What is trade based money laundering

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Trade, the global economy of import/export, has been described as a ‘readymade vehicle for laundering’.

So what is it and how does trade based laundering work?

Trade based laundering aims to move value through the use of the financial sector.  It requires collusion by the parties to the transaction and relies of the volumes of global trade being so great that it is difficult to spot.  Difficult but not impossible!

There are various ways by which trade can facilitate laundering, and other financial crimes, with documentary trade finance used as a mechanism to lend legitimacy to transactions and value transfer.

Scenario 1

Company A and Company B are both parts of a larger organised criminal enterprise.  Company A owes $100, 000 to Company B from the proceeds of criminal activity in London.  They do not want to draw attention to the transaction.

Company A operates as a legitimate seller of tribal art and cultural artefacts sourced from Africa.  Company B operates as a supplier of these items. Company A is also involved in the sale of cocaine across London and other major UK cities.

How does Company A move the $100, 000 undetected?

Company A places an order for new supplies.  The order is worth $50, 000 but the invoice states
$100, 000.  Company A pays Company B $100, 000.  An over payment of $50, 000 against the value of the goods. This can be repeated until the full amount owed has been transferred.  This is a typology of trade based laundering known as over invoicing.

Scenario 2

Company A places an order for new supplies.  The order is 3000 painted pebbles at a cost of $3, 000. Company A pays Company B $3, 000 but only receives 1, 500 painted pebbles.  An over payment of $1, 500 against the quantity goods supplied. This can be repeated as required. This is a typology of trade based laundering known as variable volumes.

These are only two of the ways in which value can be transferred globally using trade.  Other common typologies include:

  • Under invoicing
  • Ghost or phantom shipments
  • Variable goods

Trade can also be misused to breach sanctions, provide funding and resourcing to terrorist organisations, to evade tax or move the proceeds of corruption.  Trade can also be used to perpetuate fraud.

Everyday banking facilities such as documentary letters of credit are used by organised criminals to provide a veneer of legitimacy to trade based laundering and financial crime and create a sustainable mechanism for transferring value as required.

To be able to deter and detect trade based laundering, financial crime practitioners and front office staff need to understand how the various typologies work and the key risk indicators that there may be laundering occurring.

Relevant staff need to understand the importance of knowing not only the customer in order to detect potential criminal activity, but the other actors in a trade transaction and the key points of vulnerability throughout the transaction lifecycle.

On going due diligence and transaction monitoring is key to the detection of trade based laundering and an understanding of the specific vulnerabilities of the various documentary trade finance products is vital – much is written about the documentary letter of credit but that is only one of a number of products that can be utilised by launderers.