipments transit several countries or multiple unconnected subsidiaries for no good reason.
Shipments of goods with a high risk of involvement in money laundering.
Shipments of goods to or from countries considered to present a high risk of money laundering.
Shipments paid for in cash.
Shipments paid for by third parties with no obvious link to the transaction.
The use of new technologies (including AI, machine learning) can make a considerable contribution to the fight against trade-based money laundering. They make it possible to automate a large number of manual processes, helping to effectively identify risks of financial crime.
In addition, these new technologies for combating money laundering and terrorist financing must be developed and implemented in a way that reflects the threats as well as the opportunities, ensuring that their use is compatible with international standards on data protection, privacy and cyber security. The use and improvement of these new technologies could help to reduce this scourge.
On the one hand, this would represent a financial investment for countries, but it could also mitigate money laundering in trade. Countries would be able to exchange automatic reports with each other, and vigilance against criminal organizations would be heightened.
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