As anti-money laundering controls evolve, criminals find new ways to transform the financial proceeds of crime into legitimate funds. One of the most prevalent global money laundering strategies is to exploit the vulnerabilities of cross-border trade via Trade-Based Money Laundering (TBML).
What is Trade-Based Money Laundering?
Trade-Based Money Laundering takes advantage of the complexity of trade systems, most prominently in international contexts where the involvement of multiple parties and jurisdictions make AML checks and customer due diligence processes more difficult. TBML primarily involves the import and export of goods and the exploitation of a variety of cross-border trade finance instruments.
The most common TBML methods include:
- Over-invoicing: The exporter submits an inflated invoice to the importer, generating a payment that exceeds the value of the shipped goods. Greater value is transferred from the importer to the exporter.
- Under-invoicing: The exporter submits a deflated invoice to the importer, shipping goods with greater value and transferring that value to the importer.
- Multiple-invoicing: The exporter invoices multiple times for the same shipment, transferring greater value from the importer to the exporter.
- Over- or under-shipment: The exporter ships more goods than previously agreed to with the importer, thereby transferring greater value to the importer. Alternatively, the exporter ships fewer goods than agreed, transferring greater value to the exporter.
- Misrepresentation of quality: Goods shipped to importers are misrepresented on official documentation as being of a higher quality — thereby transferring greater value to the exporter.
- Information sharing between institutions makes it easier to identify the global criminal infrastructure and address specific instances of TBML.
- Law enforcement agencies are incentivized to join an information-sharing network if it is more likely they will be able to catch and stop criminal activity.
- Government authorities can use information-sharing networks to analyze TBML and better align regulatory focus.
The FATF also provides banks and financial institutions with a list of trade finance AML red flags to consider when managing cross-border transactions, these include:
- Significant discrepancies between invoices and the description of goods on official documents.
- Shipments much larger or smaller than the usual traffic of goods handled by a particular importer or exporter.
- Shipments routed through a number of countries or multiple unconnected subsidiaries without good reason.
- Payments methods inconsistent with the level of risk presented by the transaction.
- Shipments of goods typically considered at high risk of involvement in money laundering.
- Shipments of goods into or out of countries deemed to present a high risk of money laundering.
- Shipments that are paid for in cash.
- Shipments that are paid for by third parties with no obvious connection to the transaction.
Examples of trade-based money laundering activities that should raise red flags include:
- A letter of credit for a high-value cross-border import is revealed to contain anomalies when examined by the routing bank. Further investigation by the bank reveals missing and unrecognized documentation with the import agents. The bank rejects the transaction and returns the drawing documents.
- The first beneficiary of a multi-million dollar letter of credit is to supply medical goods for another country’s bureau of health; however, the second and ultimate beneficiary of the credit issues invoices which do not match those submitted by the first. The first beneficiary is revealed to have substituted invoices marked up by 300% and is additionally revealed to have a connection with the firm acting as the agent to the bureau of health. The bank cancels the transaction adds the parties to their internal watch list.
- Several shell companies purchase electronic goods with funds derived from criminal activities — and then sell the goods to buyers in high-risk countries with minimum due diligence. The proceeds are then directed back to the shell companies. The bank handling the transactions notices a number of red flags, and in particular that the shell companies are registered in countries unrelated to the transactions. The bank adds all parties to its internal watch list.