- This article was written by Mista Roberts Howard, Senior Financial Crimes Investigator at Abrigo
Trade-based money laundering: The link to terrorist financing
March 22, 2023
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Understanding trade-based money laundering
Addressing the FinCEN priorities in your AML/CFT policy means knowing what steps to take to prevent trade-based money laundering and terrorism funding.
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Takeaway 1
Criminal organizations use trade-based money laundering in part because it is difficult to detect.
Takeaway 2
Terrorist organizations work cross-culturally to facilitate terrorist financing through TBML.
Takeaway 3
Strong transaction monitoring and customer due diligence practices are key to detecting trade-based money laundering.
Introduction
Terrorist financing enabled by trade-based money laundering
One of the most prevalent global money laundering strategies is to exploit the vulnerabilities of cross-border trade via trade-based money laundering. Trade-based money laundering (TBML) is commonly used to disguise the origin of illicitly obtained wealth, making it a popular strategy among terrorist organizations and sanctions evaders. It is also one of the most challenging methods of money laundering to detect. Criminal organizations use TBML because it is ubiquitous and adaptive, allowing them to move funds through legitimate channels—even financial institutions.
Awareness
What is trade-based money laundering?
Trade-based money laundering is the process of moving illegal funds through the international trade system to legitimize them. This can include the falsification of the price, quantity, and quality of imported or exported goods. A well-known example of a TBML system is the Black Market Peso Exchange, where U.S. drug dollars are used to purchase goods that can be sold and converted into local Latin American currencies.
One simple TBML method is to purchase goods with illicit or commingled funds and ship them to a recipient who can sell or trade them for legitimate funds. In more complex systems, TBML sellers falsify invoices to undervalue or overvalue products’ price, quantity, or quality, repeatedly import and export the same commodity, or use shell companies and third-party intermediaries to facilitate transactions. These techniques are frequently used with other money-laundering methods to obscure the money trail further.
One aspect of TBML that makes it challenging to identify is that it can involve virtually any value item, not just high-end or rare goods. Preferred goods include telecommunications equipment and electronics due to the ambiguity of the values on an invoice. Still, law enforcement has reported the use of everything from air filters to gold bars. Vehicles and auto parts are prevalently used. Precious metals and stones are becoming popular due to the ease of transport, concealment, and conversion into cash. Transnational criminal organizations will use anything of value, which can be turned quickly into funds. This is why focusing on the methodology rather than the commodity is more important.
Stay up-to-date on the latest FinCEN priorities. See Part I: Implications for Community Financial Institutions.
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Means and methods
How trade-based money laundering works
In recent years, investigations have documented how terrorist organizations work with transnational organized crime groups to facilitate terrorist financing. These groups put aside cultural and ideological differences to assist each other in their illegal endeavors. Here are some common methods used in TBML:
Over- or under-invoicing: Over- or under-invoicing is the act of misrepresenting the value of a shipment to launder money across borders. For example, a seller exports $100,000 of goods to the buyer but only invoices the importer $10,000. The buyer resells the goods for $100,000, keeping the $90,000 in now-laundered local currency.
Misrepresentation: Misrepresentation involves falsely describing the quality or types of goods or services to manipulate the transaction value. Misrepresentation is used to justify the movement of funds and, in some cases, reduce the tax obligation reflected on customs documents.
Over- or under-shipment or phantom shipments: Over- or under-shipment involves misrepresenting the number of goods in a shipment. An exporter and importer may even collude on customs documents for an empty or “phantom” cargo shipment, using the imaginary transfer of goods to justify sending money across borders.
Multiple invoicing: Multiple invoicing occurs when sellers send more than one invoice for the same shipment, resulting in various payments to the exporter for the same shipment of goods.
Red flags
Key indicators of TBML in a banking relationship
Although TBML is increasingly challenging to detect, there are some indicators:
- A business that does not appear profitable yet has a significant, flashy internet presence related to a company with large funds movement and little to no internet presence.
- A lack of transparency regarding the nature of business for an account with significant funds movement, mainly when the stated line of business is telecommunications, electronics, import/export, or consulting, with no additional details provided.
- Businesses in unrelated industries that have an ongoing financial relationship with significant funds movement.
- One business providing capital to a company in an unrelated line of business where there may or may not be common ownership.
- The use of several financial institutions with no distinct purpose beyond the movement of funds.
- Large credit card payments as a majority of debit activity, where the use of funds is unknown.
- The appearance of an individual or company operating as a “broker” between other companies.
- A business with significant funds movement to/from or between higher risk geographies, including domestic areas with geographical risks, such as south Florida, southwestern border states, and New York/New Jersey.
- Account activity or a business operation that doesn’t make sense for the entity or industry. For instance, a TBML case was identified where illicitly obtained funds were sent from Africa (Nigeria/Benin) to purchase cars from used auto dealers in the Midwest U.S. The cars were then shipped to Africa for resale. Given the price of the vehicles plus the shipment cost, the activity didn’t make sense when compared to the profitability of selling the cars domestically.
Conclusion
Fighting trade-based money laundering
As trade-based money laundering becomes more prevalent, so does trade-based terrorist financing. TBML allows for the global movement of illegally obtained funds to finance terrorism with little or no detection. Although many countries promote trade transparency, others are subject to resource gaps, lax or corrupt governments, and lack of law enforcement. The underground nature of illicit activity, a need for more awareness, and the number of jurisdictions involved in any given transaction contribute to the challenge.
A robust anti-money laundering (AML) program is vital to identifying bad actors in a banking relationship. Ongoing transaction monitoring and strong customer due diligence (CDD) practices are crucial for detecting potential TBML and related activities. It is also beneficial for investigators to understand domestic and international geographical risks. Banking regulators and criminals understand TBML, so be sure your AML investigative team also does.
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