The exchange of things on international frontiers involves international trade. While some use international trade as a process to inflict harm on others, certain people might use it to benefit others. For instance, terrorist groups might use international trade to launder money and thus end up benefiting their dangerous groups.
Trade-based money laundering (TBML), also known as trade-related money laundering, is the practice of laundering proceeds of crime by transferring them through the trade of legitimate goods and services to and from two countries. It enables the movement of terrorist organizations, which hide under these networks of legitimate business partners. Such smuggling of goods creates a smokescreen through which the destination or source of significant money can be intentionally hidden.
How does trade move illicit funds internationally?
TBML depends on disguising illegal money from real trade deals between countries. Over-invoicing and under-invoicing imports and exports are two other methods that are used. It implies trade values that are higher or lower than the actual amount. For instance, a criminal may export goods to the tune of $100,000 but value the export at $200,000. This creates $100,000 for him to provide the necessary money laundering services.
The large volumes of international trade offered cover trade-based financial crime transactions that are processed daily. According to the World Trade Organization, global trade was valued at over $25 trillion in 2020, so firms have a substantial opportunity to wash in money.
Standard Goods and Services Used in Money Laundering and Terrorist Financing
The threat is sometimes from a small core of countries that include the United States, Brazil, Mexico, India, and China, and sometimes from a rotating or shifting cast of industries. Specific industries seem to be leading the way over and over again in cases of TBML and terrorist financing through trade.
For instance, Interpol has reported networks over-invoicing shipments of rice, sugar, and wheat to generate cash offshore. The software and technology sectors, which are challenging to verify once shipped, are being taken advantage of. There have been reports that trade in computer parts was used in one of the most significant recent TBML schemes to move $8 billion out of Malaysia.
Methods of Integration in the Global Supply Chain
Let’s discuss these methods in detail:
Shell Companies and Fronts
The most common strategy used by criminals is the creation of shell companies or fronts designed with a single function to hide. Illegal funds exist in their trade transactions. These companies are those that do not have any practical business activities; they only exist on paper. By misusing the links within the supply chain, funds are transferred between shell sellers and buyers around the world. According to Europol, the figures show over 15,000 such shell companies facilitating TBML in a year and masking billions of dollars in dirty money.
Fake Documentation
Another scheme is to fake the invoice. Involvement is tampered with for such documents as bills of lading, certificates of origin, and invoices, usually by unscrupulous people who change product details, prices, or shipment routes. In 2017, the UN estimated that $1 trillion of global trade would be conducted with fraudulent papers. The supply chain opens up to TBML with documentation fraud at these levels, where the stated trade values and non-existent cargo are between colluding firms.
Counterfeit and counterfeit Goods
Another way to launder is by smuggling counterfeits along with legitimate supply shipments. According to the OECD, trade-in fakes exceed $450 billion annually. People who smuggle use the long, winding, and complicated supply chains to infiltrate counterfeit medicines, electronics, and other fake goods with over-invoiced invoices that rumble criminal money.
Use of Shell and Front Companies in TBML Operations
Shell and front companies are the major components involved in performing TBML operations. These are legal paper companies that do not have actual business activity. Still, they help in the laundering of money, where the people involved in these activities offload the fake sale of business goods to some other business, resulting in money laundering.
Investigators can spot loophole-type shell sellers and buyers in several countries, which they use to differentiate. They claim that shell companies make it possible to launder billions of dollars annually. What raises many TBML red flags to law enforcement tracing financial crime across international supply chains is the need for physical operations or actual trading records.
Regulatory Challenges in Detecting TBML and Terrorist Activities
TBML especially hides within the stream of the actual trade. Hence, the detection of TBML often presents difficulties for regulators, who are attempting to curtail its use of the supply chain for crime, money laundering and terrorist financing. These so-called international trade shipments are sent between innumerable legit companies worldwide every year.
Massive legit volumes of trade mean spotting suspect transactions requires a lot of due diligence—pricing anomalies, unverifiable shipments, and signs of staged documentation between counterparties. The gaps in information between regulators and the effort in concerted action to combat the rise in the TBML stages and related threats, such as terrorist funding.
As the global economy grows ever more connected through trade, so too do opportunities for financial criminals to exploit international supply chains. Visit amlwatcher.com to learn more about how companies can strengthen trade compliance programs and prevent stages of trade-based money laundering, which threatens security worldwide.
