Trade-based money laundering (TBML) is a growing risk, as seemingly legitimate transactions are exploited by criminal groups to launder funds and finance terrorist activity. In this two-part series, I will explore some recent studies on TBML, the challenges faced in countering the problem and some industry trends. However to set a context, we must first answer the question – what is trade-based money laundering?
In its simplest definition, trade-based money laundering is the process of disguising the proceeds of crime and moving value (i.e., movement of money) using trade transactions to legitimize their illicit origins. TBML involves the exploitation of the international trade system for the purpose of transferring value and obscuring the true origins of illicit wealth. TBML schemes vary in complexity but typically involve misrepresentation of the price, quantity, or quality of imports or exports.
Two recent studies have provided a more in-depth analysis of the problem. The U.S. Government Accountability Office (GAO) published the results of a study on trade-based money laundering entitled “Countering Illicit Finance and Trade: U.S. Efforts to Combat Trade-Based Money Laundering”. This study, together with the U.S. Department of Treasury report entitled the 2018 National Money Laundering Risk Assessment, identify TBML not only as one of the most used, but also as one of the most difficult to detect methods of money laundering. Criminal organizations (from organized criminal groups to professional money launderers and terrorist financing networks) utilize TBML to disguise the origin of criminal proceeds by “integrating it into the formal economy” through trade transactions. The GAO Study goes on to say that “In addition to TBML, criminal organizations may also be involved in other trade-facilitated criminal activity, such as customs fraud, trafficking in counterfeit goods, or tax evasion.”
More recently, the G7’s Financial Action Task Force (FATF) and the Egmont Group released a joint study which recognizes the criminal abuse present in trade transactions while raising the understanding of trade-based money laundering. Money laundering continues to be a significant concern – both in the U.S. and globally – because it facilitates and disguises the proceeds of crime, can alter markets, and have broader implications on financial systems. According to the joint study, TBML is “one of the primary means that criminal organizations use to launder illicit proceeds.”
As the U.S. Department of the Treasury notes, “Trade can be inherently complex and complicated, reflecting the nature of interconnected supply chains stretching around the world,” not to mention the sheer volume of international trade. Trade is also highly adaptive, giving criminal organizations ample opportunity to infiltrate and even use legitimate channels to launder the proceeds of crime, finance terrorism, and evade sanctions. Criminal organizations will exploit any sector, any commodity or service.
Typical TBML common techniques include:
- False reporting on invoices, such as commodity misclassification, commodity over- or under-valuation.
- Repeated importation and exportation of the same high-value commodity, known as carousel transactions.
- Commodities being traded that do not match the business involved.
- The over- or under-valuation of goods on the invoice and other documentation.
- Over- or under-shipment of goods or services (also, phantom shipments).
- Shell companies or offshore front companies.
- Third-party intermediaries facilitating invoice settlement.
- Illicit cash integration in financial settlement.
- Misuse of existing trade chain to move funds for terrorists (evasion of sanctions / financing of terrorism).
The Black Market Peso Exchange is a good example of a more complex scheme of TBML used by Central and South American drug cartels to launder drug proceeds generated in the United States. Both FATF/Egmont joint study and the GAO Study provide detailed examples for various techniques and methods in their reports.
In my next post, I will focus on the challenges faced in countering the TBML problem and some of the recent industry trends.
To learn more about how FICO can help you fight financial crime visit www.fico.com/anti-financial-crimes.