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Signs of Trade Based Money Laundering and the Intersection with CTPAT Requirements

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Trade-based money laundering (TBML) is quickly developing into a global tsunami. U.S. Customs and Border Protection (CBP) is looking to Importers for help in identifying risk in this critical area, and for CTPAT participants, it is the newest dimension of the Minimum-Security Criteria (MSC) rolled out in 2020.

Before diving into warning signs and recommendations we must first give it some context. The Financial Action Task Force (FATF) defines Trade Based Money Laundering as: `the process of disguising the proceeds of crime using trade transactions to mask the origins then integrating it back into the formal economy.’ TBML involves the exploitation of the global trade system for criminal purposes.

Identifying laundering schemes through trade requires a better understanding of the conditions and parties involved in an international trade transaction. This naturally involves closer scrutiny of circumstances, transport documents, and generally gathering detailed background information in order to detect potentially illicit behavior. It is important to keep in mind that the primary objective of TBML is the movement of money. The movement of goods is the mechanism used for concealing the true origins or purposes of the money. Organizations that engage in TBML will exploit any sector, and any commodity or service.

TBML schemes vary in complexity but typically involve misrepresentation of the price, quantity, or quality of imports or exports. Traditionally it has been the financial institutions that carried the burden to identify risks and red flags in transactions. In international trade the vast majority – approximately 80 percent – is conducted on an open account basis. Open account refers to a sale where the goods are shipped and delivered before payment is due. This creates a separation between the information about the payment and the information about the trade transaction that can be exploited by organized and experienced money launderers.

The TBML security criteria in the Customs-Trade Partnership against Terrorism (CTPAT) program is addressed in three areas:

Section 3.1, Business Partners where it is required to have a written process for screening new and monitoring existing business partners. Included in this process should be a check on activity related to money laundering and terrorist funding.

Section 7.10, Procedural Security where personnel must review the information included in import/export documents with the intent to identify or recognize suspicious cargo shipments and unsupported valuation. Based on risk, attention must be paid to key warning indicators for money laundering that presents itself during reviews and activities most applicable to the functions that they and/or their business entities perform in the supply chain.

Section 12.6, Training is where the rubber meets the road and discourse must translate into practice. This section states specialized training should be provided to personnel on the practical recognition of warning indicators of TBML. (Examples of personnel who should receive this training include those responsible for trade compliance, security, procurement, finance, shipping and receiving).

Given these expectations about TBML, it is imperative to start with the training area in order to succeed in setting the standards for the other two. There has been a veritable plethora of information published in this area over the past year or so, but the focus here is on how to recognize warning signs of TBML in the everyday operation of security standards for CTPAT entities.

Structural Risk Indicators are considerations utilized during business partner screenings and must be considered when screening potential business partners AND reviewing existing ones. TBML can work its way into an organization at any time even where a long-term relationship with a particular manufacturer or logistics provider may exist. Reviews should be conducted at a minimum annually or as indicators dictate to minimize exposure. Risk factors in this area can be less obvious than in others.

First, check the Anti-Money Laundering (AML) countries of concern risk assessment chart found here:

https://www.finsolinc.com/uploads/5/6/9/3/56932361/aml_countries_of_concern_chart_-_july_30_2021.pdf

This chart will indicate MMLC in column three if the country is a Major Money Laundering Country of concern. If the business partner being reviewed has corporate presence in one of those countries look a little closer at the business practices. Some of these countries may surprise you, (e.g., Canada and Netherlands are considered as MMLC). Additional risk indicators in this area include:

• Does the company structure seem unusually complex or illogical? Search for annual reports and find out who the key players are such as the members of the Board of Directors and Corporate Officers and do they have representation from unlikely sources? An example would be a local fashion designer serving as a corporate officer in a technology company, or the Board of Directors for a Japanese company having representatives from Colombia.

• Is the trade entity registered at a “mass entity address”? Is the filing address for the business located in a residential apartment building, or does it only have a P.O. Box listed on documents? Also, commercial or industrial buildings that are part of a larger complex with no reference to a specific unit or suite might be a red flag.

• Does the business entity appear in negative news or press coverage? Perhaps the company has been suspected of fraud, criminal activities, or are part of ongoing investigations or past convictions. This should include social media research.

• A business appears to be an imitation of a well-known business, or very similar to it, to give the impression that you are dealing with a recognized and acceptable entity. For example, McMasters-Carr might be represented as MacMaster-Carrs, or Broadcom Corp. might be represented as Boardcom Corp. or Deringer Industrial as Derringer Industrial. Sometimes the differences are very subtle. Pay attention!

Trade Activity Risks are everyday potential warnings in the activities of handling cargo and documents associated with trade. There is a long list of warning signs with varied scenarios. Identifying a single indicator in a transaction may not alone warrant suspicion of money laundering but it should prompt further monitoring and alert one to keep an eye open for other transactions. Likewise, the identification of several indicators would also warrant closer analysis. Training material should cover at a minimum the following areas and provide examples. Likewise, employees need to have a clear path for questioning and reporting any suspected indicator.

1. High Risk Jurisdictions: The commodity is shipped to or from a jurisdiction designated as “high risk” for money laundering and/or terrorist activities. (Check AML list indicated above).

2. Cash: The transaction involves the receipt of cash (or other payments like wire transfers, checks, bank drafts or postal money orders) from unrelated third-party entities or an intermediary (either an individual or an entity) apparently unrelated to the seller or purchaser.

3. Incorrect Pricing: Obvious over or under valuation or pricing of goods. Exporter billed $2M, but only exported $1M in goods. Or the reverse, importer paid $1M but actually received $2M in goods. (Communications between departments is critical in identifying these transactions)

4. Discrepancies: Major discrepancies between the description of the goods on the bill of lading or invoice and the actual goods shipped. (e.g., Exporter billed $500K for silver, Importer actually received $2M in Gold.}

5. False Reporting: Any type of false reporting such as commodity misclassification.

6. Inconsistent Commodities: Commodities being traded do not match the business involved such as an equipment manufacturer shipping pharmaceuticals or a cell phone company shipping chemicals.

7. Lack of Documentation: Business partner’s inability to produce appropriate documentation (i.e., invoices, packing lists or transport documents to support a requested transaction.)

8. Inconsistent Shipping Routes: The commodity is trans-shipped through one or more jurisdictions for no apparent economic or other logistical reason. If the shipper deals in jewelry, it would be highly unlikely that they would be moving a full container on an ocean carrier and equally as unlikely they would make air bookings that transship through three different countries. Diamonds from Israel would probably not be routed though Dubai with a stop in Costa Rica before arriving at final destination in New York, USA.

9. Letter of Credit: Usage that presents abnormally complex terms, has unusually long or frequently extended payment terms, or repeated requests for amendments. Be alert to those requesting changes of the beneficiary or location of the payment.

10. Sanctioned Parties: The transaction involves individuals or organizations listed in U.S. sanctioned lists.

11. Uncharacteristic Purchases: Documentation for the purchase of uncharacteristic commodities for your organization like weapons, ammonium nitrate, hydrogen peroxide, acetone, propane, or other dual use commodities.

12. Identity Variations: Business partner provides multiple variations of name, address, phone number or additional identifiers under a single vendor number or tax number.

Endeavoring to control TBML is part regulation, part international business cooperation and part technology solutions; however, it significantly depends on human factor recognition and action. The posers involved in TBML use complex networks of modern businesses moving across the globe and hiding behind trading systems to illegally transfer large sums of money. While the tactics used to hide illegal laundering activity is not new, the application of informed business compliance practices to monitor and detect vulnerabilities is the newest dynamic that will make a difference. The key component is vigilance.

For more information on this subject please see the complete FATF risk indicators paper available at the following link: http://www.fatf-gafi.org/media/fatf/content/images/Trade-Based-Money-Laundering-Risk-Indicators.pdf


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