What is Trade-Based Money Laundering?

In the intricate world of financial transactions, Trade-Based Money Laundering, or TBML has emerged as a sophisticated method for disguising the illicit origins of funds. We at KYC Hub have earlier discussed, understanding the money laundering mechanisms is crucial in mitigating its risks. This article comprehensively explores TBML, its impact, and the measures in place to counteract it.

What is Trade-Based Money Laundering (TBML)?

TBML or Trade-based money laundering is a complex form of money laundering that exploits the international trade system. It involves the manipulation of trade transactions to disguise the illicit origins of funds. This can be done through over-invoicing, under-invoicing, multiple invoicing, or falsely describing goods or services. The Financial Action Task Force (FATF) provides a detailed overview of TBML and its various mechanisms.

How Does Trade-Based Money Laundering Work?

Trade-Based Money Laundering involves a variety of techniques, each designed to manipulate trade transactions and disguise the illicit origins of funds:

• Over-Invoicing
• Under-Invoicing
• Multiple Invoicing
• Falsely Describing Goods or Services

1: Over-Invoicing

This method involves inflating the value of goods or services on the invoice more than what is being shipped or provided. For instance, a trader might declare a shipment of goods worth $1 million on the invoice when the actual value is only $500,000. The excess $500,000 can be moved across borders and claimed as legitimate earnings from the trade.

2: Under-Invoicing

Here, the value of goods or services shown on the invoice is less than what is being shipped or provided. For example, a trader might declare a shipment of goods to be worth $500,000 when the actual value is $1 million. The undeclared $500,000 can be sold off in the destination country, and the profits can be used to launder money.

3: Multiple Invoicing

This involves issuing multiple invoices for the same trade transaction. For instance, a trader might issue three separate invoices for a single shipment of goods, each declaring the shipment to be worth $500,000. This allows the trader to justify multiple payments for the same goods, thereby moving $1.5 million illicitly for a shipment worth only $500,000.

4: Falsely Describing Goods or Services

This involves misrepresenting the type or quantity of goods shipped or the services provided. A trader might declare a shipment of low-cost goods. These discrepancies in the declaration of actual cost could justify the movement of large amounts of money for a trade transaction that would not normally warrant such amounts.

The Role of Financial Institutions in TBML

Financial institutions play a crucial role in detecting and preventing TBML. They need to conduct thorough due diligence on their customers, understand the nature of their customers’ trade activities, and monitor trade finance transactions for signs of TBML. This includes looking for red flags such as over-invoicing, under-invoicing, rapid movement of funds between banks, and trade transactions that do not make economic sense. The Financial Crimes Enforcement Network (FinCEN) provides guidelines for financial institutions on detecting and reporting TBML.

The Impact of Trade-Based Money Laundering

Financial institutions play a crucial role in detecting and preventing TBML. They need to conduct thorough customer due diligence to monitor customers’ trade activities and transactions for any signs of TBML. This includes identifying flags such as over-invoicing, under-invoicing, rapid movement of funds between banks, and trade transactions that show anomalies.

For instance, if a financial institution notices that a customer is frequently involved in trade transactions where the declared value of the goods is significantly higher than the market value, this could be a sign of over-invoicing. In such cases, the financial institution should conduct further investigations to determine the occurrence of TBML.

Financial institutions also need to have robust compliance programs in place to ensure that they adhere to all relevant regulations and guidelines related to TBML. This includes training staff to recognize the signs, implementing effective transaction monitoring systems, and reporting suspicious activities to the relevant authorities.

Trade-Based Money Laundering Challenges

• Non-Documentary Trade Transactions: One of the most significant challenges in detecting TBML is the prevalence of non-documentary trade transactions. In such transactions, banks have limited information, often just basic details like names, addresses, and account numbers. With comprehensive transaction details, banks can validate the authenticity and flow of the trade, making it easier to spot TBML.
• Complexity and Volume of Global Trade: The sheer scale and complexity of global trade transactions further complicate TBML detection. Traditional methods, such as keyword filters and essential anomaly detection, often fall short as criminals continuously adapt and evolve their tactics. The massive volume of transactions makes it challenging to identify suspicious activities amid legitimate trade.
• Lack of Standardized Data and Information Sharing: Without a standardized format for recording and reporting trade-related information, financial institutions and regulatory authorities face challenges in identifying potential instances of trade-based money laundering (TBML). This lack of uniformity across countries, industries, and stakeholders involved in international trade transactions can be a significant hurdle.
• Limited Access to Trade Flows: In non-documentary transactions, banks typically have minimal insight into the underlying trade flows. This limitation is particularly problematic in international transactions, where banks may only have basic transaction instructions without detailed trade information.
• Evolving Techniques for TBML: Criminals are perpetually devising novel methods to exploit the trade finance system, as TBML techniques are undergoing rapid evolution. Financial institutions must remain informed about the most recent TBML trends and techniques in order to adjust their AML efforts accordingly.
• Technological Limitations: Many banks need more advanced technology and tools for effective TBML detection. The complexity of modern trade-based money laundering tactics often outpaces the capabilities of traditional detection systems, necessitating the adoption of more sophisticated solutions.

How Do You Detect Trade-Based Money Laundering?

Detecting TBML involves identifying various risk indicators, such as:

1: Structural Complexity

TBML frequently prospers in complex supply channels. Criminals exploit numerous intermediaries, subsidiaries, and business entities to integrate themselves into these intricate networks. This barrage facilitates the concealment of illicit funds within legitimate ones.

2: Discrepancies in Invoicing and Shipping

Attempts to manipulate trade transactions for money laundering purposes may be indicated by discrepancies between the declared value, quantity, or description of the products that are shipped and the invoices. These discrepancies may result from collusion among the parties involved in a transaction or the forging or alteration of documents.

3: Phantom shipments

Fraudulent shipping documents may be generated by criminals for products that were never transported. Then, they may employ these documents to conceal the source of the funds and transfer them across borders.

4: Misrepresentation of Products

The commodities that are being traded may be misrepresented by criminals. For example, pharmaceutical products, health supplements, and other substances may be used to conceal illicit substances. Consequently, the proceeds of such trade transactions are legitimised, and the illegal products are transported through legitimate trade channels.

How Does TBML Affect Financial Institutions?

Criminals employ TBML as a strategy to conceal the illicit origins of their funds by manipulating cross-border trade agreements. This presents a significant risk to financial institutions that are involved in the facilitation of these transactions.

TBML is accountable for a net loss of $9 trillion in losses between 2008 and 2017, as per this report. The reason TBML is successful is that it exploits the very structures that have been established to prevent fraud. Fraudsters manipulate documentation, customer/invoicing processes, and open trade accounts to conceal or obscure the illegitimate movement of money. This ultimately calls into doubt the fundamental foundation of our global financial security.

Institutions may face “de-risking” from correspondent banks, which involves losing access to critical banking relationships. This is often a reaction to the perceived risks of handling accounts that may be involved in TBML activities.

International Efforts to Combat TBML

Several international bodies are working to combat TBML. For example, the Financial Action Task Force (FATF) has developed guidelines for countries to detect and prevent it. These guidelines include recommendations for improving the transparency of trade transactions, enhancing the exchange of information between countries, and strengthening the capacity of financial institutions to detect and report TBML.

The World Customs Organization (WCO) and the International Chamber of Commerce (ICC) also provide guidance and training to help businesses detect and prevent TBML. For instance, the WCO has developed the Customs Enforcement Network (CEN), a global database that allows customs administrations to share information and collaborate on investigations.

Counteracting Trade-Based Money Laundering:

Countering TBML requires a multi-faceted approach:

1: Regulatory Oversight

Governments and international bodies need strong regulations to monitor and control trade transactions. For instance, the U.S. Department of the Treasury mandates financial institutions to report certain types of trade transactions.

2: Information Sharing

Effective information sharing between jurisdictions and agencies is crucial. For example, the Egmont Group of Financial Intelligence Units facilitates information exchange and cooperation between financial intelligence units worldwide.

3: Use of Technology

Advanced technologies like artificial intelligence and machine learning can be used to analyze trade data and identify patterns that might indicate Trade-Based Money Laundering.

At KYC Hub, we leverage these technologies to provide robust solutions for detecting and preventing it. For instance, our systems can analyze a customer’s trade transactions and flag any anomalies that might suggest over-invoicing, under-invoicing, or other similar signs.

4: Training and Awareness

Those involved in trade transactions, including businesses and financial institutions, need to be aware of the risks and how to identify potential red flags. The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers resources and training programs. At KYC Hub, we also provide training and resources to help our clients understand and combat trade-based financial crimes.

5: The Role of Trade Transparency Units (TTUs)

Trade Transparency Units (TTUs) are specialized units established by customs administrations and law enforcement agencies to detect and prevent trade-based crimes. TTUs analyze trade data to identify anomalies and irregularities that may indicate illicit activities. The U.S. Immigration and Customs Enforcement (ICE) has been a pioneer in the establishment of TTUs.

Conclusion

Trade-Based Money Laundering is a complex and pervasive issue that requires concerted efforts from governments, regulatory bodies, financial institutions, and businesses to combat. By understanding its mechanisms and impacts and implementing effective countermeasures, we can work towards disrupting this illicit activity and maintaining the integrity of our global trade and financial systems.

The fight against different types of money laundering is not just a legal obligation but a social responsibility we all share to ensure a fair and equitable economic landscape. At KYC Hub, we remain committed to providing the tools and knowledge necessary to combat this pervasive issue. Connect with us to know more.

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