Common techniques of trade-based money laundering
Provides information on trade financing to help clarify common techniques of TBML.
Exploiting the international trade system can also result in the exploitation of trade finance products. While it isn’t necessary to have deep technical knowledge of trade financing, it can clarify the common TBML techniques and potential lines of enquiry when investigating suspected TBML.
Trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce. It makes it easier for importers and exporters to transact, reducing risk by managing the different demands of importers (who want the goods to sell) and exporters (who want paying for the goods as soon as possible).
This method accounts for approximately 80% of all international trade transactions. It usually sees an exporter provide goods to an importer with an expectation the importer will pay for the goods within an agreed timeframe, typically anywhere between 30 and 90 days after receipt of the product.
Open account trade is based on trust between the exporter and importer. Where open account trade is used, there is almost no additional oversight by financial institutions, so they may struggle to consistently assess the importer’s legitimacy, which can be exacerbated where there is collusion between the exporter and importer, or the involvement of a previously unknown third-party intermediary.
Documentary collection is a catch all term for various trade finance products. It usually involves an explicit finance enabling role for banks. For example, an exporter requests payment by presenting shipping and collection documents for the traded goods to its financial institution. The bank forward these to the importer’s financial institution, which transfers funds to the exporter’s bank, who subsequently credit the funds to the exporter.
Intuitively it might seem like using documentary collection increases the likelihood of detecting suspicious activity, but because many of these documents are not standardised and it is time consuming to attempt verification across all the trades a financial institution is facilitating, TBML can and does still occur even with an increased oversight role for banks.
The following are the most common techniques of trade-based money laundering and can be applicable in service-based money laundering.
Fictitious trading
Also known as ‘ghost shipping’ or ‘phantom shipping’ it can involve the misrepresentation of the quantity of goods or services, yet neither are provided. A seller and buyer collude to ensure that all shipping and customs documents associated with the trade are available if necessary.
In the Operation A case study used throughout this document, the suspects adopted the roles of both the seller and buyer, creating invoices and purchase orders for goods which did not exist. The evidence produced by the International Trade Division confirmed there were no goods being moved, more information can be found at the prosecution section of this handbook.
Over and under invoicing
The key element of this technique is the misrepresentation of the price of the goods or service to transfer the value. In this type of arrangement, there is sometimes collusion between the buyer and the seller, often working for subsidiaries of the same parent company. In instances of over invoicing the seller will invoice the buyer for a price above the fair market value, resulting in increased value for the seller.
Conversely, a scheme involving under invoicing would see the seller invoice the buyer for goods at a price below the market value, allowing the buyer to resell the goods and receive additional profit for the difference between the fair market value and the purchase price paid.
It is also common for certain trades to over invoice exports without there necessarily being any collusion with the ‘purchaser’. The invoice will be consistent with the customs declaration but the goods themselves will be of a very low value. TBML takes advantage of the fact that most customs agencies are primarily concerned with imports rather than exports because issues with the former have consequences for customs duties applicable, so over valuation can be an effective way of criminals hiding their TBML techniques by overpaying customs duties.
Multiple invoicing
This technique involves issuing more than one invoice for the same international trade transaction. By invoicing the same good more than once, the criminal can justify multiple payments for the same shipment of goods or delivery of services.
This does not require the misrepresentation of the price, rather it centres on the reuse of existing documentation to justify multiple payments for the same shipment of goods. Criminals exploit this further by reusing these documents across multiple financial institutions, making it difficult for one institution to identify it.
Misdescription
In addition to manipulating export and import prices, a criminal can misrepresent the quality or type of a good or service. For example, an exporter may ship a relatively inexpensive commodity and falsely invoice it as a more expensive item. This creates a discrepancy between what appears on the shipping and customs documents and what is shipped. This also applies to services which can be harder to identify.
It is important to note that making untrue declarations such as a false customs declaration is a criminal offence contrary to s167(1) Customs and Excise Management Act 1979. Other offences may also be relevant.