As controls for money laundering are evolving, criminals find new ways to transform the financial proceeding of crime into legitimate funds. One of the most common global money-laundering strategies exploiting the weak sides of cross-border trade with Trade-Based Money Laundering (TBML).
Trade-Based Money Laundering takes advantage of trade systems complexity, mostly international contexts where the involvement of multiple parties and jurisdictions make CDD processes and AML checks more challenging. TBML mainly involves the export and import of goods and the exploitation of a variety of cross-border financial instruments of trade. The most frequent TBML methods including:
Over-invoicing: Submitting inflated voice to the importer by the exporter, payment generation exceeding the value of the shipped goods. Greater value is transferred from the importer to the exporter.
Under-invoicing: Submitting the deflated invoice to the importer by the exporter, shipping goods with higher value and transferring that value to the importer.
Multiple-invoicing: Multiple times the shipment is being invoiced to the importer by the exporter, transferring greater value from the importer to the exporter.
Over/under-shipment: Exceeding goods shipped by the exporter to the importer and transferring greater value to the importer. Or, the exporter shipped fewer goods than agreed, transferring greater value to the exporter.
Quality misrepresentation: Deceiving importers about shipped goods to that they are higher quality to authorities by transferring greater value to the exporter.
To combat TBML, firms must seek to strengthen their AML/CFT controls in trade finance and correspondent banking. Unfortunately, the complexity of those sectors causes many firms to struggle to adjust their AML programs efficiently. That TBML is often hidden amongst legitimate trade activities, stretched across different organizations and jurisdictions adding to challenges that firms face in detecting it.
Information Sharing: To overcome the difficulties that TBML poses, firms must look beyond their own AML provisions and seek coordination with organizations, law enforcement agencies, and government authorities. Even more, banks and financial institutions must share their TBML discoveries and analyses because:
•Information sharing makes it easier to identify global criminal infrastructure and addressing specific examples 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 focus on regulatory alignment.
The wider the regulatory perspective on TBML, the more efficient for individual corporations can work to prevent it. International authorities, including Financial Action Task Force (FATF) issues advice and guidance to aid financial institutions to detect and address TBML. Aimed at local authorities, the FATF Trade-Based Money Laundering Practice Guidance focused on raising private-sector awareness of the need for trade finance AML policies and on educating banking supervisors on TBML weaknesses in their AML/CFT programs.
The FATF provides 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 with unusual traffic of goods handled by a particular importer or exporter.
•Shipments routed through a number of nations or multiple unconnected subsidiaries without a concrete reason.
•Payment methods are inconsistent with the level of risk presented by the transaction.
•Shipment of goods is typically at a high risk of money laundering.
•Transport of goods entering or leaving countries that are considered to be at high risk of money laundering.
•Shipments paid by cash.
•Shipments paid by third parties without an obvious connection to the transaction.
Examples of trade-based money laundering activities that should raise red flags including:
A letter of credit for a high-value cross-border import is revealed to hide unusual behavior when examined by the routing bank. Further investigation by the bank reveals missing and unrecognized documentation with agencies. The transaction gets rejected by the bank and returning the drawing documents.
The first beneficiary of a multi-million dollar letter of credit is given to supply medical goods for another country’s bureau of health; however, the second and ultimate beneficiary of the credit issues invoices not matching those submitted initially. 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 transaction got canceled and they’ve been adding the parties to their internal watch list by the bank.
Purchasing electronic goods with funds derived from criminal activities from shell companies — and selling goods to buyers in high-risk countries with minimum due diligence. Then, the proceeds are being directed back to the shell companies. The bank notices a number of red flags, and the shell companies are registered in countries unrelated to the transactions. The bank added all parties to its internal watch list.
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