Trade based money laundering (TBML) and terrorist funding activities continue to gain strength and importance even as regulators across the globe are laying down stringent controls in this regard. Regulators have categorized trade finance as a ‘high risk’ business in connection with money laundering and terrorist financing. Ridden with inherent complexities, the growing volume of trade flows is a potential breeding ground for criminal activity.
A report from the US Congressional Research Service (CRS) describes trade-based money laundering as ’among the most challenging and pernicious forms of money laundering to investigate,’ citing that billions or even tens of billions of dollars in illicit wealth are laundered through TBML schemes each year. According to this report, one of the most common TBML schemes involves over or under-invoicing of goods and services, using which an exporter can transfer money to an importer in another country by invoicing exported products at lower than market value. In this way, the importer obtains goods that are worth more than what he or she paid for them, effectively resulting in a transfer of funds from the exporter to the importer. Similarly, an exporter can over-charge for products he exports, effectively transferring funds to him from the importer.
The importance of trade related invoicing was also highlighted in a March 2017 study by Global Financial Integrity. This report mentions transnational crime as an industry with a retail value of at least USD 1.6 to 2.2 trillion a year, with misinvoicing being a key culprit.
Unlike conventional AML compliance monitoring, the trade-based compliance aspect is impacted by the lack of readily available, reliable and adequate information to deal with the money laundering suspicions noticed. This is particularly applicable for valuation related crimes as correct and updated value of all the traded goods may not be available or bankers may not have ready access to such data. To overcome this challenge, bankers need to adopt alternate methods such as analytics-driven profiling of customers to monitor their trading practices and identify anomalies in their trading behavior, like a sudden surge in the trading volume or traded amount, or change in the nature of goods traded, or trading with unrelated counterparties, and so on.
Such a tool should account for all parameters – direct and indirect, and fetch data pertaining to:
- the goods traded (from the invoices shared by the customer) and depict the probability of trade depending on various factors like demand linked to the product (for example, food grains related to its production month or the period wherein the prices are expected to be high),
- origination of traded goods, route taken vis-a-vis route path, consignment cycle (time taken for the goods to reach from point A to point B),
- pricing dynamics,
- the import-export cycle,
- the credibility limit (amount of loan that a bank is willing to provide to the customer), and so on.
The tool should analyze this data, along with other customer information such as their line of business, the kind of goods they trade in (high, low, or medium risk), and the market price of such goods.
Additionally, monitoring the prices of traded goods can also facilitate the compliance process. Hike reports, which can be prepared to keep a track of the difference or hike in the price of the products or goods, can be prepared and published on a quarterly basis. Basis the customer profile, a separate database can be created which lists all the traded goods. Further, using various social media listening tools, as well as web analytics and crawling techniques, banks can publish the current and/or forecasted prices of goods. With this, the variations in the prices of goods can be easily identified, aiding the banks to combat the over- and under- valuation of traded goods.
Finally, a caution list or a watch list of ‘dicey’ customers basis suspicious trading or invoicing activity can be prepared, which can serve as a screening tool for further trade transactions.
Criminals and terrorist financiers are becoming increasingly sophisticated when it comes to money laundering, which means that financial institutions will have to be two steps ahead – and, the easiest way to do that is by deploying advanced analytical and statistical techniques. Only a proactive, well-planned approach will help banks curb this menace and ensure regulatory compliance.