While money is typically laundered through the financial system and physical cash flow, it may also be laundered through the commerce system through the physical movement of products, known as trade-based money laundering, and it is frequently used to conceal criminal gains.
Recently, the FATF, in collaboration with the Egmont Group, published a paper on Risk Indicators Related to Trade-Based Money Laundering. The indicators are based on a sample of data obtained by the FATF and the Egmont Group of FIUs as part of the Trade-Based Money Laundering study. These Risk Indicators, which were updated in March 2021, can assist public and private institutions in identifying suspicious activities related to trade-based money laundering.
Money Laundering Techniques Based on Trade
Listed below are several techniques frequently utilized by criminals in order to engage in money laundering through trade-based activities.
Over-Invoicing and Under-Invoicing of Products and Services
An exporter can transfer value to an importer by invoicing an item or service below market value. In contrast, the exporter earns value from the importer by invoicing over market value. These arrangements are only made when the importer and exporter agree to collaborate in order to transfer economic benefit. The same corporation might potentially own them.
Multiple Billings for Goods and Services
Money can be laundered by creating several bills for the same international commercial transaction to justify multiple payments for the same shipment of goods or delivery of services.
Over- and Under-Shipment of Services and Goods
A money launderer might inflate or deflate the number of items transported or services offered. Goods may not be transported at all in some situations.
Falsely Described Products and Services
It is also possible to launder money by disguising the quality or kind of an item or service. For example, an exporter may send a low-cost item while falsely billing it as a more expensive item or something altogether different.
Types of Risk Indicators for Trade-Based Money Laundering
According to a recent joint analysis by the FATF and the Egmont Group, there are three key risk indicators for trade-based money laundering:
- Indicators of structural danger.
- Indicators of trade document and commodity risk.
- Risk indicators for accounts and transaction activities.
Structural Risk Indicators
Indicators of structural risk include:
- Exceptionally complicated and irrational organizational arrangements, such as the use of shell corporations formed in high-risk areas
- The entity is registered at a home address and does not conduct regular commercial operations.
- The absence of a company's web presence.
- The owners appear to be disguising the beneficial owners since they lack managerial experience.
- The entity has a history of being engaged in illegal investigations in the past.
- Staff numbers do not correspond to trade volume.
- There are times of rest that are unclear.
- Trade activity contradicts the claimed line of business.
- Complex commercial transactions involving dozens of new unconnected third-party brokers.
- Using shipping routes that are not under established business norms.
- Using financial instruments in an unusual or unduly sophisticated manner.
- Exhibiting unusually low-profit margins, such as reselling commodities at a loss.
- Commodity purchases that surpass the entity's financial capability.
- A newly established firm participates in high-volume, high-value trading.
Indicators of Commodity Risk and Trade Document
Among the risk indicators associated with trade papers and commodities are:
- Contracts, bills, or other trade papers include inconsistencies, do not make business sense, or have ambiguous descriptions of the items exchanged.
- Inadequate trade or customs paperwork to substantiate transactions.
- Contracts underlying sophisticated or routine trade transactions look unusually simple.
- An inconsistency between imports and exports and overseas bank transactions.
- The use of fake papers.
- Commodity shipments are routed via various jurisdictions without explanation.
Account and Transaction Activity Risk Indicators
Account and transaction activity risk indicators include:
- A commercial entity makes last-minute adjustments to the transaction's payment arrangements.
- The number and value of transactions do not correspond to the claimed company activity.
- An account has high-volume transactions that move quickly and a tiny end-of-day balance.
- Payment for imported goods is paid by a party other than the receiver.
- Cash deposits or other transactions that are regularly barely under-reporting criteria.
- A spike in transaction activity followed by a period of inactivity.
- Extraordinary payment behavior in the industry.
- Payments are routed via many nations before arriving back in the place of origin.
Using TBML Risk Indicators for Trade-Based Money Laundering Detection
TBML risk indicators can be used as a tool for identifying potential instances of money laundering through trade activities. By analyzing patterns and anomalies in trade transactions, financial institutions and regulatory authorities can identify suspicious activities that may warrant further investigation.
TBML risk indicators can be used to flag transactions that involve high-risk products or countries, unusual pricing or invoicing structures, repeated transactions between the same parties, or unusual shipping or transportation routes. By monitoring these types of indicators, financial institutions can better understand their exposure to TBML risk and take appropriate measures to mitigate it.
Additionally, TBML risk indicators can be used in conjunction with other AML tools, such as customer due diligence, transaction monitoring, and sanctions screening, to create a more comprehensive approach to combating financial crime.