Trade-based money laundering
Also written TBML
Disguising the proceeds of crime and moving value through trade transactions to legitimise their illicit origin — by misrepresenting the price, quantity or quality of imports or exports.
In plain language
Money can cross a border in three ways: through the banking system, in a suitcase, or inside a trade.
Trade-based money laundering uses the third. Every shipment of goods has a price, a quantity and a description, and every one of those can be falsified. Invoice a container of cheap goods as expensive ones, and the importer can send the exporter far more money than the goods are worth — value has moved across a border wrapped in a genuine-looking commercial payment.
The workbook's point is that the financial system and cash couriers have been tightened; trade has not, and criminals migrate to the method with the least scrutiny.
How it works
Definition (Chapter 1, section 1.2.2 and Chapter 8, section 8.5). The process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin — in practice, through misrepresentation of the price, quantity or quality of imports or exports, often also abusing the financial system through instruments such as wire transfers.
Three ways criminal value moves. (i) Through the financial system — cheques and wire transfers; (ii) physical movement of banknotes — cash couriers and bulk cash smuggling; (iii) false documentation and declaration of traded goods and services. FATF focused on the first two: in 2003 it toughened standards for the financial system and non-financial intermediaries, and two years later extended them to cash couriers — which may have made trade more attractive to launderers.
Why trade is attractive. The enormous volume of trade flows; complex, often multiple, foreign-exchange transactions and financing; commingling of illicit funds with legitimate business cash flows; limited verification or customs-data exchange between countries; and limited customs resources — most customs agencies inspect less than 5% of cargo shipments.
The four basic techniques. Over- and under-invoicing; multiple invoicing (more than one invoice for the same shipment, justifying multiple payments, often through several banks); over- and under-shipments, including the phantom shipment where nothing ships at all and banks may unknowingly finance it; and falsely described goods and services. Not all are in use in every country.
A complex technique. The black market peso exchange combines drug smuggling, laundering through the financial system and TBML, and needs no collusion between importer and exporter — prices and quantities can be correctly reported to customs while value still crosses borders.
Not the same as tax avoidance or capital flight, which usually move legitimately earned funds; TBML moves proceeds of crime.
Three practical steps against it: building better awareness (training for customs, law enforcement, FIUs, tax authorities and banking supervisors, and private-sector outreach); strengthening current measures (case studies and red flags, domestic information-sharing); and improving international co-operation (MOUs, mutual legal assistance treaties, customs-to-customs data exchange).
A worked example
Illustrative amounts.
A narcotics network in Country X needs to move USD 3 million of proceeds to associates in GIFT City without a bank wire in its own name.
The multiple-invoicing leg. A front exporter in the IFSC ships one consignment of electronic components worth USD 400,000 to an importer in Country X controlled by the network. It issues three invoices for the same shipment, each for USD 400,000, and the importer pays all three through three different banks. Value moved: 3 × 400,000 = USD 1.2 million for goods worth USD 400,000 — USD 800,000 of it pure transfer.
The phantom-shipment leg. The exporter then "ships" a second consignment invoiced at USD 1.8 million. No goods leave; the shipping and customs documents are processed routinely, and the importer pays through a letter of credit its bank finances unknowingly. Value moved: USD 1.8 million.
Total value transferred: USD 800,000 + USD 1.8 million = USD 2.6 million, with a further USD 400,000 paid for goods genuinely shipped.
Where the IFSC entity sees it. The exporter's IFSC Banking Unit sees three payments for one bill of lading reference and a letter-of-credit payment against a shipment whose documents cannot be matched to port data. Those are exactly the discrepancies the workbook says statistical and document checks are designed to catch — and the basis for an STR.
Why NISM asks about it
Chapter 1 (Introduction to AML, CFT and PF), section 1.2.2, introduces TBML and its four basic techniques, and Chapter 8 (Financial Action Task Force and Its Recommendations), sections 8.5 and 8.6, develops it: the three methods of moving value, why trade is attractive, the abuse of the trade system, the basic and complex techniques, and the three practical steps. The chapter's sample questions ask for the definition, the reasons trade is vulnerable, the difference from capital flight, and the best international co-operation measure.
Common exam traps
- TBML moves proceeds of crime; capital flight and tax avoidance usually move legitimately earned funds.
- The three methods of moving value are financial system, physical cash, and trade — TBML is the third.
- Price, quantity or quality — any of the three can be misrepresented.
- Black market peso exchange needs no importer-exporter collusion, unlike the basic techniques, and prices and quantities can be reported correctly.
- A phantom shipment is the extreme form of over-shipment — nothing is shipped at all.
- Less than 5% of cargo is inspected by most customs agencies.
- The trade-volume figures are dated. The workbook says global merchandise trade exceeds US$9 trillion a year and services a further US$2 trillion; those numbers come from the FATF study the chapter draws on and are well below today's trade volumes. Use the workbook's figures in the exam.
Check yourself
1.Criminals practise money laundering by which of the following ways?
- a)All of the above
- b)Disguising the source of ill-gotten gains
- c)Changing the form of criminal proceeds
- d)Moving profits of criminal acts elsewhere
Show the answer
Answer: (a) All of the above
When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.
Practice of or engagement in any of such activities is known as Money Laundering.
Three methods, and any one of them is money laundering.
The underlying definition: money laundering is the process of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.
Where the money comes from: illegal arms sales, smuggling, and the activities of organised crime, including drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to "legitimize" the ill-gotten gains through money laundering.
Note the second sentence — white-collar offences generate launderable proceeds just as violent and organised crime does.
The three methods map onto the three stages. Changing the form and disguising the source characterise placement; moving the funds characterises layering, where the launderer moves the money through a series of financial transactions with the goal of making it difficult to trace the original source.
And a fourth technique gets its own treatment in this workbook — trade-based money laundering, defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin.
Which is why AML laws exist: they help preventing criminals from hiding illegally obtained money and the financial impact of money laundering on a country, thus safeguarding the financial system from crimes.
2.Which measure would most effectively strengthen international cooperation to combat trade-based money laundering in line with FATF standards?
- a)Establishing clear information-sharing gateways through MOUs, Mutual Legal Assistance Treaties, and customs-to-customs cooperation for exchange of trade data
- b)Restricting cross-border trade transactions through higher customs duties
- c)Conducting unilateral investigations without involving foreign jurisdictions
- d)Limiting reporting obligations only to domestic financial institutions
Show the answer
Answer: (a) Establishing clear information-sharing gateways through MOUs, Mutual Legal Assistance Treaties, and customs-to-customs cooperation for exchange of trade data
Countries need to work cooperatively to identify and combat trade-based money laundering. Consistent with FATF standards, countries could put clear and effective gateways in place to facilitate the prompt and constructive exchange of information. In practice, this may require broader use of memoranda of understanding and mutual legal assistance treaties between countries to facilitate the sharing of information related to specific transactions. It also means greater recourse to mutual assistance agreements between customs agencies to facilitate the exchange of export and import data in order to identify trade anomalies that may indicate potential trade-based money laundering abuses.
Three instruments in one paragraph — MOUs, mutual legal assistance treaties, and customs-to-customs agreements.
Option B addresses the wrong problem. Duties restrict the volume of legitimate trade; the vulnerability lies in the limited recourse to verification procedures or programs to exchange customs data between countries and the limited resources that most customs agencies have available to detect illegal trade transactions.
Options C and D are the opposite of cooperation. International cooperation is one of the seven areas of the 40 Recommendations — 36 International instruments · 37 Mutual legal assistance · 38 Mutual legal assistance: freezing and confiscation · 39 Extradition · 40 Other forms of international cooperation — and Special Recommendation V requires each country to afford another the greatest possible measure of assistance.
The other two steps identified by the study:
Building Better Awareness — a stronger focus on training programs for competent authorities (e.g., customs agencies, law enforcement agencies, financial intelligence units, tax authorities and banking supervisors), which could result in substantial increases in the number of suspicious transaction reports filed, with outreach sessions to the private sector.
Strengthening Current Measures — access to the case studies and red flag indicators, and more effective information sharing among competent authorities at the domestic level, for example allowing law enforcement agencies... [to] seek information from customs agencies on specific trade transactions in advance of a full-fledged criminal investigation.
3.The process of disguising the proceeds of crime and moving value through the use of trade transactions is better known as:
- a)Trade-based Money Laundering
- b)Bulk cash smuggling
- c)Cheques and wire transfers
- d)All of the above
Show the answer
Answer: (a) Trade-based Money Laundering
Trade-based money laundering is defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins.
Options B and C name the other two channels, not this one. There are three main methods by which criminal organisations and terrorist financiers move money for the purpose of disguising its origins and integrating it into the formal economy:
i. The first involves the movement of value through the financial system using methods such as cheques and wire transfers;
ii. The second involves the physical movement of banknotes using methods such as cash couriers and bulk cash smuggling; and
iii. The third involves the movement of value using methods such as the false documentation and declaration of traded goods and services.
The third is trade-based money laundering — so option D is wrong because the three are distinct methods, not synonyms.
Why the third has grown. In recent years, the Financial Action Task Force has focused considerable attention on the first two of these methods. By comparison, the scope for abuse of the international trade system has received relatively little attention.
In 2003, the FATF significantly toughened the standards that apply to the financial system and various non-financial intermediaries. Two years later, it extended these standards to cover the activities of cash couriers.
And criminals move to whatever remains easiest: when governments take action against certain methods of money laundering or terrorist financing, criminal activities tend to migrate to other methods.
The four basic techniques: over- and under-invoicing of goods and services; multiple invoicing of goods and services; over- and under-shipments of goods and services; and falsely described goods and services — though all of these techniques are not necessarily in use in every country.
Where this is taught
Free preparation for NISM Series IFSCA-01Related terms
- FATFThe intergovernmental body founded in 1989 that writes the global AML/CFT standards — the 40 Recommendations plus IX Special Recommendations — and grey-lists or black-lists countries that fail them.
- FATF StandardsThe FATF Recommendations together with their Interpretive Notes and the applicable Glossary definitions — the international AML/CFT/PF standard that more than 200 jurisdictions have committed to implement.
- Money launderingTurning the proceeds of a crime into money that looks legitimate — classically in three stages, placement, layering and integration — and a standalone offence under section 3 of the PMLA.
- Over- and under-invoicingMisstating the price of goods or services on an invoice to move value between importer and exporter — under-invoicing moves value to the importer, over-invoicing to the exporter.
- Proceeds of crimeUnder section 2(1)(u) of the PMLA, any property derived or obtained, directly or indirectly, from criminal activity relating to a scheduled offence — or its value, or equivalent property where it is held abroad.
- Wire TransferAny transaction carried out for an originator through a financial institution by electronic means to make funds available to a beneficiary at a beneficiary institution — even if originator and beneficiary are the same.
- Capital flightCompanies and individuals shifting money from one country to another to diversify risk and protect wealth against financial or political crises — usually with legitimately earned funds, unlike money laundering.
- Phantom shipmentThe extreme form of over-shipment: the exporter ships no goods at all and colludes with the importer so that all shipping and customs documents are routinely processed and paid against.
- Black market peso exchangeThe complex trade-based laundering arrangement the workbook names: it combines drug smuggling, laundering through the financial system and trade laundering, and needs no collusion between importer and exporter.