International Trade Activity

International Trade Activity International trade activity is critical to an integrated economy and involves numerous components that can be manipulated for the benefit of money launderers and terrorist financiers. These components include banks, currency exchanges, free trade zones, cross-border payments, ports, invoices, goods, shipments, shell companies, and credit instruments that are often inherently complex transactions. Trade-based money laundering and the Black-Market Peso Exchange (BMPE) are two significant money laundering techniques that have proven successful in illicit finance. Typically, free trade zones are manipulated in both techniques. Free Trade Zones Free trade zones (FTZs) play an integral role in international trade. FTZs are designated geographic areas with special regulatory and tax treatments for certain trade-related goods and services. FTZs are often located in developing countries near ports of entry, but they are separate from traditional ports of entry and typically operate under different rules. Most major FTZs are also located in regional financial centers that link international trade hubs with access to global financial markets. Examples of FTZs are the Colón Free Trade Zone in Panama and the Shanghai Free Trade Zone (officially the China Pilot Free Trade Zone) in China. According to FATF, systemic weaknesses for FTZs include: • Inadequate AML/CFT safeguards • Minimal oversight by local authorities • Weak procedures to inspect goods and legal entities, including inadequate recordkeeping and information technology systems • Lack of cooperation between FTZs and local customs authorities The relaxed oversight in FTZs makes it more challenging to detect illicit activity and provides an opportune setting for trade-based money laundering schemes. Moreover, FATF noted that some FTZs are as large as cities, which makes it difficult to effectively monitor incoming and outgoing cargo, as well as repackaging and relabeling. Some FTZs export billions of dollars annually but have few competent authorities available to monitor and examine cargo and trade transactions. Trade-Based Money Laundering When men’s briefs and women’s underwear enter a country at prices of $739 per dozen, missile and rocket launchers export for only $52 each, and full toilets ship out for less than $2 each, one should notice the red flags. These manipulated trade prices represent potential money laundering, tax evasion, and terrorist financing. FATF defines trade-based money laundering (TBML) as the process of disguising the proceeds of crime and moving value by using trade transactions to legitimize their illicit origins. In practice, this can be achieved through the misrepresentation of the price, quantity, or quality of imports and exports. Moreover, TBML techniques vary in complexity and are frequently used in combination with other money laundering techniques to further obscure the money trail. Money launderers can move money out of one country by using their illicit funds to purchase high-value products and then exporting them at low prices to a colluding foreign partner, who then sells them in the open market at their true value. To give the transactions the appearance of legitimacy, the partners may use a financial organization for trade financing, which often entails letters of credit and other documentation. TBML represents an important channel of criminal activity and, given the growth of world trade, it is an increasingly important money laundering and terrorist financing vulnerability. Moreover, as the standards applied to other money laundering techniques become increasingly effective, the use of TBML can be expected to become increasingly attractive. According to the Guidance Paper on Combating Trade-based Money Laundering, developed by the Hong Kong Association of Banks, understanding the commercial purpose of any trade transaction is a key requirement in determining its money laundering risk. The guidance refers to six ways to execute TBML: 1. Overinvoicing and underinvoicing: • Overinvoicing: This technique involves invoicing the goods or services at a price above the fair market price, so the seller (i.e., exporter) can receive value from the buyer (i.e., importer). In this scenario, the payment for the goods or services is higher than the value that the buyer receives when it is sold on the open market. • Underinvoicing: This technique involves invoicing the goods or services at a price below the fair market price. The seller can transfer value to the buyer, because the payment for the goods or services is lower than the value the buyer receives when the goods are sold on the open market. 2. Overshipping or short-shipping: There is a difference between the invoiced quantity of goods and the quantity of goods that are shipped, whereby the buyer or seller gains excess value based on the payment made. 3. Ghost-shipping: In fictitious trades, a buyer and seller collude to create documentation indicating that goods were sold and shipped, and payments were made, but no goods were actually shipped. 4. Shell companies: These companies are used to reduce the transparency of ownership in the transaction. 5. Multiple invoicing: Numerous invoices are issued for the same shipment of goods, thus allowing the money launderer to make numerous payments and justify them with the invoices. 6. Black market trades: In the BMPE, a domestic transfer of funds is used to pay for goods by a foreign importer. Letters of credit are another vehicle for money laundering. Letters of credit are a credit instrument issued by a bank that guarantees payments on behalf of its customer to a third party when certain conditions are met. Letters of credit are commonly used to finance exports because exporters want assurance that the ultimate buyer of its goods will make payment, and this is given by the buyer’s purchase of a bank letter of credit. The letter of credit is then forwarded to a correspondent bank in the jurisdiction in which the payment is to be made. The letter of credit is drawn on when the goods are loaded for shipping, received at the importation point, clear customs, and are delivered. Letters of credit can be used to facilitate money laundering by transferring money from a country with lax exchange controls, thus creating the appearance that an import transaction is involved. Moreover, letters of credit can also serve as a façade when laundering money through the manipulation of import and export prices. Another method of illegally using letters of credit is in conjunction with wire transfers to bolster the legitimate appearance of nonexistent trade transactions. The Asia/Pacific Group on Money Laundering (APG) cited the lack of reliable statistics relating to TBML as a major obstacle in devising strategies to tackle it. To assist in recognizing the multiple forms of TBML, the group enumerates specific characteristics and red flags associated with jurisdictions, goods, corporate structures, and predicate offenses. It concluded that any strategy to prevent and combat TBML needs to be based on dismantling TBML structures, while allowing genuine trade to occur unfettered. It calls for an integrated, holistic approach, with an emphasis on interagency coordination and international cooperation to standardize data and statistics, create domestic task forces, deliver TBML-focused training, and conduct further research. FinCEN issued an advisory on the use of funnel accounts and TBML. The advisory was the result of the possible impact of the 2010 Mexican law that restricted cash deposits of US dollars in Mexican banks. Subsequently, the restrictions were expanded to include similar deposits made at exchange houses (casas de cambio) and brokerages (casas de bolsa) in Mexico. Furthermore, additional guidance was issued by FinCEN based on bulk cash smuggling trends related to the restrictions, which indicated an increase in the use of funnel accounts to move illicit proceeds of Mexico-related criminal organizations. FinCEN defines a funnel account as “an individual or business account in one geographic area that receives multiple cash deposits, often in amounts below the cash reporting threshold, and from which the funds are withdrawn in a different geographic area with little time elapsing between the deposits and withdrawals.” Red flags of possible funnel account activity include: • An account opened in one US state receives numerous cash deposits of less than $10,000 (the currency reporting requirement) by unidentified persons at branches outside the geographic region in which the account is held. • Business account deposits take place in a different geographic region from where the business operates. • Individuals opening or making deposits to funnel accounts lack information about the stated activity of the account, the account owner, or the source of the cash. • A business account receives out-of-state deposits with debits that do not appear to be related to its business purpose. • There are notable differences between the handwriting on the payee, amount, and signature lines on checks issued from an account that receives out-of-state cash deposits. • Wire transfers or checks issued from a funnel account are deposited into, or cleared through, the US correspondent account of a Mexican bank. Trade-based money laundering (Case example: Methods of money laundering) The EU single market’s significant trade activity and numerous borders make it vulnerable to trade-based money laundering (TBML) activities. The high volume of trade can enable goods to be moved freely across borders, giving criminals the opportunity to obscure transactions and transfer illicit funds. Many TBML schemes involve the use of luxury vehicles and other goods to legitimize funds from illegal activities. Criminals use the system to add complexity to their activities and further layer funds. Sophisticated organized crime groups (OCGs) can use a variety of sectors to diversify their risk and expand into many jurisdictions. In 2017, a joint investigation supported by Europol involving Spanish and Italian authorities identified Italian nationals with OCG links. They had created a network of companies to launder the proceeds of drug trafficking via TBML activity and legitimize the illegal proceeds. They faked invoicing to legitimize activities and used a tax fraud scheme to increase the criminal proceeds. The scheme began with the purchase of luxury vehicles in Germany by legal entities established and owned by the criminals, using cash generated by illicit sources. Most of companies were shell companies with the sole purpose of supporting the scheme. Using these legal entities, the criminals created a fake paper trail for sales and purchases, including value-added tax (VAT) chains. Next, they used TBML activities to move and disguise the proceeds of crime. They also generated additional criminal proceeds by committing tax fraud by importing goods VAT-free. The criminals also convinced a legitimate supplier in Italy to annually deliver high numbers of vehicles, increasing the legitimacy of their activities. In addition, import and export companies owned by the OCG were used to purchase other items, ranging from luxury watches to clothing and footwear. The watches were purchased in European countries before being supplied to drug traffickers in Morocco and the Netherlands. The lower value goods purchased in Hong Kong and mainland China were exported to Colombia and Morocco for onward sale. The criminals used the TBML scheme for laundering criminal proceeds and generating additional proceeds of crime. The activity spanned several jurisdictions, making it difficult for authorities to identify and understand the magnitude of the scheme. Key takeaways • Criminals use international trade to disguise illegal activities. • Shell companies and fake invoicing are common techniques. • Joint investigations mitigate cross-border and jurisdictional challenges. • Criminals add complexity to cross border trade by commingling with legitimate activity. Black Market Peso Exchange A form of TBML, the BMPE is a process by which money in the United States derived from illegal activity is purchased by Colombian peso brokers and deposited in US bank accounts established by the brokers. The brokers sell checks and wire transfers drawn on those accounts to legitimate businesses, which use them to purchase goods and services in the United States. Although the United States is prominently figured in BMPE, the process is not limited exclusively to that country. Colombian importers created the BMPE in the 1950s as a mechanism for buying US dollars on the black market to avoid domestic taxes and duties on the official purchase of US dollars and imported goods purchased with dollars. In the 1970s, Colombian drug cartels began using the BMPE to convert drug dollars earned in the United States to pesos in Colombia. Why? It reduced their risk of losing their money through seizures, and they received their money faster, even though they paid a premium to the peso broker. FinCEN reported that black market currency exchange systems have evolved beyond the Colombian BMPE method, mainly because of increased diligence by US banks. A common method used for the initial placement of illicit funds into the financial system is structured deposits in the form of cash, money orders, and other financial instruments. However, money launderers are using individuals and businesses that have control over numerous bank accounts at numerous banks to smuggle cash in bulk from the United States. The smuggled US dollars are deposited into foreign institutions—often in Mexico, but also in Central and South American countries—and wired back to the United States and other prominent trade countries as payments for international trade goods and services. Black market peso exchange example According to the US Department of Justice the following is a typical BMPE scenario involving the United States and Mexico: A peso broker works with an individual engaged in illegal activity, such as a drug trafficker, who has US currency in the United States that he needs to bring to Mexico and convert to pesos. The peso broker finds business owners in Mexico who buy goods from vendors in the United States, such as XYZ Inc., and need dollars to pay for those goods. The peso broker arranges for the illegally obtained dollars in the United States to be delivered to the US-based vendors, such as XYZ Inc., where they are used to pay for the goods purchased by the Mexico-based customers. Once the goods are shipped to Mexico and sold by the Mexico-based business owner for pesos, the pesos are turned over to the peso broker, who then pays the drug trafficker in Mexico. TBML and BMPE schemes (Case example: Methods of money laundering) In February 2021, the operator of an international wholesale consumer electronics business based in the US pled guilty to participating in a conspiracy to operate an unlicensed money services business (MSB). The MSB operated primarily between Colombia and the US and was used to legitimize money transfers. A US Drug Enforcement Administration (DEA) investigation led to the arrests of the company CEO and six Columbian nationals, who were arrested in Columbia. As of this writing, the US government is seeking the extradition of these Columbian individuals. The DEA found that the network ran operations in the US and Columbia that enabled drug traffickers to move funds into the banking system. They then laundered the funds and moved them across the border, using a blackmarket peso exchange (BMPE) scheme. Among the charges was operating an MSB without a license. The BMPE and similarly structured schemes are sophisticated methods of trade-based money laundering. Cash-intensive businesses and cross-border activities are high risk for being used to facilitate this crime. In January 2020, an investigation by the Offices of the United States Attorneys and the DEA discovered that drug dealers in the US were connected to Columbian drug cartels. These dealers generated US dollars by selling Columbian drugs in the US. The cartels needed to move their funds out of the US, without physically transporting USD across international borders or directly depositing large amounts of cash into the financial systems. They used the BPME scheme to clean the illegal funds. Money brokers are essentially unlicensed MSBs. Operating primarily in Colombia, they were used to receive US dollars in the US via couriers or receipt of wires. They then paid out in Columbian pesos in Columbia for a commission. The US based Agarwal Electronics Business exported consumer electronics globally, including to Columbia. Its CEO knowingly participated in the scheme and worked with the money broker by offering use of his bank account to receive the funds in the US. This account was then used to transfer the proceeds of drug sales to accounts in Middle and South America. Upon receiving the funds into his bank account, the CEO arranged for the export of the roughly equivalent value of electronics products to certain Colombian suppliers. They in turn arranged to pay for the products by delivering pesos to an individual in Colombia. This individual then delivered the funds to the money broker. This scheme enabled the funds to be remitted to Colombia without the need to report, declare, or smuggle them over the US border. Key takeaways • The BMPE scheme enabled the cartels to place the money into the banking system and move it across borders. • A TBML scheme was used to pay the money brokers in Columbian pesos. • Cash intensive business and cross border activity are at higher risk of being used to facilitate money laundering. Complex TBML/BMPE schemes (Case example: Methods of money laundering) In April 2015, FinCEN issued a GTO that lowered cash-reporting thresholds and implemented additional recordkeeping requirements for certain financial transactions for approximately 700 Miami-based electronics exporters. According to FinCEN, the GTO was designed to disrupt complex BMPErelated schemes employed by drug-trafficking organizations, (DTOs), including the Sinaloa and Los Zetas DTOs based in Mexico. Law enforcement investigations revealed that many of these businesses are exploited by sophisticated TBML/BMPE schemes in which drug proceeds in the United States are converted into goods that are shipped to South America, sold for local currency, and ultimately transferred to drug cartels. The GTO was designed to enhance the transparency of the covered businesses’ transactions. Key takeaways • DTOs take advantage of complex BMPE schemes involving the export of goods across the US/Mexico border to help move funds from the US back to the country where the DTO is based. • Lower cash-reporting requirements can help enforcement agencies detect BMPE schemes and alert regulated organizations to potentially suspicious activity. • Robust recordkeeping can help to detecting BMPE schemes, so that enforcement officers can access a regulated organization’s transaction records. Wildlife Trafficking Wildlife trafficking is defined as the illegal trade, smuggling, poaching, capture, and collection of endangered species and protected wildlife. It also includes wildlife derivatives and byproducts, such as leather, food, medicines, and exotic pets. The illegal wildlife trade threatens the extinction of several animal and plant species. It is a practice that affects more than 7,000 species worldwide to satisfy the illegal market demands for endangered wildlife and its byproducts. The three stages of wildlife trafficking include: 1. Source: The first stage involves the location where the initial trafficking activities occur, such as the jurisdiction in which poaching and initial transport takes place. Wildlife trafficking crimes are often facilitated by bribing corrupt officials and individuals with access to the targeted species. At the source location, the profits generated are often the lowest. Furthermore, source countries are potentially the most significantly affected by the illegal wildlife trade from the biodiversity and economic standpoints. 2. Transit: The second stage involves the movement of poached or illegally obtained wildlife goods that are disguised and consolidated with other items for transportation. These concealed items can clear customs because of known weaknesses in customs controls and/or bribery of corrupt officials. 3. Destination: The final stage involves poached, illegally acquired or trafficked goods arriving at their final destination for sale. Because the sale of these products is illegal in some countries, they are often sold at in-person or online black markets, where profits for distributors are often the highest. Organizations can combat wildlife trafficking by: • Joining the United for Wildlife Financial Taskforce and signing the Mansion House Declaration • Using current suspicious activity reporting mechanisms to report potential wildlife trafficking • Reviewing United for Wildlife Financial Taskforce intelligence alerts and implementing policies and procedures to support the detection and reporting of wildlife trafficking • Reviewing FATF’s Money Laundering and the Illegal Wildlife Trade report for valuable insights and red flags