The US government has rejected calls for closer monitoring of efforts to fight trade-based money laundering (TBML), despite an independent audit concluding that significant strategic improvements are needed.
The Government Accountability Office (GAO) – a non-partisan congressional watchdog – had been asked by US senators to examine the steps taken by the Department of Homeland Security to ensure trade transactions are not being exploited as a way to launder illicit funds.
Its report, made public last week, says the “amount of money laundered through TBML schemes may potentially be up to hundreds of billions of dollars globally, every year”.
“Some US officials and knowledgeable sources believe that, based upon available evidence, TBML is likely one of the largest forms of money laundering,” it adds.
The country’s efforts to combat TBML – an umbrella term for moving criminal funds through trade transactions that often takes the form of over or under-invoicing – are handled through its trade transparency unit (TTU).
The TTU is supposed to work by partnering with equivalent units in other countries, particularly those deemed high-risk. In the case of the US, the report says laundering schemes are widely used by drug traffickers in Colombia and Mexico, though have also been linked to illicit gold imports from Peru and government corruption in Venezuela.
But in practice, the report says the TTU programme is not working effectively across international borders. Partners in other countries have been given no funding by the US since 2013, it says, and problems have arisen around incompatible technology, a slowdown in expansion and, in some cases, total lapses of existing programmes.
It says Immigration and Customs Enforcement “does not have a clear guide on how best to operate the TTU programme and cannot make management decisions based on programme results”.
One of two recommendations – that the government ensures it “has a plan” for partnering with other TTUs and expanding into other countries – was accepted by the Department of Homeland Security. It intends to assess emerging threats and create a new strategic plan by the end of March 2021.
The second recommendation was rejected, however. The GAO suggested the development of a performance monitoring framework “that would enable to the agency to systematically track programme results” at home and overseas.
In its response, also made public by the GAO, the government says it already monitors the effectiveness of the TTU programme domestically, but cannot access the relevant information for foreign partners nor set them targets. It also “does not share information if the political climate is not supportive to the United States presence”.
Though the government requests the GAO considers the matters “resolved and closed”, the watchdog says it “continues to believe the recommendation is valid”.
Trade-based money laundering: a risk to banks
The GAO has become increasingly active in monitoring trade-based money laundering. A previous report, made public at the start of this year, found that the amount of money laundered through seemingly legitimate trade is “large and growing”, and the watchdog is due to produce two further reports in the coming months.
Its first report identified open account trade, where trade transactions are processed but not financed by a bank, as a “primary vulnerability”. Because financial institutions have little visibility over the underlying trade, detecting wrongdoing is near impossible.
For banks themselves, legal experts warn there is an immediate potential liability if they have not done enough to prevent illicit activity, as well as a risk of reputational damage that could affect their ability to work with other institutions, for instance on syndicated deals.
Though primarily concerned with government efforts, the GAO’s latest report lists several red flags that financial institutions should look out for. It includes payments made by unrelated third parties, over or under-valuation of commodities, unusual shipping routes or transhipment points, and double invoicing.
It also provides case studies of laundering rings investigated by law enforcement authorities.
Operation Fashion Police, for example, targeted clothing businesses in Los Angeles suspected of having ties to black market peso exchange schemes in Mexico, Guatemala and other Latin American countries. After finding that textile companies had been involved in laundering the proceeds of drug sales, authorities swooped to seize tens of millions of dollars in bulk cash.
Another scheme described by the report involves the export of used cars from the US to West Africa. The report says clothing and automobiles are among the most common items linked to TBML schemes, as well as precious metals and electronics.
The underlying criminal activity is often drug-related. The GAO says estimates from law enforcement agencies and independent economists put the value of cocaine proceeds laundered back to Colombia each year at between US$5bn and US$10bn.
TBML is also used by Chinese criminal gangs “to repatriate proceeds from the sale of synthetic opioids in the United States and around the globe”, it says.