4 years ago

TBML: A black hole in international banking

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Trade-based money laundering (TBML) is defined as a process of concealing the proceeds of trade-related earning through illegal trade transactions in an attempt to legitimise the illicit origin of money. It is one of the most methods of cleaning dirty money, and is difficult to detect. Practically, this can be done through misrepresentation of the price, quantity or quality of imports or exports. In many cases, this can also involve misuse of the financial system through fraudulent transactions, such as wire transfers.

Basic techniques of trade-based money laundering include:

- 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.

All of these techniques are not necessarily in use in every country.

OVER-AND UNDER-INVOICING OF GOODS AND SERVICES: Money laundering through over-and under-invoicing, which is one of the oldest methods of fraudulently transferring money across borders, remains a common practice still today. The key element of this technique is misrepresentation of the price of the goods or services in order to transfer additional value to the importer or the exporter, as the case may be.

MULTIPLE INVOICING OF GOODS AND SERVICES: Another technique used in money laundering involves issuing more than one invoice for the same international trade transaction. By invoicing the same goods or service more than once, a money launderer is able to justify multiple payments for the same shipment of goods or delivery of services. By using a number of different financial institutions to make these additional payments, he may increase the level of complexity surrounding such transactions.

In addition, even in case of multiple payments relating to the same shipment of goods or delivery of services is detected, there remains a number of legitimate explanations for such situations including amendment of payment terms, corrections to previous payment instructions or the payment of late fees.

OVER-AND UNDER-SHIPMENTS OF GOODS AND SERVICES: A money launderer can overstate or understate the quantity of goods being shipped or services being provided. In extreme case, 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 or ghost shipment" are routinely processed. Banks and other financial institutions may unknowingly get involved in trade financing for these phantom shipments.

FALSELY DESCRIBED GOODS AND SERVICES: In addition to manipulating export and import prices, a money launderer can misrepresent the quality or type of goods or services. For example, an exporter may ship a relatively inexpensive product and falsify invoice as if it were a more expensive item or an entirely different one. This creates a discrepancy between what appears on the shipping and customs documents and what actually has been shipped. The use of false descriptions can also be used in the trade in services, such as financial advice, consulting services and market research.

BLACK MARKET PESO EXCHANGE ARRANGEMENT A COMPLEX TRADE-BASED MONEY LAUNDERING TECHNIQUE: Black market peso exchange arrangements provide a useful illustration of how a number of different money laundering techniques can be combined into a single criminal operation. The method of a simple black market peso arrangement can be set out in the following way. First, the Colombian drug cartel smuggles illegal drugs into the United States and sells them for cash. Second, the drug cartel arranges to sell the US dollars at a discount to a peso broker in Colombia for Colombian pesos. Third, the peso broker pays the drug cartel with pesos from his bank account in Colombia (which eliminates the drug cartel from any further involvement in the arrangement). Fourth, the peso broker who has an agent in USA, structures or "smurfs" the US currency into the US banking system to avoid reporting requirements and consolidates this money in his US bank account. Fifth, the peso broker identifies a Colombian importer that needs US dollars to purchase goods from a US exporter. Sixth, the peso broker arranges to pay the US exporter (on behalf of the Colombian importer) from his US bank account. Seventh, the US exporter ships the goods to Colombia; and finally, the Colombian importer sells the goods (often high-value items such as personal computers, consumer electronics and household appliances) for pesos and repays the peso broker. This replenishes the peso broker's supply of pesos.

Although the term "black market peso exchange" refers to a money laundering technique that was originally associated with Colombian narcotics trafficking, these arrangements are widely used in many countries to repatriate the proceeds of various types of crimes.

SCOPE OF TRADE BASED MONEY LAUNDERING IN BANGLADESH: To accomplish trade-based money laundering, in most cases, there may be a kind of concealed impersonation of the seller and the buyer. This collusion may arise when both parties are controlled by the same person/entity. The transfer of value in this way may be executed in a number of ways such as over invoicing, under invoicing, multiple invoicing, short shipment, over shipment, phantom shipment, and complicated payment structure, discount, price changes or without making any payment at all etc. Bangladesh is not an exception in this regard.

In some cases it has been observed that desired goods are not entering into the country as per requirement of LC. But the country has to pay the value of this imaginary import in foreign currency. These illegal activities are being done through banking channels because 'banks deal with documents not with goods, services or performance to which the documents may relate' as per UCPDC 600 Article-5. Now banks should come out of these principle. Pre-shipment Inspection (PSI) is not mandatory for export import business in our country. Now we need to further think about PSI to check trade based money laundering.

KEY CHALLENGES IN PREVENTING TRADE BASED MONEY LAUNDERING: Price verification, transfer pricing, limited skilled manpower, extreme competition, absence of co-ordination, duty/tax structure etc., are key challenges for preventing trade based money laundering in Bangladesh.

Trade based money laundering may arise due to inadequate infrastructure of the bank, inaccurate assessment of the customer before taking him on board, poor identification and handling of TBML alert while conducting trade transaction by the officials concerned, and failure of the bank to address the risk at the enterprise level. Hence all the banks can establish TBML risk assessment and mitigation at infrastructure level, customer level, transaction level, and enterprise level.

First comes infrastructure risk assessment and mitigation as it is impossible to implement mitigation measures without adequate infrastructure. Secondly, high risk customers with dubious trade transactions give birth to trade fraud. Hence knowing and assessing customer is of great use to combating TBML. Thirdly, TBML risk assessment and mitigation at the transaction level is most important and vital to combating this offence. Finally, a holistic approach by the bank can be effectively implemented through senior management's engagement in TBML risk assessment and mitigation at enterprise level. Banks should develop data base of their own and the data should be interlinked with the entire process of trade transactions. Also these can be overseen by the central bank.


(Views contained in the article are writer's own and do not necessarily reflect that of  the bank he is associated with.)

Nazrul Islam is   a banker.

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