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Trade-based money laundering (TBML) is one of the primary channels used to launder the proceeds of Latin American criminal activity, including narcotics trafficking and corruption, researchers are warning. 

Global Financial Integrity (GFI), a Washington, DC-based think tank focusing on illicit financial flows, says in a report that violent criminal activities across Latin America “generate large amounts of illicit proceeds which are subsequently laundered back into the region’s economies”. 

Though anti-money laundering reforms have focused on stopping banks from facilitating such activity, GFI says these efforts have “failed to address safeguarding international trade”, resulting in a “systemic defect” in the fight against financial crime. 

Open account transactions – which make up around 80% of global trade – are widely considered higher-risk than documentary trade finance. 

Letters of credit, documentary collection and factoring benefit from greater insight into the validity of trade finance transactions as they receive documentary information such as invoices and bills of lading, GFI says. 

However, there remains a risk that importers and exporters are unintentionally involved in TBML schemes, or in some cases, are participating as a result of “wilful blindness”. 

Another challenge is the potential role of freight forwarders, carriers and customs brokers in facilitating such schemes. 

“Shippers may issue false invoices to be used on import,” the report says. “Customs brokers, who act as an intermediary between a business and customs, may not screen the documentation they file for irregularities.  

“Supervisors at container ports can also be involved in facilitating TBML by shepherding fraudulent shipments through customs clearance.” 

Though GFI has warned that trade-based money laundering risks are present globally, it says that in Latin America’s case, much of the issue stems from the region’s role in producing and exporting narcotics. 

Having gathered intelligence from financial crime experts in Latin America, GFI says there is “concrete information… that the proceeds from drug trafficking represented the majority of funds laundered through TBML”. 

The strongest connection between TBML and drug trafficking was reported in Mexico and Colombia. 

The report gives the example of Los Brokers, a professional money laundering network in Colombia that has been accused of using fake export contracts to move funds to front companies in Mexico, Costa Rica, Panama and Chile.  

Earlier this year, Colombian authorities charged the group with laundering nearly US$100mn from a range of criminal organisations during 2017 and 2018. Its members included accountants, bank employees and administrators, a government announcement says. 

Another high-risk area is the tri-border area between Argentina, Brazil and Paraguay, a region that serves as a “hub for criminal activity” across the continent and “where TBML was very popular”, GFI says. 

Challenges also extend to drugs produced elsewhere but moved through Latin America, with the report including a warning from one financial crime expert that China-produced fentanyl is being moved to the US via Mexican importers. 

In terms of high-risk goods, GFI says there is a strong connection between the region’s gold trade and TBML, particularly in relation to Colombia’s notorious illegal mining sector.  

Examples of illicit activity include exporters over-declaring the quantity of shipments or declaring gold as another commodity such as scrap metal, in order to move illicit funds across national borders. 

The report also describes a “carousel scheme” where Colombian gold would be officially exported to Mexico, smuggled back across the border and re-exported, as a means of moving funds seemingly tied to legitimate activity. 

Though some banks have responded to these risks by refusing to do business with artisanal and small-scale mining, GFI says that risks pushing such activity into underground channels or through shadow banking systems. 

The report makes several recommendations to national authorities, including law enforcement, prosecutors and customs agencies, to improve awareness and knowledge of TBML. 

It says countries should be encouraged “to better vet those private sector stakeholders engaged in trade”, including financial institutions. 

The US should also consider creating a standardised means of collecting and sharing trade data, it says, pointing out that investigators often encounter difficulties linking the import and export sides of a trade transaction.