Addressing the Abuse of Trade for Money Laundering Purposes

Trade-based money laundering (TBML) involves criminals using the trade in goods and services to move illicit money around the world while concealing their activities. Much of the action – and therefore intelligence, evidence and opportunity to intervene – exists within the global trade system rather than the banking system. The Wolfsberg Group, an association of 13 global banks, found that over 80% of global trade is not financed by banks and is therefore beyond the reach of the existing anti-money laundering (AML) regulatory regime, which relies on financial institutions and other regulated businesses such as solicitors and chartered accountants to identify and report suspicious activity.

Tackling TBML will require new collaboration and information sharing across the global trade, financial services and law enforcement communities. But there are significant hurdles in the form of legal and commercial constraints, privacy concerns and alignment of incentives which became evident when the authors recently conducted over 60 interviews with these communities in the UK, Europe, North America, Middle East and Singapore.

Financial Services

With some notable exceptions, bank representatives shared that they have little or no capability to detect TBML behaviours unless they trigger existing ‘traditional’ money laundering (ML) transaction monitoring rules, which rely on identifying anomalous transactions. Interviewees from the banking sector described low awareness and understanding of TBML typologies. Attracting and retaining staff with the requisite expertise in both compliance and trade finance was universally cited as a major challenge.

Banks currently prioritise, investigate and report suspicious activity based on their own transactions and information, but organised crime groups (OCGs) and terrorists spread their activity across multiple banks and jurisdictions, thus evading detection.

Greater information sharing between banks could help with this but faces challenges relating to privacy and data protection. Vendors have proposed technology solutions; indeed, this was the focus of the FCA’s 2019 TechSprint – a cross-industry hackathon focused on privacy-enhancing AML solutions.

However, interviews suggested that the key issues preventing banks from adopting such solutions are incentives, not technologies. To achieve widespread adoption, solutions need to:

• Develop a clear business case for industry participants to fund implementation and operation.
• Develop, agree and implement standards for rich information sharing between banks while giving assurances around data security, privacy and commercial sensitivities.
• Have their use enabled and encouraged by industry regulators within a suitable legal framework.

Crucially, banks who have yet to invest in tackling TBML believe the costs would outweigh the expected fines, perceiving a relatively low risk of regulatory action on TBML. Therefore, strong regulatory incentives – specifically enforcement action – will be necessary for banks to pay greater attention to TBML.

In addition, the authors’ research found that three other strands of activity could help incentivise greater activity in this area:

• Regulators and/or public–private partnerships such as the Financial Conduct Authority (FCA) and the UK’s Joint Money Laundering Intelligence Taskforce (JMLIT) could continue to demonstrate the art of the possible in privacy-enhancing, secure information sharing to improve detection and reporting of ML including TBML, leading to a change in regulator expectations of an effective AML regime in banks.
• Technology vendors and regulatory technology firms (RegTechs) could place a clearer focus on the banks’ investment case when developing and selling privacy-enhancing technology solutions, making it easier for banks to justify investments.
• Banks could see better understanding of transaction risks as a way to grow their trade finance businesses (as HSBC has recently announced, for example).

Logistics

The logistics industry physically moves traded goods around the world but is not required to take the same measures as banks with respect to money laundering. The major transactional risks for this industry are operational – such as the safety and integrity of their vessels from high-risk goods – and fraud.

Some fraud risks can be relatively easily mitigated, but others are more complex. For example, one logistics company interviewed was used to transport goods described as vehicle parts. After shipping them across the world, it transpired that the recipient did not exist and the goods were in fact scrap tyres. The company was left with an expensive waste disposal problem while their customer (who had given false details) disposed of their waste for the cost of shipping.

Because of such risks, logistics firms are tightening checks on the true nature of goods and customers. Although not intended to tackle TBML, the results of these checks could, if shared with banks and law enforcement, help to understand and tackle the wider activities of the OCGs involved.

For logistics companies there are, however, significant constraints to collaboration. The industry works on very tight margins, offering little room for investment in additional checks. This problem is exacerbated because much of the ‘paper trail’ in global trade is literally on paper. Even if additional checks could reduce the cost of operational and fraud risks (as well as potentially TBML), the costs could quickly outweigh the potential benefits.

Digitising much of the ‘paper trail’ could be the key to solving this problem, bringing with it the opportunity to reduce operational costs and the cost of risk-reducing checks. Any changes would need to be adopted widely across the industry, requiring standards for sharing structured data about goods trades and movements.

Law Enforcement

Money laundering is an offence in its own right but is also closely linked to predicate offences, the illegal activities generating the funds to be laundered. Government agencies each have targets to reduce a particular type of harm, and with money laundering, the harm to society comes from the predicate offences. By seeking to hit their harm-reduction targets while minimising public spending, government agencies may be missing the bigger picture. Interviewees claimed that by myopically focused on narrow targets, agencies avoid investigating the wider criminal activity which causes much greater overall harm.

For example, customs authorities said that they might observe the undervaluing of goods and regard it as an attempt to evade duties – this addresses their primary responsibility to reduce harm from tax evasion. But while this is one effect of undervaluation, criminals might also be trying to launder money through under-invoicing. That laundering could involve wider criminal activity such as trade in narcotics, arms, human trafficking, or corruption, potentially offering rich intelligence about OCG activities.

Investigating these links requires a substantial effort – including collaboration and data sharing across agencies and jurisdictions. In many cases interviewees believed that the effort would not deliver significant new intelligence relevant to the customs remit. As a result, driven by its targets and with constrained budgets, the customs agency is effectively incentivised not to pursue such investigations.

Collectively tackling the underlying OCG activities through greater collaboration would be more efficient and effective in reducing overall harm. To overcome these constraints, a shared rich intelligence picture is needed which each agency could individually benefit from. But care will be needed to address legal, security, privacy and commercial sensitivity concerns.

Trade-Based Criminal Intelligence

Since each industry experiences the problems associated with TBML very differently, it’s not clear how these incentives can be aligned to drive the breadth and depth of collaboration needed to tackle the issue. But the authors’ research identified one golden thread. OCGs’ use of global trade leaves footprints across many organisations, all of whom stand to benefit from sharing that intelligence to better understand who’s trading what with whom. It may be that some of the most effective measures against TBML will be invested in not on the back of tighter AML regulation but because of a wide range of other benefits.

Jonathan Draper is Product Strategist at BAE Systems Applied Intelligence.

The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.