By Philip TAKYI (Dr)
This article addresses major events arising from the latest Trade-Based Money Laundering (TBML) activities and how responsible institutions have duly approached these concerns.
As an introduction to the latest trends in TBML, key factors contributing to the movement of illicit financial flows in relation to developed and less developed countries (weaker versus stronger currency location preference).
In the past, there has been a growing recognition of the threat that illicit financial flows (IFFs) pose to the integrity and stability of the global financial system.
But in recent past,, with the onslaught of the COVID-19 crisis, concerns are growing that the scale and scope of IFFs could be increasing as authorities are distracted and overwhelmed by the unprecedented economic fallout.
Such concerns are especially worse in developing countries, many of which are already characterized by poor governance, weak regulatory oversight, and corruption.
The most recent annual report from Global Financial Integrity (GFI, 2023) on the challenges posed regarding TBML – the illicit movement of money across borders by hiding it within the regular commercial trading system – analyzes the scope and characteristics of global trade-based money laundering and its impact on development, found discrepancies of hundreds of millions of dollars between what nations were officially reporting about the value of their imports and exports with each other over the last ten years.
This finding strongly indicates massive levels of IFFs are going undetected through the global trading system.
Major developing events in Money Laundering
Focus 1 – Trade Transparency Units (TTUs)
The U.S. State Department and Treasury Department supported the Immigration and Customs Enforcement Bureau (ICE) of Homeland Security with necessary funding to establish TTUs with Brazil, Argentina, and Paraguay, to analyze both sides of international trade transactions data provided through these partnerships with other countries.
One of these investigations was called ‘Operation Deluge’ and revealed $200 million in Brazilian import duty fraud caused by marking imports at undervalued prices. This investigation resulted in the parties being convicted of income tax evasion in the U.S. This money laundering scheme, detected through Operation Deluge, was said to be the largest in the history of the country as indicated by Brazilian government officials (https://home.treasury.gov).
Focus 2 – The Financial Action Task Force (FATF)
In 2006 the FATF released the report entitled Trade-Based Money Laundering, in which it identified the three major methods used by criminal organizations and terrorist financers to move money for the purpose of disguising its origins and integrating it into the formal economy. Of the three methods, the physical movement of goods through the trade system and the focus of this paper was the most compelling.
Focus 3 – The Federal Financial Institutions Examination Council (FFIEC)
The FFIEC released its first Bank Secrecy Act/ Anti-Money Laundering (BSA/AML) Examination Manual in 2005, which includes key points such as the assessment of a bank’s system of managing risk associated with trade financing activities, and the management’s ability to implement rules/regulations, monitor the organization and report discrepancies.
TBML represents an important channel of criminal activity and given the growth of world trade, an increasingly important money laundering and terrorist financing vulnerability. In January 1992, Money Laundering Alert published an article on www.moneylaundering.com, which used the average country price versus the average world price for every product to detect TBML via abnormal international trade prices.
The initial objective of the research methods used by Zdanowicz was to estimate the amount of money moving out of the U.S due to over-invoiced imports and under-invoiced exports. In addition, all U.S. export and import trade databases from January 1, 1993, to December 31, 1993, in which each commodity/type of good had a 10-digit harmonized code number were gathered.
International trade has some of the most complicated regulations of any sector. International trade is governed by a range of overlapping bilateral agreements, multilateral agreements (between three or more nations) and prevailing international standards from bodies such as the World Trade Organization (WTO), World Customs Organization (WCO) International Civil Aviation Organization (ICAO), International Chamber of Commerce (ICC).
And increasingly over the years, we have observed a sharp increase in the implication of unilateral or multilateral trade embargoes, sanctions, and export-import controls on dual use of goods, military items, protected wildlife, selected chemicals, and precursors.
Furthermore, in recent years the Financial Action Task Force (FATF), Bankers Association for Finance and Trade (BAFT), The Wolfsberg Group, the Bank of International Settlements (BIS) and an increasing number of national regulators have contributed to raising trade finance compliance standards.
The WTO, which currently has over 160 members representing almost 99% of international trade, with major decisions being made by the membership, negotiations can be extremely difficult and complex.
Sometimes the length of negotiation prevents agreements from materializing. As a result, international trade regulation has somewhat limited, patchy, and complicated controls, leaving the sector exposed to a few loopholes that perpetrators are too willing to exploit.
Transnational crime is big business, research places its worth as much as $2.2 trillion each year. These perpetrators need to disguise their illicit profits to benefit from the proceeds within the legitimate financial system.
Key Factors Driving Illicit Financial Flows (IFFs)
One of the key push factors driving illicit financial flows is the economic importance to move wealth from weak to hard currencies in advanced economies (US dollars, British pounds, EU euros, Japanese yen, etc.).
Weak currencies are generally subject to higher degrees of volatility on global exchange markets and higher rates of inflation, both of which tend to erode their value over time, whereas hard currencies tend to store the value of wealth more effectively over time.
Additionally, control over assets, wealth, and property rights in developing countries are relatively more vulnerable to politically motivated confiscations and political upheavals as compared to the greater degrees of security and stability in advanced economies.
Tax evasion is another major impetus driving companies and wealthy individuals to engage in trade mis-invoicing to illicitly move value out of developing countries.
On the other hand with pull factors, a major attraction is the greater ability of rich countries and “secrecy jurisdictions,” such as tax havens and offshore centers, to store wealth, secure assets and hide illicit finances, drives many to move their wealth out of developing countries.
Conclusion
Concluding, as advanced and developing countries alike attempt to mobilize large fiscal stimulus packages to keep their economies afloat, this has meant huge bursts of government spending quickly being moved from national to local levels. The emergency nature of such spending often means that regulatory oversight is weakened as corners are cut.
The problem is magnified by the world’s disrupted supply chains, as those engaged in procurement are under pressure to resort to less well-vetted suppliers. The World Customs Organization (WCO) has warned of an uptick in Covid-19-related fraudulent activities, particularly the trafficking of counterfeit medical supplies, such as face masks and medical gloves.
The Financial Action Task Force’s (FATF) response to Covid-19 emphasized the importance of risk-based supervision to ensure authorities use their resources wisely. The group has begun to step up its coordination across its members and regional bodies and observers such as the United Nations (UN), IMF, World Bank, the Organization for Economic Cooperation and Development (OECD), the Egmont Group and Europol on Covid-19 related money-laundering risks.
It is using this global FATF network to identify challenges, good practices and policy responses to new threats and vulnerabilities arising from the Covid-19 crisis, and to identify ways to increase information sharing between public sector agencies and banks by leveraging communications with larger institutions and different jurisdictional authorities on new threat information.
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