Trade Based Money Laundering – Methods,
Identification and Prevention
Guillermo Horta
Managing Director
Global Financial Crimes Compliance
Background
Wolfsberg
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The use of trade finance to obscure the illegal movement of funds includes methods to misrepresent the
price, quality or quantity of goods. Generally these techniques rely upon collusion between the buyer and the
seller since the intended outcomes of the arrangements is obtaining value in excess of what would be
expected from an arm’s length transaction. The collusion may well arise because both parties are controlled
by the same persons.
JMLSG and FATF
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A key risk around trade finance business is that seemingly legitimate transactions and associated documents
can be constructed simply to justify the movement of funds between parties, or to show a paper trail for nonexistent or fraudulent goods. In such instances, methods used by criminals to transfer funds illegally range
from over and under invoicing, to the presentation of false documents or spurious calls under default
instruments.
FATF typologies’ studies indicate that criminal organizations and terrorist groups exploit vulnerabilities in the
international trade system to move value for illegal purposes. Cases identified included: illicit trafficking in
narcotic drugs; illicit trafficking in stolen or other goods; corruption and bribery; fraud; counterfeiting/piracy
of products; and smuggling. More complicated schemes integrate these fraudulent practices into a complex
web of transactions and movements of goods and money.
Given the nature of the business, there is little likelihood that trade finance will be used by money launderers
in the placement stage of money laundering. However, trade finance can be used in the layering and
integration stages of money laundering as the enormous volume of trade flows obscure individual
transactions and the complexities associated with the use of multiple foreign exchange transactions and
diverse trade financing arrangements permit the commingling of legitimate and illicit funds.
Background
JMLSG and FATF
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FATF's June 2006 study of Trade Based Money Laundering defined trade-based money laundering as "the
process of disguising the proceeds of crime and moving value through the use of trade transactions in an
attempt to legitimize their illicit origins. In practice, this can be achieved through the misrepresentation of
the price, quantity or quality of imports or exports. The study concludes that "trade-based money laundering
represents an important channel of criminal activity and, given the growth in world trade, an increasingly
important money laundering and terrorist financing vulnerability.”
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FATF's June 2006 study notes that the basic techniques of trade-based money laundering include:
• Over Invoicing
• Under invoicing
• Multiple invoicing by issuing more than one invoice for the same goods
• Short shipping - seller ships less than the invoiced quantity or quality of goods
• Over shipping - seller ships more than the invoiced quantity or quality of goods
• Deliberate obfuscation of the type of goods by simply omitting information from relevant
documentation or deliberately disguising or falsifying it.
• Phantom Shipping: no goods are shipped and all documentation is completely falsified.
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Generally, these techniques involve fraud by one party against another, but may also depend upon collusion
between the seller and buyer, since the intended outcome of the trade is to obtain value in excess of what
would be expected from an arms’ length transaction, or to move funds from point A to point B without being
detected or accounted for by the authorities. The collusion may arise because the parties are controlled by
the same persons, or because the parties are attempting to evade taxes on some part of the transaction.
Red Flags - FATF TBML Report - Asia
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Use of letters of credit to move money between those countries, where such trade would not normally occur and / or is not
consistent with the customer’s usual business activity. A Letter of credit is generally resorted to so as to accord more
legitimacy to the transaction in order to conceal the real facts.
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The method of payment requested by the client appears inconsistent with the risk characteristics of the transaction. For
example receipt of an advance payment, for a shipment, from a new seller in a high-risk jurisdiction.
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The transaction involves the receipt of cash (or by other payment methods) from third party entities that have no apparent
connection with the transaction or which involve front or shell companies or wire instructions / payment from parties which
were not identified in the original letter of credit or other documentation. The transactions that involve payments for goods
through cheques, bank drafts, or money orders not drawn on the account of the entity that purchased the items also need
further verification.
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The transaction involves the use of repeatedly amended or frequently extended letters of credit without reasonable
justification or that includes changes in regard to the beneficiary or location of payment without any apparent reason.
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Unusual deposits i.e. use of cash or negotiable instruments (such as traveller’s cheques, cashier’s cheques and money
orders) in round denominations (to keep below reporting threshold limit) to fund bank accounts and to pay for goods and
services. The negotiable instruments may be sequentially numbered or purchased at multiple locations and may frequently
lack payee information. Further, cash payments for high-value orders are also indication of TBML activity.
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Inward remittances in multiple accounts and payments made from multiple accounts for trade transaction of same
business entity are indicators for TBML. In this regard the study of foreign exchange remittances may help detect the
offence.
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In the case of merchanting trade, the trade finance mechanism should be in place for both export leg as well as import leg
of transaction. If the Trade Finance mechanism, for example, Letters of Credit, have been provided for only the import leg
of the transaction and not for export leg, it also indicates the possibility of TBML.
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Red Flags – Providing Insufficient or Suspicious Info
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A client uses unusual or suspicious identification documents that cannot be readily verified.
A business is reluctant, when establishing a new trade relationship, to provide complete information about
the nature and purpose of its business, anticipated trade activity, prior banking relationships, the names of its
officers and directors, or information on its business location.
A client’s home or business telephone is disconnected.
The client’s background differs from that which would be expected on the basis of his or her business
activities.
A party to a transaction is a shell company.
Transacting businesses share the same address, provide only a registered agent’s address, or have other
address inconsistencies.
Upon request, the customer refuses to identify or fails to indicate any legitimate source for his or her funds
and other assets.
The use of email addresses with public domain (e.g., mary.smith@gmail.com, Raul.Ortiz@yahoo.com)
Red Flags - Activity Inconsistent with Business
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A client who significantly deviates from their historical pattern of trade activity (i.e. in terms of value,
frequency or merchandise).
The customer wishes to engage in transactions that lack business sense or apparent investment strategy, or
are inconsistent with the customer’s stated business strategy (e.g., a steel company that starts dealing in
paper products, or an information technology company that starts dealing in bulk pharmaceuticals).
Goods or services purchased by the business do not match the customer’s stated line of business.
The size of shipment appears inconsistent with the scale of the exporter or importer’s regular business
activities. For example, a small textile exporter shipping a consignment worth US$50 million when its normal
turnover is $1.5 million.
The goods are shipped through one or more jurisdictions or unconnected subsidiaries for no apparent
economic reason.
Other inconsistencies to be considered;
– Routine installation, training, or maintenance services are declined by the customer.
– Delivery dates are vague, or deliveries are planned for out of the way destinations.
– A freight forwarding firm is listed as the product's final destination.
– Packaging is inconsistent with the stated method of shipment or destination.
Red Flags - Other Suspicious Client’s Activity
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The transaction involves the receipt of cash (or other payments) from third party entities that have no apparent
connection with the transaction.
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Transport documents do not match letter of credit documents and evidence an over-shipment or under-shipment
not covered by the letter of credit agreement.
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Shipment locations of the goods, shipping terms, or descriptions of the goods are inconsistent with the letter of
credit. This may include changes in shipment locations to high-risk countries or changes in the quality of the
goods shipped.
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Significant discrepancies appear between the descriptions of the goods on the bill of lading (or invoice) and the
actual goods shipped.
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Sudden and unexplained increases in a customer’s normal trade transactions.
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Customers are conducting business in higher-risk jurisdictions or geographic locations, particularly when shipping
items through higher-risk or non-cooperative countries as defined in the AML Risk Drivers. Please note: This
attribute in isolation would not necessarily deem a transaction as high risk.
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Customers involved in potentially higher-risk activities, including activities that may be subject to export/import
restrictions (e.g. equipment for military or police organizations of foreign governments, weapons, ammunition,
chemical mixtures, classified defense articles, sensitive technical data, nuclear materials, precious gems, or certain
natural resources such as metals, ore, and crude oil).
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Obvious misrepresentation of quantity or type of goods imported or exported.
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Obvious over- or under-pricing of goods and services (as per information received from our regulators, we are not
expected to be pricing experts on the many products that could be involved in trade transactions. However, staff
completing trade transactions should generally know that over- or under pricing can be an indicator of money
laundering and/or fraud and any instances that come to their attention should be investigated and, if suspicious
reported).
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Red Flags - Other Suspicious Client’s Activity
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Transaction structure appears unnecessarily complex and designed to obscure the true nature of the
transaction.
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Significantly amended letters of credit without reasonable justification or changes to the beneficiary or location
of payment. Any changes in the names of parties also should prompt additional OFAC review.
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The customer (or a person publicly associated with the customer) has a questionable background or is the
subject of news reports indicating possible criminal, civil, or regulatory violations.
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The customer exhibits a lack of concern regarding risks, commissions, or other transaction costs.
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The customer has little experience in the product in which they are dealing or does not seem to appreciate the
risks associated.
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The method of payment appears inconsistent with the risk characteristics of the transaction. For example, the
use of an advance payment for a shipment from a new supplier in a high-risk country.
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The shipment does not make economic sense. For example, the use of a forty-foot container to transport a
small amount of relatively low-value goods.
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The customer requests that a transaction be processed in such a manner to avoid the firm’s normal
documentation requirements.
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Regarding nonprofit or charitable organizations, financial transactions occur for which there appears to be no
logical economic purpose or in which there appears to be no link between the stated activity of the organization
and the other parties in the transaction.
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Additionally the shipment of any high dollar value items (such as electronics, autos, auto parts, gems and
precious metals) in conjunction with other indicators may be reason for further review.
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CASE STUDY 1
Export of High Value Vehicles to China
Detailed Information
Issuing Bank:
China Magic Bank
Applicant :
Tianjin Chao International Trade
Beneficiary :
Zhangai Auto Sales
Amount :
USD 79,000.00
Validity :
14 June 2014
Port of Loading / Discharge :
Any USA Port
Place of Delivery / Final Destination :
Xingang, China
Purpose :
Export of a Toyota Land Cruiser to China.
Description of Transaction:
14 June 2013:
Trade Ops Export team receives a Swift message type 700 from China Magic
Bank, Tianjin Branch. The Swift message from China Magic requests that Bank
USA advise a export letter of credit valued at $79,000. The goods to be
exported under the letter of credit is a single Toyota Land Cruiser 5700. The
retail value of this model of Toyota Land Cruiser is approximately $80,000.
The beneficiary of the transaction is Zhangai Auto Sales.
The transaction is pending in the ops export team. The validity of this
transaction is in question as the beneficiary is a Car dealer however, we are
unable to find any information to substantiate the line of business. The
beneficiary has an ongoing relationship with the Bank USA. Zhangai Auto Sales
has maintained a business account with Bank USA since October of 2005 with a
current balance of $28,358.02. The owner of Zhangai Auto Sales Guoqing
Zhangai maintains two personal accounts with Bank USA dating back to 2001
with a current total balance of $159,728.18.
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CASE STUDY 1
Export of High Value Vehicles to
China
Detailed Information
Description of Transaction:
14 June 2013 :
1. Swift message type 700 received by Bank USA from China Magic Bank asking Bank USA to
advise a $79,000 letter of credit.
2. The port of loading is any port in the United States. The port of discharge is Xingang , China.
3. The goods to be exported under the letter of credit is a single Toyota Land Cruiser 5700. The
retail value of a 2013 model of Toyota Land Cruiser is approximately $80,000.
4. The beneficiary of this transaction is Zhangai Auto Sales. Zhangai Auto Sales is not registered
with the California Secretary of State’s Office.
5. The Address for Zhangai Auto sales is 5827 Encinita Ave, Temple city, CA 91780, which is a 2,054
square foot single family home with four bedrooms and three baths.
6. The known client of the Bank, Zhangai Auto Sales has had no previous trade related
transactions.
7. Web searches revealed no websites for the applicant or the beneficiary.
Actions taken:
1. This transaction remains pending with the Trade Operations exports team.
2. Escalation to Trade Sales is being considered based on the goods being shipped, additional red
flags and the beneficiary’s ongoing relationship with the Bank.
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CASE STUDY 2
Background:
Authorities in US had information that Bank P in Lebanon had been extensively used by an
international drug trafficking syndicate controlled by individual Q for moving the proceeds
of narcotics sales through TBML across the globe.
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The syndicate smuggled narcotics from South America to Europe and to the Middle East through West Africa.
The kingpin Q of the syndicate organized shipments of 100 Tonnes of Cocaine from South America and
laundered the proceeds of up to US $ 200 Million per month, obtained from the sale of cocaine in Europe and
Middle East.
Proceeds of drug trafficking were moved and laundered through bulk cash smuggling (cash couriers), use of
exchange houses including one owned by Q and use of accounts of family members of “Q” in several branches
of Bank P
Bulk cash deposits were made by Q and his associates into exchange houses which in turn deposited the money
into several accounts maintained in Bank P.
In fact, Q owned and controlled one of the exchange houses located in the same building as a branch of Bank P.
Certain employees of Bank P were in league with Q.
Two distinct TBML schemes were used by the syndicate to move and launder illicit funds through trade.
CASE STUDY 2
SCHEME A:
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In the first scheme, wire transfers from Bank P were sent to banks in U.S. for the purchase of used cars in the
U.S.
The car dealerships were operated by individuals who had been separately identified in drug-related
investigations.
The recipients of these funds purchased vehicles in the United States, which were then shipped to countries in
West Africa and elsewhere.
The proceeds generated from sale of used cars were ultimately repatriated back to Lebanon.
The money generated from illicit drug trade was thus fully integrated into the financial system through TBML
scheme involving trade in used cars.
SCHEME B:
1. In the second scheme, Individual R, who owned a wide network of companies which were dealing in consumer
goods in Asia and in other regions provided consumer goods for TBML.
2. Although based in Asia, individual R had centralized his banking operations in Lebanon, particularly through the
use of over 30 accounts at Bank P.
3. Individual R received funds in his accounts from the kingpin Q and R also exchanged funds with the Latin
American members of the drug syndicate.
4. In the TBML scheme used by them, the proceeds generated in local currency from the sale of imported
consumer goods were deposited in individuals’ accounts in the local banks.
5. This completed the Latin America-based Black Market Peso Exchange ML cycle, and allowed for the repatriation
of proceeds for the Latin American drug producers.
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CASE STUDY 2
Commentary:
The proceeds of narcotics drug money were first placed into the financial system of a
jurisdiction where the AML regime was not adequately strong. The syndicate targeted
jurisdictions where the AML regime may not have been as strong as Europe. The criminal
syndicate was able to influence individuals on the operations of its bank as well as those of
the exchange houses. The proceeds of drugs was layered and moved through the use of
international trade. Round tripping of the money and its laundering occurred through abuse
of trade and trade finance (open accounting system). Interestingly, both the TBML schemes
were being operated concurrently and funds were moving between the two schemes, by use
of the Money Exchange House established by Q.
Red Flags
1. Trade in commodities like used cars and consumer goods for which valuation can be manipulated.
2. Payment for imports received from banks located in a third jurisdiction, whereas goods are traded between two
other countries.
3. Cash deposits made in bulk in certain bank accounts from high risk customers like exchange houses.
4. Cross border wire transfers from sensitive jurisdictions without adequate explanation of the considerations
involved for such transfers.
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CASE STUDY 3
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Company X located in India received advance remittance from Company Y located inforeign jurisdiction for a
promise to export consignments of diamonds.
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Company X filed falsely declared and forged documents with the bank to show the overvalued exports of
diamond without having made any shipment.
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To give a colour of authenticity, Company X also fabricated purchase invoices to show local purchases of
diamonds, whereas no purchases of diamonds had actually ever taken place.
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Company X received export payments through trade finance arrangements via an open accounting system from
Company Y.
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Company X had received substantial cash deposits in India from the public on the promise of high returns via a
fraudulent Ponzi Scheme.
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Company X transferred large amounts of public deposits to company Y through hawala (Alternative Remittance
System).
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Company X indulged in round tripping by receiving back as export earnings the financial value which it had
transferred abroad as hawala.
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Predicate offences of cheating, criminal conspiracy and forgery of documents occurred.
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CASE STUDY 3
Commentary:
In this case, the proceeds of crime were generated through the fraud perpetrated on general
public under a Ponzi scheme which was then laundered through fraudulent and bogus
exports. Such proceeds of crime were transferred abroad through alternative remittance
system. Money was received back from abroad through banking channels as export remittance. Round tripping of
money and its laundering occurred through TBML. Company X had a network of associate companies established in
many jurisdictions abroad. In this case, on the trade side, overvaluation of export goods and under shipment (no
shipment) of goods was done. Proceeds of Crime were moved abroad by using alternative remittance system
(hawala) and then round tripping occurred through open accounting system.
Red flags
1. Export of goods without any corresponding purchase of raw materials or finished goods.
2. Sudden increase in volume of exports by a new exporter.
3. Advance inward remittance against exports without justifiable reasons.
4. Export documents which are not duly authenticated by export regulating agency were accepted by the bank.
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CASE STUDY 4
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Toy Company T of Los Angeles, USA was receiving cash generated from trafficking of narcotics by Columbian
drug cartel S.
Company T received such cash by two methods - in some cases, people affiliated with drug traffickers simply
dropped cash at the company offices in downtown Los Angeles; the second method involved cash deposits
made directly into Company’s bank account, sometimes by individuals located as far away as New York.
During the four-year period, the investigation tracked more than $ 8 million in cash deposits into the accounts
of the Company T, and not a single transaction was for more than $ 10,000.
The bank accounts of Company T, were used to pay for import of toys into USA.
The toys, viz. stuffed animals, including teddy bears and Topo Gigio dolls, were imported from Company U in
China.
The toys imported into US from China were again exported from the U.S. to Company V in Colombia.
The Colombian pesos generated by the sales of toys by Company V were then used to reimburse the Colombian
drug trafficker.
TTU Colombia was deployed to investigate shipments of toys.
The TBML investigation brought out structuring transactions to avoid reporting requirements, bulk cash
smuggling and intimidation of witnesses. In addition, the toy Company T was charged with conspiracy to
launder money.
Five persons, including two owners of the Company T and a Columbia-based businessman were convicted and
fined.
CASE STUDY 4
Commentary:
Cash obtained from the trafficking of narcotics was first structured into financial system through smurfing.
Money was then used to import toys, thereby converting the proceeds of narcotics trafficking into goods. The
imported toys were then re-exported to move that value to the desired jurisdiction, in lieu of the value of
narcotic drugs. Thus international trade was used for layering and integrating the crime money and to disguise
its illicit origin.
Red Flags
1. Payment for import is made through multiple accounts.
2. Credits into such accounts were made mostly through structured cash deposits, i.e. through smurfing.
3. Re-export of goods to sensitive jurisdictions.
4. Inadequate consideration received for re-exported goods.
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Trade Based Money Laundering – Methods,
Identification and Prevention
Guillermo Horta
Managing Director
Global Financial Crimes Compliance