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How Criminals Move Money Through Global Trade

Going with the Flow

CHIPS is the largest private U.S. dollar clearing system in the world. The system is used to clear and settle an average $1.67 trillion in domestic and international payments every day. In 2017, CHIPS handled $393.2 trillion in payments.

In comparison, all of the merchandise trade transacted in the world in 2017 amounted to $17.73 trillion, according to the World Trade Organization. Another $5.28 trillion in commercial services were traded. As a small fraction of bank business, monitoring payments to spot “trade-based money laundering” has been a lesser priority for private banks within the larger world of financial crime prevention.

But as global trade grows and increases in complexity, trade-based money laundering has become the weakest link in anti-money laundering initiatives, so banks and government officials are strengthening international collaboration to crack down on criminals who hide and launder their dirty money in global trade transactions.

False Invoicing and Other Shenanigans

As the Economist wrote a few years ago, “cuddly toys don’t have to be stuffed with cocaine or cash to be useful to traffickers.” Instead, a drug trafficking organization in California can buy toys from China with dirty money, re-export them to their home country in South America, and sell the toys in exchange for local pesos, effectively washing their drug money (a real example).

These kinds of normal-looking transactions enable transnational criminals to disguise billions in proceeds from their crimes, moving the money across borders and intermingling it into the formal economy through trade. How do they do it? They falsify trade documents, misrepresent trade-related financial transactions, or both.

Among the most common schemes are over-invoicing and under-invoicing commodities whereby the shipper, often colluding with the importer, misrepresents the price of goods. The difference between the declared value of the goods and money paid in the transaction represents illicit money exchanging hands undetected. In other cases, a shipper invoices the same shipment multiple times, receiving payment over and over for one shipment. In more brazen cases of “phantom shipping,” a fake invoice travels alone with no merchandise associated with it.

Criminals can even co-opt an unwitting legitimate business. An unsuspecting company might receive an online order, invoice and ship the goods to a business in country A, but the payment is made by some separate third-party in country B.

Red Flags: Cigarettes, Gems, and…Home Appliances?

The volume, complexities, and speed of global trade transactions make finding these illegitimate schemes challenging for law enforcement and financial institutions.

Authorities and payment institutions scan for indicators of funny business, such as payments made to vendors by unrelated third parties in the example above. They report incidents of document falsification, creating databases for use by customs officials. They look for mismatches between commodities traded and types of businesses involved, unusual shipping routes or transshipment points, and double invoicing.

Banks also look for unusual customer behaviors and transaction structures. Authorities are on high alert when reviewing trade in “high-risk commodities” such as gems and precious metals, tobacco products, and even consumer electronics and home appliances. They work to identify global “hotspots” with higher incidence of trade-based money laundering and monitor for shipments involving those countries.

According to a 2010 Treasury Department advisory notice to financial institutions, transactions involving entities in Mexico and China were the most frequently named in “suspicious activity reports” (SARs) produced by U.S. law enforcement regarding possible trade-based money laundering. The advisory noted that SARs involving transactions in China continued to increase while those citing a connection to Mexico were beginning to decrease. That same advisory report identified rapid growth in potential trade-based money laundering activities involving Venezuela.

Following the Money

In the game of money laundering, the trade transaction provides the vehicle and cover for some form of payment.

Trade financing to support those payments include a suite of services such as bank guarantees, document collection, import/export loans, pre-shipment loans, trust receipts, warehouse financing, and structured trade financing. Through organizations like the Bankers Association for Finance and Trade (BAFT), financial institutions have common guidance on red flags and ways to comply with “know your customer” legal requirements for trade finance transactions.

But banks only have adequate visibility into trade transactions that require documentation on the underlying transaction. In a “documentary” transaction, the bank handles paperwork such as bills of lading, invoices, packing lists, certificates of origin and other forms of underlying information surrounding the transaction. In this scenario, banks can monitor and review for any red flags before executing payment.

The problem is that at least 80 percent of trade is “open account,” according to BAFT. In facilitating these payments, banks might provide pre-shipment financing, without information about the nature of the shipment itself. Or the bank might clear a single net payment via wire transfer, settling multiple transactions among parties without any paperwork on the nature of the underlying trade transactions themselves.

Overinvoicing example

Customs Authorities as a Line of Defense

Because banks often lack sufficient documentation to prevent trade-based money laundering, the task of catching the criminals still falls mainly to customs authorities who have access to more detailed manifests and declarations provided by shippers. Portions of the full data set they need, however, are collected by different entities.

Some pieces of the puzzle are gathered directly by federal customs and some by port authorities. Other important information remains in the private sector with banks, insurers, brokers, storage services, and logistics companies. Having greater ability to pool that data while respecting business confidentiality would offer authorities a better chance to create big trade data they could then marry with other contextual information like crime statistics and satellite imagery to improve their ability to spot patterns or irregularities.

As well, customs agencies are working to enhance cooperation across national jurisdictions to get a full line of sight, comparing official import records with official export records for significant mismatches. Without such collaboration, customs agencies can’t see both sides of a trade transaction where discrepancies can occur.

Customs compliance officers face another significant hurdle in determining accurate and reasonable pricing for commodities. How much should a particular cell phone cost: $200, $450, $850? What about a dress, or jewelry of varying quality?

Homeland Security established a Trade Transparency Unit in 2004 which piloted a special computer system called the Data Analysis and Research for Trade Transparency System (DARTT). DARTT aggregates data across all shipments to detect and analyze price variations that fall outside a range, allowing customs to sharpen the focus of its transaction reviews. Better global data collection in digital form and the deployment of secure data sharing mechanisms will help customs agencies combat money laundering in global trade, but most customs officials around the world still operate in a low-tech environment. The U.S. government has been working to help other governments stand up units like the U.S. Trade Transparency Unit, mainly throughout Latin America.

Estimated North-South Illicit Flows

A “Persistent” Feature in North-South Trade

Global Financial Integrity is an organization that estimates the volume of illicit flows into and out of 148 developing and emerging countries that piggyback onto trade in goods with advanced economies. They believe trade-based money laundering and cheating by falsifying trade documents is a “significant and persistent feature” of developing country trade with advanced economies. Their latest annual report suggests it is a particular problem in outflows from resource-rich countries such as South Africa and Nigeria, but detected in every region. GFI says that over the last ten years, as much as 48 percent of Mozambique’s trade with advanced economies is illicit, as is 44 percent of Malawi’s trade, 43 percent of Zambia’s, 39.7 percent of Honduras, and 30.8 percent of Myanmar’s trade with advanced economies.

Inflating values on customs documents can allow exporters to skirt capital controls by moving more money out of a country that would otherwise be allowed; under-invoicing can be used by importers to evade taxes and duties. Governments lose revenue and undervalued goods enter the marketplace, undermining fair competition for legitimate businesses. Illicit inflows often fuel further illegal activities in the receiving country.

Given the persistence and growing nature of trade-based money laundering, both government-to-government collaboration and the deployment of innovative technologies to analyze big data and predict illicit behaviors will be key ingredients to staying ahead of this trend and enabling unimpeded growth of legitimate businesses engaging in global trade.