What is Money Laundering?

Money Laundering is a way to convert illegally earned money into legitimate money.
It is an indispensable, ever-present element of all financial crimes.

What are the sources of illegal money?

• General Fraud
• Narcotics Trafficking
• Theft & Embezzlement
• Tax & Customs Violation
• Cybercrime

 How does the Money Laundering Scheme Work

 Source

• Fraud
• Embezzlement
• Tax Crimes
• Theft
• Bribery 
• Cybercrime

 Placement

The launderer introduces his illegal profits into the financial system. 

• Changing Currency into other financial instruments
• Structured Deposits
• Transportation of cash
• Utilizing Front companies esp. cash intensive business
• Purchasing digital currencies 

 Layering

Conceal the criminal origin of proceeds

• Wire Transfers
• Withdrawals in Cash
• Cash Deposit in other Bank Accounts
• Shifting of assets between shell cos. and trusts etc.
• Multiple Purchase and Sale of investment instruments

 Integration

Funds re-enter the legitimate economy

• Front or shell companies,
• Real estate transactions, 
• Trusts, 
• Limited liability companies
• Creating fictitious loans

What is Trade?

Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties.

What is Trade Based Money Laundering?

Trade-based money laundering is defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin.

Why Trade Based Money Laundering?

Criminals, Money Launderers and Terrorist Financiers move money in three different ways:

• The use of financial system 
• Physical movement of cash
• Trade transactions
  • Post 9/11, considerable regulations have been introduced by governments to regulate the first two methods. 
  • However, trade transactions present the greatest challenge to businesses.

 Why trade transactions?

1. Enormous volume of trade
2. Complexity of transactions
3. Additional complexity from commingling of funds                                  
4. No exchange of customs data between countries
5. Limited resources of customs agencies

 How BIG is the problem?

• Trade related illicit financial flow due to MISINVOICING (calculated on the basis of value gaps) is US$817.6 billion in 2017
• The analysis shows trade misinvoicing is a persistent problem across developing countries, resulting in potentially massive revenue losses,”
• A project implemented GFI in partnership with leading civil society organizations in Kenya, Uganda and Colombia and with the support of the Government of Norway
• TBML occurred in over 77 jurisdictions around the globe.
•  United States (16 percent of all countries mentioned in cases) 
• Mexico (10 percent),
• Colombia (6 percent),
• China (6 percent) and 
• Hong Kong (3 percent)

However, prevalence of cases may also speak to institutional capacity to detect and investigate such cases. On average, cases involved 3 jurisdictions.

 Types of Trade Settlements

1. Open Account--80%
2. Advance Payment
3. Bills on Collection
4. Letter of Credit

Basic Trade Based Money Laundering Techniques

• Over- and under-invoicing of goods and services; 
• Multiple invoicing of goods and services; 
• Over and under-shipment of goods and services; and 
• Falsely described goods and services.

Multiple Invoicing

• More than one invoice is issued for the same international trade transaction. 
• Number of different financial institutions are employed to make payments
• Number of legitimate explanations like amendment of payment terms, corrections to previous payment instructions etc. are given.
• No need for the importer or exporter to misrepresent the price of goods or services.

 Over- and Under-Shipments

• A money launderer overstates or understates the quantity of goods being shipped or services being provided. 
• Extreme Case -  An exporter may not ship any goods at all, but simply collude with an importer to ensure that all shipping and customs documents associated with this so called “phantom shipment” are routinely processed.
• Banks and other financial institutions may unknowingly be involved in the provision of trade financing for these phantom shipments.

 FALSELY DESCRIBED GOODS AND SERVICES

• An exporter may falsely invoice an inexpensive good as a more expensive item and vice versa or an entirely different item. 
• This creates a discrepancy between what appears on the shipping and customs documents and what is actually shipped. 
• Company I ships 10,000 gold watches worth $700 each to Company J, but invoices Company J for 10,000 silver watches worth $140 each. 
• Company J pays Company I for the goods by sending a wire transfer for $ 1.4 million. 
• Company J then sells the gold watches in the open market for $7 million and deposits the difference $5.6 million into a bank account to be disbursed according to Company I’s instructions. 

 COMPLEX TBML TECHNIQUES

 Techniques which are a combination of the above and beyond

Tax and Transfer Pricing : Where two related companies that trade through intermediaries at Tax Haven countries with each other artificially distort the price to minimize the overall tax bill

U-Boating Shipments : A commercial trade diversion scheme which involves the diversion of genuine products from its intended international market back to its country of production, thereby avoiding duty on the returning goods. The goods will often be resold on the black market or other illegitimate distribution channels.

Hawala Payment Systems : Informal Money Transfer systems avoiding the banking system.

TBML - Effects and Challenges

 Effects

• Import Over-Invoicing
  • To shift money abroad (evade capital controls, shift wealth into a hard currency, etc.);
  • Overstating the cost of imported inputs to reduce income tax ;
  • To avoid anti-dumping duties
• Export Under-Invoicing
  • To shift money abroad (evade capital controls, shift wealth into a hard currency, etc.);
  • To evade income taxes by lowering taxable income levels;
  • To evade export taxes
• Import Under-Invoicing
  • To evade customs duties or taxes;
  • To avoid regulatory requirements for imports over a certain value
• Export Over-Invoicing
  • To exploit subsidies for exports;
  • To exploit drawbacks (rebates) on exports

Challenges

• Global price information for specific goods
• FI’s deal with documents – cannot verify goods
• Customs verification globally sparse (less than 4%)
• Varying degree of ML norms across jurisdictions
• Secrecy laws of various jurisdictions
• No sharing of information among FIs
• Information sharing between FI’s & legal authorities

MITIGATING RISKS – TRADE SPECIFIC

Trade Finance Profile

• Prepare Client Trading Profile
• Prepare Client Risk Profile
• Provide Trade processing teams sufficient time to investigate e.g. excessive volumes, over pricing / under pricing, incorrect description of goods

 TBML Red Flags

• Use the Red Flags checklist as a starting point of transaction review instead of the tick the box exercise
• Ensure sufficient understanding and proper assessment of the red flags by staff (e.g. thorough training)
• Update the red flags on a periodic basis

Dual Use Goods

• Develop detail list of dual use goods with multiple categories (SCOMET items)
• Develop internal register for the goods regularly traded by the customers
• Good understanding and awareness of dual use goods by processing staff
• Taking into account relevant red flags in a transaction 

 Documentary Fraud

• Proper scrutiny of documents to identify…
• Alteration of key information and  Forged documents
• Over/under invoicing of shipments &  Phantom shipment 
• Multiple Bills of Lading and Invoicing
• Incorrect description of goods to import/export banned goods or claim subsidies 

Risk Control

The Risk Mitigation controls should be updated and  tested against revised policies and procedures and for their effectiveness to ensure they are adequately mitigating the risks identified through the latest inherent risk assessment.

RECOMMENDATIONS

• Conduct education campaigns and raise awareness
• Convene inter-agency task forces
• Implement national beneficial ownership registries
• Ensure that beneficial ownership information extends to trade
• Share transaction-level trade information in real time
• Utilize new technologies to assess pricing of trade transactions
• Ensure that national anti-corruption efforts cover international trade
• Strengthen supervision over free trade zones
• Ensure that customs departments have the necessary resources
• Harmonize regional customs frameworks

Some Good Advice

1. Money launderers are as educated, as smart as, and more innovative than you are; they often speak more languages, and have previously been bankers and lawyers. 
2. Do not underestimate them.
3. Good money launderers are forever looking for weaknesses in your bank’s compliance program, and when they find one, they drive a truck through it and successfully move illicit funds.
4. Do not neglect your in-house AML/CTF training program. 
5. Often, only senior compliance staff is sent to seminars and conferences; send your junior frontline staff as well.
6. Above all, compliance should be taken as a challenge and an adventure. Money launderers are staying up nights and weekends creating schemes to move money through your bank.

 On-going participation and cooperation is required of the following…

• Government
• Law Enforcement Agencies
• FIU-IND
• FATF
• Export Credit Agencies                    To                   Ensure that financial crime is not facilitated through Trade.
• Customs and Excise
• Tax Authorities
• Port Authorities
• Shipping Agents and Carriers