Trade-based money laundering (TBML) is quickly turning into a global tsunami. U.S. Customs and Border Protection (CBP) are looking to importers to help identify risks in this critical area, and for CTPAT participants, this is the newest dimension of the criteria. Minimum Security Systems (MSC) deployed in 2020.
Before we dive into the warning signs and recommendations, we need to first give it a bit of context. The Financial Action Task Force (FATF) defines trade-based money laundering as: “the process of concealing the proceeds of crime by using commercial transactions to mask the origins, and then reintegrating them into the formal economy. “. TBML involves the exploitation of the global trading system for criminal purposes.
Identifying patterns of money laundering through commerce requires a better understanding of the terms and parties involved in an international business transaction. This naturally involves a closer examination of the circumstances, transport documents and generally the collection of detailed background information in order to detect potentially unlawful behavior. It is important to keep in mind that the main focus of TBML is the movement of money. The movement of goods is the mechanism used to conceal the true origins or purposes of money. Organizations that engage in TBML will tap into any industry, and any product or service.
TBML schemes vary in complexity but generally involve a misrepresentation of the price, quantity or quality of imports or exports. Traditionally, it has been the financial institutions that have borne the burden of identifying risks and red flags in transactions. In international trade, the vast majority – around 80% – is done on an open account basis. An open account refers to a sale where goods are shipped and delivered before payment is due. This creates a separation between payment information and business transaction information which can be exploited by organized and experienced money launderers.
The TBML security criteria of the Customs-Trade Counterterrorism Partnership Program (CTPAT) are addressed in three areas:
Section 3.1, Business Partners where it is necessary to have a written process for selecting new Business Partners and monitoring existing Business Partners. This process should include monitoring of activities related to money laundering and terrorist financing.
Section 7.10, Procedural Security where staff must review information included in import / export documents for the purpose of identifying or recognizing suspicious cargo shipments and unsuccessful assessment. On the basis of risk, particular attention should be paid to the key warning indicators for money laundering that arises during reviews and activities most applicable to the functions they and / or their business entities perform in the Supply Chain.
Section 12.6, Training is where the rubber meets the road and the speech should translate into practice. This section indicates that specialized training should be provided to staff on the practical recognition of TBML warning indicators. (Examples of personnel who should receive this training include those responsible for trade compliance, security, procurement, finance, shipping and receiving).
Given these expectations of TBML, it is imperative to start with the area of training in order to be successful in setting the standards for the other two. There has been a veritable plethora of information published in this area over the past year or so, but the focus here is on how to recognize the warning signs of TBML in the day-to-day operation of safety standards for CTPAT entities.
Structural risk indicators are considerations used when selecting business partners and should be taken into account when selecting potential business partners AND reviewing existing partners. TBML can find its way into an organization at any time, even when a long-term relationship with a particular manufacturer or logistics provider may exist. Examinations should be performed at least once a year or according to indicators to minimize exposure. The risk factors in this area may be less obvious than in others.
First, check out the Anti-Money Laundering (AML) Country Risk Assessment Table located here:
This graph will indicate MMLC in column three if the country is a Country of Major Money Laundering Concern. If the business partner under review is present in one of these countries, take a closer look at the business practices. Some of these countries may surprise you (eg Canada and the Netherlands are considered MMLCs). Additional risk indicators in this area include:
• Does the structure of the business appear unusually complex or illogical? Look up annual reports and find out who the main players are such as board members and corporate officers and are they represented by unlikely sources? An example would be a local fashion designer serving as a business executive in a tech company, or the board of a Japanese company with representatives from Colombia.
• Is the business entity registered at a “mass entity address”? Is the company’s drop-off address located in a residential building or does it only have a PO box listed on the documents? Additionally, commercial or industrial buildings that are part of a larger complex without reference to a specific unit or suite can be a red flag.
• Does the business entity appear in negative news or in the press? Perhaps the business has been suspected of fraud, criminal activity, or part of ongoing investigations or previous convictions. This should include research on social media.
• A company appears to be an imitation of a well-known company, or very similar to it, to give the impression that you are dealing with a recognized and acceptable entity. For example, McMasters-Carr may be represented as MacMaster-Carrs, or Broadcom Corp. may be represented as Boardcom Corp. or Deringer Industrial under the name Derringer Industrial. Sometimes the differences are very subtle. Pay attention!
Risks in trading activities are potential daily warnings in the activities of handling goods and documents associated with trade. There is a long list of warning signs with varying scenarios. Identifying a single indicator in a transaction may not by itself justify suspicion of money laundering, but it should prompt further surveillance and alert someone to keep an eye out for it. other transactions. Likewise, the identification of several indicators would also merit a more in-depth analysis. The training material should cover at a minimum the following areas and provide examples. Likewise, employees should have a clear path to query and report any suspicious indicators.
1. High Risk Jurisdictions: Merchandise is shipped to or from a jurisdiction designated as “high risk” for money laundering and / or terrorist activity. (See the AML list shown above).
2. Cash: The transaction involves the receipt of cash (or other payments such as wire transfers, checks, bank drafts or money orders) from unrelated third parties or an intermediary (an individual or an entity) apparently unrelated to the seller or buyer.
3. Incorrect pricing: obvious overvaluation or undervaluation of the goods. The exporter charged $ 2 million, but only exported $ 1 million worth of goods. Or the other way around, the importer paid $ 1 million but actually received $ 2 million in goods. (Communications between departments are essential to identify these transactions)
4. Discrepancies: Major discrepancies between the description of the goods on the bill of lading or invoice and the goods actually shipped. (eg exporter charged $ 500,000 silver, importer actually received 2 million gold.}
5. Misrepresentation: Any kind of misrepresentation, such as misclassifying products.
6. Inconsistent Goods: The goods being traded do not match the company involved, such as an equipment manufacturer that ships pharmaceuticals or a mobile phone company that ships chemicals.
7. Lack of Documentation: Inability of the business partner to produce the appropriate documentation (ie invoices, packing lists or shipping documents to support a requested transaction.)
8. Inconsistent Shipping Routes: Goods are transhipped through one or more jurisdictions for no apparent economic or logistical reason. If the shipper is selling jewelry, it would be highly unlikely that they would move a full container on a sea carrier and just as unlikely to make air reservations that go through three different countries. Diamonds from Israel would likely not be routed through Dubai with a stop in Costa Rica before arriving at their final destination in New York, United States.
9. Letter of Credit: Use that has unusually complex terms, has unusually long or frequently extended payment terms, or repeated requests for changes. Be aware of those requesting changes in beneficiary or payment location.
10. Sanctioned Parties: The transaction involves individuals or organizations on US sanctions lists.
11. Unusual Purchases: Documentation for the purchase of unusual products for your organization, such as weapons, ammonium nitrate, hydrogen peroxide, acetone, propane, or other dual-use products.
12. Identity Variations: The Business Partner provides multiple variations of name, address, phone number, or additional identifiers under a single vendor or tax number.
Striving to control TBML is part regulation, part international business cooperation and part technological solutions; however, it depends significantly on the recognition and action of human factors. The installers involved in TBML use complex networks of modern companies moving around the world and hiding behind commercial systems to illegally transfer large sums of money. While the tactics used to hide illegal money laundering activity are not new, the application of sound trade compliance practices to monitor and detect vulnerabilities is the most recent dynamic that will make a difference. The key element is vigilance.
For more information on this, please consult the full document on FATF Risk Indicators available at the following link: http://www.fatf-gafi.org/media/fatf/content/images/Trade-Based -Money-Laundering-Risk- Indicators.pdf