Earlier this month, FATF-Egmont group has published a report which aims to help public and private sectors with the challenges of detecting trade-based money laundering. Report explains the ways in which criminals exploit trade transactions to move money, rather than goods.
Trade-based money laundering (TBML) is the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illegal origin or finance their activities. In practice, this may be achieved through the misrepresentation of the price, quality or quantity of imports or exports. The aim of TBML is the movement of money, which the trade transactions facilitate.
Trade can be inherently complex and complicated, reflecting the nature of interconnected supply chains stretching around the world. These are exploited by Organised Criminal Groups (OCGs), Professional Money Launderers (PMLs), and Terrorist Financing (TF) networks, to facilitate myriad types of financial flows, including the laundering of proceeds of crime, such as from drug trafficking; the financing of terrorism; and the evasion of sanctions.
Report indicates that criminals are continuing to exploit same TBML techniques as identified in the 2006 FATF study. These continue to be used for ML purposes as they are highly flexible and adaptable, despite changes in global trading patterns and the growth of new markets. These techniques are particularly effective when there is a complicit relationship between the importer and exporter, who are actively misrepresenting an aspect of the trade or the associated invoice settlement process. Below are the techniques described in the 2006 FATF study:
- over- and under-invoicing of goods and services;
- multiple invoicing of goods and services;
- over- and under-shipments of goods and services;
- falsely described goods and services; and
- black market peso exchange arrangements.
Just like techniques, same challenges to identify TBML remain to this day. However, there are additional, new challenges to identify TBLM including the growth in online businesses, restricting scope for proactive compliance activity, and new technologies and the digitalisation of trade processes, increasing the speed of trade operations.
The report notes the continued occurrence of third-party intermediaries, often as part of the financial settlement process. These third-party intermediaries, linked to the OCG, PML or terrorist financier, can quickly integrate into the transaction chain, creating additional distance between their activities and the TBML scheme.
While financial institutions were aware of the risks associated with third-party intermediaries, the report acknowledges that others in the supply chain, such as legitimate importers or exporters, or those with an oversight role, such as auditors or accountants, may not question why an entirely unrelated third-party is involved in the payment settlement process.
Report emphasizes that one of the best ways to detect and successfully disrupt TBML is to deepen one’s knowledge about all aspects of the trade process, including how different financing processes are managed. Countries should use national risk assessments and other risk-focused material to raise awareness with the public and private sector entities involved in international trade.
Prepared by legal assistant Vilius Neverdauskas