Trade-Based Money Laundering

As anti-money laundering controls evolve, criminals are finding new ways to turn financial proceeds of crime into legitimate funds. One of the most prevalent money laundering strategies globally is to exploit vulnerabilities in cross-border trade through trade-based money laundering.

How does trade-based money laundering work?

Trade-based money laundering takes advantage of the complexity of commercial systems, especially in international contexts where the involvement of multiple parties and jurisdictions makes anti-money laundering controls and due diligence procedures more difficult. of the clientele. This mainly involves importing and exporting goods and exploiting various cross-border trade financing instruments. The most common whitening methods are:

• Over-invoicing: The exporter submits an inflated invoice to the importer, generating a payment that exceeds the value of the goods shipped. A higher value is transferred from the importer to the exporter.
• Under-invoicing: The exporter submits a deflated invoice to the importer, shipping higher value goods and passing that value on to the importer.
• Multiple Invoicing: The exporter invoices multiple times for the same shipment, thereby transferring greater value from the importer to the exporter.
• Over- or under-shipment: The exporter ships more goods than agreed with the importer, allowing them to transfer more value to the importer. The exporter can also ship fewer goods than agreed, allowing them to transfer more value to the exporter.
• Misrepresentation of quality: Goods shipped to importers are misrepresented on official documents as being of higher quality, which has the effect of transferring greater value to the exporter.

How can companies fight against money laundering?

To combat money laundering, businesses should seek to strengthen their AML/CFT controls in the area of ​​trade finance and correspondent banking. Unfortunately, the complexity of these sectors makes it difficult for many companies to effectively adjust their anti-money laundering programs, as many illegal activities can be hidden among legitimate business activities, spread across different jurisdictions and organizations, adds the difficulty that companies encounter in detecting it.

Information Sharing: To overcome the challenges posed by money laundering, businesses should go beyond their own anti-money laundering arrangements and seek to coordinate with other organizations, law enforcement agencies and government authorities. Specifically, banks and financial institutions should, where possible, share their AML findings and analysis because:

• Sharing information between institutions facilitates the identification of the global criminal infrastructure and the handling of specific cases of money laundering through commerce.
• Law enforcement agencies are incentivized to join an information-sharing network if they are more likely to catch and stop criminal activity.
• Government authorities can use information exchange networks to analyze money laundering and better align regulatory direction.

International focus: The broader the regulatory perspective on money laundering, the more effectively individual businesses can work to prevent it. International authorities, including the Financial Action Task Force (FATF), issue guidance and advice to help financial institutions detect and address commercial money laundering. Aimed at national authorities, the FATF guidance on money laundering through trade focuses on raising awareness of the private sector on the need for anti-trade finance policies and on training banking supervisors on the vulnerabilities of their systems in their AML/CFT programs.

The FATF also provides banks and financial institutions with a list of trade finance anti-money laundering red flags to consider when managing cross-border transactions:

• Significant discrepancies between invoices and description of goods on official documents.
• Shipments significantly larger or smaller than the usual traffic of goods handled by a particular importer or exporter.
• Shipments pass through multiple countries or through multiple unrelated subsidiaries without a valid reason.
• The payment methods are not compatible with the level of risk presented by the transaction.
• Commodity shipments are generally considered to pose a high risk of involvement in money laundering.
• Shipments of goods to or from countries considered to pose 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

Here are some examples of trade-based money laundering activities that should give rise to red flags:

• A letter of credit for a high-value cross-border import is found to contain discrepancies when reviewed by the routing bank. Further investigation by the bank reveals missing and unrecognized documents from import agents. The bank rejects the transaction and returns the drawdown documents.
• The first beneficiary of a multi-million dollar letter of credit must supply medical goods for another country’s health office; however, the second and last beneficiary of the credit issues invoices that do not correspond to those presented by the first. The first payee is revealed to have surrogate bills increased by 300% and is further revealed to have a connection to the company acting as an agent for the health bureau. The bank reverses the transaction and adds the parties to its internal watch list.
• Several shell companies purchase electronic goods with funds from criminal activity – and then sell those goods to buyers in high-risk countries with minimal due diligence. The proceeds of these sales are then donated to the front companies. The bank processing the transactions notices a number of red flags, and in particular that shell companies are registered in countries unrelated to the transactions. The bank adds all parties to its internal watch list.

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