Trade-Based Money Laundering (TBML) and Sanctions

Blog / Trade-Based Money Laundering (TBML) and Sanctions

Crime and trade are as old as human history. There is money where there is a trade and vice versa, and it is possible to laundry the funds obtained from the crime by transferring it to the pool. Trade, which began in the earliest periods of history in changing goods, has become widespread with increased communal life and contact with nearby geographies. The first long-distance trade is estimated to have started about 150,000 ago. In contrast, according to written sources, the first trade dates to 3,000 B.C. It is accepted that the Sumerians settled in Mesopotamia made long-distance trade with the Harappa civilization in the Indus Valley. It is also estimated that similar commercial activities were carried out in Egypt, Lower Mesopotamia, and China during the same period. With the development of water-resistant transport vehicles, opportunities to trade in more distant and vast waters have emerged. Egyptians and the Minoans made the first long-distance trade in the eastern Mediterranean region (Minoan Crete) and with the Phoenicians throughout north Africa. The first gathering areas other than religious and social activities, Barter was bazaars for exchanging goods.  

It was used for short-distance trades. Surplus of goods and building relations (exploration, war, tourism.) with people allowed more long-distance trade to be conducted. Long-distance trade, unlike short-distance trade, required more robust, resistant, and safer road vehicles. The dangers and uncertainties were increased with the distance. The risks on distant roads created the need for security and logistics. Traditions, customs, culture, and laws that were not so different in the short distance led to new ones. This situation brought the problem of disagreement. People who did not know each other had to understand each other, get along well and gain trust in one other to be able to trade with each other. New trade traditions and business methods showed up. For example, on credit, spot business, delivery at the door. New payment methods weren't written down. Promises were important. The need for written documents occurred as the trade between people who didn't know each other increased, and the methods used for trade started evolving. More complex trade planted the first seeds of rules. ICC-International Chamber of Commerce, a company with a mission of being a rule-maker and making trade worldwide easier, published rules. Some of these rules were about payments. Meanwhile, others were about contracts, trade dates, pricing, conflict resolution, and other areas. Trade and the movement of money started to get complicated. 

While this was what was going on on the commercial side, profits made by crime started increasing on the other side. Money that came from crime was trying to get sneaked into governmental documents, but states wanted to exclude them. Trade was a great place to sneak black money into the pool. Trade is not the only way to launder money but is an essential place in this regard. New methods and techniques are constantly being developed to launder money through trade. Some of these methods are; The money equaled to the difference between the price on the bill and the real price of a good is sneaked into the pool by using OverbillingThe money equaled to the difference between the real price of a good and the price on the bill is being tax evaluated using UnderbillingMultiple money transfers can be done with a single bill using Multiple Billing. Quality misrepresentation can be used to propose the quality of a good better than its actual quality to launder large amounts of money.  A large amount of money can be transferred to the pool with a bank commitment before paying for the goods. This method is called the red clause letter of credit. The price on the bill can be shown as a reserve using a presented letter of credit.

The digital print of money can be erased using revolving letters of credit. Standby letters of credit are used to launder large amounts of money by stating the trade failed to happen. A large amount of money can be laundered by saying the undertaking has not been fulfilled using a letter of guarantee. The methods used to launder money are not limited to these. They are given to put things into perspective. States, organizations, and authorities have been trying to prevent the laundering of proceeds of crime through trade (Trade-Based Money Laundering (TBML).  Some of their efforts are preparing proposals, doing business with cooperating countries, and excluding those who do not cooperate in worldwide AML Compliance from the financial systems, imposing embargoes/sanctions are used before. The ICC, BAFT, and Wolfsberg Group, which consider themselves heavy hands in this field, made one.

The study called "Principles of Clean Trade" became available many years ago, primarily the transactions of financial institutions and the world. It was a study aimed at making the worldwide trade clean with the support of the ICC, and a guide was made and published. The "Principles of Trade Finance" sets out standards that can be used to control the risks of financial crimes related to commercial activities. The financial crimes mentioned here are:

  • Bribe,
  • Corruption,
  • Financing terrorism,
  • Financing the proliferation of weapons of mass destruction,
  • Activities that violate the integrity of international finance,
  •  Money laundering activity derived from works such as human trafficking, tax evasion, and forgery,

Principles of trade finance state the role of financial institutions as;

  • To show the risks of financial crimes related to commercial activities,
  • Assisting in compliance with United Nations regulations on regional/national sanctions and the proliferation of weapons of mass destruction. 

"Trade Financing Principles" also includes the following topics;

Understanding the primary process, Risks Related to Financial Crimes, Risks, Risk Assessments, Enforcing Sanctions, Definitions, Sanctions, Embargoes, Enforcement of Compliance Rules, Challenges, Suggestions, Control Mechanisms, Customer Due Diligence, Screen Scanning Names, Financial Sanctions Based on Activity, Controlling Exports, Restrictions, Escalation Management, 3 Lines of Defense and Enforcement, Letter of Credit Payment Methods and Control Areas, Monitoring of Letter of Credit Transactions, Letter of Credit Transactions "Customer Due Diligence," Letter of Credit/Standby/Guarantee/Counter Guarantee/Open Account/Collection/Credits/Discount Transactions Activity Controls, Examining Transaction Information, Risks and Controls, Risk Indicators and BAFT's Control Chart.

According to Trade Financing Principles,  institutions must have an "Approach to Risk Management" to protect themselves. Each institution needs to know its customers and perform the "Customer Due Diligence'' and the "Activity Due Diligence" for each transaction it is involved in. Each institution has to establish its monitoring, alarm, and control mechanism and carry out effective monitoring and controls at periodic intervals and in alarming situations to protect itself from risks, major penalties, and losses and stay out of dirty trade. The publication of trade finance principles is a significant opportunity that protects themselves and their counterparts for institutions and individuals to do business without getting involved in dirty trade.

Benefiting from it depends on being aware and using it. Organizations should consider and apply these principles together with their risk approach policies. Individuals are also advised to create their own risk management at a level. These are not luxuries; they are necessities. Any situation that is not noticed and skipped is a severe risk to society. Again, not being aware is no excuse. Whether sanctions cover, a transaction is usually done through screen checks in the financial world. Screen controls are vital here. It is possible to identify the persons, vehicles, places, routes, roads, and workers under a sanction in a transaction with screen controls. For this purpose, the people and companies who install the control mechanisms must have a program that can make professional, up-to-date, and sufficient screen controls.

Abdurrahman Özalp | Foreign Trade Advisor and Chair of ICC Turkey Banking Commission


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