Trade Based Money Laundering (TBML)

Overview

  • definition
    • the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins or their activities
    • contains lots of transactions
  • aim
    • is not the movement of goods, but the movement of money, which the trade transactions facilitate
  • trade process and financing
    • international trade involves a range of risks for the parties involved, leading to uncertainty over the timing of payments between the exporter and importer
    • the Wolfsberg Group notes approximately 80% of international trade processed by FIs is open account trading
      • “open account transaction” involves a sale where the goods are shipped and delivered before payment is due
    • TBML schemes frequently involve this method because financial institutions have a reduced role on the documentary collection process in the transaction

TBML Risks & Trends

Economic sectors and products vulnerable to TBML activities

  • details
    • a wide range of economic sectors are vulnerable to TBML, meaning both high-value, low-volume products (such as precious metals) and low-value, high volume products (such as second-hand textiles) can be exploited by criminals to launder the proceeds of crime
    • common themes conducive to TBML exploitation were identified
      • goods with wide pricing margins
      • goods with extended trade cycles (i.e., shipping across multiple jurisdictions)
      • goods which are difficult for customs authorities to examine
    • supply chains moving lower-value goods are most at risk to end-to end ownership by a criminal organization or Professional Money Launderer (“PML”) network
    • the set-up costs can be considerably lower than supply chains moving higher-value goods and may not attract the same level of scrutiny by authorities across the supply chain
  • examples
    • gold, precious metals, and minerals
    • auto parts and vehicles, including second-hand cars or luxury cars
    • agricultural products and foodstuffs
    • clothing and second-hand textiles
    • portable electronics (mobile phones, laptops, etc.)

Common TBML techniques

  • misrepresentation of the price of the goods
    • a mismatch in the invoice value and the fair market value
  • misrepresentation of the quantity of goods
    • a mismatch in the invoiced quantity and/or quality of goods actually shipped
  • fictitious trades
    • also known as ‘phantom shipments’, seller may not ship any goods at all, but simply collude with a buyer
  • multiple invoicing of goods
    • reuse of existing documentation to justify multiple payments for the same shipment
  • use of shell or fictitious companies
    • the exploitation of shell and front companies has become a key feature of many different types of ML activity
    • these companies are incorporated but have no significant assets or operations
  • black market trades
    • commonly referred to as “black market peso exchange arrangements”, this usually involves the domestic transfer of funds to pay for goods on behalf of foreign importer

Use of trade finance in TBML

  • trade finance is often used by money launderer as a channel that
    • moves the funds around
    • minimizes the cost and burden of funds used in trade
    • disguises the source of funds through banks
  • typical trade finance instruments
    • import/export trade loan
    • import/export invoice discounting
    • letters of credit (“L/C”)
    • financing for transactions under L/Cs

Challenges to Combating TBML

Overview

  • TBML is a complex form of ML
  • has low number of successful TBML investigations

Contents

  • lack of understanding and awareness
    • national authorities still only have a basic understanding of TBML
    • authorities increase the knowledge, but criminals seek new methods through the misuse of the international trade system
    • law-abiding organisations often only see a piece of puzzle
    • new technologies and the digitalisation of trade increase the speed of trade operations
  • domestic co-ordination and co-operation
    • is one of the fundamental pillars
    • a lack of collaboration between national authorities
    • de-prioritise investigations into ML
    • a lack of information sharing between national authorities
    • analyze and match large volumes of data from various sources
  • international co-operation
    • criminals use front companies registered in one jurisdiction and transfer funds and goods between others
    • internaltional co-operation in a timely manner
    • TBML take place transnationally
    • a lack of effective information sharing, how to provide information without significant delays
  • investigation and prosecution
    • ML is carried out by one group of criminals, while the predicate offences are committed by other criminals
    • ML activity and predicate offences may lack the sufficient expertise to investigate the associated ML activity
    • prosecution need to prove the laundered funds or assests are the proceeds of crime and that the defendant knew this
    • knowledge requirement to collect enough evidence is hard, especially if predicate offence was committed in another jurisdiction
    • often result in the procesution of predicate offences only, while TBML activity remains out of focus
  • challenges from the private sector perspective
    • FIs are often the forefront of the fight against ML, but criminals constantly improve their ML methods and the private sector has to keep pace
    • TBML is highly adaptive, it is difficult for FIs to prioritize resources and translate the latest insights into the business rules and compliance systems
    • involved FIs can see only a small part of the network
    • verfication of information when there is a lack of a public registry to promptly verify information
    • estimating the “fair price”, TBML using the over-/and under-pricing technique, FIs have only a vague description
    • the documentation provided to FIs is often in different formats and languages, which would be done manually and need additional time and resources
    • paying methods like letters of credit or documentary collection are often less vulnerable to TBML, money launderers may see open account trade as more attractive because the FI has limited oversight of the transaction

Red Flags

Categories and contents

  • customer red flags
    • uncommon transaction structure or overly complex transaction structure
    • significantly deviates from their historical pattern
    • refuse contact and communication with the authorized insititutions (AIs)
    • pay unusually high fees to the AI
    • unknown party whose identity is not clear
    • the transaction is not commensurate with known customer profile, structure or business strategy
      • this may be where the nature or type of goods shipped is not in line with the business nature of the customer - (e.g. a steel company that starts dealing in paper products, or an information technology company that starts dealing in bulk pharmaceuticals)
      • the customer has no experience in the goods in question, or the size or frequency of the shipments appear inconsistent with the scale of the customer’s regular business activities (e.g. a sudden surge in transaction size)
  • documentary red flags
    • high-risk countries or changes in the quality of the goods shipped
    • contract value is unusually high for a party
    • significantly amended letters of credit without reasonable justification
    • the description of goods on the transport documents (if any) cannot be linked to the document terms and / or the actual invoice
    • the customer re-submits a document rejected earlier
    • unusual codes or markings
    • the customer requests
      • an L/C without calling for a transport documents or documents evidencing shipment or delivery of goods
      • an amendment to a L/C removing the transport document or document evidencing shipment or delivery of goods as required in the original terms
    • the documentation appears illogical, fraudulent and/or improperly modified
  • transaction red flags
    • the transaction structure is designed to conceal information or make it difficult for FIs to obtain certain information or the true nature of the transaction
    • the transaction involves round-tripping or circular transactions
    • the method of payment appears inconsistent with the risk characteristics of the transaction
    • the transaction involves the use of front or shell companies
    • documents through unverified channels such as unauthenticated SWIFT message
    • the shipment does not make economic sense, takes an uneconomical shipping route, or the shipping route is unclear
    • the commodity is trans-shipped through one or more jurisdictions for no apparent economic or other logistical reason
    • the transaction involves the receipt of cash (or other payments) from third party entities that have no apparent connection with the transaction
    • the transaction involves an unusually high number of intermediaries
  • commodity red flags
    • commodity being shipped is designated as “high risk” for trade-based money laundering activities (e.g. precious metals and stones)
    • commodity being shipped appears inconsistent with the exporter or importer’s regular business activities
    • commodity is shipped to (or from) a jurisdiction designated as “high risk” for ML/TF activities
      • India for diamonds
      • Iraq, Afghanistan for military goods and weapons
    • significant discrepancies appear between the value of the commodity reported on the invoice and the commodity’s fair market value
  • vulnerable goods red flags
    • the transaction involves goods vulnerable to trade-based money laundering
      • gems
      • jewellery
      • cigarettes and other tobacco products
      • consumer electronics and home appliances
      • telephone cards and other stored value cards
      • precious metals
      • military goods and war material (such as arms, ammunition, bombs, missiles, sensor integration equipment, armoured vehicles, electronic equipment, laser systems, flying objects, tear gases and other irritants, certain components used for the production of arms and software developed for the use of war materials)
      • obvious dual-use goods, having regard to the “Dual-use Goods List”

Regtech in AML/CFT and Fraud Investigation

Technology

  • using
    • Robotic Process Automation (RPA)
    • Optical Character Recognition (OCR)
    • network / graph analytics and Artificial Intelligence (AI)
    • machine learning
    • Natural Language Processing / Generation (NLP/NLG)
    • cloud computing
    • facial / voice recognition
    • distributed ledger technology
  • takeaways
    • compliance has to use technology to keep pace with the new digital landscape
    • rule-based transaction monitoring - to ensure it is effective, the parameters and thresholds need to be regularly reviewed
    • machine learning is in development, FIs need to develop predictive risk-based patterns and cases
    • data analytics help to assess client and transaction data in their transaction monitoring
    • FIs should start collating good and complete static + behavioural data of their customers
    • terrorist financing - name screening is focused on detecting know terrorists but FIs should take a comprehensive strategy to detect signs of potential terrorism financing
    • investigation of CTF - monitoring alerts should pair traditional typologies with evolving knowledge about financing methods, social media, anonymized payment methods, etc.

Computer forensic

  • model
  • four main steps
    • data acquisition
      • from suspect hard drive
      • create image copies of suspect media
      • to ensure the integrity of the evidence (the HDD), a hardware will be used to prevent any writing and corruption
      • process of copying avoids risk of spoliation of the evidence
    • validation
      • in forensic workstation
      • authenticate image copies
    • investigation (analysis)
      • in forensic workstation
      • analyze content of suspect media
    • report
      • logical evidence file
      • document findings / examination process
      • deliverables
        • evidence report
        • log report
        • single-evidence custody form
        • examination protocol