Trade Base Money Laundering

Trade base money laundering is the abuse of international trade to move illicit funds in cross-border trade. It’s on the rise because money laundering is about deception and trade which is inherently paper-based. Naturally comfort in money handling and relax or gaps in regulatory policies gives a place for criminals to hide or disguise black money. We’re also seeing that criminals gravitate to the path of least resistance and this is a very successful way to move funds.

What is Trade Base Money Laundering?

Therefore in order to monitor Trade Base Money Laundering effectively it will have to look at how your customer and their counterparty interact. You have to use a process called entity resolution to correctly identify that counterparty who is not at the bank and understand the context of the transaction when you join together.

Trade base money laundering is a major part of money laundering. Different data sources you also have to understand how this fits into the global supply chain and legal hierarchies which is a network analytics problem. When you combine those two together you gain more power and more context to make better more accurate decisions and models for alerting trade based money-laundering. It is one of the main ways for criminals to do illegal activities like traffickers, smugglers and organized crime groups try to disguise and move the proceeds of their crimes. They also use trade based money laundering to violet  US sanctions, evade taxes and customs duties. Avoid capital controls or a legitimately claim tax incentives. These criminals can launder in this way are substantial estimated to be at least many hundreds of billions of dollars each year unless action is taken these figures are only going to increase.

So, why do these criminals use trade based money laundering to move their ill-gotten gains? Firstly the financial system becomes a more hostile place for money launderers. Trade is seen as an increasingly attractive option secondly the scale speed and complexity of global trade which is valued in the trillions also makes it difficult to spot. Through Illicit transactions the criminals are able to hide their activity in plain sight amongst the millions of containers of goods transported each week.

So, what does trade based money-laundering look like well most of it seems just like legitimate trading activity. So it’s very hard to detect the most popular techniques to used are mispricing which is where trade goods are invoiced above or below fair market price. Submitting more than one invoice for the same transaction over or under stating the volume of goods traded using a fake description for the goods. Altogether or making up phantom shipments that don’t even exist with no set prices for goods and with value varying based on quality quantity. Other commercial considerations detecting illicit trade are a real challenge. This challenge is largely shouldered by customs authorities, enforcement agencies and banks, which provide trade finance products contribute to the fight against trade based money-laundering by implementing risk-based controls. These include a robust customer due diligence process to ensure banks, know their customers and their expected business and transaction patterns. As well as checking against actions and other watch lists surveillance and other controls designed to identify and investigate potential red flags or key risk indicators.

Training and awareness programs for employees involved in processing trade finance transactions but there’s a limit to what banks can do partly because they’re not involved in every trade transaction. In fact banks provide traditional financing in no more than 20% of cases they have such limited information about the underlying trade deal in the other 80% of transactions which are called open account transactions. Detecting trade based money-laundering is virtually impossible and where banks are involved they have no opportunity to physically inspect actual goods or containers with the possible exception of the importer and exporter.

No one party in any trade activity has a complete view of the transaction without the full picture. Identifying and preventing illicit trade is incredibly difficult some banks think. This risk is too great and choose instead to stop offering trade finance products altogether which can have a negative effect on legitimate trade.  

So, what are banks doing well of course they should apply the lessons learned from fighting cash based money-laundering. To better understand in the ship trade using automated surveillance which is one of the key and – money laundering controls for cash may increase effectiveness to some extent. But this isn’t enough on its own in fact momentum across the industry is moving in favor of a more tailored approach. For example banks could use potential red flags to better identify and categorize higher risk customers.

They’re also looking at ways to harness risk-based intelligence bringing together comprehensive customer knowledge, transaction information and other meaningful risk factors with the added boost of innovative technology. This intelligence could be turned into a powerful weapon for experienced analysts to use against illicit trade this may also help banks to react faster to emerging trends in trade base money laundering.

International Chamber of Commerce (ICC) and the Bankers Association for Finance and Trade made a number of recommendations in trade finance principles. One of these is to have greater collaboration between the private and public sectors. If all stakeholders from shippers Airlines and truckers ports and custom authorities to businesses banks and law enforcement agencies could find better ways of sharing information then collectively they could do much more to disrupt these criminals.

Scope and Methods of TBML

Generally, criminals use trade finance to obscure the illegal movement of funds through misrepresentation of price, quality and/or quantity of goods and services. And to do this, in most cases, there might be collusion between the seller and the buyer. The collusion may well arise as both parties could be controlled by the same person/entity. The transfer of value in this way may be executed in a number of ways such as Over Invoicing, Under Invoicing, Multiple Invoicing, Short shipment, Over Shipment, Phantom Shipment, and Complicated Payment Structure, discount, price changes, freight charges or without making any payment at all etc. Bangladesh is not an exception in this regard. Some avenues of Trade Base Money Laundering at different stages of trade transactions. Below are the 3 major reasons for the scope of Trade Base Money Laundering:

There’s hundreds of millions containers and trillions of dollars of trade moving around the world very hard to find the money laundering in there.

The second factor is around expertise so at the moment monitoring is done via experience clerks and analysts within the banks they’re doing a great job but they cannot look at all of the information and data points.

The last and the final reason is the repurposing so banks have used existing monitoring capabilities which are more suited to retail and they’re trying to look at to monitor trade and it’s not working for them international trade is about relationships.

Trade Base Money Laundering Through Import Activities:

1. TBML through Multiple/ Fake IRC:

For any import in Bangladesh, an importer has to obtain Import Registration Certificate (IRC) from the Office of the Chief Controller of Import and Export (CCI&E). As per regulation, an importer can get one IRC for commercial and one for industrial import. Importers may take the opportunity to have more than one IRC to use one in TBML throughout the import procedure and reporting of the transactions as importers are identified through IRCs not through their names. Moreover, family members of a trader having same business address may obtain IRCs and abuse them to commit Trade Base Money Laundering.

2. Trade Base Money Laundering through misrepresentation in Letter of Credit Authorization Form: Letter of Credit Authorization Form (LCAF) is mandatory for importer as it is the declaration of amount, value, HS code and the description of the goods as per Customs First Schedule and terms of import. After declaration of LCAF, importers are allowed to open/issue LC/Contract by the Authorized Dealers. On the basis of the LC/Contract declaring on IMP by the importers, ADs can sell/make payment of LC/Contract documents. Though importers are strictly prohibited from making payment in excess of LCAF value, sometimes abusing FC/ERQ accounts or other means, they pay more than the value of the LCAF or of expired value and thus facilitate Trade Base Money Laundering (TBML).

3. Trade Base Money Laundering using incorrect INCOTERMS: Major portion of imported goods are imported on CFR basis in Bangladesh where freight charges are invoiced to the importer. In some cases it has been found that freight charges reached several times of the FOB value. In fact, freight and other charges can also be a medium of Trade Base Money Laundering.

4. Trade Base Money Laundering using under / over invoicing: Value of goods to be imported can be medium of TBML as value can be quoted less than the actual price (under invoicing) of the goods with a deliberate intention to evade import duties and taxes. Generally, most of the amount of under invoiced import is paid through unofficial channel (hundi, hawala etc.). Evasion of taxes and duties i.e., custom related offenses is the predicate offence. On the other hand, capital machinery and raw materials (for which import duties are lower) can be imported quoting more than the actual price (over invoicing) of goods as a medium of TBML.

5. Trade Base Money Laundering through fabricating documents: Banks are responsible to make payment against the import documents if found in order and no discrepancy arises. Yet, documents can be received directly by the importer and the goods can be released from the customs. In that case, banks may make payment based on the customs certified bill of entry (BE) submitted by the importer. This practice takes place while Page 14 releasing goods with copy documents. TBML can occur in these situations as there are opportunities to fabricate the import documents and related BE by the mala fide importer.

6. Trade Base Money Laundering through fake bank guarantee (in case of advance payment): Banks are permitted to make advance payment against import without prior approval based on a repayment guarantee from a bank abroad. This guarantee is not needed for remittance up to USD 10,000 (and USD 25,000 from ERQ accounts). Moreover, fabricated/fake/false bank guarantee can create a scope of TBML through payment of advance remittance against import.

7. Trade Base Money Laundering by issuing fresh Import Registration Certificate (IRC) when any previous Bill of Entry is overdue: After making payment against the goods to be imported, importers are liable either to import the goods or to bring back the amount remitted in proper banking channel. Failure to transport the goods within the prescribed duration makes the related Bill of Entry (BE) overdue and no importer can get any import facility (opening LC/making advance payment, or enhancement of existing LC/Contract value) from any bank having overdue BE against any of its previous import without the prior approval. Importers may take the opportunity to surrender the IRC (intended to avoid the import liability and also to be involved in TBML) against which BE is being overdue and get another IRC for a fresh start.

8. Trade Base Money Laundering through showing loss/ damage of goods: The incidence of loss or damage of the goods-in-transit or before release as well as cancellation of shipment may be used as a medium of TBML. Compensation against the damaged goods or return of the remittance against cancelled shipment can be received from sources/third parties directly not related to the exporter of the goods. Again, loss of goods before release from the customs can be concocted (intended to evade tax and commit capital flight) to get the insurance claim and get waiver from submission of the BE.

9. Trade Base Money Laundering through opening back-to-back LC against fake master Letter of Credit: The ADs are allowed to open back-to-back (BTB) import LCs against export LCs operating under the bonded warehouse system, subject to observance of domestic value addition requirement. Misuse of the bonded warehouse facility (intended to evade tax) by selling the imported goods to the local market can also be an example of TBML in import. Again, BTB LCs opened against arranged/fake master LCs can also be used in TBML where no export occurs showing some ‘valid’ reasons though raw materials imported duly against the BTB LCs.

10. Trade Base Money Laundering through Suppliers’/ Buyers’ credit: ADs are allowed to open deferred or usance basis L/C. As there are instances and vulnerabilities of abuse of suppliers’ and buyers’ credit, utmost care should be given to those payments where payments are settled through buyers’ credit or suppliers’ credit.

11. TBML through Free of Cost (FOC) raw materials: Exporters are allowed to export on CMT (Cutting, Making and Trimming) basis as well as to import the raw materials on Free of Cost (FOC) basis. Since this FOC import does not require any bank endorsement and there is no matching of bill of entry with the value, customers can manipulate the FOC items.

 12. TBML through import of non-physical goods: Import of non-physical goods (software and others) can be a medium of TBML as keeping track of import process of such non-physical goods is difficult to trace out for any reporting/regulatory agency.

13. TBML through import of goods for personal consumption: Import Policy Order allows actual users to import up to a certain limit (USD 7,000.00 per year) for their personal consumption. As AD banks have no control to monitor this limit through any system individuals might import through different ADs exceeding the limit and sell them commercially to the market illegally.

14. TBML through import of goods through international debit /credit cards: Consumers can purchase goods online by making payment through international credit or debit cards or unused portion of Travel Quota and later receive goods through courier. Criminal proceeds might be transferred through this online payment.

Trade Base Money Laundering Through Export Activities:

1. TBML through multiple/ fake ERC: An exporter has to obtain Export Registration Certificate (ERC) from the Chief Controller of Import and Export (CCI&E) under the Importers, Exporters and Indenters registration process. According to the order, an exporter can get only one Export Registration Certificate (ERC) for export. Exporters may take the opportunity to have more than one ERC to use one in TBML, as throughout the export procedure and reporting of the transactions, exporters are identified through ERCs not through their names.

2. Trade Base Money Laundering using under / over invoicing: Value of goods to be exported can be a medium of TBML as value can be quoted less than the actual price (under invoicing) of the goods intended to siphon money abroad.

3. TBML through overdue export bills: After shipment of the goods for export, exporters are liable to repatriate export proceeds in full. The duration of the repatriation of export proceeds within 4 months of shipment. Failure to receive the full export proceeds within the prescribed duration makes the related Export Bill overdue. Exporter can be out of track having huge amount of overdue export bills intended to commit money laundering through export.

4. Trade Base Money Laundering through remittance of other miscellaneous charges: Commission, brokerage fee or other trade charges to be paid to foreign importers/agents (of which up to 5% ADs can allow) may also sometimes be abused for TBML.

5. TBML through partial drawing of export bill: Partial drawing of export bill/Advance Receipt against export can be abused for TBML. It is the responsibility of the ADs to follow up each such case and to ensure that the balance amount is also realized within the prescribed period.

6. TBML through fake shipment / suspicious shipments: Shutting out of a shipment by a particular vessel and re-shipment in another vessel should be checked. This is because there are opportunities of TBML as transshipment through one or more jurisdictions for no apparent economic reason is suspicious.

7. TBML through reporting loss / damage of exported goods: The incidence of loss or damage of the exported goods in-transit or before release as well as cancellation of shipment (for which payment has not already been received) may be used as a medium of TBML. Compensation against the damaged goods can be received from other sources/third parties directly not related to the importer of the goods.

8. TBML through export of non-physical goods: Export of non-physical goods (software and others) can be a medium of TBML as keeping track of the export process of the non-physical goods is difficult for any reporting/regulatory agency.

9. TBML in connivance with Buying House: Buying House Arrangement/Buyer Nominated Supplier Arrangement can be a medium of TBML. Shipment of goods can illicitly be delayed by the buying houses through ‘arranged game’ for getting discount on the exported value. Again, buyer nominated supplier can quote higher price for the raw materials and thus money laundering can take place.

10. TBML through advance payment against export of unconventional items: Inward remittance as “Advance Payment” against export of unusual commodities (those having high percentage of cash incentive allowable) without making shipment rather paper works are to be involved to TBML.

11. ADs are allowed to discount the Usance Bill: ADs should take utmost care while discounting or purchasing foreign documentary export bills.

Trade Base Money Laundering through Inward Remittances:

1. Transaction in large volume through other than banking channel such as exchange house etc. is vulnerable to TBML.
2. Wage earners remittance may be brought into Bangladesh in the name of export proceeds to claim cash incentives.
3. Inward remittance may be brought from the countries where it has direct/indirect business and cash incentive may be claimed.

Challenges in Preventing Trade Based Money Laundering

1. Price Verification for Financial Crime Control

As Import Policy Order, importers are obligated to import goods at competitive prices. Banks are also advised to take usual and reasonable cautionary measures to ensure that the price of the goods concerned is competitive in terms of prevailing price in the international market on the date of contract and/or similar imports in contemporary period. They are also advised to verify the above, if needed, with the help of concerned Bangladesh Mission abroad. Due to lack of relevant business information, such as the terms of business relationship, volume discounting or specific quality, or feature, specifications of goods involved AB officials have to be cautious in making meaningful determinations about the appropriateness of the unit price. Moreover, many products are not traded in public markets and their market prices are also not publicly available. Even where goods are publicly traded, the current prices may not reflect the agreed price used in any contract of sale or purchase and these details will not usually be available to the banks involved due to competitive sensitivity of such information.

2. Transfer Pricing

Transfer pricing is a related party transaction commonly used by transnational corporation as part of their financial and tax planning strategy. Multinational organizations use transfer pricing to shift taxable income from jurisdictions with relatively high tax rates to jurisdictions with relatively low tax rates to minimize income tax. Similar strategies are also employed in relation to import duties and value added tax. TBML can occur when international trade is abused for transfer pricing. This poses a significant challenge which needs to be overcome.

3. Limited Skilled Manpower

Performing the foreign exchange activities involves proper communication with the client, various banks of the country as well as abroad. A single error may cost thousands of dollars. In Bangladesh there are limited skilled manpower who are able to understand and handle the foreign exchange dealings very well. As such, skill development through proper training is a must to address TBML risk.

4. Extreme Competition

Unhealthy competition is driving bankers to constantly hunt for aggressive business and profit target. Thus working under pressure of such target combined with the fear of losing customers and presence of other competitor banks officials sometimes ignore minor trade related due diligence which makes the bank a victim to TBML. Unhealthy competition poses a challenge to combating TBML.

5. Absence of Co-ordination

Absence of coordination is also one of the major challenges in combating TBML. A coordinated Risk Management Unit/Division in combination of all concerned agencies may be firmed to ensure co-ordination & concerted efforts. Besides, National Board of Revenue (specially the Valuations and Audit unit)/, Customs and Bangladesh Banks may also work to assess the value of the imported or exported goods/commodities/services. Arrangements may be in place so that customs authority and banks may be aware through mutual information sharing mechanism when there is abnormal increase in the number and value of LC of a particular company/firm etc., risky import of goods such as Reconditioned Capital Machinery, Software, Chemicals where complexity exists in determining price and description of the products, cases where importer and exporter are related, when import and export goods are inconsistent with the nature of trade of the customer, inconsistency in price exists, when an LC is frequently amended, where beneficiary desires payment in third country or party, when Bill of Lading does not mention container number, does not bear invoice number, where miscellaneous charges such as freight, lading charge etc are abnormal etc.

6. Absence of Management Information Systems (MIS) and a Central Data Base

Lack of MIS and a central data base or uniform price list of various commodities is also a hindrance to preventing under invoicing and over-invoicing by those engaged in trade operations.

7. Duty/Tax structure

At times, bankers disagree with the quoted price in the Proforma Invoice (PI), because they fail to match the given price which is sometimes far away from the actual price of the commodity in the international market. In some items of imports importers may quote higher price in line with customs’ rate of duty even though the price may be less than the price mentioned in NBR’s minimum price list10. Though there is no scope of tax/VAT evasion against such imports, it may be abused for TBML.

The Challenges and difficulties faced by the sector and the specific trend of trade based money laundering in Bangladesh indicates the challenging task the banks have to accomplish to protect themselves from this financial crime. The next chapters, therefore, highlight the risk based framework and trade controls that banks should establish to combat trade based money laundering effectively.

Trade Base Money Laundering Risk Assessment & Mitigation:

Mechanism to address risks at different levels of trade operations, it will establish TBML risk assessment and mitigation mechanism at the following 4 stages or levels of trade processing:

1. Infrastructure level: Firstly, AB Bank needs to have in place adequate system based /software based infrastructure for assessment of TBML risks before starting a trade transaction.
2. Customer level: Secondly, high risk customers with dubious trade transaction give birth to trade fraud. Hence knowing and assessing customer before on board for trade transaction is extremely important for combating TBML.
3. Transaction level: Thirdly, TBML risk assessment and mitigation at the transaction level is the most important and vital to combating this offense since in most cases, TBML takes place during trade transactions (i.e. LC opening, Trade financing, EXP issuance etc.)
4. Enterprise level: And finally, a holistic approach by the entire institution shall be effectively implemented through senior management engagement in TBML risk assessment and mitigation at enterprise level.