Trade-Based Money Laundering (TBML) is one of the most prevalent money laundering methods encountered by professional firms in the Designated Non-Financial Businesses and Professions (DNFBP) sectors. This method primarily involves exploiting the vast volume of global trade and the complexities associated with foreign exchange and cross-border transactions.
Given the significant threats posed to compliance, it is crucial for professional firms to understand and address the challenges of TBML. This article provides an overview of TBML, including common techniques, high-risk goods, and key red flags. It will also explore a case study to illustrate how TBML operates and highlight the indicators used to identify associated risks. Finally, we will outline strategies for detecting TBML and best practices for AML/CFT to mitigate the potential risks.
What is Trade-Based Money Laundering (TBML)?
Trade-Based Money Laundering (TBML) is a sophisticated method used by criminals to execute the three stages of money laundering: Placement, Layering, and Integration. This process often intertwines global and local trade activities, allowing illicit funds to be disguised as legitimate business transactions.
Criminals manipulate trade documentation and exploit logistics processes, frequently using advanced payment settlement options or financing solutions. The complexity and volume of international trade transactions present significant challenges for traditional detection systems. Distinguishing between legal and illegal activities becomes increasingly difficult, especially when trade networks involve middlemen, shell companies, and diverse payment methods. This allows criminals take advantage of the limited resources available for detection, complicating the efforts of authorities to trace and combat financial crime.
Four Common Techniques of Trade-Based Money Laundering (TBML)
- Over- and Under-Invoicing
This technique involves overstating or understating the price of goods or services in trade invoices. By inflating the invoice amount, criminals can transfer excess funds under the guise of legitimate transactions, while under-invoicing allows them to move money out of a jurisdiction without attracting scrutiny. - Multiple Invoicing
Criminals may issue multiple invoices for the same shipment of goods. This tactic enables them to justify multiple payments while referencing a single transaction. Such manipulation complicates the tracking of funds and obscures the true nature of the transaction.
- Falsely Described Goods
Misrepresenting the nature or quality of goods in trade documents is another common method. By providing inaccurate descriptions, criminals can disguise the illicit movement of funds, making it challenging for authorities to detect suspicious activities. - Short-Shipping
In this scheme, criminals ship a lesser quantity of goods than what has been invoiced. The difference in payment, therefore, represents excess funds that can be used for laundering purposes. This technique often goes unnoticed due to the complexities involved in international trade logistics.
Understanding these techniques is crucial for professional firms in the DNFBP sectors to effectively combat TBML and strengthen their AML/CFT compliance frameworks.
High-Risk Goods Commonly Associated with Trade-Based Money Laundering (TBML)
Certain categories of goods are frequently exploited in Trade-Based Money Laundering (TBML) schemes due to their high value, portability, and market demand. The following items are considered high-risk:
- Gemstones and Jewellery
These items are often used to facilitate large transactions and can be easily transported and liquidated. - Tobacco Products
The high taxes and regulations surrounding tobacco make it a prime target for illicit trade practices. - Consumer Electronics and Home Appliances
High-value items, such as mobile phones, are frequently trafficked due to their demand and resale value. - Stored-Value Cards
Calling cards and other prepaid cards can be used to obscure the source of funds and facilitate anonymous transactions. - Precious Metals
Gold and other precious metals are highly valuable and can be used to disguise illicit funds. - Chemical Products
Certain chemicals can be misappropriated for illegal activities, making them a target for laundering or terrorism operations. - Military Items
Weapons and military-grade items are frequently trafficked in Trade-Based Money Laundering (TBML) schemes. One item that may not be immediately obvious is communications equipment. DNFBP firms should exercise caution, as certain types of communications equipment can be classified as military-grade, potentially raising significant compliance and regulatory concerns.
Awareness of these high-risk goods is crucial for professional firms in the DNFBP sectors when conducting Know Your Customer (KYC) and Customer Due Diligence (CDD) processes. This understanding helps ensure that risk assessments are effective and robust.
Case Study: Trade-Based Money Laundering Through False Markup of Sales
This case study illustrates a Trade-Based Money Laundering (TBML) scheme that exploits the false markup of sales.
A network of companies controlled by A was established in Dubai. These companies opened letters of credit to the importer in Dubai in favour of a Hong Kong exporter, B. Notably, the amounts specified in the letters of credit significantly exceeded the actual value of the traded goods.
Upon receiving payment from the importer in Dubai, A remitted the inflated amount—derived from drug proceeds—to company B, in line with the terms of the letter of credit. After receiving this inflated remittance, B retained the actual value of the exported goods and subsequently transferred the excess funds to A’s partner, C, in Hong Kong. This example underscores how TBML schemes can manipulate trade documentation and financial transactions to obscure the origins of illicit funds, highlighting the need for heightened vigilance in the DNFBP sectors.
Common Red Flags to Identify Trade-Based Money Laundering (TBML)
When detecting Trade-Based Money Laundering (TBML), it is essential to be vigilant for the following red flags:
- Documentation Inconsistencies
Look for discrepancies in trade or customs documentation, such as missing, forged, or frequently modified documents. - Complex Structures
Suspicions should arise when multiple intermediaries or shell companies are utilized to obscure the source of funds. - Abnormal Supplier and Customer Activities
Frequent, unexplained changes in suppliers or unclear business relationships may indicate efforts to obscure audit trails and launder money through trade transactions. - Heavy Use of Cash Payments
An excessive reliance on cash, especially when followed by international fund transfers or third-party involvement in settling invoices, may signal the introduction of illicit cash. - Pricing Inconsistencies
Significant deviations in item pricing from market rates or erratic fluctuations can indicate TBML activities. - Operating in High-Risk Jurisdictions
Businesses situated in jurisdictions with weak anti-money laundering (AML) controls or identified as high-risk for money laundering require heightened scrutiny of their financial activities and trading practices. - Inconsistent Client Business Activity
If a client’s activities deviate from their typical business operations, automated detection alerts should be triggered, and pre-inspections by knowledgeable officials are recommended. - Fraudulent or Tampered Documents
Any signs of fraudulent or tampered documents, including false shipments, should prompt post-transaction alerts and thorough reporting, with pre-inspections by knowledgeable officials. - Payments to Third Parties or Unrelated Entities
Transactions involving payments to unrelated parties should be flagged for post-transaction alerts and require pre-inspections by knowledgeable officials. - Address Inconsistency
Identical addresses for beneficiaries, applicants, drawers, payers, or related parties should trigger alerts, necessitating post-transaction reporting and pre-inspection by knowledgeable officials. - Material Discrepancies in Trade Documents
Material discrepancies in trade documents should be flagged through pre-trade alerts and require partial automated detection, with pre-inspections recommended. - Unverified or Fake Letters of Credit (LC)
Detection of unverified or fake LCs should involve pre-transaction checks and partial automation, with physical inconsistencies cross-checked by knowledgeable officials. - Large Amount Submissions/Payments
Transactions involving unusually large amounts should trigger post-trade alerts and automated reporting. - Large Overdraft Letters of Credit
Letters of credit exceeding their stated value should undergo automatic detection or manual review prior to transaction completion. - Bills of Lading with Future or Pre-Specified Dates
Bills of lading dated for future or pre-specified times should be subject to pre-trade checks and automated detection or manual reviews.
By being aware of these red flags, professional firms in the DNFBP sectors can enhance their detection capabilities and strengthen their defenses against TBML.
Strategies to Identify Trade-Based Money Laundering (TBML)
The most effective way to identify Trade-Based Money Laundering (TBML) is through the sharing and analysis of trade and financial information. Key strategies include:
- Import and Export Data
Comparing domestic and foreign import and export data can help detect discrepancies and anomalies, such as irregularities in tariffs, origins, manufacturers, importers, exporters, final consignees, unit prices, and shipping ports. - Import and Export Documents
Verification of the movement of goods is crucial. By comparing the import and export documents of the two parties, firms can determine whether the official data from the two countries aligns. - Unit Price Analysis
Automated techniques can be employed to analyze domestic import data. Unit price analysis helps identify whether traders are importing or exporting goods at prices significantly above or below global market rates by comparing them with average unit prices for the commodities in question. - Customs Export and Tax Declaration Information
Irregularities and anomalies can be detected by comparing details such as origin, description, price, consignee and sender information, and shipping routes with intelligence stored in existing databases, customs export data, and tax declaration records. - Requesting Detailed Explanations and Supporting Documents
When irregularities are found in trade and financial transactions, appropriate follow-up actions should be taken. This may include allowing traders to provide detailed explanations and supporting documentation on a case-by-case basis. Furthermore, auditing the size of the trader’s business, operational norms, types of imported and exported commodities, and associations with other illegal activities can aid in the investigation.
By implementing these strategies, professional firms in the DNFBP sectors can enhance their ability to detect and prevent TBML activities effectively.
Best Practice to Mitigate Trade-Based Money Laundering Risk
How can we effectively overcome the challenges and reduce the risks associated with Trade-Based Money Laundering (TBML)? Implementing best practices in Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) are essential for maintaining a sustainable business while mitigating money laundering risks. Here are key strategies:
- Formalized AML Procedures
Establish clear internal Anti-Money Laundering (AML) policies and procedures that explicitly address money laundering risks within trade operations.
If your firm has not yet developed internal policies, procedures, and control documents, or lacks the professional expertise to create them, you can now purchase the Internal Policies, Procedures and Controls (IPPC) template from Ingenique Solutions. This customizable IPPC template includes all the essential information needed for standard AML/CFT frameworks, ensuring compliance with regulatory requirements for professional firms.
IPPC for Singapore Professional Firms
IPPC for Hong Kong Professional Firms
IPPC for Malaysia Professional Firms - Robust KYC and CDD Process
Implement comprehensive Know Your Customer (KYC) and Customer Due Diligence (CDD) processes to thoroughly assess client profiles and monitor their risk levels. This involves verifying identities, understanding the nature of their business, and identifying beneficial owners and related individuals and entities. This is to ensure that your clients are not listed on sanctions lists, designated lists, or adverse media, thereby providing a clearer understanding of their relationships and potential risks. - Effective Verification Through Screening Technology
Utilize third-party data sources or screening solutions to verify the information provided in customer documents. This approach minimizes human oversight and enhances efficiency, ensuring timely notifications of any potential risks.
To enhance your compliance efforts, Ingenique Solutions offers SentroWeb® screening solutions that enable you to conduct name searches of your clients against over 33,000 sources, including PEPs, sanctions lists, watchlists, and adverse media. Additionally, our CDD module allows you to record customer information, identify relationships, and document risk assessments effectively. - Documentation of Evidence
Maintain thorough documentation of screening, KYC, CDD, and money laundering risk assessments to serve as audit trails. This documentation is also essential for providing evidence during Suspicious Transaction Report (STR) submissions and regulatory inspections. - Quality Assurance
Conduct regular and periodic quality assurance reviews performed by qualified staff to evaluate assessments related to money laundering risk and identify suspicious activities.
To reduce manual operational time and costs, as well as minimize human error, you can now leverage the SentroWeb® AML/CFT system to automate the ongoing monitoring of your clients. This ensures that you can respond promptly to any issues that arise, thereby strengthening your overall AML/CFT framework. - Staff AML Knowledge and Training
Provide regular training programs to equip staff with the skills and knowledge necessary to understand trade practices, expected customer activities, and AML/CFT regulations, along with internal AML/CFT policies and procedures. This training will empower them to effectively identify TBML risks and take appropriate actions.
Conclusion
As the complexities of global trade and the sophistication of illicit financial activities continue to grow, professionals face significant challenges in detecting and preventing Trade-Based Money Laundering (TBML). The consequences of failing to address TBML risks can be severe, including license revocations, reputational damage, loss of customers, substantial financial penalties, and even litigation, jeopardizing the hard work and dedication you have invested in your business.
Therefore, it is vital for professional firms to ensure adherence to best practices in AML/CFT compliance to safeguard their operations. At the same time, leveraging advanced AML/CFT solution tools can enhance these efforts, ensuring a more robust defense against potential risks. By taking proactive measures, firms can protect their integrity and contribute to a safer business environment for all.
About Ingenique Solutions
Ingenique Solutions Pte Ltd delivers Anti-Money Laundering & Know Your Customer (KYC) screening and due diligence solutions to help small businesses and large enterprises meet their AML/CFT compliance requirements. It is trusted by 1,600+ companies in Hong Kong, Singapore, Malaysia, China and Taiwan, including government Ministry/ Agency, public listed companies, and top leading firms in various sectors.
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