Australian Institute of Criminology

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Executive summary

This report examines the use of trade, principally international trade, to launder the proceeds of crime and the effect that trade-based money laundering (TBML) has on Australian interests. The aim was to assess the nature, extent and ramifications of TBML globally and the possible risks for money laundering in Australia.

This research is based on an assessment of a range of publicly available resources from Australian and international government agencies, the private sector and academic research. This was supplemented by background information provided by Australian and international stakeholders and experts.

Trade-based money laundering techniques and defining features

TBML is known to be used to disguise proceeds of crime and to mask legitimately obtained funds that are directed towards terrorism and other criminal activity. TBML techniques range from simple fraud, such as the misrepresentation of prices, quantity or quality of goods on an invoice, through to complex networks of trade and financial transactions. While TBML schemes most commonly involve the misrepresentation of price, quantity or the type of merchandise, trade in intangibles (such as information and services) is emerging as a significant new TBML frontier—also known as service-based money laundering (see Lormel 2009). TBML (and the approaches designed to address it) is defined in terms of international trade, rather than domestic trade.

There is a fine line between TBML and other money laundering methods and in practice, they often overlap. Many TBML schemes use financial transactions to launder funds. TBML may also result in evasion of income tax and excise and involve other financial crimes, although tax evasion may not be the primary objective. For clarity of analysis and to assist understanding of TBML and its ramifications, TBML is defined and differentiated from other types of money laundering and associated activities such as tax evasion.

Bearing in mind the essential features of TBML, TBML is defined here (and developed within the report) as the use of trade to move value with the intent of obscuring the true origin of funds. TBML does not include transportation of cash and bearer negotiable instruments, nor does it include the services provided by alternative remittance dealers.

Several factors make trade attractive to money launderers. These include growth in volume and value of world trade and the relative ease of disguising the true nature of the trade, especially by comparison with other money laundering avenues, which are subject to closer scrutiny. There is anecdotal evidence that increased reporting and scrutiny of financial transactions, as a result of anti-money laundering/counter terrorism financing (AML/CTF) initiatives, is making trade more attractive as a vehicle for money laundering (FATF 2006). The concern is that, unless TBML is addressed, it will increase and become entrenched.

While TBML methods such as over- and under-invoicing and merchandise substitution are not new, there is a growing awareness of TBML among governments, experts, business and individuals.

The full extent of TBML as it affects Australia and its interests is currently unknown. This is of concern, given the ramifications of TBML. However, TBML is arguably a significant concern for a country like Australia that relies heavily on trade and foreign investment, although it is likely that TBML poses a more significant risk in regions where border security is not as restrictive, such as Free Trade Zones (FTZs) or the European Union.

Future Australian and international anti-trade based money laundering strategies

There has been little research conducted internationally and within Australia on TBML. With the Australian Government’s emphasis on evidence-based policy and regulatory development, there is a need for further research to be undertaken in this space to address existing gaps in knowledge concerning the nature and extent of TBML and how to design national regulatory measures to address them most effectively.

In collaboration with the respective trade bodies and subject matter experts, the Australian Government could, arguably, take a leading role in capacity-building and awareness-raising, both within government agencies and with existing reporting entities who facilitate trade through the provision of financial or logistical services (eg financial institutions) in Australia and with Australia’s trading partners. These agencies and service providers would benefit from a better understanding of TBML within the Australian context.

This report argues that the formation of a regulatory framework to deal with TBML would be premature and unnecessary at this stage, as more research needs to be conducted to ascertain with greater precision the nature, risks and prevalence of TBML in Australia.