Trade-based money laundering (TBML) is a type of money laundering that involves the use of trade transactions to disguise the true source of funds. TBML is a sophisticated form of money laundering that can be difficult to detect and prosecute. TBML is often used to move money out of countries where it is illegal or subject to high taxes, and into countries where it can be used more freely.
TBML typically involves three steps. First is the placement of funds into the financial system through the purchase of goods or services, followed by the layering of funds through a series of complex trade transactions. Finally, there is the integration of funds into the legitimate economy through the sale of goods or services.
There are many reasons why trade-based money laundering is done. One reason is to avoid taxes and another is to hide the source of illicit funds. By using multiple banks and shell companies, criminals can make it difficult to trace where the money came from. According to UNODC, it is estimated that 2–5% of the world’s GDP, or $800 billion–$2 trillion in current US dollars, is laundered internationally each year. Moreover, financial losses from these crimes in developing countries totalled $9 trillion between 2008 and 2017.
In the last 10 years in India, the Enforcement Directorate registered the highest number of money laundering and foreign exchange violation cases in the 2021-22 financial year — at 1,180 and 5,313 complaints respectively, according to government data provided to Parliament. The Indian government has taken steps to crack down on TBML, but it remains a problem in the country, hence it is important for businesses in India to be aware of the risk of TBML.
There are many trade schemes that criminals can use to integrate illegal money into the legitimate financial system including,
- Over-invoicing or Under-invoicing: Over-invoicing technique is where the value of goods or services is artificially inflated on invoices. This allows the launderer to move more money out of the country than would otherwise be possible. The opposite of this trade involves artificially inflating the cost of goods or services on invoices. The exporter ships products with a higher value and transfers that value to the importer, who then receives it on a deflated invoice. This makes the shipping of the goods costlier, and they transfer low priced value of laundered money. This allows the launderer to bring more money into the country than would otherwise be possible.
- Over-Shipping Or Short-Shipping: Over-shipping or short-shipping works through a difference in the invoiced quantity of goods and the quantity of goods that are shipped. The buyer or seller gains excess value based on the payment made This is where goods or services are misclassified on invoices in order to avoid customs duties or taxes. For example, declaring a shipment of electronic components as “computer parts” instead of “electronic components”.
- Trans-shipment and Ghost Shipment: Trans-shipment involves shipping goods to an intermediary destination before they are shipped to their final destination. This can be done to inflate the value of the goods or to avoid customs duties or taxes. Ghost-shipping refers to fictional transactions in which a buyer and a seller work together to create all the paperwork proving that things were sold, delivered, and money was received. In reality, no goods were actually shipped.
- False documentation and multiple invoicing: False documentation refers to the creation of false documents such as invoices, bills of lading, and shipping manifests in order to conceal the true nature of the transaction. The term “multiple invoicing” refers to the issuance of multiple invoices for the same shipment of goods. This gives the money launderer the chance to send out several payments and then account for them using invoices.
Combatting TBML
With the global anti-money laundering market size expecting to reach USD 7.7 Billion by 2030, there are a number of solutions that have been proposed to address the issue of trade-based money laundering. One solution is to require businesses to report any suspicious transactions to the authorities. Other solutions include:
- Know Your Customer
One way to reduce the incidence of trade-based money laundering is for businesses to know their customers and suppliers better (KYC). This can be done through due diligence, which includes verifying customer identity, understanding the source of funds, and monitoring customer activity. In addition, businesses should maintain complete and accurate records of their transactions. Legitimate traders must contribute by doing Know-Your-Customer (KYC) checks as part of increased due diligence during the onboarding of new clients.
- Role of Custom Officials
The function of the customs officials is also very important because they may compare the amount and quality of the goods with the price that the trader has specified and look for discrepancies in the product description and pricing.
- Targeted Regulations
In order to serve as a fair disincentive for banks to improve their TBML monitoring programmes and bring all banks up to a common baseline on TBML controls. There is an urgent need for tougher and more focused regulatory oversight in the area of TBML as well as the imposition of greater penalties. To prevent money launderers from abusing the trade finance systems of banks with laxer controls, regulators may consider implementing a minimum set of controls that all banks must have.
- Continuous Training and Knowledge Building
Trade finance is a highly specialized field of expertise, and Anti Money Laundering (AML) analysts working with TBML alerts frequently struggle to comprehend challenging paperwork, complicated items, and pricing-related concerns. AML compliance teams won’t be able to develop policies and set up procedures to adequately monitor TBML inside the organization without the necessary expertise. The AML compliance team has to engage in specialized knowledge building as well as ongoing training for the workforce to make them aware of trade hazards.
- Banking on Technology
Technology advancements, particularly in the areas of big data and analytics, can aid in making connections and preventing and combating TBML. The development of big data technology may make it possible for businesses to more effectively and economically combine data from various systems across several business lines. This gives the organization a complete picture of their client data.
Growing trade exposes the nation to increasing risk as the threat of TBML persists. Weak TBML regulations or a lack of regulation may have a substantial influence on India’s status as a major trade partner. To assist the sector in strengthening its defences against trade-based money laundering and the unauthorized use of trade finance systems, significant investments in resources and technology are required, along with cooperative efforts from all concerned players.
