Criminals are
increasingly taking advantage of cross-border exchange order to change the
financial proceeds of the illegal activities into revenues that appear
legitimate. This practise, known as trade-based money laundering (TBML), occurs
in domestic in addition to international trade. The international trade system
offers more opportunity for money launderers due to the complexity and huge
volume of natural cross-border trade connections, allowing criminals to hide in
plain sight. 

Alongside this,
criminals are become increasingly sophisticated and financially literate.  They are now using multiple companies and foreign
exchange transactions, mingling diverse trade financing agreements with normal
transactions, and are even starting to mix legitimate and illicit funds. The
limited resources of customs agencies causes it to be even harder to detect suspicious
trade transactions.

As lending options, practices and technologies continue to evolve, so do the possible threats to the broader financial system, with TBML becoming increasingly sophisticated. Consequently, it is vital that banking institutions , regulators, governments and law enforcement work together to reduce the impact of TBML within the global markets.

How is TBML conducted?

TBML is all about
transferring value from one party to a different and disguising this like a
legitimate business-to-business transaction. Criminals use a variety of
mechanisms to transfer money; for instance, party A pays for 10 tandem and
only 5 are shipped (partial shipment), or sometime they are not shipped. Another
method could be over or under invoicing, where for example, the motor cycles
are worth lb10,000 each but they are only invoiced at lb5,000 each. Oftentimes the
banks are not even aware when the lb50,000 payment is for motorcycles, mobile
phones or carrots.  Banks only see this
information when they finance the trade, which only makes up about around 15% of
all transactions.

Alexon Bell, Chief Product Officer at Quantexa

Suspicious activity can also involve payments to a vendor by unrelated third parties, false reporting, repeated importation and exportation of the identical high-value commodity (this is known as carousel transactions), commodities being traded that don't match the business involved, unusual shipping routes, inconsistent packaging and double-invoicing.

The growing threat

TBML is a
primary vehicle for moving funds overseas and plays a significant part in the
layering and integration stages of money laundering. 80 per cent of illicit financial flows from
developing countries are accomplished through TBML, as well as an estimated $2.3
trillion was moved from the US from 2003 to 2021 as a result of deliberate
pricing anomalies.

The scale of
TBML is vast due to the amount of money that can be moved. If your business
sends another business a payment, they're trading, buying goods or services,
paying royalties or commissions and TBML covers all of this. Consequently, it’s
much more complicated than detecting placement, since funds are not involved and it
was already placed into the banking system.  

The increase in TBML has precipitated a recent rise in regulatory
scrutiny, as well as new guidelines from global bodies including The Wolfsberg
Group. New regulations aim to develop financial industry standards for anti-money
laundering (AML), know your customer (KYC) and counter terrorist financing
(CTF) policies. The Monetary Authority of Singapore (MAS) has also recently issued
specific guidance on TBML.

Whose responsibility is it to tackle TBML?

Banks play a large role in tackling TBML because they process the payments,
but to actually combat TBML, we need cross-industry collaboration between banks,
governments, shipping and logistics companies.

For example,
banks don't have any way to know if a shipping container contains 40,000 shirts or
40,000 computer chips. This must be validated by the shipping company or port
authority however it simply isn't practical to open every single container; the
busiest port in the UK handles over 3.5 million containers annually.

Alongside this,
the banks often have no clue what is being shipped, as 85 percent of all
transactions are straight payments, without any documentation or financing
involved. Take, for instance, 10 companies in the UK importing T-shirts in the
same manufacturer in Bangladesh. If each UK company banks having a different bank,
each bank has only 1/10th of the data on the Bangladeshi T-shirt manufacturer. This
is where shipping companies and logistics firms can help, as they have detailed
knowledge of what they are transporting.

It is at this
point that governments need to step in. The only point at which all imports are
seen is the port and tax authority, even though the cargo cannot be thoroughly checked.
The government is the only entity that will see all the imports from the
Bangladeshi T-shirt manufacturer, so it must act to pull this data together and
share it.

Next steps

An approach to tackle TBML needs to be agreed and this requires cooperation from
across the finance industry, the governments and police force. One effective
method would be to remove the paper from the documentation process and
record who is shipping what to whom. Currently, banks are investing heavily in
digitising paper documents into something a pc can use. This seems
strange because the Bills of lading and invoices are no longer written by hand, but
are instead created on the computer and printed. 
We ought to stop digitisation and start forcing businesses to upload their
documents inside a machine-readable format in order for them to access
finance and be able to import right into a country.

suggestion is that the G20 governments should mandate that imports are
registered electronically. A simple spreadsheet consisting of the sender and
recipient details, the delivery location, a brief breakdown of each item, quantity
and price should be sufficient for banks to make use of this same information for
financing and processing transactions. 
For emerging markets and third world countries, trading with each other
paper it's still required but this would be a step in the right direction.

banks should ensure they are conducting comprehensive risk assessments of their
trade finance businesses, taking into account their customer base, geographical
locations, products offered and then any risks in order to determine the amount of
financial crime risks they could be exposed to. Banks should also make use of advanced
data analytics, network analytics and machine-learning technologies which are
able to identify information, trends, connections and anomalies suggestive of
TBML schemes.

TBML may
never be fully eradicated, however with the right technology and processes in
place, and thru collaboration and regulation, we can devote the required
time and resources to produce a robust AML program that can stand firm against
financial crime.

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