FRA Associate Director, Mihnea Rotariu and Manager, James Yoo recently attended a conference on Trade-Based Money Laundering (TBML) hosted by Terrorism, Transaction Crime and Corruption Center (TraCCC) at the Schar School of Policy and Government of George Mason University. TraCCC is one of the leading research-based centers in the US devoted to educate and help formulate policy on matters pertaining to TBML as well as other matters on corruption, transnational crime and terrorism.
The conference explored the complex topic of TBML, global trends on the efforts of banks, regulators and companies to identify and mitigate the risks associated with TBML, and potential recommendations to break the status quo on what appears to be a highly-vulnerable and under-assessed area of global trade. The discussions were led by numerous panels of speakers comprised of researchers, members of civil societies, regulators, and representatives of private-sector including bank professional in charge of financial crime, risk mitigation and sanctions.
Below are their key insights from the conference:
TBML, at its core, is a process of legitimizing ill-gotten gains by use of trade transactions. TBML is predicated on an illicit activity that generates the proceeds (such as from bribery, trafficking, counterfeiting, etc). The individual or group of complicit individuals then attempt to hide the origins of the proceeds by transferring the money, cross-borders, through layers of corporate entities and across different financial institution in a seemingly valid buyer-seller transaction. Various schemes that achieve this goal include, under or over-invoicing the value of goods between colluding importer and exporter, invoicing for delivery of phantom inventory, multiple invoicing, and misclassification and falsification of content of goods being delivered.
Prevention and detection of TBML is particularly challenging due to the scale of global trade and volume and frequency at which cross-border business transactions occur. It was estimated by Global Financial Integrity that illicit inflow and outflow to and from developing economies was on average, over 20 percent of total trade over ten years between 2006 and 2015. This accounts for more than a trillion dollars of trade activity.
It seems natural to look upon the compliance and investigative functions of financial institutions to mitigate TBML risks. This assumption is reasonable as there are statutory requirements for the banks to perform certain anti-money laundering and counter-terrorist financing assessments and report flagged observations via the Suspicious Activity Reports (SARs) to FinCEN. While useful in their own regard, when looking closer into the population of transactions, the bank’s monitor would show that only bank-intermediated financing transactions, which account for about 20% of all banking transactions, are supported with documents that would enable compliance officers to identify red-flags with regard to TBML. The remaining “open account” transactions, such as those transactions where banks are merely settling payments, have limited documentation and therefore even the most scrupulous compliance officer would not have enough data points to make determinations on the propriety of transaction, and execute entity resolution, both of which are important for assessing TBML.
U.S. Senator Bill Cassidy, M.D., (R-LA) stated in his speech that “Cartels and terrorists are moving billions of dollars unchecked to fund their violent organizations. Trade-based money laundering is America’s biggest national security threat that almost no one is paying attention to.” (…) “In order to solve this crisis, we need to bring it into the national conversation. This conference elevates the issue.”
Dr. Sharon Melzer, Strategic Policy Specialist at FinCEN, summarized the latest advisories published by FinCEN, including:
- Illicit Financial Schemes and Methods Related to the Trafficking of Fentanyl and Other Synthetic Opioids
- Email Compromise Fraud Schemes Targeting Vulnerable Business Processes
- Illicit Activity Involving Convertible Virtual Currency
- Financial Action Task Force-Identified Jurisdictions with Anti-Money Laundering and Combating the Financing of Terrorism Deficiencies and Relevant Actions by the United States Government – focused in particular on the Democratic People’s Republic of Korea (DPRK) and Iran
Mr. Brendan McMurrough, British Embassy, highlighted additional red flags that are applicable to outside of the United States, including: payments made by third parties, use of cryptocurrencies and service based money laundering.
Mr. Raul Aguilar, ICE/HIS, also identified certain TBML red flags from his perspective, including:
- Carousel transactions (Repeated importation and exportation of the same high-value commodity)
- No internet presence for the vendors
- Payments to vendors made in cash by unrelated third parties
- Packaging inconsistently with the commodity or shipping method
Each member representing different sectors of the market discussed the various challenges and uncertainties surrounding TBML and the approach they are taking to identify red flag indicators as part of their monitoring and screening process. Recommendation by the various organizations could be summarized in two general concepts:
- Reevaluate the traditional method of monitoring program to integrate trade elements in their recurring assessment of customer profile and transactions, such as a review of trade documents counterparties, shipping routes, line of business and market valuation of goods
- Promote interdisciplinary review across various stakeholders in the public-sector, private-sector and civic societies to share trends, observations, and industry best practices. The panel of regulators referred to the great success of Joint Money Laundering Intelligent Task Force (JMLIT) in the United Kingdom, which was a testament to the benefit of sharing knowledge between regulators and private sectors to develop high quality intelligence and execute coordinated effort for mitigation of economic crime
As the conference came to a close, the speakers on the panel provided their recommendations and guidance on tackling the emerging trends of TBML with a tone that was markedly imploratory. Given the ever-present and ever-evolving threat that TBML imposes on the global trade system, we need to re-think the way in which the banking industry, regulator, law enforcement and other stakeholders respond to the emerging risks of TBML.