Trade-Based Money Laundering

The Next Frontier in International Money Laundering Enforcement

John A. Cassara

• Publisher: Wiley
• Year: 2015
• Print ISBN: 9781119078951
• eBook ISBN: 9781119125396
• Edition: 1
• Topic: Business
• Subtopic: Auditing
• Index: Business

Uncover the financial fraud that funds terrorist organizations

Trade-Based Money Laundering is an authoritative examination of this burgeoning phenomenon, now coming under scrutiny in the War on Terror. This book walks you through the signs and patterns of trade-based money laundering (TBML) to help you recognize it when it occurs, and shows you how data and analytics can be used to detect it. You'll learn the common value transfer techniques including invoice fraud, over-and-under invoicing, and misrepresentation, and learn why analytic detection systems have yet to be implemented despite the existence of copious data. Case studies from around the world highlight the real-life implications of the concepts and processes presented in the text, giving you a first-hand view of the mechanisms at work inside this expanding illegal market.

Trade-based money laundering uses trade to convert large quantities of illicit cash into less conspicuous assets or commodities to evade financial transparency laws and regulations. As an ideal funding mechanism for terrorist groups, the practice is getting more attention even as it increases in scale and spread. This book takes you deep inside TBML to better arm you against its occurrence.

• Learn the typical value transfer techniques of TBML
• Examine case studies detailing international examples
• Discover why institutions have failed to implement detection systems
• Explore ways in which analytics can identify TBML

According to the U.S. State Department, TBML has reached staggering proportions in recent years, and is considered by many to be the next frontier of international money laundering enforcement. Trade-Based Money Laundering gives you a battle plan, with expert insight and real-world guidance.

Chapter 1
The Next Frontier

The Financial Action Task Force (FATF) has declared that there are three broad categories for the purpose of hiding illicit funds and introducing them into the formal economy. The first is via the use of financial institutions; the second is to physically smuggle bulk cash from one country or jurisdiction to another; and the third is the transfer of goods via trade.¹ The United States and the international community have devoted attention, countermeasures, and resources to the first two categories. Money laundering via trade has, for the most part, been ignored.

The United States' current anti–money laundering efforts began in 1971, when President Nixon declared the “war on drugs.” About the same time, Congress started passing a series of laws, rules, and enabling regulations collectively known as the Bank Secrecy Act (BSA). The BSA is a misnomer. The goal is financial transparency by mandating financial intelligence or a paper trail to help criminal investigators “follow the money.” Today, primarily as a result of the BSA, approximately 17 million pieces of financial intelligence are filed with the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) every year. The financial intelligence is warehoused, analyzed, and disseminated to law enforcement agencies at the federal, state, local, and increasingly the international levels.

The worldwide community slowly followed the U.S. lead. In 1989, the G-7 created the FATF. The international anti–money laundering policy-making body championed 40 recommendations for countries and jurisdictions around the world aimed at the establishment of anti–money laundering (AML), and after September 11, counterterrorist financing (CFT) countermeasures. These included the passage of AML/CFT laws, the creation of financial intelligence, know your customer (KYC) compliance programs for financial institutions and money services businesses, the creation of financial intelligence units (FIUs), procedures to combat bulk cash smuggling, and other safeguards.

The FATF's initial recommendations were purposefully imprecise in order to accommodate different legal systems and institutional environments. In its infancy, the FATF was also Western centric, focusing on money laundering primarily through the prism of the West's “war on drugs,” where large amounts of dirty money were found sloshing around Western-style financial institutions. The FATF and its members almost completely ignored other forms of non-Western money laundering. Unfortunately, the FATF's early myopia had serious repercussions. Terrorist groups and criminal organizations continue to take advantage of what Osama bin Laden once called “cracks” in the Western financial system.²

As FATF evolved and the international community responded to growing financial threats, including the finance of terror, its nonbinding recommendations became increasingly precise. Its recommendations and interpretive notes have undergone periodic updates. In 1996, 2003, and 2012, its standards were significantly revised. The FATF's membership expanded, and today FATF-style regional bodies are found around the world.

Yet outside of FATF's 2006 trade-based money laundering “typology” report and similar studies conducted by FATF-style regional bodies (a study of particular note was conducted by the Asia Pacific Group in 2012), trade-based money laundering and value transfer have, for the most part, been ignored by the international community. This despite the FATF's above declaration that trade is one of the three principal categories of laundering money found around the world. For a variety of reasons, it has not been possible to achieve consensus on the extent of the problem and what should be done to confront it. And there continues to be an ongoing debate about whether financial institutions have the means and should assume the responsibility to help monitor international trade and trade finance as it relates to money laundering.

In 2014, The Economist called trade “the weakest link” in the fight against dirty money.³ I agree with the assessment but believe it will change. Governments around the world—simultaneously pressed for new revenue streams and threatened by organized crime's use of money laundering, corruption, massive trade fraud, transfer pricing, and the associated threat of terror finance—are slowly moving to recognize the threat posed by trade-based money laundering and value transfer. (Note: TBML will be used in this book as the accepted acronym.)

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So what is TBML? The FATF defines the term as the “process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.”

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The key word in the above definition is value.⁴ To understand TBML, we must put aside our linear Western thought process. Illicit money is not always represented by cash, checks, or electronic data in a wire transfer, or new payment methods such as stored-value cards, cell phones, or cyber-currency. The value represented by trade goods—and the accompanying documentation both genuine and fictitious—can also represent the transfer of illicit funds and value. This book will provide many examples of the how and why.

The Magnitude of the Problem

To estimate the amount of TBML in the United States and around the world, we must first examine the magnitude of international money laundering in general. Those estimates are all over the map. In fact, the FATF has stated, “Due to the illegal nature of the transactions, precise statistics are not available, and it is therefore impossible to produce a definitive estimate of the amount of money that is globally laundered every year.”⁵

However, the International Monetary Fund has estimated that money laundering comprises approximately 2 to 5 percent of the world's gross domestic product (GDP)⁶ or approximately $3 trillion to $5 trillion per year. In very rough numbers, that is about the size of the U.S. federal budget! The United Nations Office on Drugs and Crime (UNODC) conducted a study to determine the magnitude of illicit funds and estimates that in 2009, criminal proceeds amounted to 3.6 ...

Table of contents

• Cover
• Title Page
• Copyright
• Table of Contents
• Foreword
• Preface
• Acknowledgments
• About the Author
• Chapter 1: The Next Frontier
• Chapter 2: Trade-Based Money Laundering Techniques: Invoice Fraud
• Chapter 3: Black Market Peso Exchange
• Chapter 4: Hawala: An Alternative Remittance System
• Chapter 5: Chinese Flying Money
• Chapter 6: Misuse of the International Gold Trade
• Chapter 7: Commercial TBML
• Chapter 8: More Schemes and Facilitators
• Chapter 9: Monitoring Trade
• Chapter 10: Red-Flag Indicators
• Chapter 11: Conclusions and Recommendations
• Appendix A: Money-Laundering Primer
• Appendix B: Original Trade Transparency Unit (TTU) Proposal
• Glossary
• Index
• End User License Agreement