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Transnational Trade-Based Money Laundering

Transnational Trade-Based Money Laundering ("TBML") constitutes one of the most challenging and malevolent forms of money laundering to investigate. According to Immigration and Customs Enforcement ("ICE"), "Criminal organizations frequently exploit global trade systems to move value around the world by employing complex and sometimes confusing documentation associated with legitimate trade transactions." The flagrant volume of the criminal activity has resulted in ICE establishing the Trade Transparency Unit, designed to target transnational trade-based money laundering worldwide.

This shouldn't surprise you, since criminals are now seeking novel and creative means to effectuate money laundering and subsequently escape detection. Your financial institution's BSA/AML program will be strengthened and benefit tremendously if you undertake efforts to educate employees on key elements of TBML to pay attention to in their daily money laundering investigations. Reputational risk at your financial institution will also remain minimized with a focus on extinguishing egregious and often disregarded methods of money laundering, as these criminals will ultimately be coerced into locating other outlets to perpetuate their illicit behaviors.

TBML scheme types vary; however, regardless of the degree of the complexity of the scheme, consistent elements can be realized across the TBML landscape. Your financial institution should particularly look our for its customer's involvement in occupations or businesses in which there is misrepresentation of the price, quantity, quality or process associated with imports or exports. This article discusses, specifically, the "gray market" or "parallel imports" market, defined as markets where commodities are traded through distribution channels that maintain illegal components to their processes, unintended by the original manufacturer.

Powdered Infant Formula (Parallel Imports Market)

Powdered infant formula is an example of a commodity that remains in high demand in China. In 2008, Chinese infant formula was adulterated with a plastic substance called melamine. As a result, the supply and demand for quality powdered baby formula in China erupted with formula being exported to China from around the world. This method of TBML is known as "over-or under-invoicing goods and services," and it involves the misrepresentation of the price of goods in order to transfer additional value between importer and exporter.

Let us discuss how simple infant formula translates to a TBML schematic. Our endeavor commences at a restaurant. Restaurant employees skim customer's credit cards in an effort to establish the means of purchasing infant formula for export. Customers' finds are funneled from multiple restaurant accounts into a master account, which is utilized to purchase Prepaid Products. The proceeds of the Prepaid Products are consolidated, and they are subsequently used to purchase $250,000 in powdered infant formula in preparation for export to China. During a standard money laundering investigation at a bank, the BSA/AML investigator performed additional research on an accountholder's IP address. A simple Google search of the IP address led to a Chinese blog, where the aforementioned accountholder was advising others to refrain from using a particular shipping company due to his $250,000 shipment being stolen from him when it reached the port. The irony!

Export Vehicles (Vehicle Gray Market)

Let us now consider a second example of TBML that involves a combination of falsely described goods and services and illegal components of the export process. This example pertains to the gray vehicle market, and this scheme consists of brand new vehicles purchased from legitimate dealerships by private "dealers" and shipped as "used" vehicles to China. The process has similar functions in the powdered infant formula scheme described above. The originator of the funds is a private individual doing business under a shell company name. The shell company usually has a business address located in the Martial Islands, Seychelles, Belize, and other known high-risk jurisdictions. Under the shell company name, international wires or international lines of credit are sent to dealers within the U.S. These funds are all high round-dollar amounts ($50,000, $75,000, etc.) and are often preceded by wires in smaller round-dollar amounts ($2,500 to $5,000), which constitute vehicle deposits. The wire instructions frequently contain a 17-digit Vehicle Identification Number ("VIN") or partial VIN of the vehicle being purchased. The same VIN is evident in the wire instructions for the low-value deposits. The VIN functions as a means of accounting for the vehicle purchase, and thousands of vehicles are purchased in this manner.

The private dealer maintains constant communication with the wire originator, and these dealers have knowledge of the VIN of the exact vehicle that must be purchased on the originator's behalf. This dealer leverages multiple "straw buyers" to complete the purchases due to the high purchase volumes. The straw buyer subsequently conveys to the dealership that the vehicle s/he is purchasing will not be registered in the state of purchase, thereby evading that state's taxes. Manufacturers have directed dealerships that they are not permitted to knowingly sell a vehicle for export, as this can only legally be done through the manufacturer and authorized dealership in the country of origin.

Global communications, rendered as many glowing lines encircling the planet

The private dealer's account will reflect payments to logistics companies that are used to tow the vehicles directly from the dealership to a designated port for export. The dealer's account will also regularly reflect payments to third-party motor vehicle licensing companies, where the Manufacturer's Certificate of Origin ("MCO") is mailed. The new vehicle is then licensed and titled via mail. The two pertinent elements for titling the vehicle are: 1) It is necessary for the vehicle to be titled to be considered "used;" 2) The U.S. Government is responsible for ensuring the vehicle is not stolen before it leaves the country. An MCO (an untitled vehicle) would be an indicator of a gray market vehicle being exported outside of the manufacturer. The wire originator purchasing these vehicles has no use for the title and only needs the MCO, which is also sent via mail. Documentation of ownership is created in the country of origin through the use of the MCO, giving the appearance that it came from a manufacturer, regardless of the end destination.

In both examples, there are elements of criminal activity present within the process. Financial institutions are frequently being exploited to funnel large amounts of money into and out of seemingly legitimate business accounts. It is vital for your financial institution to have robust Know Your Customer ("KYC") and Suspicious Activity Reporting ("SAR") processes in place in order to identify potential TBML activities.

Our Financial Crimes Advisory Practice at AML RightSource, a Gabriel Partners Company, is well-acquainted with the ever changing AML environment and can help you develop a scalable AML program. For more information about our Financial Crimes Advisory Practice, please visit the Financial Crimes Advisory Practice page.