The trade route to money laundering

One of the 17 Sustainable Development Goals of the United Nations is to “significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets, and combat all sorts of organized crime by 2030.” A major challenge is trade, which has increasingly emerged as a popular path for illicit fund flow.

Trade involves the exchange of goods and services across the domestic and overseas markets. Basically, any trade involves two parties: the seller and the buyer. Both have a support eco-system comprised of the banks and FIs, insurers, export credit agencies, tax auditors, mediators or facilitators of trade, and such others. But financing agencies—banks in particular—are the most prominent.

Considering the scope and opportunity for financing trade, there is a wide range of products available to both parties. Banks have always looked at trade finance as a lucrative area given the fact that it is primarily short-term and rewarding, meeting both liquidity and profitability perspectives.

Apart from the credit and country risks, trade financing comes with the risk of being used as a channel for money laundering. Banks are used as conduits in so many cases. Money laundering is essentially disguising the original, unscrupulous source and legitimising the same. What better way than trade? Using trade to legitimise the source is “trade-based money laundering”.

Trade finance is a double-edged sword. When used for genuine trade transactions, finance provides a safety net protecting the interests of both the buyer and the seller, but on the flip side, when used by the “wrong people,” it becomes a very effective way for money laundering and the international shift of illicit and ill-gotten funds. TBML is a process through which fraudsters and criminals use legitimate trade to cleanse their money earned illegitimately. Most of the time, the trade transaction is so well shrouded and supported by documents that the money laundering act goes undetected. Banks’ dealing with documents, and not goods per se, is well exploited by fraudsters. The majority of such trade-based money laundering happens in “open account trade,” where the financial channel is limited to only providing a platform for payment unless credit facilities are also provided.

TBML methods often involve misrepresenting the value of the goods--sometimes absurd like 12 pairs of men’s underwear for $739 and a rocket launcher for only $52. It is much easier to manipulate the value or price, particularly of services. In practice, TBML can be achieved through misrepresentation of the price, quantity, or quality of imports or exports.

TBML can occur in the following ways and their combination: Trade mis-invoicing (over-invoicing or under-invoicing), over-shipping or short-shipping, phantom shipping, shell companies, multiple invoicing, and black market trades. It can have devastating impacts on business and the economy. TBML erodes and destabilises the financial sector, causes collateral damage (reputational, operational, and legal), promotes crime and corruption, deaccelerates economic growth, and reduces productivity.

However, certain concrete actions can strengthen the combat mechanism:

• Increased knowledge and awareness through regular training interventions
• Sharing and discussing related case studies
• Enhanced due diligence, particularly when the goods shipped as per the invoice are other than those normally traded in
• Timely identification of red flags and reporting of suspicious transactions
• Scrutiny of the documents based on which invoices are raised for the supply, etc.

These are some of the red flags: inexperienced managers holding multiple positions, negative news in the market, volume-staff ratio, missing or vaguely written documents, new company but high trading, overuse of complex financial products, unusual shipping routes or patterns of trade, and activity surges after unusual periods of dormancy.

To conceal the origin and integrate the ill-gotten money into the economy, the anti-social elements resort to primarily three methods: use of the financial system, physical movement of money, and the trade route. Measures are in place to combat the first two methods and are proving effective; therefore TBML is being increasingly used.