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Practical Tips to Detect Trade-Based Money Laundering

Sarika Harkumar is a Senior Analyst I, Client Delivery at AML RightSource. We encourage our team members

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FATF defines Trade-Based Money laundering (TBML) as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins”.

TBML is challenging to detect through transaction monitoring (TM), especially when it involves trade through front companies, which use a legitimate business to mask illegal activity by co-mingling legitimate business activity with the trade of illicit goods. To move illegal goods, a front company may ship illegal items along with a much larger amount of legal goods that items pass through undetected. To move money as part of illicit trade, criminals may use under or over-invoicing to disguise the actual value of funds transfers moved through financial institutions. Under invoicing involves declaring the price of goods below market value, effectively transferring extra money to the “buyer”. Over-invoicing sets the declared price of goods and services as higher than the actual market value, which effectively transfers money to the seller.

When reviewing a business, comprehensive due diligence must be performed on all entities involved in the transaction(s). The customer’s business model is ascertained by performing open internet searches, requesting additional information via an RFI when necessary and verifying supporting documents, such as invoices, shipping manifest, and notes provided within transactions such as wire transfers. Thorough scrutiny should be applied to both sides of the transaction, as small inconsistencies can be an indicator of suspicious transactions.

Let us consider this fictitious example:

Company A trades in textiles and alerted for large cash deposits and wires received from a high-risk jurisdiction.

A review of the company’s profile, account activity, negative news searches, open searches on the applicable Secretary of State (SOS) site where the company is registered, Open Corporate, and open internet searches using the company’s name, location, owner, and a negative news search were performed. The following are noted:

  • The volume of the incoming wires received in the customer’s account appears to be excessive for a newly established business, based on the expected average sales declared at the time of account opening on the KYC form.
  • A review of counterparties consisted of entities registered in high-risk jurisdictions and adjacent to jurisdictions currently designated as medium risk by FATF.
  • The customer received domestic wire transfers referencing gold purchases and automobile parts, which is unrelated to the business model (textile trading).
  • An open search on all counterparties involved was done using Panjiva for foreign entities. External research shows that the counterparty trades in gold, marine products, and automobile accessories.

The next step can be sending a request for Information (RFI) to the client. Sample questions may include:

  • Documents evidencing the physical location and business activity of both companies A & B.
  • Invoices and shipping documents for the listed incoming wires.
  • The source of funds for cash deposits.
  • Purchase receipts and payroll documents.

When sending an RFI, avoid referencing any inconsistencies, which could tip off the customer. In response to the RFI, the owner claims that cash deposits and domestic wires were proceeds of domestic sales and that international wires are proceeds of international sales.

A crucial part of the review process, especially in TBML, is to verify the supporting documents and the customer’s response to the RFI as compared to data obtained through account activity review and open external research. In the case of incoming wires, the shipper’s name and address should match with the customer’s name and address, and the receiver’s name and address should match with the wire counterparty’s details. The shipment details section provides a description of the goods being shipped, the quantity, invoice references, a shipping bill number, and a barcode. Similarly, invoices usually list an invoice number, date, dollar amount including taxes, item numbers, terms of payment, the name of the party to be billed, a shipping address, and the seller’s details.

A review of information received through the RFI process noted that all invoices referenced the same product, “Western Outfits”, with only a slight variation in quantity, and all invoices were dated the same as the transaction date. None of the invoices included tax, payment details, or the receiver’s address. Invoices of domestic wires referenced “Western Outfits,” while the corresponding wires referenced “gold purchase” and “automobile parts.” The buyer details, dates, and dollar amount in the shipping bills did not match the wires received in the customer’s account. The company also provided an employee’s information as a source of cash. Business documents sent in response to the RFI revealed that the related Company B is a wholesale trader of medical devices with no import/export license.

In the example, large wire transfers are going to unrelated businesses, and large cash deposits are not in line with the expected activity of a wholesale importer/exporter of textiles. The customer appears to have provided false documentation, and the RFI response was not in line with the reviewed activity. The review concluded that the activity of Company A is suspicious for acting as a front company for receiving funds from unknown sources and unrelated businesses in FATF-designated high-risk and medium-risk jurisdictions.

Investigators are united in this global fight against criminal activity, and it is crucial to report potentially suspicious activity as well as provide useful information to help law enforcement investigate potential crimes involving trade-based money laundering.