Q&A: Trade-based money laundering investigations

December 2021  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

December 2021 Issue

FW discusses trade-based money laundering investigations with Adil Raza and Toni Weirauch at BDO.

FW: How would you describe the prevalence of trade-based money laundering (TBML) as a means of disguising the proceeds of crime? In what ways are criminals using TBML to legitimise illicit gains?

Raza: Criminal and terrorist organisations can use trade-based money laundering (TBML) to disguise the illicit origins of their proceeds and to fund their organisations. As law enforcement and other gatekeepers, like financial institutions (FIs), have become better at detecting and preventing traditional methods of money laundering, criminal and terrorist organisations have been forced to get creative and devise more complex structures for the movement of funds. TBML techniques often rely on misrepresenting the price, quantity or type of goods in trade transactions through falsifying invoices and bills of lading. Other known schemes include the use of the Black-Market Peso Exchange to launder funds which involve merchants who accept payment in illicitly derived funds, often from third parties to a trade transaction for the export of goods.

Weirauch: Law enforcement and FIs have become successful at detecting and preventing traditional money laundering, such as bulk cash smuggling. This has made criminals get creative and use complex methods to disguise funds, such as TBML. Today, criminals utilise a variety of TBML techniques, such as changes in bills of lading and invoices. An example is an illegal enterprise disguised as an export company which conceals the true source of funds by issuing incorrect invoices and bills of lading. Often, goods being transported can be disguised or the market value of items distorted. Another example is where an exporter and importer work together and do not ship or receive any goods but instead submit shipping documents referred to as ‘phantom documents’. FIs generally do not review invoices and bills of lading, and if they do, they could be reviewing phantom documents which they assume to be valid.

FW: How great is the financial harm caused by TBML? How would you characterise its economic impact?

Weirauch: According to the Financial Crimes Enforcement Network (FinCEN), TBML has grown in volume and expanded globally. TBML reduces government revenues. It can also contribute to official corruption. Often, drug cartels use various methods of money laundering, including TMBL, and obtain assistance with the aid of corrupt government officials and businesses. The resources needed to combat money laundering continue to tax governments around the world. TBML can affect highly taxed products such as cigarettes, which are subject to counterfeiting, resulting in lost sales for legitimate companies. The pandemic has weakened many national economies, which increases opportunities for criminals to benefit.

Raza: There are no official estimates on the magnitude of TBML. According to the US Government Accountability Office (GAO), evidence indicates that the amount of TBML occurring globally is likely substantial. Some studies have suggested TBML from a customs and invoicing perspective can represent 6-9 percent of all US trade. However, TBML is not limited to customs issues. Furthermore, only a small fraction of containers are inspected at US ports and different countries will have different inspection methods. Globally, it is extremely difficult to quantify the volume of TBML, but significant financial harm can be caused by TBML, such as the reduction of government revenues through taxation. It can also contribute toward corruption. Furthermore, legitimate businesses can lose revenue due to the proliferation of counterfeit goods.

“As law enforcement and FIs have become quite adept at identifying traditional money laundering, more complex methods such as TBML become more common.”
— Toni Weirauch

FW: What new TBML threats and heightened vulnerabilities have been amplified by the effects of the coronavirus (COVID-19) pandemic?

Raza: As with many crimes, the pandemic has increased opportunities for money launderers and has contributed to significant changes in the financial behaviour of governments, businesses and people. These behavioural changes have introduced new risks for money laundering and financial fraud. For example, the introduction of large-scale emergency financial aid and stimulus programmes has increased the availability of government funds which may be challenging for existing structures or law enforcement to monitor due to increases in volumes. Further exacerbating the issue are voluntary and government mandated quarantines and work from home directives which reduce the availability of resources for FIs, which may now be dealing with an increase in activity because of the stimulus programmes. In addition, the increased use of remote banking, customer identity verification and due diligence make it challenging for FIs to comply with AML and counter-terrorism financing (CTF) requirements. FIs and regulatory bodies may also not be able to perform the same level of onsite inspections to help identify illicit activity.

Weirauch: Many crimes, including money laundering, have increased during the pandemic. This is due, in part, to a decrease in workforce as well as a change in focus both at FIs and some law enforcement agencies. Government funding has been used to combat the virus and subsidise the incomes of many families. This has decreased funding and diverted the attention of authorities away from investigating illegal activities, including TBML. FIs have increasingly turned to digital platforms, including the use of FinTechs, though these methods have also been employed by criminals and other malicious actors. Because FinTechs are still relatively new to many, the opportunities are abundant for money launderers. Additionally, FinTech companies, like all FIs, are struggling with reductions in the size of their workforces.

FW: To what extent can technologies such as artificial intelligence, machine learning, data analytics and information management assist the process of monitoring and detecting potential TBML activity, including identifying red flags?

Weirauch: On 29 January 2020, a GAO report identified emerging technology that could help combat TBML. The GAO study found that TBML transactions are difficult for FIs to detect because they are complex in nature, have high volume and often banks do not receive trade documents. Trade finance transactions are very difficult for FIs to monitor as it has typically been done via a manual process. Technology could be used in government agencies as well, to give customs offices in different jurisdictions the ability to share and compare export and import data.

Raza: There are numerous aspects of trade documents for FIs to review, such as sanctions, vessel tracking and identification, and verification of accurate invoices and bills of lading. Monitoring TBML requires numerous individuals and man hours, which is costly and inefficient for FIs. Technology can and should be used to combat TBML. Application of technology, including artificial intelligence (AI), can be used to monitor the entire transaction cycle, as opposed to having employees manually look through documentation. The digitalisation of tools and techniques to analyse trade data is critical.

FW: In your experience, what elements are essential to conducting an effective TBML-related investigation?

Raza: Many techniques can be utilised to perform TBML-related investigations. Often a combination of various processes and controls contributes to an effective TBML monitoring programme. These techniques and controls include the collection of all trade-related documents, such as invoices, trade agreements, bills of lading, methods of shipping and vessel information for trade transactions. Often trade data is also available on public websites, which should be considered when assessing activity. All entities involved in the trade should be reviewed, which may necessitate the collection of relevant organisational documents, such as corporate formation information. Reviewing the risks associated with the jurisdictions involved in the trade is also critical. Furthermore, it is important to analyse the price of goods being shipped for signs of over and underpricing.

Weirauch: An effective investigation would entail gathering all invoices, trade agreements, bills of lading, method of shipping and vessel information for all trade transactions. Some trade data is available on public websites, so a thorough online search of all entities involved in a trade is important. Each entity should have appropriate organisational documents, such as corporate formation. Another essential element is to identify all jurisdictions used during the trade, which is critical as each jurisdiction has different laws and regulations, and will be key to understanding the role each plays in the trade.

“The complex nature of TBML makes it extremely difficult for FIs to detect and there is often a lack of collaboration across jurisdictions and between the FIs involved in the trade to help identify TBML.”
— Adil Raza

FW: Could you outline some of the common challenges that arise during a TBML investigation? How can they be overcome?

Weirauch: TBML is complex and more difficult to decipher than traditional money laundering. International trade systems can be complex due to multiple jurisdictions, multiple foreign exchange transactions, and the comingling of legal and illegal sources funds, as well as the ease with which money launderers can obtain letters of credit. Receiving invoices, bills of lading, letters of credit and customs documents can be difficult, especially given the various jurisdictions and the number of FIs that may be involved. Most FIs do not receive or review all documents related to trade business, including invoices, bills of lading and agreements. If they do receive them, it can be difficult to determine the legitimacy of those documents. Accessing reliable government-sourced information and documents can still be challenging in many jurisdictions. US Immigration and Customs has partnered with some countries to exchange and analyse trade data. However, many countries collect data in different formats, making it difficult to compare.

Raza: TBML can exist in all types of businesses and often there is a lack of understanding of the associated risks. The complex nature of TBML makes it extremely difficult for FIs to detect and there is often a lack of collaboration across jurisdictions and between the FIs involved in the trade to help identify TBML. Furthermore, obtaining qualified resources with experience in identifying TBML can be a challenge, alongside a need for FIs to dedicate funding and provide appropriate training to the investigative units. In addition, the availability of trade-related documents, such as invoices and bills of lading, can be a challenge. When they are obtained, it may be difficult for staff to identify fake documents. To overcome these challenges, FIs should develop clear policies and procedures to review and monitor trade-based activity and ensure appropriate funding and training is provided to the investigative teams to ensure they are equipped to identify TBML. Cooperation with other FIs should also be considered through the establishment of protocols to exchange information.

FW: Do you anticipate an increase in TBML activity in the years ahead? What steps can be taken to mitigate TBML risks and reduce economic vulnerability to this illicit practice?

Raza: Money laundering, and specifically TBML, will always exist. As FIs, law enforcement and regulatory bodies get better at identifying existing methods and techniques for money laundering, criminal enterprises will seek out new and unique methods to launder proceeds. As trade increases in developing countries, this will also likely create new opportunities for money launderers. With the increase in new and disruptive forms of payment methods, we are likely to see an increase in TBML through these methods. Combatting TBML requires cooperation across jurisdictions and requires the availability of reliable documents and sources of information. Technology can also be utilised to assist in identifying TBML. FIs implementing requirements to collect trade-related documents can also make it difficult to engage in TBML.

Weirauch: As law enforcement and FIs have become quite adept at identifying traditional money laundering, more complex methods such as TBML become more common. Reliable government-sourced information and documents are still difficult to access in many jurisdictions. The use of technology to assist in obtaining and reviewing trade-based documents could help both FIs and law enforcement. It would also be valuable if custom offices across multiple jurisdictions had the ability, or perhaps the requirement, to share documents. This would enable one side to verify the export and the other side to verify the import.

Adil Raza is a managing director in BDO’s forensics practice. He has extensive experience delivering anti-money laundering (AML) and sanctions compliance services, including know your customer (KYC), client due diligence (CDD), enhanced due diligence (EDD), transaction monitoring, suspicious activity reporting and AML training. He works primarily with banks, broker dealers, and other non-bank financial institutions that offer a multitude of products and services, including retail and business banking, US dollar clearing, capital markets services and trade finance. He has experience assessing and validating Bank Secrecy Act (BSA)/AML systems used for transaction monitoring and Office of Foreign Assets Control (OFAC) filtering. He can be contacted on +1 (212) 885 7484 or by email: araza@bdo.com.

Toni Weirauch is a senior manager in BDO’s forensics practice. She has over 30 years of tax, financial investigative and law enforcement experience. Prior to joining BDO, Ms Weirauch held significant roles with the IRS, criminal investigation department, including special agent and deputy director of international operations, where she managed employees and investigations located throughout the world. She conducted and led investigations of complex security fraud schemes, narcotics trafficking, tax fraud and money laundering. She has expertise in working with financial institutions to remediate risk and develop AML policies, as well as the development of compliance training. She can be contacted on +1 (629) 224 4944 or by email: tweirauch@bdo.com.

© Financier Worldwide

THE PANELLISTS

 

Adil Raza

Toni Weirauch

BDO

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