The Growing Concern Of Trade

Global trading companies have many things to worry about – political changes threatening borders, currency fluctuations, and now trade-based money laundering (TBML).  Once seen primarily in regulated industries such as law, real estate, and finance, money laundering is becoming increasingly common in global trade and supply networks.

At the beginning of December 2020, the Financial Action Taskforce, the intergovernmental watchdog for financial crime and terrorist funding released a report entitled FATF/Egmont Trade-based Money Laundering: Trends and Developments.  At a press conference to announce the report’s publication, FATF President, Dr Marcus Pleyer stated:

“Today’s report builds on earlier work and outlines ways to identify and tackle trade-based money laundering. This includes the use of better and closer public-private sector partnerships; detailed money laundering risk assessments; and the use of advanced IT systems to detect suspicious activity.

By taking these actions, countries can disrupt the underlying criminal business models that enables crime and terrorism.

Countries need to recognise the importance of this issue. This is about taking away the economic motives for serious crime, drugs and arms trafficking, environmental crime and much more. If countries take action, we can make money laundering through trade too risky, too complicated, and in the end unprofitable.”

The report cites that one criminal network was able to pocket $400 million over a few years through TBML.

According to the Financial Times, the UK Treasury and Home Office were also deeply concerned about TBML.  In its third “national risk assessment”, the sums involved in money laundering in all forms was “in the hundreds of billions of pounds annually”.  And they were in no doubt that TBML had become “a favoured . . . technique, which has increased since 2017”.

How TBML works

There are several ways criminal networks launder money through trade networks:

• Over and under-invoicing of goods and services – both the importer and exporter are complicit in the misrepresentation of the price of the good or service in order to transfer value.
• Over and under-shipment of goods and services – the quantity of the good or service is misrepresented, sometimes leading to ‘phantom’ shipments where nothing actually moves at all.
• Multiple invoicing - centres on the reuse of existing documentation to justify multiple payments for the same shipment of goods or delivery of services. Criminals or terrorist financiers exploit this further by reusing these documents across multiple FIs, making it difficult for one institution to identify it.
• Falsely described goods and services - the misrepresentation of the quality or type of a good or service, such as the shipment of a relatively inexpensive good, which is described as a more expensive item, or an entirely different item, to justify value movement.

In many cases, these methods are mixed, further complicating the transaction chain.

How businesses can get caught up in TBML

The report found that any business, from SMEs to large multi-nationals could become victims of TBML schemes.   Companies that exhibit one or more of the following factors could find themselves being investigated:

• “Rapid growth of newly formed companies into existing markets;
• Evidence of consistent and significant cash payments, including those directed towards previously unknown third-parties. These businesses may also receive unexplained third-party payments;
• Unnecessarily complicated and complex supply chains, involving multiple transhipments;
• Previously established companies specialising in one sector that unexpectedly pivot into an entirely unrelated sector. One example provided noted an IT company quickly established a foothold in the acquisition and distribution of bulk pharmaceuticals;
• Companies simultaneously involved in more than one unrelated sector.”

If your company has one or more of these “business indicators” it is imperative that you conduct and document money laundering due diligence policies and procedures and that all your employees, agents, and distributors are trained to do so.

TBML due diligence practices

While most TBML involves shell companies, legitimate businesses and/or people working for them have been unwittingly caught up in illegal activities.  If you cannot show that your organisation has adequate anti-money laundering controls in place you and your business could face regulatory investigation and possible prosecution.  There is also the risk of reputational damage, smart sanctions, and being locked out of trade routes.

The first step to creating due diligence policies and procedures is to work with a legal team to develop a TBML risk-based assessment.  As with your cyber-security risk assessments, this should be a live project; criminals change tactics constantly and your risk assessments must encompass new threats.

Creating a documented compliance framework which is communicated throughout the organisation will provide evidence that your business has fulfilled its legal requirements to look out for and report suspicious activity.  Keep a close eye on invoices, shipping documents, packing lists, and bills of lading.  And above all, ensure everyone connected with trade, distribution, and supply has the confidence to question anything that looks out of place or does not make commercial sense.