Phantom shipment

Trade laundering usually lies about a number. A phantom shipment lies about the whole shipment.

Start with the honest version of the trick. A launderer can overstate or understate the quantity of goods being shipped or services being provided. Fifty machines are invoiced; thirty are sent. The money paid no longer matches what moved.

Push that to its limit and you get the phantom shipment. The exporter ships no goods at all. It simply colludes with the importer so that all the shipping and customs documents for the shipment are routinely processed. Paper travels; cargo does not.

The workbook adds the part that should worry a bank. Banks and other financial institutions may unknowingly provide trade financing for these phantom shipments. The bank is not in on it. It is looking at a complete, consistent set of documents for goods that were never made.

So the control cannot be a price check. The price may be perfectly fair. The question is whether anything shipped.

Where it sits. The four basic trade-based money laundering techniques (Chapter 1, section 1.2.2 and Chapter 8, section 8.6.2) are:

1. over- and under-invoicing of goods and services — misrepresenting price;
2. multiple invoicing of goods and services — more than one invoice for the same transaction;
3. over- and under-shipments of goods and services — misrepresenting quantity;
4. falsely described goods and services — misrepresenting quality or type.

The workbook notes that all of these techniques are not necessarily in use in every country.

The technique in full (section 8.6.2(c)). In addition to manipulating export and import prices, a money launderer can overstate or understate the quantity of goods being shipped or services being provided. In the extreme, an exporter may not ship any goods at all, but simply collude with an importer to ensure that all shipping and customs documents associated with this so-called phantom shipment are routinely processed. Banks and other financial institutions may unknowingly be involved in the provision of trade financing for these phantom shipments.

What distinguishes it from its three siblings.

Collusion is required. A phantom shipment cannot work unless the exporter and the importer are both in it — somebody at each end has to process documents for nothing. That is what makes it a basic technique in the workbook's scheme, and it is the point on which it differs from the black market peso exchange, which the workbook says needs no collusion between importer and exporter.

How it is looked for. The workbook offers document analysis rather than cargo inspection: studies analysing whether reported import and export prices reflect fair market values, and one method being explored that uses statistical techniques to detect discrepancies in the information provided on shipping documents.

No figure for this technique. The workbook attaches none — no value, no share of cases, no threshold. It does give one figure for the trade system as a whole: most customs agencies inspect less than 5 per cent of all cargo shipments entering or leaving their jurisdictions. That figure is offered as a reason the trade system is attractive to launderers generally, and the workbook does not attach it to phantom shipments specifically.

Illustrative amounts. The technique is the workbook's.

A network wants USD 1.8 million moved from an importer in Country X to a front company in GIFT IFSC.

The phantom shipment. The IFSC front company raises an invoice for USD 1.8 million of electronic components. No goods are made, bought or loaded. The two sides prepare and process a full document set — commercial invoice, packing list, bill of lading and customs declarations — and the importer's bank finances the payment under a letter of credit.

That last line is the lesson. A price-based test finds nothing, because the price was never the lie.

Compare a plain over-shipment. Suppose 10,000 units at a fair USD 50 are invoiced and paid for — USD 500,000 — but only 6,000 units ship.

• Goods actually delivered = 6,000 x USD 50 = USD 300,000
• Value transferred to the exporter = 500,000 - 300,000 = USD 200,000
• Shortfall as a share of the invoice = 200,000 / 500,000 = 40%

Here a quantity check at the port would catch it. A phantom shipment is the same arithmetic with the quantity at zero and 100% of the invoice transferred.

What the bank could have seen. Illustrative. The IFSC Banking Unit financing the deal holds a bill of lading that cannot be matched to any vessel or container movement, and a customs declaration for a consignment no port record shows. Those are document-to-reality mismatches, not price mismatches — and the workbook's statistical detection of discrepancies in shipping documents is aimed exactly at them. On those facts the unit has reasonable grounds to suspect, which is the trigger for a suspicious transaction report.

Chapter 8 (Financial Action Task Force and Its Recommendations on AML and CFT), section 8.6.2(c), carries over- and under-shipments and the phantom shipment, including the unknowing trade financing by banks. Chapter 1, section 1.2.2, lists it third among the four basic techniques. Section 8.6.1(c) supplies the statistical detection of discrepancies in shipping documents.

Expect a matching question: which technique misrepresents price, which quantity, which quality or type, and which involves no goods at all. Expect also a definition question on the phantom shipment — the two marks are that nothing ships and that the documents are routinely processed — and a question on how a bank comes to be involved, where the answer is unknowingly, through trade financing.

• Quantity, not price. Over- and under-shipment falsifies quantity; over- and under-invoicing falsifies price; falsely described goods falsifies quality or type. Three separate techniques, one for each attribute of a shipment.
• A phantom shipment is the extreme case of over-shipment, not a fifth technique. The workbook lists four basic techniques and puts the phantom shipment inside the third.
• Nothing ships. If some goods move, it is an over-shipment, not a phantom shipment.
• The importer and exporter must collude. The documents have to be processed at both ends. Contrast the black market peso exchange, which the workbook says needs no collusion between them.
• Banks are involved unknowingly. The workbook says financial institutions may unknowingly be involved in the provision of trade financing — being financed is not being complicit.
• A fair-value price test will not find it. The price can be correct; the shipment is the fiction. Look for documents that cannot be tied to real cargo movement.
• The under-5% cargo inspection figure is about the trade system as a whole. The workbook gives it as a reason trade is attractive to launderers generally and does not tie it to phantom shipments.
• Not all four techniques are in use everywhere. The workbook says so explicitly, so do not answer that all are universal.