Why trade-based money laundering is the final frontier of AML

 

Our current political climate continues to highlight the dangers of international money-laundering and its close links to terrorist financing, human trafficking and corruption. Whilst comprehensive strategies have been deployed to tackle the issue, laundering through use of international trade has been notoriously hard to detect and investigate. The convoluted nature of the problem, combined with the universal reliance on trade by legitimate governments and businesses, allows criminals to hide in plain sight and has subsequently earned trade-based money laundering the title of the final frontier of AML (Anti-Money Laundering).

What is trade-based money laundering?

Trade-based money laundering refers to the process whereby criminals move funds overseas and transfer assets (money) internationally to break the financial trail. This turns the criminal funds or profits into ostensibly legitimate assets by abusing and misusing international trade.

There are many ways that criminals launder funds. The first and perhaps most common is the over and under invoicing of goods, whereby a supplier overcharges for a good in a way to collect profit from the complicit supplier. Other methods include, over-and-under shipment of goods, delivery of lower quality products but at the price of a higher quality good, and phantom shipments where no shipment actually takes place.

Trade-based money laundering has become an increasingly contentious issue in recent years as it has become increasingly associated with terrorist financing and nuclear proliferation. The nature of terrorist financing often requires that funds cross international borders and trade-based laundering, in conjunction with offshore accounts and relationships (discovered in the Panama and Paradise Paper leaks) is a common way of facilitating this.

Why is it so hard to monitor?

Trade-based money laundering has been referred to as the final frontier in anti-money laundering monitoring because current attempts to monitor and analyse this activity have met with little success. Compared to the other methods of laundering such as manipulation of financial services or transit of physical currency, trade-based money laundering is particularly hard to monitor. Banks currently use a highly manual process to monitor for money laundering. They rely on experienced clerks who process paperwork to spot irregularities, and data scientists who look at financial data to spot interesting anomalies, but this is not automated.

The primary reason that trade-based money laundering is so hard to monitor is that the volume of international trade is so large that it is impossible for every single shipment to be checked. The majority of trade is legitimate and only a tiny fraction is used to launder money. Effective monitoring and controls need to be accurate so as to not disrupt the natural flow of commerce.

Another factor that complicates the monitoring challenge is that trade is currently very paper-based, with the Manifests, Bills of Lading and invoices moving around with the shipment and being processed by ports, custom authorities and banks. As well as hindering sophisticated electronic monitoring, holding data in paper is inadvertently useful to criminals. It provides them with a natural layer of obfuscation and an easy method of manipulation because they are often easily forged.

The final factor is that banks only see the complete data picture in a small number of circumstances. When the banks provide finance for a trade they gain visibility into the transaction including the goods being traded, the routes taken, and prices charged. This increased visibility supports effective monitoring, but financed trade only represents 15% of the total volume of goods traded. The majority of trade happens through bank transfers whereby a bank relies on their existing controls to look at the flow of funds but they have no visibility of what the funds transfer is for.

Difficulty monitoring trade-based money laundering is exacerbated by the elaborate schemes employed by criminals to ensure their trades appear legitimate or unsuspicious. The methods used are myriad, diverse and often creative, which means that there cannot be one standard procedure for investigation.

Criminals are innovative. We have seen them deploy a number of elaborative schemes to move funds. For example, they buy gold which they melt down and cast as nuts, bolts and taps or other general hardware items in order to cross the border undetected. Another example is to set up a front company that sells products that are easy to distribute: toys, phone accessories, household electrical goods, luxury goods. They use criminal funds deposited into the front company to purchase the goods from legitimate suppliers and the sell these in the country, which effectively cleans the money.

There are various processes that criminal groups use to make activity seem legitimate. Fraudulent trades will commonly be supported by convincingly forged documentation. Further, criminals will commingle illicit transaction with the activity of legitimate business ventures. This might involve the purchase of a struggling legitimate business which then changes their trading behaviour and transacts with businesses in new unrelated industries and usually in different countries. This means that the illicit funds are combined with the existing legitimate funds, giving the overall operation an appearance of legitimacy and effectively hiding the suspicious transactions.

Trade-based money laundering, unlike other methods of cleaning up money, is so difficult for various reasons that rely mainly on the sheer volume of trades that occur and the subsequent opportunity this provides criminals for operating without detection.

What is being done about it?

The FCA has published industry papers and thematic reviews on trade-based money laundering (July 2013) and continues to monitor this sector. They work with banks and ports to help understand the scale of and changes in criminal activity. The Government also works with technology providers as recent advances in Optical Character Recognitions, Natural Language Processing and Artificial Intelligence will give banks, ports and the government enhanced capabilities in tackling this problem.

New and enhanced types of monitoring technology, such as contextual monitoring, are now being adopted to combat trade-based money laundering. By using big data analytics, the contextual monitoring software makes links and connections between transactions and counterparties across internal and external third party data sources that cannot be easily made by investigators or current monitoring technologies. This allows each transaction and trade that occurs to be placed into a wider context, or network, of relevant transactions, counter parties and legal entities. Applying this type of capability to a practice that has typically been riddled by inefficacy is already bringing real change to the industry. The ability to contextualize each transaction means that investigators have a holistic understanding of various transactions without having to monitor every container that crosses every border in the first instance.

With awareness on the importance of this area growing, and technological innovation reshaping the way that banks, ports and governments monitor and control it, real positive steps are being made to understand and mitigate an acute problem that has profound implications globally.

Alexon Bell, Quantexa

February 07, 2018

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