Growing Threat of Trade Based Financial Crime, trade based money laundering (TBML) can be defined as the process in which financial criminals hide their black money behind trade. The legitimacy of the origin of the trade is obscured in trade transactions. This money can enter into the financial system as simply as transactions between “buyer and seller” or through banks through services such as documentary collection or letters of credit.
The most commonly used technique in TBML is over or under invoicing for goods or services. This involves an agreement between the buyer and seller who are working for the same parent company. When a seller over invoices the buyer, they quote a price which is higher than the actual market value.
On the other hand, when the seller under invoices the buyer, they will buy at a price which is lower than the fair market value. This allows the buyer to resell at the fair market value and earn profit on the difference created. This difference is created artificially and the economy suffers as a result.
Another commonly used technique in TBML is through fake shipment of goods. The exporter will create an invoice of goods sent to a buyer – which will not be sent in the first place. The buyer (who is also involved with the exporter) will make payment for the fake goods. The buyer will also create fake documents of shipment received. False transportation documents will also be made in this process.
The third most commonly used technique is the false description of goods. Low quality, inexpensive goods are labeled as expensive and invoices created on the higher prices. This results in more money being transferred than it would have in a legitimate transaction. The invoices created include descriptions of these goods which are actually not true.
Combating TBML is not easy but if banks and other financial institutions can examine activities that raise red flags, it can be stopped. Training should be given to bankers to help them identify suspicious activities like over valuation of goods, or transportation vessels that are inappropriate for transfer of goods. Improper documentation and inconsistent shipment dates can also pave way for trade based money laundering.
Compliance program can help banks identify these red flags and catch the culprits. At times, heavy bribery can also buy senior bank officials who get involved and turn a blind eye to these illegal activities. Being involved in any financial crime can ruin the name of a company for life.
Trade Finance Compliance is now offered as a certification whereby trade finance operation staffs, bank auditors and risk managers can get certified. The idea is to educate and train the members about the best practices in the ever-changing trade finance compliance landscape.
Money laundering is usually done by financing small and medium-sized enterprises (SMEs). What criminals usually do is that they hide their large amounts of money in small businesses that have less public exposure. Larger corporations are naked to the public eye as compared to smaller ones. Financial criminals expand SMEs to other geographical locations by financing it. These businesses also serve as a camouflage for criminals who can act like businessmen who are genuine.
It is not easy for financial crime investigators to catch such criminal activities. It takes training and a lot of work to catch the actual criminals. Money trail and business finances can be identified by a thorough examination of details. Rigorous checking of documents can lead the investigators in the right direction.
Banks can also play an important role in minimizing the risks of TBML. For most banks, data quality is the key problem for compliance. Usually, banks use the identification and detection of red flags to identify TBML trails. They examine documents and come to a logical conclusion. For example, if a document has details about a shipment route but it does not match the nature of the transaction – it may be an indication of a financial fraud in process.
Most banks cannot handle the burden of compliance because of the poor quality of information gathered. The shortage of skilled personnel also adds pain to injury. As a result of these barriers to compliance, banks are left vulnerable to high losses and frauds.
Regulatory authorities are aware of this issue and are taking measures to identify the loopholes. A report published in July 2017 in UK Financial Conduct Authority inferred that the information gathered by relationship managers is being used by the sales teams. The customer information is also being exploited within the organization.
As for criminals, they constantly look for opportunities where they can exploit any vulnerability within a financial institution. Trading for money laundering is done in large volumes and concealed behind malicious strategies to bypass controls set by the authorities.
Banks can identify fraudulent activities by collusion. This is done by studying the details of transactions between two parties. Although it is very difficult to identify the actual deal in complex structures, the criminals hide behind company directors and beneficial owners. It can still be identified by examining the firm’s online presence and company registry with credit data.
The key identification factor is to visualize the company in the corporate group and within the supply chain it is operating in. There is a wide range of identification factors which banks can use to identify frauds and TBML activities. For instance, the buyer and seller cannot have the same operating address, but in TBML, they may.
Banks can also identify transactional activities being done at a network level, where many small companies are involved and individuals are making large amount of transactions. The right compliance regulations can send alerts about potential or on-going trade based money laundering.