Of the three primary methods that transnational criminal and terrorist organizations utilize to launder the proceeds of illicit activity and finance terrorism, trade-based money laundering is arguably the most challenging. Most people associate money laundering with the misuse of financial institutions or the bulk movement of hard currency using smuggling techniques, but trade-based money laundering works differently. In its simplest terms, trade-based money laundering involves disguising the proceeds of crime using trade transactions to obscure their illegal origin. Almost any product, service, or sector can be used for that purpose – from precious metals to household appliances.
Recently on the Fraud Eats Strategy podcast was White and Case white-collar crime partner Jonah Anderson and Research Fellow at the UK think tank the Royal United Services Institute, Anton Moiseienko.
Trade-based money laundering is very difficult to detect, and once the illicit proceeds are converted into products for export, there is a good chance it will never be detected. This is because the goods purchased with illegal proceeds are largely indistinguishable from goods purchased legitimately.
Further compounding the challenge of detecting trade-based money laundering is the sheer volume of goods that are in transit at any given time. It’s estimated that the value of goods exported across the globe in 2019 was $19 trillion. Global seaborne freight in 2018 was estimated at 11 billion metric tons and air freight volumes for 2020 are estimated at 54.2 billion metric tons. Only a tiny percentage of cargo is inspected. Intercepting contraband at the ports and air cargo hubs is an ongoing challenge. And of course, there is nothing obvious about the goods in transit that is likely to cause them to be intercepted by Customs officials. This gives rise to the question: is it even possible to detect trade-based money laundering once it has been converted into consumer or commercial goods?
For the most part, trade-based money-laundering detection rises and falls on whether the purchase of the goods with illicit proceeds triggers any alarms or red flags. Drug trafficking organizations and professional money launderers have long used import-export companies as part of their money laundering infrastructure. As is often the case, financial institutions are in the best position to flag suspicious transactions surrounding the purchase of goods in the furtherance of trade-based money laundering. The biggest challenge facing trade-based money launderers is at the point of placement. Introducing large sums of cash generated from illicit activity into the banking system is becoming increasingly difficult. For this reason, money launderers have long favored cash-intensive businesses such as grocery stores, liquor stores, bars, restaurants, movie theaters, car washes, laundromats, dry cleaners and other retail businesses that accept cash as a form of payment. These businesses can play an important role in the placement of illicit money into the stream of commerce without detection. Cash-intensive businesses used to launder money can overstate their sales in amounts that correspond to the illicit cash passing through their establishments. They then issue checks, send wires or ACH payments to coconspirator businesses as though they are for the purchase of goods or otherwise disguise those payments as intercompany transfers, loans or investments.
None of these efforts or red flags assist shipping lines or logistics companies to detect trade-based money laundering. Instead, they are dependent upon tip-offs, law enforcement and customs officials and banking institutions’ ability to detect that there is something wrong with the goods at the point of purchase. Further amplifying the challenge is the fact that there is little incentive for shippers and freight carriers to know their customers. When you look at these things together, it illustrates that of the three major money laundering methods, trade-based money laundering remains a blind spot.
Trade-based money laundering poses similar challenges to law enforcement agencies. It’s hard for law enforcement to investigate and prosecute individuals concerning this type of conduct. Once the goods have been acquired, the laundering has happened. The illicit money has now been converted into goods that are indistinguishable from goods that were sourced legitimately.
Bonded warehouses and free trade zones play important roles in international exporting and importing operations. Free trade zone transactions can be viewed as bad apples in the world of international trade but that reputation is not always well-deserved. They are supposed to facilitate trade and limit the customs duties imposed. Not applying customs duties is intended to encourage international trade and attract shippers to those free trade zones the operation of which can be lucrative to the countries where they are located. Because of this overarching imperative of facilitating trade, the oversight of free trade zones is not always as rigorous as it is in other ports of entry. That has prompted organizations like the OECD – the Organization for Economic Cooperation and Development – to issue the Code of Conduct for Clean Free Trade Zones in 2019. This OECD guidance has a set of standards as to how free trade zones should approach preventing illicit trade. This relative lack of oversight in free trade zones can sometimes play a role in disguising shipments in circumvention of trade sanctions such as OFAC. While there are undeniably some benefits for commerce, free trade zones are more lightly regulated than other types of shipping hubs which can give rise to greater risk. The challenge is finding the balance between those two competing concepts.
Trade-based money laundering schemes sometimes involve either under-invoicing the goods in transit, to understate the value and limit the customs duties, or the opposite and overstating the value of goods in transit. Sometimes, invoices and shipping manifests mischaracterize the country of origin to shift the associated tax obligations to lower tax jurisdictions. The challenge in detecting and mitigating these various invoicing scenarios, even with a law enforcement investigation into the pricing of commodities, it often comes down to “a dueling experts scenario” in which the two opposing experts come up with distinctly different valuations of the goods in question.
Trade-based money laundering is most effective when the exporter and importer work in collusion. Often, the two are owned or controlled by the same criminal organization. That common scenario may offer investigators and compliance officers some ability to detect these undisclosed relationships between shipper and recipient or unearth other red flags suggesting the possibility that the goods in shipment are part of a trade-based money laundering scheme. From the perspective of global logistics companies, it’s about knowing your counterparty and your supply chain. It has become increasingly important to conduct due diligence on counterparties and other participants in the supply chain.
Bribery and corruption frequently play a significant role in trade-based money laundering. Although goods involved in trade-based money laundering schemes are largely indistinguishable from legitimately sourced goods, money launderers will take additional steps to ensure shipments reach their destination without the intervention of customs or border officials. Customs and border officials can seize or significantly delay goods in transit. Shippers often are operating under tight timetables and may incur significant penalties if the goods do not arrive within the agreed-upon timetable. Money launderers are under similar time pressures since the goods must arrive at their destination and then converted back into cash for the money laundering transaction to be completed. Corrupt border and customs officials are keenly aware of these time pressures and often exploit them for their financial gain. It is very common to pay modest bribe payments for goods to clear customs without delay.
Organized crime groups are very proficient at moving contraband through traditional shipping channels and have long-established corrupt relationships with ocean-going freight, air freight, trucking and rail transit companies. Given the fact that they are very adept at concealing large amounts of narcotics, weapons and human beings amongst the trillions of tons of cargo in transit, hiding cargo purchased with illicit proceeds that are indistinguishable from legitimate cargo is a much simpler undertaking.
Trade-based money laundering is the most challenging and elegant form of money laundering. It’s simply the purchase, exportation, and sale of goods in a country where there’s consumer demand. To ensure the ability to convert products into liquid cash, it just needs to be sold at or slightly below its market value. Once the goods have been sold, the proceeds simply need to be transferred to where the head of the snake is located.
Detecting trade-based money laundering is difficult but not impossible. The best way to detect it is through a combination of the vigilance of financial institutions and law enforcement efforts at countering narcotics trafficking, illegal weapons sales, human trafficking and other income-producing crimes and then carrying those investigations forward to the point of identifying and dismantling the money-laundering infrastructure.
To hear the full Fraud Eats Strategy podcast episode with Jonah Anderson and Anton Moiseienko, click here. Note: The postings on this site are my own and do not necessarily represent FTI Consulting’s positions, strategies or opinions