Trade Based Money Laundering: Why Shippers Should Care

Trade-based money laundering (TBML) occurs when criminals disguise the profits from their illegal activities as legitimate trade. In simple terms, money laundering takes dirty money and cleans it.

TBML comes in many different forms, including the movement of illegal goods, falsification of documents, and misrepresentation of financial transactions. In all cases, however, the schemes ultimately benefit and support violent conflicts, corrupt governments, terrorists, the illegal drug trade, human rights abuses, and other criminal activities that endanger global economies, the environment and human lives. Experts estimate that the dollars associated with trade based money laundering exceed $1.6 trillion annually.

Criminal organizations traffic in virtually everything. Drugs, weapons, humans and human organs, counterfeit and pirated goods, wildlife, illegal logging and mining, and illegal fishing. Illegal logging alone accounts for $157 billion each year. According to the Department of Homeland Security, the most common items involved in TBML (70% of cases) are precious metals, automobiles, clothes/textiles, and electronics. Criminals will exploit virtually any commodity, however, in their schemes.

Enforcement of TBML

U.S. Customs and Border Protection (USCBP) recently announced a greater focus on enforcement against trade based money laundering and its growing threat to U.S. financial and national security.

USCBP leverages a host of resources to identify TBML-related import and export transactions. For example, it looks for red flags in its internal targeting, manifest and entry data for payments made to vendors via wire transfers from unrelated third parties, commodity misclassifications, over- and under-valuation, double invoicing, and packaging that’s not consistent with normal shipping methods for a commodity.

Every importer and exporter should have robust processes and policies in place to assure compliance and to protect their brands against bad actors that may attempt covert trade-based money laundering schemes in their supply chains without the company’s direct knowledge.

A building materials company was asked to pay “protection” money to individuals ultimately linked to ISIS. The money was obtained through false, over-valued invoicing to the company’s plant in a foreign country. This building materials company was ultimately found to be guilty of providing funds to a terrorist organization and paid a $778 million penalty, or approximately 10 times the amount of profit earned from the scheme.

Any brand would be hard-pressed to survive the negative publicity surrounding a money laundering scheme and association with human or drug trafficking, or support of terrorists. Conspiracy to commit money laundering can come with a prison sentence of up to 20 years and fines of up to $500,000 or two to three times the value of the proceeds. Companies could also face the loss of importing privileges or other sanctions that impact their ability to import and export through the U.S. Taking just a little bit of time to protect against these risks and implement a robust TBML compliance program is a smart move.

It’s easy to get caught up in a TBML scheme without knowing it’s even happening. Here’s an example.

In Australia, a Chinese criminal organization gave Australian dollars from drug sales to individuals who used the funds to purchase items for buyers in China who want higher quality foreign goods. The shoppers then export the items to the buyer. The buyers in China pay in Chinese Yuan for the items. Through this TBML scheme, the criminal organization launders the money, moving its proceeds to China.

Neither the companies selling the goods in Australia, the companies shipping the goods to China, nor the parties buying the goods in China may be aware of the scheme.

Key TBML Warning Indicators

How can you ensure your company and your brand does not get unintentionally pulled into one of these schemes? Following are just some of the key warning indicators of trade based money laundering. Train your team to be on the lookout:

1. 1. Unusual or overly complex payments, like moving funds through parties with no legitimate purpose
   2. Misdeclaration, under/over-valuation, actual vs. fair market ($50/oz when market is $95/oz)
   3. Inconsistencies in documentation, like an invoice that doesn’t match the bill of lading or the details on the original purchase order
   4. Sudden increase in or deviation from normal activity ($1.5m company with a $50m shipment)
   5. Commodity does not match the business involved (an IT company selling or buying jewelry)
   6. Unreasonably high overages or shortages, or undocumented cargo
   7. Unknown contacts/companies involved, or parties that don’t appear on documents or POs
   8. Requests for unusual transportation routings or transshipment through high-risk areas
   9. Last-minute changes to payment or shipping instructions, or delivery addresses
   10. Alteration of documents or confusing or inconsistent documentation or transactions

How to mitigate money laundering risks

So, you’re not a financial expert. What can you do to avoid trade based money laundering? The best defense is a good offense! Remember that periodic background checks on employees, on-going employee training, and a Know Your-Customer (KYC) / Know-Your-Vendor (KYV) approach are the best ways to mitigate the risk of TBML in your supply chain. Be sure to have written, risk-based processes in place to screen new business partners and monitor current partners. Some of the most effective steps in combatting TBML are:

1. 1. Identify and map all your business partners – understand who you’re working with
   2. Verify the identity of both the companies and contacts and vet against official sanctions lists
   3. Confirm the identity of business partners with address & google searches. Are they who they say they are?
   4. Check business references and visit their facilities
   5. Employ continuous education on TBML across your organization
   6. Employ robust financial controls for all international transactions
   7. Perform credit checks on partners, assuring their financial soundness
   8. Perform Enhanced Due Diligence (EDD) for high-risk companies, geographies and commodities
   9. Watch for suspicious addresses that don’t match the business partner’s registration

What should I do if I suspect trade-based money laundering in a transaction?

First, if something unusual occurs, slow down and ask questions. Remember that a transaction under pressure is a transaction at risk.

And you can always report suspicious activity or get additional help from your financial institution or your local office of U.S. Immigration and Customs Enforcement (ICE) at www.ice.gov/contact/field-offices or via email at [email protected].

Want to discuss trade compliance in more detail? Reach out Dimerco to start a conversation.