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Responses to trade-based money laundering

Over the last decade, there have been sinificant initiatives across the globe to combat money laundering and the financing of terrorism. The US Government and the European Union have both developed widespread AML/CTF programs and through transnational agencies, such as FATF, there has been a push to establish coordinated and interconnected AML/CTF strategies, with an emphasis upon compliance with FATF’s 40+9 Recommendations (although the level of compliance by individual countries is varied). Although how successful the global AML/CTF response has been is not conclusive, its possible effectiveness in limiting certain avenues of money laundering, primarily using financial systems to launder money and finance terrorist activities has been attributed to the apparent rise in TBML.

Global anti-money laundering/counter-terrorism financing programs

FATF first issued its 40 Recommendations on anti-money laundering in 1990.They were revised in 1996 and again in 2003, and are currently under review by FATF with an expected response to public consultations to be delivered at the Plenary Meeting in February 2012 (FATF 2011). In October 2003, FATF added 8 Special Recommendations on Terrorist Financing in the aftermath of the events of 11 September 2001. A recommendation addressing cash couriers was subsequently added in October 2004, making 9 Special Recommendations. Consistent with the OECD approach of ongoing consultation and enforcement through peer pressure, the 40+9 Recommendations rely on information gathering, mutual monitoring and ‘name and shame’ sanctions (Levi & Reuter 2006; Marcussen 2004). Recommendations 21 and 22 of the 40 Recommendations set out sanctions that range from letters of warning to diplomatic missions to calls to other FATF members to take action. This approach has prompted one commentator to describe the FATF sanctions as ‘a graduated system of embarrassment through peer pressure’ (Simmons 2000: 255–258).

The 40+9 Recommendations apply to both state and non-state actors, such as financial institutions and designated non-financial businesses and professions (DNFBPs). Those DNFBPs cover five categories—lawyers, notaries and accountants when engaged in commercial transactions for clients, dealers in precious metals and precious stones, gambling casinos, real estate agents and company and trust service providers when engaged in a range of services (FATF 2004).

The 40+9 Recommendations call upon countries to:

  • criminalise and penalise money laundering and the financing of terrorism;
  • require customer due diligence and record keeping by financial institutions and DNFBPs;
  • require the reporting of suspicious transactions and other similar measures;
  • provide for sanctions against non-compliant states;
  • create and maintain competent authorities to prevent money laundering, including law enforcement;
  • supervise financial institutions and DNFBP; and
  • engage in greater international cooperation.

AML/CTF frameworks are founded on cooperation and standards of conduct to address common issues of concern. This is true of the program at international level as well as its domestic implementation. In Australia, the Anti Money Laundering/Counter Terrorism Financing Act 2006 (Cth) (AML/CTF Act) sets out explicit sanctions and enforcement mechanisms.

This approach is especially effective where there is a clear need to generate standards to address mutual concerns and has been increasingly employed in international banking and more recently, in international finance (Malloy 2005). While increased regulation is generally regarded as unwelcome and often unwarranted, this type of compliance program provides incentive and encourages increased involvement, especially in an area where the private sector predominates (Wirth 2000). The program has been described as increasing ‘opportunities to engage in desirable behavior’ (Shelton 2000: 15). In the banking and finance sector, for example, it has been observed that those entities that do not adhere to the international standards set and monitored by the Bank for International Settlements:

risk being regarded by major international banks and their financial authorities, including [the Bank for International Settlements] itself, as ‘unattractive’ business partners. And in this global economy they cannot afford to develop activities in isolation (Felsenfeld & Bilali 2004: 991–992).

These observations have been borne out in the implementation of the 40+9 Recommendations. By 2000, all except one FATF member had endeavoured to facilitate mutual legal assistance for investigations. All except two FATF members had established requirements for specific AML programs, including activity reporting; and most FATF members had enacted measures for customer identification. In 2000, FATF began identifying countries that had not implemented the 40 Recommendations by publishing a list of non-cooperative countries and territories (NCCT). The initial NCCT list contained 15 jurisdictions. By 2006, all of those 15 jurisdictions had made the necessary improvements to enable their removal from the NCCT list.

Periodic mutual evaluation of the implementation of 40+9 Recommendations by FATF members is a key component of global AML/CTF strategies. The evaluation reports are circulated to all FATF members and executive summaries are published in the FATF annual report.

However, there are limits to FATF’s 40+9 Recommendations in regards to action on TBML. A working paper drafted by the UN Secretariat for the Twelfth UN Congress on Crime Prevention and Criminal Justice (United Nations Secretariat 2009: 10) noted that the FATF 40+9 Recommendations, as well as the UN’s Organised Crime Convention and Convention against Corruption, do not

contain an express obligation to collect, compare, analyse and disseminate trade data with a view to identifying trade-based money-laundering schemes and facilitating investigations and prosecutions of the persons involved therein

but these Recommendations and Conventions:

set out a general obligation for member States to properly investigate money-laundering offences, and to do that, the money-laundering offence needs to be defined broadly to include trade-based money-laundering schemes (United Nations Secretariat 2009: 10).

However, the same paper noted that

the provisions of the two conventions and the FATF recommendations are rather general and give Member States little guidance on how to best implement their obligations (UN Secretariat 2009: 11).

Combating trade-based money laundering—FATF’s best practices

In 2008, FATF produced a Best Practices Paper for combating TBML (FATF 2008a). The aim of this report was

to improve the ability of competent authorities to collect and effectively utilise trade data, both domestically and internationally, for the purpose of detecting in a risk-based manner and investigating money laundering and terrorist financing through the trade system (FATF 2008a: 1).

Rather than transferring the 40+9 Recommendations that applies to AML/CTF to TBML, the emphasis of the FATF Best Practices Paper was to raise awareness of the issue of TBML and recommend the collection of data that may help identify TBML activities. At this stage, more needs to be done at the international level to understand the phenomenon of TBML before FATF or individual countries can establish regulations to tackle TBML.

To build this awareness of TBML and to gather, as well as disseminate, information about this form of money laundering, the FATF Best Practices Paper proposed:

  • A stronger awareness of TBML, with countries ‘to incorporate TBML/TF into existing training programs on AML/CTF’.
  • Extending TBML training to relevant staff of

    trade authorities, investigative authorities, customs agencies, tax authorities, the financial intelligence unit, prosecutorial authorities, banking supervisors and any other authorities that the country identifies as being relevant to the fight against TBML/TF (FATF 2008a: 2).

  • Continued efforts to ‘tailor training programmes to meet the specific requirements and needs of different authorities’ (FATF 2008a: 3). For example

    training programs for analytical and investigative authorities could include a focus on the existence and relevance of financial and trade data to crime targeting, and techniques for conducting such analysis (FATF 2008a: 3).

  • Sectors, such as financial institutions, that have customers dealing in trade transactions should be made aware of TBML and should

    include in training programs for banking supervisors a focus on the importance of evaluating the adequacy of a bank’s policies, procedures and processes for handling trade finance activities (FATF 2008a: 4).

  • Outreach and awareness raising concerning TBML/TF issues be conducted with private sector organisations not listed above.
  • Training should not be limited to one format, with countries encouraged to

    consider using a combination of delivery methods, such as: offering or participating in conferences, seminars, workshops and other events; developing internet-based learning tools (e-learning); publishing guidance; posting information on the websites of competent authorities; including relevant information in the annual reports or other publications of competent authorities; or sending relevant materials to contacts directly (FATF 2008a: 4).

  • As part of the general awareness raising and education about TBML, ‘countries could agree to make case studies and red flag indicators identified in the [FATF] typologies report available to competent authorities and financial institutions’ (FATF 2008a: 4).
  • Financial institutions to include case studies, red flag indicators and FATF typologies ‘in their internal guidance and training manuals, and to keep their employees informed of developments in the area of TBML/TF’ (FATF 2008a: 5).
  • Countries conduct further study of TBML/TF at the national and regional level to improve understanding of TBML and identify TBML typologies.
  • The collation of this information is also important, with countries encouraged to ‘develop a domestic mechanism to link the work of authorities responsible for investigating money laundering and terrorist financing’ (FATF 2008a: 5).
  • That countries should
    • first identify where trade data and relevant financial information are being stored’ and to ‘ensure that there are clear and effective gateways, mechanisms and channels that allow the investigative authorities access, directly or indirectly, on a timely basis to trade data and relevant financial information (FATF 2008a: 5).
  • The establishment of ‘memoranda of understanding, information sharing agreements, the use of liaison officers and the establishment of multi-agency task forces’ or

    a specialised unit that has designated responsibility for monitoring imports and exports, analysing trade data and identifying anomalies with a view to detecting TBML/TF and other illicit activity, and supporting related investigations and prosecutions (FATF 2008a: 5)

    such as a Trade Transparency Unit.
  • That Financial Intelligence Units should also have access to the information gathered.
  • The information gathered and disseminated should ‘only be conducted in an authorised manner and consistent with a country’s domestic privacy and data protections laws’ (FATF 2008a: 6).
  • This information should be stored in ‘a national electronic secure database which can only be accessed by the appropriate authorities for the purpose of discharging their official duties’ (FATF 2008a: 6), with data to be redacted or sanitised if necessary.
  • That in order to foster international cooperation on anti-TBML matters, ‘countries could establish clear and effective gateways...to facilitate the prompt and effective exchange of trade data and other relevant information’ (FATF 2008a: 7).
  • Inter cooperation that could also extend to ‘mutual legal assistance in TBML/TF investigations and prosecutions’ (FATF 2008a: 7).
  • Countries should explore the possibility of sharing datasets, through transnational/regional databases or ‘[r]egional or international information exchange platforms’ (FATF 2008a: 7).
  • That anti-TBML activities should be undertaken ‘with a view to ensuring that legitimate trading activities are not unreasonably hindered or obstructed’ (FATF 2008a: 7).
  • Countries are encouraged to ensure competitive neutrality and economic efficiency when implementing measures to tackle TBML.

The last point of the FATF’s Best Practices Paper (2008a) outlines measures which could be taken by countries to combat TBML without hindering legitimate trading activities. These are:

  • applying an intelligence, risk-based and target-based approach which makes consistent use of TBML/TF red flag indicators;
  • using data capture mechanisms so that information can be electronically exchanged between authorities from one computer system to another;
  • authorising traders that meet certain criteria to benefit from facilitations for customs controls or simplifications for customs rules;
  • utilising trade data that is gathered automatically from customs declaration forms, thereby avoiding any extra burden for the traders who are involved in legitimate trade;
  • conducting non-intrusive inspections of goods being imported and exported using scanners;
  • having authorising domestic authorities (eg customs, Financial Intelligence Units) share information either upon specific request or spontaneously;
  • providing information to foreign authorities and placing conditions on the use of such information; and
  • establishing a TTU to facilitate the sharing and analysis of import/export data. Because the system does not rely on real-time information to target trade transactions (the system uses historic data to identify anomalies that are indicative of TBML/TF), legitimate trading activities will not be unreasonably hindered.

However, some, such as Delston and Walls (2009), have argued that there needs to be greater harmonisation between the FATF Best Practices Paper for combating TBML and the 40+9 Recommendations updated by FATF in 2004, calling for traders to adopt Customer Due Diligence, Know Your Customer and Suspicious Activity Reports reporting protocols, which financial institutions and DNFBPs are compelled to do under current AML/CTF standards. Delston and Walls’ (2009) proposals would seem to be at odds with the recommendations put forward in the Best Practices Paper, particularly the concept of attempting not to put further regulatory burdens upon legitimate trading activities. However, they do warn that ‘companies may ignore their TBML risk only at their peril’ (Delston & Walls 2009: 118) and suggest that businesses may voluntarily go beyond FATF’s Best Practices to safeguard themselves against TBML threats.

Trade-based money laundering red flags

The US Federal Financial Institutions Examination Council AML manual and FATF have identified a number of indicators of TBML activities. These ‘red flags’ are predominantly based on activity observed in Suspicious Activity Reports in the United States, which indicate possible TBML. The red flags are not proof of illegal activity. They are indicators that money laundering may be occurring which should prompt further investigation, having regard to other factors including the normal transaction activity expected for the customer, the good or service traded, its value and geographical location.

When combined, the indicators listed by the US Federal Financial Institutions Examination Council and FATF form a comprehensive list of red flags for TBML, which is applicable to both the trade and financial sectors. These are listed in Table 2.

Table 2: Trade-based money laundering red flags
  1. Inability of a bank customer to produce trade documentation to back up a requested bank transaction
  2. Significant discrepancies appear between the description of the commodity on the bill of lading and the invoice
  3. Significant discrepancies appear between the description of the goods on the bill of lading or invoice and the actual goods transported
  4. Significant discrepancies appear between the value of the commodity reported on the invoice and the commodity’s fair market value
  5. Shipment locations or description of goods that are inconsistent with the letter of credit
  6. Documentation showing a higher or lower value or cost of merchandise than that which was declared to Australian Customs and Border Protection or paid by the importer
  7. A transaction that involves the use of amended or extended letters of credit that are amended significantly without reasonable justification or that include changes to the beneficiary or location of payment
  8. A third party paying for the goods
  9. A consignment that is inconsistent with the business (eg a steel company that starts dealing in paper products, or an information technology company that suddenly starts dealing in bulk pharmaceuticals)
  10. Customers conducting business in high-risk jurisdictions. Although not specifically identified by the US Federal Financial Institutions Examination Council or FATF, FTZs may be added to the list of high-risk jurisdictions given that there is an argument that FTZs exacerbate the risk
  11. Customers shipping items through high-risk jurisdictions, including transit through non-cooperative countries
  12. The commodity is transhipped through one or more jurisdictions for no apparent economic reason
  13. Customers involved in potentially high-risk activities, including those subject to export/import restrictions such as equipment for military or police organisations of foreign governments, weapons, ammunition, chemical mixtures, classified defence articles, sensitive technical data, nuclear materials, precious gems, or certain natural resources such as metals, ore and crude oil
  14. Obvious over- or under-pricing of goods and services
  15. Obvious misrepresentation of quantity or type of goods imported or exported
  16. A transaction structure that appears unnecessarily complex so that it appears designed to obscure the transaction’s true nature
  17. A shipment that does not make economic sense (eg the use of a large container to transport a small amount of relatively low value merchandise)
  18. Consignment size appears inconsistent with the scale of the exporter or importer’s regular business activities
  19. The type of commodity being transported appears inconsistent with the exporter or importer’s usual business activities
  20. The method of payment appears inconsistent with the risk characteristics of the transaction, for example the use of an advance payment for a shipment from a new supplier in a high-risk country
  21. A transaction that involves receipt of cash or payment of proceeds (or other payments) from third-party entities that have no apparent connection with the transaction or which involve front or shell companies
  22. A transaction that involves commodities designated as high risk for money laundering activities, such as goods that present valuation problems or high value, high turnover consumer goods

Source: Brannigan 2010; Brown 2009: 10–12; FATF 2006: 24; US FFIEC 2010: Appendix F: F–5

Trade Transparency Units

To date, there has been little regulatory action taken by individual countries to target TBML specifically. The creation of TTUs by the United States and their implementation in several South American countries provide one example of how countries may institute regulations to combat TBML. In 2004, the US ICE established TTUs to combat TBML and other import–export crimes. These TTUs rely on data analysis of international trade patterns to identify potential TBML activities. The TTUs in the United States use the Data Analysis and Research for Trade Transparency Systems (DARTTS), which

allows investigators to view totals for merchandise imports and then sort on any number of variables, such as country of origin, importer name, manufacturer name, and total value (US DHS 2010: 3).

Through this, DARTTS identifies trade and financial transactions that are ‘statistically anomalous based on known facts and user queries’, rather than being used to ‘predict future behaviour’ or to ‘profile’ traders (US DHS 2010: 3) The data that DARTTS uses are collected from US Customs, the US Bureau of Census (where historical trade data are held), FinCEN and foreign government bodies, and consists of information gathered from those required to complete import–export forms (US DHS 2010).

From this collection of data, three types of analysis are conducted by DARTTS:

  • International Trade Discrepancy Analysis—US and foreign import/export data are compared to identify anomalies and discrepancies that warrant further investigation for potential fraud or other illegal activity.
  • Unit Price Analysis—trade pricing data are analysed to identify over- or under-valuation of goods, which may be an indicator of TBML or other import–export crimes.
  • Financial Data Analysis—financial reporting data (the import/export of currency, deposits of currency in financial institutions, reports of suspicious financial activities and the identities of parties to these transactions) are analysed to identify patterns of activity that may indicate illegal money laundering schemes (US DHS 2010: 110).

When conducting this analysis, the TTU in the United States relies heavily upon information gathered from other countries. A report by US ICE (2011a: 2–3) explained that for TBML to work, ‘one of the primary factors criminals rely on...is the idea that a customs agency can only see one side of a trade transaction’, but for example:

if both the U.S. and Brazilian customs agencies could see each other’s trade paperwork, the transaction becomes transparent, allowing law enforcement personnel to identify fraudulent transactions indicative of money laundering.

This has meant that the United States has established TTUs with important trading partners, such as Argentina, Brazil, Colombia, Paraguay, Mexico and Panama, with the possibility of setting them up in Central and Eastern Europe as well (McSkimming 2010; US ICE 2011b). The United States hopes that this network of TTUs will expand and ‘provide a forum for the open exchange of trade data between all participating countries’ (US ICE 2011b: np).

According to US ICE’s annual report for 2008 (US ICE 2008: vi), the data analysis of the TTUs in the United States and overseas had ‘launched 51 investigations leading to seizures of $4.5 million’. A later report outlines two more recent successful cases (US ICE 2011a). The first resulted in

four individuals and three Miami based freight forwarding companies [being] indicted on conspiracy charges for violating the International Emergency Economic Powers Act…and the smuggling of electronic goods (US ICE 2011a: 4)

with over $119m of merchandise seized. The second saw several defendants and a top company charged with money laundering offences, as well as other offences, with ‘a criminal forfeiture indictment of $8.6 million for structured assets...also filed’ (US ICE 2011a: 4).

However, it has been noted that the ‘[s]et up costs and efforts are somewhat prohibitive’ for TTUs and rely on the political will of certain countries like the United States, who are ‘commonly having to provide start-up funding, assistance in systems upgrading, equipment, and training for the newly functioning unit (Liao & Acharya 2011: 83). These costs may deter governments from implementing these kinds of regulatory units, particularly while the effects of the Global Financial Crisis are still being felt and while more research into TBML outside of the Americas needs to be done.

In examining the global responses to TBML, particularly the recommendations set out by FATF and the approach taken by the US Government, it is evident that the emphasis is on information gathering and the analysis of data to identify possible TBML activities, with a secondary focus on sharing this information with relevant agencies and authorities. FATF’s (2008) Best Practices Paper highlights education and awareness of TBML as paramount to combating it, as an understanding of TBML is required to assess what information needs to be gathered about trade. The TTUs established by US ICE are an example of how the information gathering on TBML is put into practice, using statistical analysis to identify suspicious activities and possible TBML activities. However, it has been noted that TTUs have high start-up and administration costs, which may make them a less attractive option for other countries. The viability of establishing TTUs in Australia seems remote while there remains much unknown about TBML in this country.