AML 101: Trade-Based Money Laundering
AML 101 is a series of posts that will cover the basics of a specific AML concept and discuss real life cases from the news. The first post will be centered on Trade-Based Money Laundering or "TBML".
At a high level, criminals launder their money using any combination of three methods. First, is by passing it through financial systems and institutions. Second, is by physically moving money from one place to another. Third, is by trade of goods and services. TBML involves manipulating vulnerabilities in the trade market to disguise dirty money. Experts agree that the first two methods tend to be more heavily monitored and scrutinized, perhaps because international trade can be rather complex.
The Financial Action Task Force (FATF) identifies four basic techniques of Trade-Based Money Laundering in a 2006 publication:
Over and under invoicing of goods and services
Multiple invoicing of goods and services
Over and under shipments of goods and services
Falsely described goods and services
Over and Under Invoicing
Deliberately over or under invoicing, or charging, for goods and services is one of the most classic, but still commonly used methods for laundering money across international borders. In theory, it is really quite simple. The exporter delivers goods to the importer worth a certain amount, say $10 million, but only charges them $7 million. If unnoticed by customs, the scheme successfully transfers $3 million worth of value to the importer. Alternatively, the scheme can be run in reverse where the exporter over-invoices the importer thereby transferring value to the exporter. FATF highlights three important points in these scenarios. First, the exporter and importer must be colluding. Second, they may be completely unrelated but there is also nothing preventing the exporter and importer from being the same entity. Third, this scheme also has major tax ramifications, specifically export tax credits and import duties.
Multiple Invoicing
As opposed to over or under invoicing, money launderers may instead invoice the same shipment of goods more than once. In order to obscure the true nature of this scheme, organizations will employ multiple financial institutions to assist in financing. Unlike over and under invoicing, the price specified for the goods or services does not have to be manipulated, making it harder to detect, not to mention that it is not uncommon to issue multiple payments in legitimate transactions due to amendments and corrections.
Over and Under Shipment
The over or under shipment of goods is similar to over and under invoicing in that value is transferred to either the buyer or seller. However, rather than misrepresent the cost, the parties misrepresent the quantity. The seller charges the buyer $7 million, which reflects the true cost of the goods being sold, at least on paper. The seller then proceeds to ship $10 million worth of product, so again the buyer ends up with an additional $3 million. In extreme cases of under shipment, sellers will ship nothing at all - just an empty container and full documentation that appears to be in order.
False Description
Finally, exporters can falsely describe the goods or services being transferred - either inflating or deflating their true value in order to pay off or get paid off. In essence, they are trying to disguise the true market value of the transaction for their benefit. False description is the TBML scheme that is sometimes service-based rather than good-based. It can entail things like financial advice, consulting work, or market analysis.
Red Flags and Best Practices
In reality, most Trade Based Money Laundering involves more than one method, more than one organization, in more than one jurisdiction. This makes it a challenge for financial institutions and authorities to monitor effectively. Some of the key red flags, as identified by FATF, include:
Discrepancies between the description of the good or service and the invoice
Discrepancies between the description of the good or service and the actual good or service
Discrepancies between the reported value and the fair market value
When the underlying good or service varies significantly from the exporter or importer's typical shipment
When the size of the shipment varies significantly from the exporter or importer's typical shipment
When the good or service is designated as "high risk"
When the jurisdiction is designated as "high risk"
When multiple jurisdictions are involved for no economic reason
When the transaction involves shell companies
News
In August 2017, George (71) and Agatha Enns (69) of Meade, Kansas plead guilty to one count of Trade Based Money Laundering conspiracy. The couple would travel to Mexico, more than 25 times between 2012 and 2014, and return with millions of dollars in cash and third-party checks that they would not report at the border. They then deposited the funds at their local bank: Plains State Bank and transfer it out of state. The funds were used to purchase genetically modified corn that was shipped to the border and transported into Mexico.
The Enns were ordered to three years of federal probation and to pay back more than $1.5 million. But they were not the only ones prosecuted. Former president of Plains State Bank was placed on one year of probation for aiding and abetting by failure to report suspicious transactions. A loan officer at the bank entered an agreement for a one-year deferment of prosecution. And a cashier was initially charged for failing to file a Suspicious Activity Report (SAR), but was not prosecuted.