Trade-Based Money Laundering — Ways to Detect & Prevent TBML

International trade is huge; in 2016, world merchandise exports were valued at US$ 15.46 trillion and the growth rate is projected over two percent annually. Unfortunately, this also creates an environment that’s rife for abuse – trade-based money laundering (TBML) accounts for hundreds of billions of dollars of illegal money flows annually.

With sums of that magnitude, it’s no surprise that TBML is highly sophisticated. And, as it hides its activities amongst massive volumes of legitimate trade, it’s difficult to uncover. Techniques such as under- or over-invoicing, falsifying documents, and misrepresenting financial transactions, are difficult to trace as they can involve multiple parties, jurisdictions and transactions.

Additionally, true value is often difficult to set accurately. Is someone overpaying on purpose to hide illicit funds or is that what they think its worth? Consider artwork; as art is so subjective, how could authorities prove that the price paid was to hide funds, if everyone involved is in on the scam? Only 35 out of 220 jurisdictions have Anti-Money Laundering (AML) rules that specifically deal with art or antiquities.

Of course, there are many other avenues for TBML. What is the proper price for a dress; $30? $300? $3000? Compliance officers assigned the role of uncovering TBML face a distinct lack of information for specifics that can help determine accurate pricing. Even if more information about the quality of the product is available, it’s difficult for compliance officers to be experts in the pricing vagrancies of multiple industries.

Complicating the matter is the lack of shipping, import/export, and customs information that would help compliance teams assess the risk of a transaction. They are not privy to the same information that Customs and Border Protection (CBP) has. Due to privacy and confidentiality considerations, some jurisdictions don’t allow sharing information across borders — even within the same institution. In addition, 80 percent of trade activity is so-called open account trade, which is not documentary-based, thus offering no banking documentation to help make determinations.

As in other areas of compliance, there’s trade-offs between allowing the free flow of commerce with ensuring that steps to effectively counter TBML are taken. After all, no one wants to unnecessarily burden legitimate trade but we can’t accept unfettered TBML. What’s a compliance officer to do?

Know Your Customer

While the tactics needed to properly vet against TBML require more extensive analysis, fortunately the overall strategy is well-known – or more precisely Know Your Business (KYB), as we are talking about business entities. Note that the second step of KYC is to understand the nature of the client’s activities.

In regards to pricing, you can collect information from your business clients about the product range and pricing during the due diligence process. You can also research online to check the accuracy of the data. After you have completed gathering research, you can check transactions against that data to ensure they are in line with expectations.

It’s not only the clients themselves that you need to concern yourself with. Who are they doing business with? Third party due diligence policies, screening and processes (Know Your Customers Customer or KYCC) are necessary to mitigate your risk.

What is your company’s appetite for risk and what risk does that client pose for TBML? There are certain industries, such as used cars that pose a much higher risk for TBML, or certain countries that pose a higher risk. In these high-risk situations, enhanced due diligence procedures (EDD) are in order to fully check the background, ownership and business dealings of the client.

In higher risk situations, an actual on-site visit can illuminate more information about the nature of the client.

Combatting TBML

Other specific measures to combat TBML, as recommended by the FATF, include:

a) Assessing the adequacy of a bank’s systems for managing the risks associated with trade finance activities, including whether the bank effectively identifies and monitors its trade finance portfolio for suspicious or unusual activities, particularly those that pose a higher risk for money laundering.

b) Determining whether a bank’s system for monitoring trade finance activities for suspicious activities, and for reporting suspicious activities, is adequate, given the bank’s size, complexity, location, and types of customer relationships.

c) Sample testing trade finance accounts with a view to verifying whether the bank is meeting its

customer due diligence, record keeping, monitoring and reporting obligations.

d) Providing AML training to financial institutions’ global trade services departments and personnel.

Allowing financial institutions (FIs) to see more information from exporters, importers, shippers, and authorities would enable them to better perform due diligence and monitoring.

As TBML is so widespread, sophisticated, and cross-border, it’ll require coordinated international efforts from numerous agencies, regulators and FIs to successfully combat money laundering. With technological advances, such as distributed ledger technology, the capabilities to monitor complex, multi-part transactions are improving. If regulators across jurisdictions can formulate agreements for better information sharing and improve harmonization of cross-border data, dramatically reducing the scourge of TBML is a strong possibility.