On January 29, 2020, the U.S. Government Accountability Office (GAO) publicly released the results of a study which the GAO conducted on trade-based money laundering, or TBML, entitled “Countering Illicit Finance and Trade: U.S. Efforts to Combat Trade-Based Money Laundering” (the Study). The Study – sent upon request to the U.S. Senate Subcommittee on Crime and Terrorism – was commissioned in January 2019 after the U.S. Department of Treasury issued a related report, entitled the 2018 National Money Laundering Risk Assessment, identifying TBML as one of the most commonly-used, and one of the most difficult to detect, methods of money laundering.
According to the Study, U.S. law enforcement agencies believe that the increase in TBML is due, ironically in part, to improved compliance by U.S. financial institutions with requirements under the Bank Secrecy Act (BSA) and related Anti-Money Laundering (AML) regulations. For example, the Study noted a downturn in reported cash seizures throughout the United States, suggesting that international crime has pivoted to utilizing TBML schemes to keep the U.S. government’s hands out of the illegal till. In other words, as one rat hole gets closed, the rats creatively create other holes. This is a familiar story in law enforcement, across all spectrums.
The Study describes the particular vulnerabilities that U.S. financial institutions experience with monitoring trade-based transactions as opposed to other day-to-day activity. The Study further notes that this problem has not gone unnoticed, and suggests that there is hope that developing tools and technologies will stave off those who seek to use U.S. systems for TBML. The Study further draws upon earlier reports, described herein, to acknowledge that the problem is not new.
What is Trade-Based Money Laundering?
According to the Study, the international Financial Action Task Force, or FATF, has identified TBML “as one of the primary means that criminal organizations use to launder illicit proceeds.” Criminal enterprises utilize TBML to disguise the origin of criminal proceeds by “integrat[ing] it into the formal economy” through a trade transaction. Common forms of TBML include over- and under-invoicing goods and services, multiple invoicing of goods and services, over- and under-shipments of goods and services, and falsely describing goods and services.
FATF issued its own study in 2006, entitled Trade Based Money Laundering, which concluded in part that – echoing the findings of the GAO Study – “as the standards applied to other money laundering techniques become increasingly effective, the use of trade based money laundering can be expected to become increasingly attractive.” Thus, TBML has become more important to would-be launderers, as more traditional avenues for laundering become more difficult to pursue. The 2006 FATF study provided a list of potential TBML “red flags,” which include: significant discrepancies in bills of lading; discrepancies between invoices and apparent fair market value of the goods being transported; discrepancies between the shipment and the importer’s or exporter’s stated business purpose, and, of course, the use of potential shell companies.
What did the GAO Study Find?
The U.S. Financial and Trade System Is Vulnerable to TBML
The BSA require covered U.S. financial institutions to report any suspicious activity, including any occuring in trade transactions. The GAO’s findings, however, suggest that this duty is difficult to carry out in the context of trade. Not only are trade transactions difficult to monitor due to their complex nature and volume, but banks often do not receive trade documents that might indicate whether criminal activity is afoot and trigger a duty to report or investigate further. For example, in open-account trade, the transaction is completed between a buyer and seller and the bank’s only role is to submit payment on behalf of its client, which is often done through automatic payment systems. In such a situation, a bank is often blind to the purpose, intent, and more importantly the documents, underlying the transaction.
The Study provides this graphic regarding the vulnerabilities to open-account transactions:
Transnational Criminal Organizations Are Using Various Forms of TBML
Although many types of organizations use different TBML schemes—including those engaged in customs fraud, financial fraud, and professional money laundering and terrorist activity—narcotics trafficking organizations are most likely to use a form of TBML known as “black market peso exchange schemes.” The aptly-named ploy acts as a currency exchange for illicit proceeds from U.S. dollars into other countries’ currencies. According to the Study, these schemes are particularly difficult to monitor because “the contents, prices, and quantities of goods exported and imported can be correctly reported to customs agencies, with no use of fraudulent trade documents.”
Trade, Financial and Law Enforcement Data is Crucial to TBML Investigations
The Study states that retrospective review of data on imports and exports, suspicious financial activity, and legal investigations is essential to identifying patterns and anomalies in trade transactions. Retrospective review also has proven useful for developing leads, supporting investigations, and regulatory oversight—such as when FinCEN issued a 2010 advisory for financial institutions to inspect for potential indicators of TBML schemes after an uptick in TBML activity in the Western Hemiphere.
Public and Private Sector Entities are Utilizing Technology to Monitor TBML
Entities in both the public and private sector are investigating a range of tools to identify and combat TBML. For example, and interestingly, the digital blockchain is being used “to improve supply chain visibility and integrity, both for regulatory agencies and market participants.” The Study also noted that a large (unnamed) bank is in the pilot stages for a technology that would “digitize and automate its document review process for trade finance transactions.” The Study indicates that these methods could address TBML-related challenges by obtaining and analyzing fraudulent documentation used in trade transactions.
Nonetheless, it is likely that for the foreseeable future, financial institutions will remain bereft of adequate tools to combat TBML, which remains a critical money laundering vulnerability susceptible to exploitation by sophisticated bad actors.
A Historical Basis for TBML Concerns
The Study acknowledges that it is hardly the first publication to observe that international trade is a particular effective vehicle for money laundering. As previously noted, the Report states that FATF previously has identified TBML “as one of the primary means that criminal organizations use to laundering illicit proceeds.” Further, the Report also cites the 2018 National Money Laundering Risk Assessment issued by the U.S. Department of the Treasury (2018 Assessment). In that 2018 Assessment, the Treasury Department described various trade-based money laundering enforcement cases, including those involving the international trade of gold, as well as cases involving intersections between the U.S. and China, Peru, Mexico, and Guatemala.
Finally, and although not referenced by the Study, the Congressional Research Service issued its own report in 2016, entitled Trade Based Money Laundering – Overview and Policy Issues, which provided a broad summary of TBML issues, including a description of the scope of the problem; selected case studies; selected policy responses; and issues for Congress.