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Trade-Based Money Laundering

One might imagine the surprise a Customs Official has when viewing an invoice for toilet paper imported from China at $4,121 per kilo. Even during times of COVID this price is a bit high. However, discrepancies like these are one of the key ways money launderers transfer value across the globe through the process of trade-based money laundering.

Often referred to as “TBML”, trade-based money laundering is a way in which value can be moved across borders by utilizing channels of international trade. John Cassara, former Special Agent in the Department of Treasury’s Office of Terrorism Finance and Financial Intelligence, made an important point in the definition of TBML in his 2016 testimony to Congress on the matter: “FATF defines TBML as ‘the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.’ The key word in the definition is value.”

Because the concern is about transferring value, there are a variety of ways that money launderers can use trade to mask their illicit activities. These can be either with goods themselves (which have an inherent value) or invoices (documentation of the alleged value of the goods they represent). 

  • Over-shipping & Short-shipping: Relatively more simple, these methods of TBML involve sending more or less than is declared to Customs, allowing money launderers to move value between jurisdictions. This can also involve disguising goods as something they are not, such as melting gold into the form of common items like wrenches and belt buckles as was done in a drug-smuggling scheme uncovered during HSI’s ‘Operation Meltdown’. 
  • Ghost-shipping: This is the process of simply making up fictitious trades wherein the buyer and the seller collude to provide documentation that a trade took place. The banks financing the transaction may then transfer the funds even though nothing was actually exchanged. Through the use of shell companies, criminals can act as both “buyer” and “seller” if they are able to obfuscate the fact they control both entities in the transaction.
  • Over-Invoicing & Under-invoicing: By declaring more than the items are actually worth on the invoice, the seller is able to receive excess value from the buyer. This would be a case of over-invoicing. Under-invoicing, in contrast, allows the seller to send excess value to the buyer in the form of the goods that were not paid for at fair market price. The case of the mysterious $4,000 toilet paper would fall into this category, as criminals hope to disguise such discrepancies in the nearly $19 trillion in global trade transferred in 2019.

The exact extent of TBML is unknown. In John Cassara’s testimony, he points to mirror-gap analyses on 2013 U.S. Census Bureau data conducted by Dr. John Zdanowicz, which estimated that approximately $218.9 billion and $341.1 billion of value was moved out of and into the U.S. respectively - representing 5.69% of all U.S. trade that year! 

So what is the solution? 

One thing is clear, however: we are woefully unclear in our trade transparency and this allows criminals to exploit TBML to launder ill-gotten gains. Cassara, along with a 2020 report from the Government Accountability Office on TBML, both point to the need for better analysis of trade data and a better understanding of TBML methodologies for law enforcement and financial institutions. 

Luckily, Sigma is at this nexus of both financial crime risk management and data analytics. It is clear that understanding who is buying and selling what, where and for how much is an important factor in financial crime management. Indeed, it is ever more important as criminals must adapt to stricter controls against traditional money laundering means. TBML will certainly be an increasingly fruitful area for money launderers and analysts alike.. 

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