Alexon Bell, Chief Product Officer at Quantexa
Criminals are
increasingly taking advantage of cross-border trade in order to change the
financial proceeds of their illegal activities into revenues that seem
legitimate. This practise, known as trade-based money laundering (TBML), occurs
in domestic as well as international trade. The international trade system
offers more opportunity for money launderers due to the complexity and enormous
volume of natural cross-border trade connections, allowing criminals to hide in
plain sight.
Alongside this,
criminals are become increasingly sophisticated and financially literate. They are now using multiple companies and foreign
exchange transactions, mingling diverse trade financing agreements with normal
transactions, and are even starting to mix legitimate and illicit funds. The
limited resources of customs agencies makes it even harder to detect suspicious
trade transactions.
As financial products, practices and technologies continue to evolve, so do the possible threats to the broader financial system, with TBML becoming increasingly sophisticated. Consequently, it is vital that financial institutions , regulators, governments and law enforcement work together to reduce the impact of TBML within the global markets.
How is TBML conducted?
TBML is about
transferring value from one party to another and disguising this as a
legitimate business-to-business transaction. Criminals use a variety of
mechanisms to transfer money; for example, party A pays for 10 motor cycles and
only 5 are shipped (partial shipment), or sometime none are shipped. Another
method would be over or under invoicing, where for example, the motor cycles
are worth £10,000 each but are only invoiced at £5,000 each. In many cases the
banks are not even aware if the £50,000 payment is for motorcycles, mobile
phones or carrots. Banks only see this
information when they finance the trade, which only accounts for around 15% of
all transactions.
Suspicious activity can also involve payments to a vendor by unrelated third parties, false reporting, repeated importation and exportation of the same high-value commodity (this is known as carousel transactions), commodities being traded that do not match the business involved, unusual shipping routes, inconsistent packaging and double-invoicing.
The growing threat
TBML is a
primary vehicle for moving funds overseas and plays a major part in the
layering and integration stages of money laundering. 80 per cent of illicit financial flows from
developing countries are accomplished through TBML, and an estimated $2.3
trillion was moved out of the US from 2003 to 2014 as a result of deliberate
pricing anomalies.
The scale of
TBML is vast because of the amount of money that can be moved. If a business
sends another business a payment, they are trading, buying goods or services,
paying royalties or commissions and TBML covers all of this. Consequently, it’s
much more complicated than detecting placement, since cash is not involved and it
has already been placed into the banking system.
The rise in TBML has precipitated a recent increase in regulatory
scrutiny, as well as new guidelines from global bodies including The Wolfsberg
Group. New regulations aim to develop financial industry standards for anti-money
laundering (AML), know your customer (KYC) and counter terrorist financing
(CTF) policies. The Monetary Authority of Singapore (MAS) has also recently issued
specific guidance on TBML.
Whose responsibility is it to tackle TBML?
Banks play a large role in tackling TBML as they process the payments,
but to really combat TBML, we need cross-industry collaboration between banks,
governments, shipping and logistics companies.
For example,
banks have no way to know if a shipping container contains 40,000 shirts or
40,000 computer chips. This must be validated by the shipping company or port
authority but it simply isn’t practical to open every single container; the
busiest port in the UK handles over 3.5 million containers a year.
Alongside this,
the banks often have no idea what is being shipped, as 85 per cent of all
transactions are straight payments, with no documentation or financing
involved. Take, for example, 10 companies in the UK importing T-shirts from the
same manufacturer in Bangladesh. If each UK company banks with a different bank,
each bank only has 1/10th of the data on the Bangladeshi T-shirt manufacturer. This
is where shipping companies and logistics firms can help, as they have detailed
knowledge of what they are transporting.
It is at this
point that governments need to step in. The only point at which all imports are
seen is the port and tax authority, although the cargo cannot be thoroughly checked.
The government is the only entity that will see all the imports from the
Bangladeshi T-shirt manufacturer, so it must act to pull this data together and
share it.
Next steps
An approach to tackle TBML needs to be agreed and this requires cooperation from
across the finance industry, the governments and law enforcement. One effective
method would be to remove the paper from the documentation process and better
record who is shipping what to whom. Currently, banks are investing heavily in
digitising paper documents into something a computer can use. This seems
strange as the Bills of lading and invoices are no longer written by hand, but
are instead created on a computer and printed.
We should stop digitisation and start forcing businesses to upload their
documents in a machine-readable format in order for them to gain access to
finance and be able to import into a country.
One
suggestion is that the G20 governments should mandate that all imports are
registered electronically. A simple spreadsheet consisting of the sender and
recipient details, the delivery location, a short breakdown of each item, quantity
and price should be sufficient for banks to use this same information for
financing and processing transactions.
For emerging markets and developing nations, trading with each other
paper will still be required but this would be a step in the right direction.
Meanwhile,
banks should ensure they are conducting comprehensive risk assessments of their
trade finance businesses, taking into account their customer base, geographical
locations, products offered and any risks in order to determine the amount of
financial crime risks they could be exposed to. Banks should also make use of advanced
data analytics, network analytics and machine-learning technologies that are
able to identify information, trends, connections and anomalies indicative of
TBML schemes.
TBML may
never be fully eradicated, but with the right technology and processes in
place, and through collaboration and regulation, we can devote the required
time and resources to create a robust AML program that can stand firm against
financial crime.
