trade based money laundering

Why trade is the latest frontier in the war on money laundering

The battle against money laundering often feels like an extended game of “Whac-a-mole”. Crack down on one problem area and another one inevitably pops up elsewhere. Witness the rise of trade-based money laundering: as governments have got tougher on traditional money-laundering schemes, TBML has become ever more common. The NGO Global Financial Integrity warns that trade mis-invoicing has become “the primary means for illicitly shifting funds between developing and advanced countries”.

Criminal groups have become increasingly adept at using the perfectly legal flow of goods across borders – and the movement of funds to pay for them – to relocate dirty money. In the process, they establish a paper trail for the cash that gives it the legitimacy required to move it into the mainstream financial system.

TBML often makes use of sophisticated trade arrangements, illicit goods, falsified documents and mis-represented financial transactions, but a simple example illustrates how it works. Imagine, say, that a criminal group that wants to move £1m of illicit funds from China to the UK. The group colludes with an exporter in the UK – or even sets one up – and an importer in China. The exporter agrees to ship £2m worth of goods to China and invoices the importer accordingly; crucially, however, it only ships goods worth £1m. The importer then pays the £2m bill – it has then moved the criminal group’s £1m across jurisdictions and established a document trail to make the money appear legitimate.

Given the scale of global trade, it is extremely difficult for regulators and law enforcement agencies to spot such transactions. The international transaction banking association BAFT has described tackling TBML as akin to trying to find a “bad needle in a stack of needles”.

Many groups fear TBML is spiralling out of control. The International Narcotics Control Strategy Report has warned that TBML is now facilitating the laundering of hundreds of billions of dollars each year. In the UK, the Office of Financial Sanctions and Implementation says there are now hundreds of reported cases each year – and that a substantial proportion of the illegal funds now flowing through the UK are doing so via TBML.

There is no avoiding the fact that TBML is challenging to detect. The deceptions involved are often very subtle: shipping paperwork may be consistent with both sales contracts and with the goods actually shipped, so the illegitimate funds are obscured unless investigators appreciate the true market value of the goods. With hard-to-value goods, such as fashionable clothes or used cars, detection gets even more difficult.

Moreover, sophisticated criminals operate by mixing illicit TBML activities with legitimate business ventures; they ship goods through third countries, route payments through intermediaries, and seek to exploit lax customs regulations in certain jurisdictions, especially free trade zones. In the US, the Senate Judiciary Committee has described the possibility of missing TBML as “just a decimal point away”.

All is not lost, however. For one thing, despite the undoubted difficulty of identifying suspect transactions, regulators have pinpointed particular red flags to look out for. US Immigration and Customs Enforcement picks out payments to vendors by unrelated third parties, false reporting, carousel transactions where the same good is repeatedly imported and exported, unusual shipping routes, inconsistent packaging and double invoicing.

In addition, new technologies provide more powerful tools in the battle against money laundering, including TBML. Harnessing these tools increases the chances of enforcement agencies getting to grips with TBML – particularly if they can work with the banking sector to make the best of new technologies.

One example is distributed ledger technology. A paper just published in the US highlights the possibility of using a public ledger to create immutable records of global trade so that all parties, including enforcement agencies, can, in real time, simultaneously follow a transaction and track any suspicious changes. Such a ledger would require significant co-operation between the public and private sector, including the banking industry, but could be a powerful mechanism for detecting and preventing TBML.

Elsewhere, technologies such as artificial intelligence, natural language processing and analytics may prove invaluable. Trade generates significant documentation, but the data in the paperwork is typically unstructured and therefore difficult to analyse automatically via traditional tools. However, AI and NLP will increasingly provide better solutions.

The banking sector will certainly have a role to play but will need support from other agencies. In practice, banks often have limited visibility of the trade they are facilitating, particularly where they are not providing finance for a transaction; in trade where the bank’s only role is to process payments and settle the transaction, it may see no documentation at all.

Nevertheless, by building on existing know-your-customer practices, collaborating with third party agencies and exploiting new technologies, including analytics tools that identify unusual or irregular payments, banks can do more to help combat TBML. They will increasingly be expected to do so.