Money laundering is the disguising of the origins of the proceeds of crime. It is the “laundering’’ of dirty money – money that has been gained through criminal activity - and is something that someone can do with their own proceeds of crime or someone can do for them.
Money laundering can be done in a number of different ways. Some ways are more complex than others. It can involve varying numbers of individuals or chains of companies and may be carried out in one or more countries.
This article explains one particular type of money laundering – trade-based money laundering.
What is trade-based money laundering?
Trade-based money laundering (TBML) usually involves fraud involving invoices and the manipulation of other related documentation in order to enable the movement of money. Buyers and sellers work together to manipulate the price of goods and services through deliberate false pricing.
How does trade-based money laundering differ from other trade offences?
TBML can involve criminals carrying out a variety of offences; including using false invoices, dishonest descriptions of goods and illegal use of payment systems and supply chains. But with TBML those illegal activities are being carried out to move money rather than the goods that are involved.
The main purpose of TBML transactions is to launder the money. While offences such as smuggling and fraud are committed to generate money from crime, TBML activities are carried out to move and disguise money that has already been gained from crime.
The criminals who are involved in TBML are not usually the ones who benefit from the activities that are carried out, whereas they usually are when other trade offences are committed.
Common Trade-Based Money Laundering Techniques
TBML is done to disguise the criminal origins of money. It can be carried out in a number of different ways. These include:
Over-Invoicing and Under-Invoicing
Under-invoicing involves deliberately under-reporting the market value of a commercial transaction (a deal) on an invoice, whereas over-invoicing sees the value of the deal falsely overstated on the invoice. These practices give a false account of the trading that has happened, which enables money to move undetected between the parties involved, who are usually importers and exporters.
Multiple Invoicing
Existing documentation is reused by being sent to a number of financial institutions so that the same payment for a single shipment of goods is made a number of times.
Falsely Describing the Goods
This can disguise the true value of what is being bought or sold as a cover for the movement of money that has been gained through illegal activity. It could even involve the movement of counterfeit goods.
Over-Shipment and Under-Shipment of Goods
This means shipping more or fewer goods than is shown on the invoice or even no goods at all.
Penetration of Supply Chains
Money launderers work their way into legitimate supply chains by paying for the goods through the involvement of a previously unknown third-party. They may use the practice known as circular trading where goods are repeatedly bought and sold (at least on paper) to disguise the real transfer of value that is being carried out to launder money.
Abuse of Payment Systems or Regulations
Those looking to launder money may look to circumvent sanctions, use illegal foreign exchange markets or abuse Hawala payment systems, which operate in the Middle East and South Asia.
The Importance of Preventing Trade-Based Money Laundering
If TBML is allowed to thrive it can have severe repercussions for those who become involved in it – whether they did so knowingly or unknowingly.
It can cause damage to previously crime-free trading arrangements. Those who are accused of it can face reputational damage that can seriously affect their ability to keep trading, as retaining and attracting customers can become difficult.
What is the maximum penalty for money laundering in the UK?
In the UK, the maximum penalty for money laundering under the Proceeds of Crime Act 2002 is 14 years in prison and an unlimited fine. As it is an offence that involves the disguising of the proceeds of crime - and can be linked to terrorist financing - it is treated very seriously by the authorities.
Red Flags - How to Identify Trade-Based Money Laundering
The serious nature of TBML makes it important for those in business to be aware of the signs of TBML - the “red flags’’ - that they should be looking out for.
These include:
- Payments to or from a third party who appears to have no connection to a trading arrangement.
- Suggestions that payments should be in cash.
- Unusually beneficial payment arrangements.
- False reporting, such as the incorrect classification of goods or the under- or over-valuation of them.
- Repeated importing and exporting of the same high-value goods.
- Commodities being traded that do not match the business or businesses involved.
- Unusual routes being used for the transportation of goods.
- The incorrect packaging of goods for transporting. For example, no refrigeration being used for the movement of frozen goods.
- Changes to normal trading or payment practices.
- The introduction of unusual or complex trading arrangements, often using many intermediaries (middle men) or shell companies.
- Vague or evasive answers being given about a deal or pressure being put on people to complete it.
- Details on documentation that do not appear to make sense.
How can trade-based money laundering be prevented?
Everyone who buys and sells as part of their business activities is involved in one or more supply chains: arrangements that link buyers and sellers, goods transporters and, in some cases, middlemen who arrange deals or parts of them.
Those in business have a duty to carry out due-diligence to ensure that nobody in that supply chain is using it for criminal purposes, such as money laundering.
In order to do this, they should have in place anti-money laundering (AML) and combating the financing of terrorism (CFT) measures (as money laundering is often used to fund terrorism) that include checks on current and potential customers, trading partners and other parties involved in the business.
Companies should also have an individual who oversees such measures (a compliance officer) and a system for staff or other individuals involved in the business to report their suspicions of TBML.
In 2013, the UK’s financial regulator, the Financial Conduct Authority (FCA), emphasised the need for banks to assign clear roles and responsibilities for managing financial crime risks, identifying customers and transactions that represented the greatest risk, screening everyone involved in a transaction and making detailed guidance available for staff on what might be a suspicious transaction.
The Financial Action Task Force, which is the international organisation created to tackle money laundering, has made a total of 40 recommendations for tackling the illegal flows of money.
These are divided into distinct areas, including:
- The coordination of anti-money laundering measures and practices designed to counter the financing of terrorism.
- Money laundering and confiscation.
- Preventive measures.
- Transparency regarding the ownership of assets.
- The powers and responsibilities of authorities.
- International cooperation.
It should be said that no two businesses are the same. The TBML risks that one faces will differ from those faced by another. But measures need to be in place to identify and prevent the TBML risk. If a company is unsure how to create such measures, they should seek advice from those who can assess the risk and put in place arrangements to tackle it.
How to Report Your Suspicion That Trade-Based Money Laundering is Taking Place
Any suspicion of TBML needs to be reported to the relevant person in the company. Many companies will have a money laundering reporting officer (MLRO) whose role is to oversee all activity relating to anti-money laundering; including reviewing any reports of suspected money laundering and deciding whether they should be submitted to the National Crime Agency (NCA) for investigation.
Companies that are in the regulated sector – which is those that are subject to AML and CFT regulations - are required under Part 7 of the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000 to submit a suspicious activity report (SAR) to the NCA if they know or suspect that a person is engaged in, or is attempting, money laundering or terrorist financing.
But companies that are not in the regulated sector may still have an obligation to submit a SAR. It can be an offence if you have knowledge or suspicion of money laundering activity and fail to make a SAR.
Conclusion
Many obligations are placed on those in business. The responsibility to prevent TBML may seem daunting for companies and individuals, as they may not know how to go about this.
At Rahman Ravelli, our money laundering specialists can advise on all aspects of identifying and preventing TBML. We can assess the nature and size of the risk and devise procedures for companies to combat this. This is important - as the risk of TBML cannot be ignored.
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