Criminals and tax evaders are using trade as a veil for their illicit activities. Finbarr Bermingham reports on the damage that’s being done, and how banks and companies need to clean up their acts.


There’s an urban myth that says the term ‘money laundering’ stems from Mafia attempts to put a legitimate front on their criminal activity by buying up laundromats. Since they were cash businesses – people would put money directly into the machines and dryers – there was no need to involve banks nor payment systems. It fitted the purpose: there was no paper trail, the Mafia was able to pool its legitimate earnings with those made from dark arts like gambling, extortion and protection fees.

Alas, it’s more likely that the term derives from the original verb, to ‘launder’ – to wash clean – rather than the physical laundromat. In other words, processing criminal proceeds to disguise their illegal origin. But the laundromat analogy is worth considering since it emphasises the sense of everyday-ness money laundering has managed to attain.

The United Nations Office on Drugs and Crime estimated in 2009 that 2.7% of global GDP (around US$1.6tn) was laundered in some way or other. And you don’t have be a Tommy gun-toting wiseguy to get in on the act. In May, the Financial Information Authority of the Vatican City announced that it had detected a big hike in suspect money laundering cases in 2013, vowing to instigate an “action plan, with certain corrective measure for the full implementation of anti-money laundering regulations”.

Common sense tells us that the world of trade lends itself to all sorts of money laundering activities. For a start, the sheer volume of trade helps to obscure individual transactions, allowing ample opportunity for those who seek it to transfer their ill-gotten gains across borders. There’s also the complexity: the complication of multi-denominational transactions can often provide obfuscation for those who seek it.

It’s estimated that 80% of global trade is done on an open account basis, meaning that the buyer and seller agree on contract terms without the level of documentation that would be available under a letter of credit. “In other words, a bank may have no visibility of the transaction and therefore is not able to carry out anything other than the standard anti-money laundering and sanctions screening on the payment,” Thierry Senechal, senior policy manager at the ICC’s Banking Commission tells GTR.

In recent months and years, players in the trade and commodity finance games have had their fingers burnt time and time again. Tales of money laundering are reaching the public domain more and more frequently – but that’s not to say they didn’t always exist. “At least half of the deals that come across my desk I cannot touch because I know there’s some kind of laundering going on,” says one banker who works in Central Asia but who, for pretty obvious reasons, wishes not to be named.

He tells a story of a steel mill in one of the former Soviet republics, which approached a development bank for a loan one bitterly cold January. Rather than ore, the plant processed scrap steel, pressing it into sheets, before selling it on to local industry. Now, the owner required a loan to purchase some more scrap. The mill’s owner provided the requisite documentation to show where the scrap was coming from and to prove that it was capable of paying the loan back. He also produced a bill of lading, the document which shows the weight and description of the goods to be transferred.

The loan was disbursed and the development bank naturally paid a visit to inspect the cargo, once it had arrived at the mill. Inspectors found that the steel was just half the weight recorded on the bill of lading. When quizzed on the missing tonnage, the owner played dumb, saying: “Of course it’s half the weight, when I bought the steel in January there was a thick layer of ice, which has now melted.” Needless to say, the loan was revoked, but this, says GTR’s source, is a classic tale of the lengths some will go to in order to pull the wool over the eyes of the authorities.

This anecdote, which was told with a hearty belly laugh, helps to paint money laundering as some sort of quaint, Dickensian deception. But it’s not always so roguish, and banks have been hit with heavy fines for their role in the practice.

El Chapo

Earlier this year in Mexico, authorities finally caught up with Joaquín “El Chapo” Guzmán, the elusive leader of the Sinaloa cartel, described as “the world’s most powerful drug trafficker”. The Sinaloa is the most fearsome of Mexico’s drug gangs, which have collectively been responsible for an estimated 120,000 deaths, as of 2013. That’s not including the 27,000 people that are still missing.

In 2012, HSBC was found guilty of ignoring basic anti-money laundering (AML) controls, as its staff wired gang money (much of it coming from Sinaloa) from accounts in Mexico to the US. The trial heard that HSBC “failed to apply legally required money laundering controls to US$60tn in wire transfers alone, in only a three-year period”. That’s four times the total volume of the US’ GDP.

HSBC was fined US$2.6bn for its misdemeanours, with one bank official bemoaning the “lack of a compliance culture”. Others weren’t so flippant. “If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” was Wachovia Bank’s former AML chief Martin Woods’ scathing take on proceedings, as told to Bloomberg.

The bank failed to implement even the most basic of checks. The likes of Bank of America and Wells Fargo have also been implicated in gang-based money laundering, something which the Financial Conduct Authority (FCA) is keen to ensure doesn’t happen again. “We are about to issue regulatory guidance on how firms can meet their obligations in this area and continue to work closely with national and international stakeholders to improve financial crime standards in the industry,” an FCA spokesperson tells GTR.

How much impact this will have in parts of the world where transparency is lacking most, however, is questionable.

Chinese whisper

Qingdao port is the seventh-busiest container port in the world. In 2012, it handled 14.5 million twenty-foot equivalent units (TEU), 1.2 million more than Dubai and almost three times the volume it processed in 2004. When port authorities announced plans to launch an IPO in June, investors were excited, anxious to get a slice of one of the fastest growing cargo terminals on the planet.
But as the port prepared to, ahem, float, an investigation was launched into alleged fraudulent behaviour involving copper and aluminium inventories. Reports emerged that a company – suspected to be Decheng Mining – used single cargoes of metal multiple times to obtain financing. The IPO, it’s fair to say, didn’t go according to plan. Investors steered clear, with just 824 retail investors applying for 11.9 million shares. But that may be the least of the authority’s worries.

In the wake of the investigation, Standard Chartered suspended new metal financing to some Chinese customers, as it reassessed its exposure to the country.

Citic Resource Holdings, the commodity trading unit of one of China’s biggest state enterprises, announced its own concern at the level of exposure to the port. “Until the status of the investigation is clarified, the company is not able to accurately assess its impact on the group’s alumina and copper stored at Qingdao port or on the group itself,” said chairman Kwok Peter Viem in a note released to the Hong Kong Stock Exchange. In places such as China, there’s a modicum of opacity which banks and traders need to be aware of.

The ICC’s Senechal warns that a common understanding of risks carried by trade-based money laundering are essential for industry and policymakers. “Appropriate risk-based approaches have to be implemented by the industry and policy communities and sharing of information is critical to the success of combating finance crime,” he says.

But in a market such as China, it’s tough to know how stakeholders can ensure these are robust. The only sure-fire way of doing so would be to pull out altogether. For most companies involved in the commodity trading sector, that’s simply not an option.


Perhaps the most startling story to emerge on trade-based money laundering in recent times, however, involves the practice of misinvoicing in Africa. A May study by Global Financial Integrity (GFI), a not-for-profit research house, found that some African countries are losing huge portions of their national GDP to trade misinvoicing – “a method for moving money illicitly across borders which involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs”.

GFI looked at trade flows out of Ghana, Kenya, Mozambique, Tanzania and Uganda between 2002 and 2011, finding that Uganda lost 12.7% of its GDP over the study’s period.

While it’s feasible that misinvoicing could be used to conceal illicit goods, the conclusion drawn by GFI is that it is primarily being used as a tax evasion tool, to avoid paying import duties or move taxable income out of one jurisdiction into another with
a lower tax rate.

The methodology looks at export and import prices from sources which are trading with one another. It takes the difference between the two and comes up with an estimate of the apparent under-pricing. When goods are leaving the country of origin at one price and arriving at a different price at their destination, there’s a serious problem.

“What’s happening is something called supply chain management,” Dr Richard Murphy, director of lobbyists Tax Justice Network, tells GTR. “The degree of sophistication depends very largely on the size of the company, but the objective is always the same. The goal is always: let’s not pay tax. The only question is the degree of sophistication applied. That percentage of total revenue [12.7%] as a result of mispricing… is it plausible? In my opinion based on the size of world trade, the size of global profits, the amount of tax which is due, it is entirely plausible that losses of this size could exist.”

The GFI report explains that the removal of onerous customs procedures, viewed by many as an impediment to trade, make trade misinvoicing a “fairly low-risk endeavour for criminals – especially for those who only moderately misinvoice their transactions by, say, 5% to 10%”. This makes the practice more widespread and more difficult to detect.

Murphy says: “Is this commonplace? Yes. Is this a normal business objective? Yes, because you can go and find respectable companies selling supply chain management. Do some companies do it legally? Yes. Do some do it illegally? Yes.
But the goal is always the same. Do they succeed in reducing the tax bill? Oh, yes!”

Economics 101 dictates that the number one rule of efficient markets is transparency. As we’ve seen in China recently, without this, those involved in trade can wind up in serious difficulty. Governments have been under increasing pressure to close tax-avoiding loopholes, to ensure companies pay taxes where they do the bulk of their trade. But the onus is not just on the regulators: banks and companies need to be drivers of change in emerging markets by pushing for more transparent practices, and steering well clear of anything they would not touch closer to home.

With regard to trade-based money laundering generally, and by virtue of this misinvoicing, GFI makes a number of general recommendations. These include governments making customs more robust; higher levels of scrutiny around trade transactions, particularly those involving known tax havens; financial regulators requiring all banks to know the true owner of bank accounts; hardest hit countries participating actively at multilateral level, moving towards the automatic exchange of tax information.

Many of these aims, however, seem a long way off. In the meantime, about eight million Ugandans live below the national poverty line.

The billions of dollars being siphoned off in trade-based money laundering every year could go some way to eradicating this, just as stopping the flow of trillions of dollars of cartel money over the Mexican border would help reduce the number of killings and disappearances. The information is out there. It’s time to make a change.