Transnational crime is worth up to US$2.2tn each year and much of it is facilitated by trade misinvoicing and other forms of trade-based money laundering (TBML).

A new, wide-reaching study by Global Financial Integrity (GFI) shows that in the illegal trade of drugs, art, endangered wildlife, and stolen crude oil and other minerals, TBML is a common way of legitimising the funds obtained.

These illicit trades form a large portion of the estimated US$2.2tn in criminal activity around the world (although the largest area is counterfeiting, which accounts for transnational crime worth up to US$1.13tn every year).

Banks and companies are complicit – often unknowingly – in facilitating these illicit activities. Along with governments and multilateral organisations, these private sector companies should take greater action to make all trade transparent in order to limit this proliferation in crime.

Trade misinvoicing is a method of moving money illicitly across borders that involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs by fraudulently misreporting the quantity, quality, price per unit, type of good, or any other fact that would result in the shipment being over or under-invoiced.

It is commonly used to launder money and avoid paying the requisite tax on goods. In countries which have controls on the amount of capital that can leave their borders, it is often used as a way of getting money out.

For instance, a company may add false value to goods invoiced in order to justify the transfer of a higher amount of money out of a country. This is over-invoicing. Under-invoicing, on the other hand, is a common way for complicit exporters and importers to avoid paying tax.

It is a serious issue in trade finance and one to which more awareness has been brought in recent years. The latest data from GFI sheds light on just how widespread this practice is.

“TBML is an important component of the underlying system that supports all transnational crime. TBML facilitates both the movement of illicit goods as well as illicit value. Attacking the systemic elements of transnational crime – TBML as well as anonymous shell companies and secrecy jurisdictions, among others – allows governments to combat crime as a whole, instead of market by market. Governments must target the profits of transnational crime, not just the people and products,” Channing Sophia May, policy analyst at GFI and author of the report, tells GTR.

Drugs and artwork

The illegal drug trade, for instance, is worth up to US$652bn in 2014, GFI data shows. TBML acts as a value-transfer system that allows drug trafficking organisations (DTOs) to repatriate drug proceeds through the trade of goods, as opposed to the movement of money.

“For example, a Colombian DTO will use drug proceeds, in US dollars, to purchase goods, such as electronics, toys or appliances, in the United States, which are then exported to Colombia. Once in Colombia, the imported goods are sold, in Colombian pesos, and the DTO recoups its proceeds,” the report reads.

Thus, the money is laundered. This leads to significant tax revenue losses for the governments of these states, and also distorts market value of goods, since DTOs often sell them at a large discount to hasten the inflow of cash.

In China, TBML of artwork is often used to evade currency controls. The country is one of the fastest growing art markets in the world, and legal sales generated US$11.8bn in 2015. However, with legislation allowing citizens to send just US$50,000 overseas each year, misinvoicing is often used as a way around this.

For instance, a US-based art dealer could sell a painting worth US$500,000 to a Chinese counterpart. However, by invoicing for US$750,000, the Chinese buyer is able to use value transfer to get an extra US$250,000 out of the country. Parties are complicit, and the subjective value of art makes this a particularly difficult field for authorities to monitor.

“There is an overall absence of transparency or regulation of the art market. The market operates without the safeguards required of other high-value, high-risk markets and industries, such as real estate, insurance, casinos, and dealers of precious stones and metals. Of 212 surveyed countries and jurisdictions, only 35 had anti-money laundering and combatting the financing of terrorism rules on customer due diligence that specifically included dealers in art and or antiquities,” the report reads.

TBML is not just confined to criminal goods: reports abound of Chinese importers paying thousands of dollars for rolls of toilet paper, as a means of getting their money out of the country. There are reports of bulldozers being shipped to Colombia at US$1.74 apiece. By under-invoicing the goods, importers can avoid paying taxes.

But this report emphasises the darker side of the business – it often helps fund serious crime, including human trafficking, illegal organ sales, and the killing of many seriously endangered animals. GTR has reported previously on the lack of a binding international standard on TBML.

While some authorities, most significantly, the Hong Kong Monetary Authority and the Monetary Authority of Singapore, have issued guidelines on TBML, no international standard on reporting exists. GFI calls for transparency across the board in order to clean this up.

“Increasing financial transparency, especially through the creation of public registries of beneficial ownership information, limiting secrecy jurisdictions, and curtailing trade misinvoicing, along with improved information sharing across government agencies, has the potential to significantly shrink all forms of transnational crime simultaneously,” May writes.