The amount of illicit money being laundered through seemingly legitimate trade transactions is “large and growing”, according to new research carried out on behalf of the US government.

A report produced by the US Government Accountability Office (GAO), a self-styled “congressional watchdog” that provides nonpartisan advice to federal officials, suggests tougher regulations in other areas of the financial sector have meant organised criminal groups are increasingly turning to trade as a means to hide payments.

It says trade-based money laundering (TBML), an umbrella term for moving criminal funds through trade transactions in order to disguise their origins, is now “one of the primary means that criminal organisations use to launder illicit proceeds”. The most common form of TBML is believed to be under or over-invoicing for shipments of goods.

“According to Treasury, since 2013 there has been a consistent decrease in bulk cash seizures reported by agencies throughout the United States that suggests that transnational criminal organisations may be increasing their use of international funds transfers to wire money across borders as part of TBML schemes,” says the report, which was sent to a trio of senators in December but only made public in late January.

The scale of the problem is difficult to estimate. The non-profit organisation Global Financial Integrity has suggested that transnational crime is worth as much as US$2.2tn each year, much of which is facilitated by trade-based money laundering, but the GAO did not provide new figures of its own. It says the opaque nature of the issue is part of its appeal to criminals.

“The large volume and complexities of international trade transactions, as well as the limited resources and varying priorities of customs agencies to identify and investigate illicit trade, make the US financial and trade systems attractive for illicit activity, including TBML and related schemes,” it says.

“Criminal organisations commonly commingle legitimate trade with illicit trade, further complicating the identification of suspicious activity.”

It is also a global phenomenon. The GAO gives case studies of bulk cash smuggling linked to Mexico and Guatemala, though says it has also been informed by law enforcement authorities in El Dorado, Arkansas of “increasing use of shell companies by Chinese entities as well as wire transfers for goods from Chinese companies”.

The underlying activity facilitated by TBML schemes primarily involve transnational criminal organisations, according to the report. Examples given include narcotics trafficking, customs fraud and other financial fraud, as well as “professional” money laundering services and financing for terrorist groups.


Primary vulnerability

Open account trade, where transactions are handled but not financed by a bank, is identified by the GAO as a “primary vulnerability”. Though banks carry out standard anti-money laundering (AML) and due diligence checks, and are required to report any suspicious activity detected, payments are usually handled automatically and with “limited visibility into the underlying reason”, it says.

In a presentation given to government staffers in December, also published last week, the GAO says around 80% of international trade processed through financial institutions is believed to be open account trade.

“Subject-matter experts and representatives of banks we spoke with told us that a bank’s ability to identify indicators associated with TBML is limited for open-account transactions,” it says.

“Banks generally do not review documentation such as invoices, bills of lading, or customs declarations in open-account transactions – as would be the case for transactions that are financed by the bank and where the bank is exposed to greater financial risk.”

Because financial institutions have so little visibility over the trade itself, detecting possible TBML activities is near impossible. That difficulty is borne out by suspicious activity reports filed by regulated companies to the US Financial Crimes Enforcement Network. In 2019, 1.15 million reports were submitted that related to money laundering, but of those just 2,212 were related specifically to trade-based money laundering – equivalent to under 0.2% of the total.

Jeremy Kuester, counsel at White & Case in Washington, DC, says there are no set rules around what specific information banks must collect about a trade transaction, and it would not be reasonable to expect them to access that information as a condition of processing a payment.

Instead, with open account trade, banks typically rely on information collected as part of their customer due diligence obligations.

“The challenge of ensuring AML compliance in trade-based money laundering illustrates a potential vulnerability in the AML framework, where data about an underlying transaction flows in a different channel than the payment chain,” Kuester tells GTR.

“AML compliance is essentially an intelligence gathering operation and in such situations, a compliance officer is never able to pull the disparate pieces of information into a meaningful understanding of risk posed by the customer or a specific transaction. This, in turn, allows suspect transactions to go unchallenged and unintegrated into law enforcement’s understanding of the problem set.”


The role of technology

Despite these concerns, the GAO report says there are signs emerging technology could help combat money laundering through international trade.

It reviews several efforts to apply blockchain technology to trade, meaning information is more visible and tamper-proof across the supply chain, as well as a pilot project by an unnamed large bank to digitise and automate document review processes for trade finance transactions.

It gives two examples from the private sector: TradeLens, a blockchain-based platform developed by IBM and Maersk that aims to improve supply chain transparency for businesses and authorities; and Insurwave, a digital signature system built by Guardtime and EY that uses blockchain technology to digitise and automate insurance processes for marine cargo.

That these projects are still in their infancy suggests the wider banking industry is relatively slow to adopt such technology.

Eli Rosenberg, a partner at Baird Holm law firm, suggests that is likely in part due to the cost of replacing legacy IT systems. Another factor is that US regulators “still take a position that human involvement is an essential piece to compliance, while embracing of technology for monitoring purposes in some respects”, Rosenberg tells GTR.

There are signs of progress at government level, with the report citing a proof-of-concept study by US Customs and Border Protection in 2018 that trialled the use of blockchain technology to facilitate document submission for cargo entry.

However, for such efforts to be fruitful in cutting out illicit activity, experts believe that information exchange between different authorities – particularly across national borders – is vital.

Tom Cardamone, president and chief executive of Global Financial Integrity, tells GTR: “There are instances where individual pairs of customs departments have agreed to share trade information, but those are very few and far between. The exporting country just wants to see the export invoice and the importing country just wants to see the import invoice, and they just don’t tend to communicate.”

Cardamone suggests that theoretically, a shared digital platform could be used to help customs officials share information on trade transactions in real-time.

“As the goods leave the exporting country, the importing customs department could have that information before the goods arrive,” he says. “It is technologically possible, but it’s a matter of trying to get the right institutions to determine how it should be implemented and funded.”