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Alexon Bell, Chief Product Officer at Quantexa

Criminals are increasingly taking advantage of cross-border trade in order to change the financial proceeds of their illegal activities into revenues that seem legitimate. This practise, known as trade-based money laundering (TBML), occurs in domestic as well as international trade. The international trade system offers more opportunity for money launderers due to the complexity and enormous volume of natural cross-border trade connections, allowing criminals to hide in plain sight. 

Alongside this, criminals are become increasingly sophisticated and financially literate.  They are now using multiple companies and foreign exchange transactions, mingling diverse trade financing agreements with normal transactions, and are even starting to mix legitimate and illicit funds. The limited resources of customs agencies makes it even harder to detect suspicious trade transactions.

As financial products, practices and technologies continue to evolve, so do the possible threats to the broader financial system, with TBML becoming increasingly sophisticated. Consequently, it is vital that financial institutions , regulators, governments and law enforcement work together to reduce the impact of TBML within the global markets.

How is TBML conducted?

TBML is about transferring value from one party to another and disguising this as a legitimate business-to-business transaction. Criminals use a variety of mechanisms to transfer money; for example, party A pays for 10 motor cycles and only 5 are shipped (partial shipment), or sometime none are shipped. Another method would be over or under invoicing, where for example, the motor cycles are worth £10,000 each but are only invoiced at £5,000 each. In many cases the banks are not even aware if the £50,000 payment is for motorcycles, mobile phones or carrots.  Banks only see this information when they finance the trade, which only accounts for around 15% of all transactions.

Alexon Bell, Chief Product Officer at Quantexa

Suspicious activity can also involve payments to a vendor by unrelated third parties, false reporting, repeated importation and exportation of the same high-value commodity (this is known as carousel transactions), commodities being traded that do not match the business involved, unusual shipping routes, inconsistent packaging and double-invoicing.

The growing threat

TBML is a primary vehicle for moving funds overseas and plays a major part in the layering and integration stages of money laundering. 80 per cent of illicit financial flows from developing countries are accomplished through TBML, and an estimated $2.3 trillion was moved out of the US from 2003 to 2014 as a result of deliberate pricing anomalies.

The scale of TBML is vast because of the amount of money that can be moved. If a business sends another business a payment, they are trading, buying goods or services, paying royalties or commissions and TBML covers all of this. Consequently, it’s much more complicated than detecting placement, since cash is not involved and it has already been placed into the banking system.  

The rise in TBML has precipitated a recent increase in regulatory scrutiny, as well as new guidelines from global bodies including The Wolfsberg Group. New regulations aim to develop financial industry standards for anti-money laundering (AML), know your customer (KYC) and counter terrorist financing (CTF) policies. The Monetary Authority of Singapore (MAS) has also recently issued specific guidance on TBML.

Whose responsibility is it to tackle TBML?

Banks play a large role in tackling TBML as they process the payments, but to really combat TBML, we need cross-industry collaboration between banks, governments, shipping and logistics companies.

For example, banks have no way to know if a shipping container contains 40,000 shirts or 40,000 computer chips. This must be validated by the shipping company or port authority but it simply isn’t practical to open every single container; the busiest port in the UK handles over 3.5 million containers a year.

Alongside this, the banks often have no idea what is being shipped, as 85 per cent of all transactions are straight payments, with no documentation or financing involved. Take, for example, 10 companies in the UK importing T-shirts from the same manufacturer in Bangladesh. If each UK company banks with a different bank, each bank only has 1/10th of the data on the Bangladeshi T-shirt manufacturer. This is where shipping companies and logistics firms can help, as they have detailed knowledge of what they are transporting.

It is at this point that governments need to step in. The only point at which all imports are seen is the port and tax authority, although the cargo cannot be thoroughly checked. The government is the only entity that will see all the imports from the Bangladeshi T-shirt manufacturer, so it must act to pull this data together and share it.

Next steps

An approach to tackle TBML needs to be agreed and this requires cooperation from across the finance industry, the governments and law enforcement. One effective method would be to remove the paper from the documentation process and better record who is shipping what to whom. Currently, banks are investing heavily in digitising paper documents into something a computer can use. This seems strange as the Bills of lading and invoices are no longer written by hand, but are instead created on a computer and printed.  We should stop digitisation and start forcing businesses to upload their documents in a machine-readable format in order for them to gain access to finance and be able to import into a country.

One suggestion is that the G20 governments should mandate that all imports are registered electronically. A simple spreadsheet consisting of the sender and recipient details, the delivery location, a short breakdown of each item, quantity and price should be sufficient for banks to use this same information for financing and processing transactions.  For emerging markets and developing nations, trading with each other paper will still be required but this would be a step in the right direction.

Meanwhile, banks should ensure they are conducting comprehensive risk assessments of their trade finance businesses, taking into account their customer base, geographical locations, products offered and any risks in order to determine the amount of financial crime risks they could be exposed to. Banks should also make use of advanced data analytics, network analytics and machine-learning technologies that are able to identify information, trends, connections and anomalies indicative of TBML schemes.

TBML may never be fully eradicated, but with the right technology and processes in place, and through collaboration and regulation, we can devote the required time and resources to create a robust AML program that can stand firm against financial crime.


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