Trade-Based Money Laundering: What Compliance Professionals Need to Know

Hundreds of billions of dollars are laundered every year through trade-based money laundering (TBML). Its sophisticated techniques allow criminals to use legitimate trade to disguise the source of illegal proceeds and transfer value across borders without the use of traditional money movement methods.

Laurie Kelly, CAMS, shares her knowledge and experiences gained from 20 years in leading the AML, fraud, and sanctions compliance functions for a $145 billion U.S. financial institution that provided extensive trade finance services for global exports of U.S. agricultural products. Attendees learn the fundamentals of foreign trade and trade finance, and why these long-established processes make it so vulnerable to TBML.

We break down the most common TBML techniques, including the Black Market Peso Exchange, over & under-invoicing, and others, using real-world case studies. Finally, we review TBML red flags and how to incorporate transaction monitoring, sanctioned/restricted party screening, and enhanced customer due diligence to mitigate TBML risks.

Here are the questions and answers from the event.

Q: How is Trade-Based Money Laundering (TBML) affected by COVID-19? Can you speak to any side effects of the pandemic?

A: Well, that is an interesting question. It has probably been both affected positively and negatively. Negatively, because the whole global logistics process has been stalled by COVID-19 because either things are not getting loaded onto the docks, or the ships are sitting there. The crews on the ships aren’t allowed to get off the ships. It is taking longer to unload. So, I think just overall logistics, in general, have been slowed down by COVID.

On the other hand, it is probably much easier to overprice things. I mean, you think about masks or personal protective equipment, or hand sanitizer, even. The economics of supply and demand has probably boosted the prices of those things, so you could say you were shipping stuff like that and increase that price and move money that way through over-invoicing.

So, I think there is probably more in the line of some of those false reporting kinds of things or even phantom shipments going on, multiple invoicing, that kind of thing.

Where they are bypassing actual logistics and just pretending to do a trade transaction.

Note: As an additional resource for the person who asked that question, the Financial Action Task Force has released COVID-19-related money laundering and terrorist financing risks and policy responses. The report was released in May of this year and it covers new threats and vulnerabilities stemming from COVID-19 related crimes and impacts on money laundering and terrorist financing risks.

Q: What role do you anticipate blockchain technology playing in the trade finance industry in the future?

A: The way I see it is kind of like what the Bank of India did, the Reserve Bank of India, and also what HSBC did. As I understand, blockchain or distributed ledger trends technology provides a lot more transparency. All these shipping documents and information become digital and can be accessed by all the parties involved. So there’s not this handing off of documents anymore. In addition, everybody has access to everything.

That makes it much less likely that fraud could be imposed by being able to manipulate things that they used to be able to manipulate. The documentation is open for all to see. So, just the electronic aspect of it, as well as the transparency of it, I think, are the things that we are probably going to see more of.

Q: What is the threshold for under or over-invoicing being considered money laundering, versus just someone making a profit through supply and demand?

A:  That’s the crux of the whole problem, is that you can’t really decide that unless you have something to compare it to.

So like in the case that I investigated, I had data that was specific to that type of export, in that time period, that specific product to that country.

I had no government data on that, that I could use to then calculate an average price and compare it. Now, that’s not to say that our customer was able to score a really good deal and be able to charge a lot more.

So that’s where the whole concept of a red flag comes into play. And that you can’t just look at something in isolation. So the only thing I could find on that transaction was just that they were charging a lot more than the average price.

But if everything else checked out, then I wouldn’t have filed a suspicious activity report (SAR) because I can’t decide whether or not that’s under-invoicing or just really good business. But the fact that they had some unknown third party making payments. The down payment and the weird explanation on the wire transfer. And the fact that that third party was in UAE, a Free Trade Zone, but the ultimate buyer was supposed to be in Germany.

It’s just all those things together point to: ‘I probably need a SAR  on this’, and then the over-pricing was just one more piece of this puzzle that just didn’t seem right, so you can’t look at any particular red flag necessarily in isolation.

Q:  Given that 80 percent of international trade uses open accounts, how much of this can be explained by weak or limited banking services in developing regions?

A: That’s probably true. If the importer is in a developing country where there aren’t necessarily banks that can service that by issuing letters of credit, or that import is in those countries that just can’t afford it because the importer is the one who’s paying for the letter of credit.

I’m sure that has an impact. Absolutely.

Q: Is open accounts a faster way to trade?

A: I suppose it is, You don’t have to wait for the bank to review all the documents and then all of the handoffs between the banks and the seller and the buyer while all these reviews are going on.  With open account trading, you just make a deal with somebody that you have met in another country who wants to buy your product. You strike a deal, you settle on a price and you agree on when are you going to ship it.

And then if you’re typical, you’ll say OK, pay me 20 percent up front. Once they get that, then they put the stuff on the boat. It goes to the other country and then when the buyer, when the ship comes in, then the seller says OK, pay me the rest.

And then the buyer pays him the rest, then the shipper or seller sends him an original copy of the bill of lading and other documents that he needs to get the goods off the ship. So, you know, there are no delays in terms of banks having to process letters of credit, having to review documents, and that sort of thing.

So it can be faster, especially in smaller shipments.

Q: In False Reporting techniques, shouldn’t that get caught by the border and customs authorities?

A: It’s very rare because they have to actually open that container and compare it to the shipping documents. And when you consider how many every day, 79,000 containers are going in and out, and they only have the manpower to actually inspect maybe three to five percent of all those containers.

And they’re looking for much more important things, like drugs, or weapons, they’re looking for the bad stuff, so they use this.

They use some systems that generate algorithms that, help them identify and pick which containers are going to open and inspect, And that’s based on a whole variety of factors like where it’s coming from or going to and the history of the importer or the exporter and a lot of other different factors.

But there’s just there’s so little manpower to be able to inspect the container.

Q: We are focused on foreign trade, but one attendee asked can this be applied to domestic transactions.

A:  I’m sure it could. I mean, especially open account, So, as you’re doing your transaction monitoring, when you see payments or wire transfers that seem out of pattern for your customer, and you ask them for documentation to support it.

If they provide you with something that looks like shipping documents, or an invoice, or something like that, then even if it is a domestic transaction, there still could be that exact same process going on.

Q:  Do geographic targeting orders have any specific limit for trade transactions?

A: Each one is unique and there they seem to be focused at least historically, around requiring either financial institutions in a particular geographic area, or more recently, certain types of businesses in a particular geographic region where a certain type of money laundering has been known to be brewing to do all this additional reporting on their transactions, their cash transactions and so forth.

The ones I’ve seen have not been around so much the actual trade transaction itself, it’s more about these companies accepting cash. Ultimately it comes from narcotics trafficking.

Q: Is TBML not scrutinized as part of transaction monitoring? In terms of the process of an alert investigation.

A: Well, no because of the fact that it’s still as if you remember all the red flags we went over. A large number of those red flags all relate to documents, and that data is not digitized. So it’s just the documents and the trade finances analyst that’s looking at the documents and making sure that everything on that letter of credit matches up with the documents that they have.

Now, the letters of credit themselves, especially if they are coming through SWIFT, which most of them are for foreign exports, our OFAC monitoring system screens every word in every SWIFT message, including letters of credit. So we looked for things like any sanctioned vessel names or sanction parties.

What the AML monitoring systems are looking at, are the monetary transactions. And what these red flags for TBML are showing is in the underlying documents. So until we have a fully digital process for this, that an AML monitoring system could look at and compare, then it’s just not going to show up. So we have to really look at the suspicious payment activity instead.

Q: With comprehensive KYC/CDD, isn’t that enough to handle these TBML activities?

A: It could. What’s more likely, though, is that what’s going to happen is a legitimate business is going to become involved in money laundering because that’s the best place to hide, is through legitimate businesses, and we’ve seen that over and over again.

So then once you have a good CDD/KYC on your customer who is an exporter or importer, and you know what kinds of business they’re doing, then that allows you to really be able to flag anything that becomes out-of-pattern for them.

And that’s the way to detect it. Now, if they’re really good, they’re not going to do anything that’s out-of-pattern.

So they’re still going to be able to if they want to accomplish some form of TBML that you’re never going to be able to detect, because they’re going to keep it all under the guise of what they normally do if they’re really good.

Q: Would you consider all under-invoicing as facilitating smuggling or committing money laundering? And would you report it as a SAR?

A: Well, it would depend on the whole big picture. What kind of goods are involved? What you are seeing in terms of the under or overpricing and what evidence do you have that makes you believe that it’s over or underpriced? And then, any other factors that you can look at in terms of the parties.

So, for example, is this a brand new customer that you don’t have a lot of history with, and then all of a sudden, you see this? That fact could come into play as well.

Just to summarize this, you need to look at the big picture of everything to do with that transaction.

And see what kind of proof can you provide that shows that you think it’s under or overpriced.

Q: FinCEN doesn’t keep any list of countries that have a high risk of TBML, do they?

A: No, it can really happen anywhere.  The one area that FinCEN does emphasize though, is free trade zones within countries. And there are free trade zones in almost every country, but more so in certain countries. For example, the United Arab Emirates has 37 different free trade zones. Also, there are a lot of them in Central America. So they can really be anywhere.

And so that’s where that’s the one area that FinCEN identifies, but not countries in general.

Q: I usually request invoices from my customer suppliers. Check those businesses and vessels through the sanctions list, but not always a bill of lading is received, is there another document that can be requested?

A: So, it depends on what you’re seeing. I guess if you have the commercial invoice, if that’s got enough information on it, that may be sufficient if you can get a bill of lading as well to compare that to, then that’s bonus points.

Because it may have some information on it that isn’t on the commercial invoice, or if the information is different, then that tells you something odd is going on.

Q: How can a correspondent bank deal with the menace of over and under-invoicing? A common feature in most of the trade – trade-finance-related transactions.

A: The question is a little vague, but if the correspondent bank is the issuing bank on the LC they can examine the underlying documents for any obvious pricing issues.

If the correspondent (technically the respondent) is processing a payment that underlies a trade transaction, unless there’s something else about the payment that triggers suspicion and subsequent inquiry there’s not much that can be done by the bank. That’s why TBML works so well!

Q:  Can trade-based money laundering be done with human smuggling or human trafficking?

A: I’m sure it could. Because a lot of trade-based money-laundering techniques are involved. The reason that they are successful is they involve legitimate trade.

They could probably use Trade-Based Money Laundering to launder the proceeds from human trafficking in human smuggling, definitely.

Q:  So, in a regular wire transfer transaction for commercial payments, what type of support documents must be requested?

A: That just depends on the nature of what the transaction appears to be. Again, requesting specific documents is sometimes only if something suspicious appears with the transaction.

So, unless that’s the policy of your bank for a commercial payment they would have to provide support before they actually process the transaction.

But usually, on a commercial payment, some kind of invoice, if it’s an export or import, even a bill of lading is a good thing to look for or ask for.

Q: Would the amount of the wire transaction be a factor?

A: It could. That goes back to the out-of-pattern activity for that customer.

So if it’s a dollar amount that’s in pattern for them and they are routinely receiving or sending wire transfers around that dollar amount to the same countries then that’s not necessarily a red flag. But unusually high, or sometimes unusually low wire transfers can be a red flag that needs to be investigated.

Q: If during a regular non-Covid season there was limited control by customs authorities, due to COVID-19, do you think traffic will soon increase considerably?

A: I guess, so potentially, depending on what the goods are, in terms of foreign trade. However, so many goods come out of China. And that side of the trade was really delayed. And it’s really the whole supply chain because if you think about China, they shut down a lot of their manufacturing. So then, the goods that were being ordered by foreign counterparts weren’t arriving because they weren’t being manufactured, so then they weren’t getting put on the ships and they weren’t getting shipped.

And then, once they did start to pick up the manufacturing again, then they had this backlog.

And still, there were issues with the ships themselves getting loaded and just the safety of the crew. And, whether you had enough people there to do the physical, loading and unloading. And all of that has just created this big backlog with things from China especially.

Q: I think the pandemic has also highlighted a point that you made earlier about the value of goods and how can a compliance team determine the value. So for example, did the price for personal protection equipment change considerably during the pandemic?

A: Use hand sanitizer for example. And so it’s all based on the economics of supply and demand when there’s a huge demand and supply stays. So it would just be natural to see prices going up on these things. But now I think it has stabilized a little bit because as economies work, people jump into the mix. And they decide to manufacture hand sanitizer or they are manufacturing masks. Just look at all the masks. You can now buy them in all the different colors, and patterns and things like that.

Now, you can buy masks at the convenience store. Whereas you couldn’t get your hands on a mask at the beginning to save your life, it’s just how economics works.

Q: How do banks monitor TBML activity? Do they use anything other than regular transaction monitoring tools? Thanks to the red flags discussed in his presentation. It looks like there’s a lot of overlap between TBML and regular transaction monitoring.

A:  The one thing that an AML monitoring system can’t do right now is look at the documents and the nuances in a trade finance transaction.

So, you’re really comparing what can you do when you’ve got an export or import finance transaction with letters of credit involved versus open account trading?

So, the red flags, for open account trading, do tend to be more on the side of the traditional monitoring, Red flags, transaction monitoring, because that’s all the bank is seeing, is wire transfers. And they don’t have any of the underlying data, or trade documents of any kind to support that. So that’s where you have to look for those red flags of countries and parties, and indicators, or freeform text messages on the wire transfers, locations of originators or beneficiaries.

All of those, exactly what that person is saying is that it sets suspicious activity, and it could just be that TBML is the underlying activity that’s going on that has generated that suspicious transaction.

In my example, I get a wire transfer from the UAE that says something about used cars, something weird there, and there are actually a lot of sales of US used cars to the Middle East that have been involved in money laundering schemes.

So, that’s what really got my attention, and it was flagged from our transaction monitoring system, too, as unusual.

But as far as the export finance side, or import finance side, and the letters of credit, banks are not digitizing the data on these documents to a great degree yet. If you don’t have digital information, then you can’t have a monitoring system that looks for it, because it needs data to compare things to.

Q: Did you allow the wire transfer to go through and just report it as a SAR?

A: Yes. Because in money laundering, you don’t want to reject a transaction. Number one, you’re tipping off your customer, and number two, you don’t really have a legal, right to be doing that.

You do with fraud if you think that your customer is being defrauded or is committing fraud, but with a legitimate customer, you would have to let that go through, and it was an incoming payment as well. So we had to post that.

Q: Have any of the banks been penalized for TBML violations by U.S. regulatory agencies?

A: That’s a good question. I’m not aware of any and is typically the things that sort of underly money laundering. So, a lack of customer due diligence and looking the other way at the customers that they take on and not paying any attention to what the customer’s doing in terms of suspicious activity monitoring.

Q: People are asking questions about how they should adapt to COVID-19.

A: It’s really in any type of emergency or environment like we’re in, that the criminals are just going to come out of the woodwork because they’ve got all kinds of fraud scams that can take advantage of people who are in these unusual circumstances. They are probably aware that banks are struggling too, because of limited staffing and people not working in their normal patterns. The criminals know what’s going on.

So I think it’s just great. It provides a greater opportunity just for financial crime of all types to increase.

Q: I think it was mentioned that LCs will have to be submitted to the banks. Will these LCs no longer be available during case investigations?

A:  They would be. It all depends on what triggered your alert. If you had good communication with your trade services staff and they brought something to your attention then yes, absolutely. You can read the LCs and pull the files. I’ve done it at various times. Just had the trade services folks pull their file for me and look at the documents and then the LCs are stored in the SWIFT messages. So all of it is there and you can see exactly what they see.

REPORTS/PUBLICATIONS: 

• Asia/Pacific Group on Money Laundering. APG Typology Report on Trade-Based Money Laundering. 20 July 2012.  
• BAFT. Combating Trade-Based Money Laundering: Rethinking the Approach. August 2017.  
• BAFT. Guidance for Identifying Potentially Suspicious Activity in Letters of Credit and Documentary Collections. March 2015.  
• Cassara, John A. Trade-Based Money Laundering: The Next Frontier in International Money Laundering Enforcement. 2016. 
• Congressional Research Service. Trade-Based Money Laundering: Overview and Policy Issues. Report to the U.S. Congress. 22 June 2016. 
• Erera, Alan. Logistics Glossary. Georgia Institute of Technology.   
• Financial Actions Task Force. Best Practices on Trade-Based Money Laundering. 20 June 2008.  
• Financial Crimes Enforcement Network. Advisory to Financial Institutions on Filing Suspicious Activity Reports regarding Trade-Based Money Laundering. FIN-2010-A001, 18 February 2010. 
• Financial Crimes Enforcement Network. Update on U.S. Currency Restrictions in Mexico: Funnel Accounts and TBML. FIN-2014-A005, 28 May 2014. 
• Global Financial Integrity. Trade-Related Illicit Financial Flows in 135 Developing Countries: 2008-2017. March 3, 2020.  
• Legaldictionary.net. Bill of Lading.
• U.S. Department of Commerce, Bureau of Industry and Security. Commerce Control List. 
• U.S. Department of Commerce Commercial Service. A Basic Guide to Exporting, 11th edition. 
• U.S. Department of Transportation, Bureau of Transportation Statistics. Port Performance Freight Statistics in 2018. Annual Report to Congress 2019. 
• U.S. Government Accountability Office. Countering Illicit Finance and Trade: U.S. Efforts to Combat Trade-Based Money Laundering. Report to the U.S. Senate Judiciary Committee, Sub-Committee on Crime and Terrorism. 30 December 2019. 
• Wolfsberg Group, ICC, BAFT.  Trade Finance Principles, 2019 amendment.  

WEBSITES: 

• U.S. International Trade Administration. 
• ACAMS Trade-Based Money Laundering Resources.  

SOURCE OF U.S. TRADE DATA: 

• U.S. Census Bureau: U.S. International Trade Data.  
• U.S. International Trade Administration: TradeStats Express system. 
• U.S. International Trade Commission: Dataweb system. 

SUBSCRIPTION/FEE-BASED U.S. CUSTOMS DATA: 

• Export Genius (80 countries, export/import data) 
• Panjiva (comprehensive import/export data)  
• PIERS (Bill of lading database, import/export data) 
• Port Examiner (U.S. imports only)