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Trade-Based Money Laundering: What Compliance Professionals Need to Know

Alessa
Alessa

WATCH WEBINAR - https://www.caseware.com/alessa/webinars/trade-based-money-laundering/ Hundreds of billions of dollars are laundered every year through trade-based money laundering (TBML). Its sophisticated techniques allow criminals to use legitimate trade to disguise the source of illegal proceeds and transfer value across borders without the use of traditional money movement methods. Laurie Kelly, CAMS shares her knowledge and experiences gained from 20 years in leading the AML, fraud, and sanctions compliance functions for a $145 billion U.S. financial institution that provided extensive trade finance services for global exports of U.S. agricultural products. Attendees learn the fundamentals of foreign trade and trade finance, and why these long-established processes make it so vulnerable to TBML. We break down the most common TBML techniques, including the Black Market Peso Exchange, over & under invoicing, and others, using real world case studies. Finally, we review the red flags for these activities and how to incorporate transaction monitoring, sanctioned/restricted party screening, and enhanced customer due diligence to mitigate TBML risks. About Alessa, a CaseWare RCM product: Alessa is a financial crime detection, prevention and management solution offered by CaseWare RCM Inc. With deployments in more than 20 countries in banking, insurance, FinTech, gaming, manufacturing, retail and more, Alessa is the only platform organizations need to identify high-risk activities and stay ahead of compliance. To learn more about how Alessa can help your organization ensure compliance, detect complex fraud schemes, and prevent waste, abuse and misuse, visit us at caseware.com/alessa. Connect with us online: Visit the Alessa WEBSITE: https://www.caseware.com/alessa/ Follow Alessa on LINKEDIN: https://www.linkedin.com/caseware-alessa Follow Alessa on TWITTER: https://twitter.com/casewarealessa SUBSCRIBE to Alessa on YouTube: http://tiny.cc/Alessa

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Download to read offline
https://www.caseware.com/alessa/
Trade-Based Money
Laundering: What Compliance
Professionals Need to Know
Laurie Kelly, CAMS
https://www.caseware.com/alessa/
Agenda
2
1. What is trade-based money laundering
(TBML)
2. Understanding foreign trade – and trade
finance
3. TBML methods and case studies
4. Red flags
5. Emerging strategies for fighting TBML
6. Investigating potential TBML
7. Concluding comments
8. Q&A
https://www.caseware.com/alessa/
Trade-based money laundering: The process of moving the value of criminal
proceeds through trade transactions, to disguise the illegal origin.
3
What is Trade-Based Money Laundering (TBML)?
• Most challenging form of money laundering to identify and investigate
• Transnational organized crime – primary method of laundering
• A global phenomenon
• Estimate: $2.2 trillion annually
https://www.caseware.com/alessa/ 4
Why TBML is growing?
Trade-
Based
Money
Laundering
Open account trading
Weak information sharing
between customs agencies
Domestic customs agencies
resources & priorities
Traditional AML
compliance
successes
Volume &
complexity of
global trade
Comingling legitimate and
illegal transactions
https://www.caseware.com/alessa/
Understanding Foreign Trade & Trade Finance
https://www.caseware.com/alessa/
• Sale of goods (or services) from a seller in one country
to a buyer in another country
• Most tangible goods shipped in containers by ocean
vessels
6
Basics of Foreign Trade
• Indirect vs. direct export
• Contractual agreement between buyer and seller
• Multiple intermediaries and documents

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Trade-Based Money Laundering: What Compliance Professionals Need to Know

  • 1. https://www.caseware.com/alessa/ Trade-Based Money Laundering: What Compliance Professionals Need to Know Laurie Kelly, CAMS
  • 2. https://www.caseware.com/alessa/ Agenda 2 1. What is trade-based money laundering (TBML) 2. Understanding foreign trade – and trade finance 3. TBML methods and case studies 4. Red flags 5. Emerging strategies for fighting TBML 6. Investigating potential TBML 7. Concluding comments 8. Q&A
  • 3. https://www.caseware.com/alessa/ Trade-based money laundering: The process of moving the value of criminal proceeds through trade transactions, to disguise the illegal origin. 3 What is Trade-Based Money Laundering (TBML)? • Most challenging form of money laundering to identify and investigate • Transnational organized crime – primary method of laundering • A global phenomenon • Estimate: $2.2 trillion annually
  • 4. https://www.caseware.com/alessa/ 4 Why TBML is growing? Trade- Based Money Laundering Open account trading Weak information sharing between customs agencies Domestic customs agencies resources & priorities Traditional AML compliance successes Volume & complexity of global trade Comingling legitimate and illegal transactions
  • 6. https://www.caseware.com/alessa/ • Sale of goods (or services) from a seller in one country to a buyer in another country • Most tangible goods shipped in containers by ocean vessels 6 Basics of Foreign Trade • Indirect vs. direct export • Contractual agreement between buyer and seller • Multiple intermediaries and documents
  • 7. https://www.caseware.com/alessa/ Foreign Trade: Parties Seller Buyer Foreign Primary Party in Interest (FPPI) Consignor AKA: Shipper or Sender U.S. Authorized Agent (Buyer’s Agent) Notify Party Carrier Customs Broker Freight Forwarder Consignee
  • 8. https://www.caseware.com/alessa/ 8 Foreign Trade: Documents Seller Buyer Sale Agreement Commercial Invoice Bill of Lading Insurance Certificate Freight Forwarder Contract of Carriage Carrier Export Packing List Export License Certificate of Origin Electronic Export Information (EEI) (fka Shippers Export Declaration) AES Direct OFAC License
  • 9. https://www.caseware.com/alessa/ Foreign trade exposes seller and buyer to risks Trade Finance: • Financial instruments used to facilitate international trade • Brings a third party into the equation Open Account Trading: • Little to no risk protections for both parties • No intermediary involved 9 The Money Side of Foreign Trade
  • 10. https://www.caseware.com/alessa/ Understanding the Export Letter of Credit (LC) Buyer’s Bank Seller’s Bank Exporter/Seller Importer/Buyer Letter of Credit Sales Agreement LC Application Agreement to process LC Short-term financing agreement Letter of Credit: Guarantee from buyer’s bank to seller
  • 11. https://www.caseware.com/alessa/ 11 Letter of Credit Process and Document Flow Letter of Credit 2 Letter of Credit 1 3 Goods shipped Docs 4 5 Docs 6 7 8 Docs 9 Seller’s Bank Buyer’s Bank Importer/BuyerExporter/Seller
  • 12. https://www.caseware.com/alessa/ • Advising: Receiving the LC from the Issuing Bank and confirming it’s genuine • Negotiating: Verifying the seller’s documents match the LC; pay the seller up front • Confirming: Guaranteeing payment to the seller, even if Issuing Bank defaults • Documentary Collection: Acting as a channel for documents and payment 12 The Role of the Seller’s Bank in Export LCs
  • 13. https://www.caseware.com/alessa/ Risks to Seller: • Non-payment • Non-acceptance of goods • Short payment • Late payment Open Account Trading Risk Mitigation: • “Cash against documents” • Export credit insurance Why use open account trading: • Seller competitiveness in foreign market • Significantly lower cost to seller and buyer • Minimize scrutiny?? Wolfsberg Group: 80% of international trade is through open-account trading
  • 15. https://www.caseware.com/alessa/ 15 TBML Through Under-Invoicing Exporter/Seller Importer/Buyer Invoice: 1,000 microwaves for $100 apiece: $100,000 $200,000 dirty cash Buys 1,000 microwaves at $200 apiece: $200,000  $100,000 comes back to seller as laundered funds in form of a trade payment  Buyer pays $100,000 but sells microwaves for $300,000, transferring the $200,000 of illegal proceeds to Germany $100,000 payment Microwaves shipped Microwaves sold for $300 apiece: $300,000
  • 16. https://www.caseware.com/alessa/ 16 Exporter/Seller Importer/Buyer Invoice: 1,000 microwaves for $400 apiece: $400,000 $200,000 dirty cash Buys 1,000 microwaves at $200 apiece: $200,000 $400,000 payment Microwaves shipped Microwaves sold for $300 apiece: $300,000 TBML Through Over-Invoicing
  • 17. https://www.caseware.com/alessa/ Techniques for moving money by falsifying elements of a trade transaction: False Reporting Image courtesy of Nomad_Soul/Shutterstock.com • Phantom shipments • False description of goods • Misrepresentation of quantity • Multiple invoicing
  • 18. https://www.caseware.com/alessa/ • Launders $5 billion dollars per year for Colombian traffickers. • U.S. cocaine sales generated $$ millions in cash – flown back to Colombia or deposited in bulk with U.S. banks • Investigating the money side of drug trafficking started in mid-1980’s • Restrictive Colombian currency exchange laws created a black market • Drug kingpins need pesos to spend in their home country 18 The Black Market Peso Exchange (BPME) "The Black Market Peso Exchange is perhaps the largest, most insidious money laundering system in the Western Hemisphere. It's the ultimate nexus between crime and commerce, using global trade to mask global money laundering." Raymond Kelly, Commissioner of the US Customs Service 1998-2001 Photo Illustration by Lyne Lucien/The Daily Beast
  • 19. https://www.caseware.com/alessa/ 19 BPME cont’d Cartel contacts Peso Broker Drug cash placed into US financial system Money is laundered Goods shipped to Colombia Colombian importer pays Peso Broker in pesos Peso Broker finds US exporter & Colombian importer U.S. Exporter Colombian Importer Peso Broker Peso Broker pays US exporter w. laundered US$ Pesos transferred to cartel
  • 20. https://www.caseware.com/alessa/ 20 Carousel Transactions – Background on VAT VAT: Value-Added Tax • Used almost everywhere EXCEPT the United States • “Consumption tax” whenever value is added in a product’s life cycle • Tax assessed on cost of the product, less costs of any materials used in the product that have already been taxed. • Seller charges VAT to buyer, and remits it to the government. • If buyer is not the end user, but will use it to produce another product, tax he previously paid is deducted from the tax he remits to government • Final end buyer pays the entire amount of the VAT tax
  • 23. https://www.caseware.com/alessa/ • Toy wholesale in City of Industry, California • 2005 to 2011: Laundered over $6 million in drug proceeds for Mexican and Colombian cartels • Structured deposits of drug cash • Classic BMPE scheme involving Mexican and Colombian toy retailers • Husband and wife co-owners sentenced to imprisonment, supervised release and $2 million cash forfeiture 23 Case: Woody Toys Inc.
  • 24. https://www.caseware.com/alessa/ • International drug trafficking proceeds: $1.5 billion USD • Cash couriers, MSBs, hawala, and formal trade finance (LCs) • Primary techniques: over-invoicing and false reporting • Complicit exporters • Used letters of credit and open account trading 24 Case: Dubai-Based International Drug Trafficking
  • 26. https://www.caseware.com/alessa/ 26 Why So Hard to Detect TBML? Customs Limitations • Limited resources for inspections/audits • Different priorities: import- focused; contraband; tariffs • Data sharing between countries based on agreements The Role of Banks • 80% of trade now through open account • Trade is highly document-based • Price manipulation difficult to assess • Cannot address collusion between buyer/seller Volume of International Trade • WTO: $19.5 trillion in int’l trade for 2018 • 79,000 containers entered US ports in 2019 ~ $7.3 billion in goods • Complexity of trade transactions • Comingling legit and illegal transactions
  • 27. https://www.caseware.com/alessa/ 27 Why So Hard to Detect TBML? “While helpful, clarification of regulations and additional compliance staff are not enough to solve the problem. The core problem with TBML is that it is a methodology criminals use to hide illicit funds by integrating them into normal commercial flows. There is an inherent trade-off between interrupting normal commerce and intercepting illicit transactions. Some have likened this not to looking for the needle in a haystack, but rather, looking for the bad needle in a stack of needles.” Combating Trade Based Money Laundering: Rethinking the Approach – BAFT, August 2017 Considerations: • Trade documents in a TBML scheme will likely be perfect • Bank’s obligation to determine over/pricing? • Trade products/services are structured to cater to differing interests of genuine transacting parties
  • 28. https://www.caseware.com/alessa/  Suspicious activity can occur at various points in a trade transaction  Trade Services Department staff are on the front line  Many red flags only detectable through manual document review/research 28 Red Flags for TBML Red Flags: Out of Pattern Activity • Trade transactions inconsistent with the customer’s business strategy or profile, or makes no economic sense • Significant deviation from historical patterns of trade activity • Patterns indicating funnel account
  • 29. https://www.caseware.com/alessa/ 29 Red Flags for TBML con’t Red Flags: Parties • Exporter and importer appear to be affiliated in some manner: • Similar names • Share the same address • One/both parties provide only a registered agent’s address • One/both parties operate from a residential address • Use of front or shell companies to hide the true parties involved • Payments for goods made by unrelated third party intermediary
  • 30. https://www.caseware.com/alessa/ 30 Red Flags for TBML con’t Red Flags: Higher Risk Geographies/Goods • Customer does business in high money laundering or terrorist financing risk countries • Customer ships items to, from, or through higher money laundering risk countries • Goods shipped to/from Free Trade Zones • Goods involve a higher risk of money laundering; may be subject to export/import restrictions; dual-use goods Red Flags: Obvious False Reporting • Obvious over or under pricing of goods • Obvious misrepresentation of quantity of goods shipped
  • 31. https://www.caseware.com/alessa/ 31 Red Flags for TBML con’t Red Flags: Transaction Structure and LC Issues • Transaction structure and/or shipment terms unnecessarily complex/unusual • Trade documentation appears illogical, altered, or fraudulent • Certain documentation missing • LC: frequently significantly amended - extensions, beneficiary or payment location changes • LC: non-standard clauses/phrases; unusual characteristics
  • 32. https://www.caseware.com/alessa/ 32 What’s Being Done to Fight TBML? Law Enforcement: • Trade Transparency Units • US: Homeland Security Investigations (HSI) • DARTTS system • Customs & Border Protection - ATS • FinCEN • Advisories to financial institutions • Geographic Targeting Orders (GTOs) Private Sector: • Blockchain technology • Digitization of paper documents; process automation • New AML technology • India’s public/private partnership
  • 34. https://www.caseware.com/alessa/ Case Study: • Customer exports walnuts & other tree nuts internationally through open account trading ONLY • Average shipment value: $75,000 to $100,000 • Initial red flag: Suspicious incoming wire transfer from UAE • Round dollar amount $50,000 • OBI on wire transfer: “for used cars” 34 Using Customs Data in TBML Investigation
  • 35. https://www.caseware.com/alessa/ Research: • Customer supplied a copy of a commercial invoice • Goods: 20,000 kilograms of shelled walnuts • Buyer/destination address: Germany • Wire transfer originator’s name non-existent; our research indicated a shell company • Searched for U.S. export record using 3rd party data provider • Price analysis: USDA’s Foreign Ag Service database to calculate average price per kg of shelled walnuts shipped to Germany over the last 6 months; compared to price charged by customer per kg TBML Red Flags: Strange incoming wire; unidentified sender unrelated to the transaction; possible over-invoicing; no concrete customs record; higher than normal shipment value; balance on invoice not received 35 Using Customs Data in TBML Investigation con’t
  • 36. https://www.caseware.com/alessa/ Roadblocks to TBML research: • Open account trade – no documents • US Customs data:  Only available through 3rd party vendors  Not all data is public record  Exporters can opt-out of having their export records published  Available data geared toward business & competition research  Shipment value is an optional data field 36 Using Customs Data in TBML Investigation con’t
  • 37. https://www.caseware.com/alessa/ • TBML is the #1 money laundering method for transnational organized crime • Very difficult to detect – “finding a bad needle in a stack of needles” • Open account trading used for 80% of all foreign trade • Research – ask questions – ask for copies of documents • Train your Trade Services staff to recognize TBML red flags • Trade-specific KYC and EDD for export/import customers • Thoroughly document any research/analysis to support a SAR 37 Concluding Comments
  • 38. https://www.caseware.com/alessa/ Trade-Based Money Laundering: What Compliance Professionals Need to Know Laurie Kelly, CAMS