“You can’t hit what you can’t see.” This is as true for crime as it was for Muhammad Ali, and in the case of lenders battling trade-based money laundering, it’s a big problem. Isaac Hanson explores why the industry is so bad at detecting this type of fraud, and who can help fix it.
Although widely acknowledged as a scourge of international trade, the difference between how often trade-based money laundering (TBML) occurs and how much is actually detected is vast. Many experts believe this indicates a problem with the methods used to identify it.
The US Government Accountability Office (GAO) described TBML in 2021 as “one of the primary mechanisms criminal organisations and others use to launder illicit proceeds”.
The report highlighted misinvoicing as the most common technique, involving deliberate under or over-stating the price of goods to disguise the movement of illicit funds.
This understanding is widely accepted within the trade finance industry and is backed up by data from various independent bodies. A report by think tank Global Financial Integrity (GFI), which analysed a decade of trade data from 2011 to 2021, found that 63% of known TBML cases involved misinvoicing.
Nevertheless, TBML remains notoriously difficult to study and fully comprehend. The International Chamber of Commerce described it in 2018 as the “least understood financial crime method”.
The brunt of the compliance burden currently rests with banks, but this approach has largely failed to shed light on the scale of TBML, and experts question whether lenders should be responsible for solving the problem in the first place.
GFI’s report notes that “the overall universe of TBML cases that go undetected is almost certainly much larger [than their analysis]”.
While its analysis identified just US$60bn of suspected TBML globally over 10 years, GFI estimates that the illicit flows linked to TBML could amount to trillions annually.
This raises the question of whether governments and law enforcement agencies are looking for the criminals in the right places.
There are a range of techniques employed by money launderers beyond misinvoicing, says Tom Cardamone, chief executive and president of GFI.
“If you’re a drug cartel, and you have a million dollars in drug profits you want to launder, you buy cell phones, you buy sides of beef; all kinds of legitimate products can be purchased and then shipped back to the country where you want to convert those profits into local currency,” Cardamone tells GTR.
“You do not have to manipulate the value of those goods when using trade to launder money” since it’s extremely difficult to detect money laundering when goods are transferred at the market rate he says.
Over the last two decades, banks have been subject to increasingly stringent anti-money laundering controls, including transaction monitoring and reporting requirements.
But for Cardamone, gaps persist even after information on potentially suspicious activity is reported to the authorities.
“This is a law enforcement issue primarily,” says Cardamone. “One of the issues is that law enforcement is not looking at this from a holistic view. Different departments have different silos of information that are not being shared.”
Cardamone is not alone in highlighting these concerns.
Following a December 2021 report, GAO issued two recommendations to help combat TBML in the US.
The first was that the Department of the Treasury establishes an interagency collaboration mechanism to exchange data on the topic between federal agencies and relevant private sector entities.
The second was that Immigration and Customs Enforcement (Ice) grants other US agencies access to TBML-related data from its Trade Transparency Unit (TTU) to enhance detection and enforcement efforts.
The TTU is a body within Ice that shares suspicious trade data with partner countries, allowing it to analyse both sides of a trade transaction. This makes discrepancies between aspects like price and documentation clearer than if only US data was used.
Ice stated in February 2022 that it does not have the authority to provide its data to other departments because of data-sharing agreements with other countries.
Four months later, the Treasury responded to say that it “could seek to promote greater formal coordination among federal agencies on TBML […] but the effectiveness of such a coordination would rely on the Trade Transparency Unit data being made available”.
As of March 2024, neither agency has provided an update. GAO states on its website that it continues to believe the recommendation is warranted.
Mariola Marzouk is co-founder of anti-TBML company Vortex Risk and holds a doctorate in the field. She offers two potential reasons for this lack of progress: under-funding and limited understanding of the issue within law enforcement agencies.
“There is no budget, and no knowledge,” Marzouk tells GTR. “We are asking police to investigate economic crimes, but the officers are saying ‘we don’t understand what those things are’.
“They have statistics they need to be reporting to their managers, who need to look good to their managers, and so on. In this environment, are they really going to focus on crimes that are challenging, expensive and lengthy? No.”
An internal audit of Ice in August 2023 found that it had “limited ability to identify and combat commodities imported as part of TBML schemes”.
The report highlighted that the agency lacks automated technology to identify potential TBML risks and has not allocated enough funding to ensure sufficient staffing levels in the TTU.
Can you ever really know your customer?
Even though experts and campaign groups say that TBML is largely the responsibility of law enforcement – it is, after all, a crime – their inability to solve the problem has shifted much of the burden onto the banking sector.
A wide variety of recommendations, standards and laws are in place to ensure that banks do their due diligence in detecting, intercepting and reporting potential money laundering activities among clients.
Among the most influential are the 40 recommendations set by inter-governmental body, the Financial Action Taskforce (FATF), which were last updated in 2023.
These recommendations form a baseline that nations should aim to meet in order to remain off the FATF’s so-called grey list, a list of countries “under increased monitoring”, or its black list, for jurisdictions deemed “high risk” for financial criminal activity.
Joining the grey list can have major consequences for an economy. A 2023 paper by law firm White & Case notes it can “restrict cross-border trade transactions, lead to difficulties for a state obtaining credit, and limit inward foreign investment”.
The FATF’s preferred way of assessing money laundering is the risk-based approach. In theory, this is a way to give banks the flexibility to assess TBML risk on a case-by-case basis, judging a company or transaction against a series of risk indications published by the FATF.
The reality, however, is quite different, Vortex Risk argues in a white paper.
Despite being introduced to curb the amount of over-reporting by banks, many countries that implemented a risk-based approach have, in fact, noticed an increase in over-reporting, it says.
“This can be explained by the ‘crying wolf’ factor, which arises due to the excessively high fines for non-compliance with regulatory expectations,” the paper says. These fines mean it is safer – and cheaper – for the bank to report anything that could be interpreted as at risk of TBML to ensure they are not liable for any breaches of the law.
This shifts money laundering reporting from an attempt to catch criminals into a box-ticking exercise, the report suggests. It has the added downside of flooding law enforcement agencies with reports that often have nothing to do with TBML, diluting the pool of real leads.
An anonymous industry source quoted in the report says: “There is little motivation to truly uncover TBML as the focus is on identifying suspicion and filing SARs [suspicious activity reports]. It’s a lot easier to fine a bank with a lot of money than it is to capture a criminal.”
Compliance doesn’t come cheap, either. A 2023 report by data analytics company LexisNexis found the annual cost of anti-money laundering measures for financial institutions in the UK was around £34.2bn, 13% higher than the figure it reported in 2021.
On top of this, even if compliance measures capture what they are intended to, the actual volume of TBML that banks can measure is low.
A 2017 report by Baft (Bankers Association for Finance and Trade) calculated that only around 0.52% of all global payments represent trade settlement.
Since only an estimated 20% of trade is done using documentary finance – compared to 80% via open account – only around 0.1% of all global payments annually are tied to documentary trade.
Therefore, the Baft report says, “all of the AML monitoring and controls put in place in a bank’s trade services department are there to identify and intercept roughly 0.1% (or less) of illicit funds flow”.
What is to be done?
Institutions sceptical of existing anti-TBML regimes have ideas for ways to improve the system.
For Marzouk, much of the solution lies with trusting experts in the field to make the right choices.
“[Banks have] hired AML professionals. They are thinking human beings, but then we tell them they are not allowed to think,” she says. “They are to have this list of things, and be very careful to tick them all off, otherwise we are going to get a fine.”
GFI’s Cardamone, meanwhile, recommends greater collaboration between government agencies, difficult though this may be to orchestrate.
Using the US as an example, he suggests a centralised database held by the Financial Crimes Enforcement Network – a government agency that sits within the Treasury – to better map the flows of goods and money into and out of the country, though he notes that would likely require congressional approval.
Additionally, GFI is promoting the use of blockchain technology to share the valuation of goods between customs departments in real time, enabling law enforcement to see discrepancies between imports and exports of each transaction.
“One of the things we are now pushing is a new global norm where every international port would use blockchain technology to automatically, securely and privately provide valuation information between customs departments,” says Cardamone.
“It would be an automatic process where the importing customs department would know what these goods are valued at before the goods even arrive.”
Solutions are coming from other corners, too. The Asian Development Bank reported in September that it plans to roll out its programme for improved TBML reporting from banks globally, following a successful pilot in several Asian countries.
The scheme allows banks to include trade-specific data elements when reporting suspected TBML to their government bodies and has resulted in large increases in the number of reports filed.
Given its early stage, the Asian Development Bank tells GTR it has not yet been able to assess whether this has led to a discernible impact on law enforcement action, but plans to do so are in the works, and the bank is eyeing a global rollout.
Case study: Shell companies in Singapore
A case study outlined in the Monetary Authority of Singapore’s 2024 Money Laundering Risk Assessment Report details a case of phantom shipments and fraudulent trade finance loans used to launder illicit cash.
In 2023, Ng Kheng Wah, director of Singapore-based company T-Specialist International, was sentenced to 34 months in prison for fraud and violating UN sanctions on trading with North Korea.
T-Specialist had shipped luxury goods worth over S$6mn (US$4.46mn) to a North Korean department store between 2010 and 2017, the report says.
However, the North Korean company fell behind on repayments, and T-Specialist found itself facing a liquidity shortage.
The company used fictitious invoices from a shell company registered outside the country to deceive five Singaporean banks into disbursing trade finance loans worth over US$95mn.
The shell company, Pinnacle Offshore, received the proceeds and layered them through a second shell company, Mars-Rock Offshore Trading.
They were then routed back to T-Specialist, which repaid the banks. When the banks requested shipping documents, T-Specialist informed them that the goods were delivered by road, and therefore did not generate any. In reality, no shipment had taken place, but the banks were forced to take T-Specialist’s word as they had no means of verifying the goods’ movement via open-source databases.
T-Specialist was convicted of money laundering offences and fined S$880,000 (US$653,563).
