Investigating Trade-Based Money Laundering

Investigating Trade-Based
Money Laundering
Michael Schidlow, Financial Crime Compliance Training
and Advisory Specialist

Michael Schidlow
Michael Schidlow is the Head of Financial
Crime Risk Training for HSBC Bank’s Global
Internal Audit Function, where he designs and
delivers training on anti-money laundering,
terrorist financing, anti-bribery/corruption, and
anti-financial crime best practices. He also
leads the function’s Emerging Risk Advisory for
North America, Latin America, and for the
Global Financial Crime Risk teams.
He is a Certified Fraud Examiner (CFE),
Certified Anti-Money Laundering Specialist
(CAMS), holds ACAMS Advanced Certification
in AML Audit (CAMS-Audit) and is a licensed
attorney.

© Michael Schidlow 2019
Trade-Based Money LaunderingAmount
$1.5-3
trillion/year FIs
70%
Transactions
92% digital
Detection
1%
Money Laundering

Trade-Based Money Laundering
Definitions Controls Methods
What Is Money
Laundering
KYC/Risk
Rating
TBML
Legal Definition Transaction
Monitoring
Front
Companies
Functional
Definition
Investigations Comingling

Why
Trade?
2018 – US $19.48 trillion in world
merchandise exports (per World
Trade Organization)
Significant annual increases – up
10%+ from 2017
Single transaction, deal, series
contract can have million-dollars in
value

Poll Question #1
Which of the countries below is a hub
for company formations?
• Brazil
• Spain
• United States

Shell Companies:
Exist only on paper and create a separate legal identity:
– No office or digital footprint
– No employees
– No products and no legitimate use other than to hold an
asset or a bank account
Often registered in offshore jurisdictions known for secrecy.

Shell Companies:

Shell company—Panama Papers:
– 200,000 shell companies opened over decades
– All opened by a law firm in Panama
– Often opened in “tax havens”
Source: “Panama Papers and Mossack Fonseca Explained,” Lisa Main and Elise Worthington, ABC News

Shell companies and offshore havens
Shell
company/trust
Nominee
Offshore
haven KYC?

Finance/Insurance Loan Trade Receivables
Screen:
• Involved
Parties
• Goods
(quality/
quantity,
price)
• Dual-Use
• Shipping
Routes/
• Transship
ment
Monitor:
• Payment
Amount
• Origin/
Country
• Third Party
• Typologies
• Sanctioned
Parties
• Sanctioned
Countries
Risk Interface – Global Trade and Receivables Finance

Documentary
Collection
Letter of
Credit
Standby
Letter of
Credit
Bill of
Lading
Invoice
Shipping
Manifest
Insurance
Docs
Trade Manipulation

”Normal” Trade Receivables
Contract – Price, Quantity, Quality
LoC – bank confirms payment
Shipping – Manifest
Funds Settlement – Buyer and
Seller
Standby
LoC:
Third party
Named and
Identified

Methodologies – BMPE
• Drugs in US
• Sold for US
Dollars
Seller in
Colombia
• Importer in
Colombia
• Deal w/US
Exporter
Illegal
Exchanger • Exchanger Pays
in USD
• Importer
Transfers to Seller
Deal Settled

Poll Question # 2
Estimating the global inspection rate
for shipping containers, what
percentage are physically inspected?
• 3-5%
• 10-15%
• 30-40%

Methodologies – Manipulation
• Over/Under Invoicing
(“Obvious”)
• Over/Under Shipment
• Phantom Shipments
3-5%

Example: Billy Buyer and Sandra Seller
New Rolex “No Date” Submariner Model 114060
Retail Value +/- $9,000 – Billy agrees to buy 100 units @ list price,
pay via 5 separate wires
Contract – 100 Units, “Rolex
114060”
$9,000 per watch
Total (less tax, freight,
transport) – $900,000
Invoice – 100 Units,
“Luxury Watches”
$10,500 per watch
Total (less tax, freight,
transport) – $1,155,000
5 wires sent for $240,000
each
3rd Party sends one/
Billy sends four
$1,200,000

Example: Billy Buyer and Sandra Seller
Manifest and Bill of Lading
Lists “Luxury Watches” as contents
Requires additional locks/security - Less opportunity to inspect
255 g watch (Actual = 155 g) + 845 g box (Actual = 645 g) =
Extra 300 g
x 20 watches per shipment = 6 kg
6 kg x 5 shipments = 30 kg = $1,125,000 worth of cocaine
(as of May 2019)
Image Source: Rolex.com

Transaction Risk Indicators
Pricing
Potential
over- or
under-
valuation
Payment
Payments to
a vendor by
unrelated
third party
Valuation
Commodities
being traded
that do not
match the
vendor
involved

Contract vs. Invoice Price –
Retail $9,000 vs. Invoice Price
$10,500 Transaction Monitoring
Alerted:
- Third party transfer
- Pricing discrepancy
- Round dollar transfers
Billy - agreed to increased price
due to limited availability of sport
models.
Wire from 3rd Party
Sandra - the watches needed
extra security and padding,
hence the increased weight.
Freight Weight – Increase of 300 g
Billy - third-party payment was
from another vendor who went in
on the deal with him.
Evidence of Inspection Manual Review Noted:
- Documentary
Discrepancy (BoL, LoC,
Contract, Manifest)
- List Price Variant
- Exclusion of Freight/Tax
Sandra/Billy - blame receivables
difference on taxes and freight .
Volume of Units v. Production
basis
SAR or No
SAR?
Contract says price less freight
and taxes
Transactions in round dollars
Example: Billy Buyer and Sandra Seller – Risk Indicators and Investigation

Poll Question #3
Most controls related to trade based
money laundering are automated.
• True
• False

and Sanctions Evasion
Example: North Korea
Ore,Coal,Timber
Transfer
Tracking
Automatic
Identificatio
n
System
(AIS)
transponde
rs
Close to
Ports of
Call Ship to
Ship
Transfers Image Source:
Simrad Commercial

Example: a Loan to Billy Buyer and Sandra Seller
Per the finance documents provided by the client:
 Rolexes set to ship from port near Tianjin, China
 Scheduled stop to offload goods in Taipei, Taiwan
port
 Destination: Vladivostok, Russia

Transponder tracks through Dalian; stops
tracking vessel 20 miles from NK coast
Transponder turns back 18 hours later on at
pass around South Korean peninsula
Ship pings near Taipei, transponder shuts off
for another 12 hours
Transponder shows vessel 10 miles from
Pagudpud, Philipines
Tracking shuts off for another 12 hours.
Turns on again 15 miles southeast of Taipei

Example. Billy Buyer and Sandra Seller
Rationale
Why was
the AIS
shut off?
Transshipment
Country of
Origin for
the Goods
Why the
additional
stop?
Evidence
Were
goods,
containers,
crew
brought
on?
Entities
Third
Parties
Front/Shell
Companies

GHOST LAUNDERING
PRODUCTS AND SERVICES
• Gibberish/Nonsense books sold on Amazon.com
• Some true author names are stolen
• Authors get 60% of the revenue
• One $555 book sold more than 60 times over
FALSE
AUTHORS
FAKE BOOKS
COLLUSIVE
”BUYERS”

PRODUCTS AND SERVICES
Ex. Billy Buyer owes Sandra Seller USD $1mn for a drug purchase
Source: The Guardian
GHOST LAUNDERING
Numerous online
publishers for
authors who want to
self publish
“Joke or gag books
with repeated content
or an intentional
absence of content”,
only where “clearly
labelled as such”

GHOST LAUNDERING
$500
B i l l y “ p a ys ” f o r
P U B L I C AT I O N
B i l l y “ p a ys ” f o r
E D I T I N G /
I L L U S T R AT I O N $7,000
S A L E S
10 SALES
PLATFORMS
10 X PER MONTH
$1,000,000 W/O
GOING TO THE BANK
Billy’s
Book

Transaction Laundering
Ex. Billy Buyer owes Sandra Seller USD $1mn for a drug purchase
Ex. World of Warcraft –
HUNDREDS of hours game
play to “earn” experience and
have a more powerful
character
Closed VC – used for in
application/game purchases
on common software,
programs, and games.
Upskill,
Power Up,
Armor,
Weapons,
Outfits,
Vehicles
Access to boards/levels

3rd Party Market
Ex. G2G.com
Clash of Clans and Clash Royale
and Marvel Contest of Champions:
• Over 250 million users,
• Generates USD $330mn per
year

Ghost Laundering – FORTNITE
• Lots of in game modifications
• V-bucks needed/only available through game
• Fortnite $125k/month on eBay
• Per capita increase of dark web mentions
Schemes
•STOLEN CREDIT
CARDS USED
PROFILES
RESOLD AT
DISCOUNT
VICTIMS
SEEKING V-
BUCKS SENT TO
PHISHING SITES
CYCLICAL –
ILLICIT PROFIT
UNKNOWN

B i l l y l o c a t e s
O N L I N E D ATA B A S E
o n D A R K W E B
2 0 , 0 0 0 B R E A C H E D
C R E D I T C A R D S f o r
$ 5 0 , 0 0 0 i n V C
Billy makes IN -APP
PURCHASES in
ONLINE GAMES
2,000 profiles x $30
to upgrade =
$60,000 in fraudulent
charges
E N H A N C E D 2 , 0 0 0
P R O F I L E S S O L D
E X T E R N A L LY f o r $ 5 0 0
e a c h =
U S D $ 1 , 0 0 0 , 0 0 0
f i a t / V C
Ghost Laundering – FORTNITE
Breach ID’s sold
Unauth
Purchases
RESOLD
FIAT/VC CLOSED VC FIAT/VC

Risk Indicators: Ghost Laundering
Shell
Co.s
Unclear
Biz
Secrecy
Havens
No Ops
Acct
Constant
Ratio/%
Flux

Risk Indicators and Takeaways

Detecting a shell company
Profile:
• Single owner/common owner
• Only registering agent on file
• Set up in a secrecy haven
• Not publicly listed
• No clear biz purpose
• No employees
• No products
Activity:
$ Paythrough
$ Comingling
$ Transactions not in line
with stated purpose

Risk
Deviation –
PRODUCTS,
SERVICES,
LINE of TRADE
Third Party
Payments
Obvious
Over/Under
Invoicing
Illogical Price:
Asset Ratio

TBML/Sanctions
Hidden
Identity
Shell Co.
Apparent
Purpose
Operating
Purpose
Altered ID
Screening
Proximity

Thank-you for participating
Michael Schidlow
michael@scientergroup.com
@ProfSchidlow
https://www.linkedin.com/in/mschidlow/
Contact i-Sight
j.gerard@i-sight.com
Find more free webinars:
http://www.i-sight.com/resources/webinars
@isightsoftware

Investigating Trade-Based Money Laundering

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