AML/CFT Risks during COVID-19 – Trade Based Money Laundering
As at date, about a third of the global population is under lockdown due to the Public Health Emergency created by the coronavirus. Officially declared a pandemic, the coronavirus effects on the world is immense and widespread, leaving the global population not only counting the death rate and the number of new and active cases daily, but also staring helplessly at the drastic slowdown of the global economy. From a financial perspective, a change in the manner into which financial institutions do business was inevitable, bringing with it its load of Anti-Money Laundering & Combatting Financing of Terrorism (AML/CFT) risks.Welcome to WordPress. This is your first post. Edit or delete it, then start writing!
Defining Trade-based Money Laundering
Criminals are increasingly taking advantage of cross border trade with the primary aim to move illicit assets and make same appear to be coming from legitimate sources. Trade-based Money Laundering (TBML) was recognized by the Financial Action Task Force (FATF) in its study published in 2006 as one of the three main methods by which criminal organizations and terrorist financiers move money for the purpose of disguising its origins and integrating it back to the formal economy . TBML is difficult to detect due to mix of channels and methods used, hiding among cross border transactions. The basis of using TBML resides in the ability to transfer value from one party to another, from one jurisdiction to another and disguising this as a legitimate transaction. In practice, this is achieved through the misrepresentation of the price, quantity and/or quality of goods imported / exported. An example is the under-invoicing of goods and services.
Basic Scenario – For illustration
Company A established in a South American country exports 1 million rubber bracelets to Company B based in an Eastern European Country for USD 3 each. Company A invoices an amount of USD 1.5 million only. When effecting payment, Company B pays the said amount to Company A.
Company B then sells the 1 million rubber bracelets at its normal market price of USD 3 each to Company C, a local retail seller. Company B would receive USD 3 million as payment from Company C.
Company B now deposits the USD 1.5 million difference (real market value USD 3 million – payment to company A of USD 1.5 million) in a bank account with legitimate documents related to trading to substantiate the transaction.
What do we observe?
It is apparent that Company A and Company B colluded to under-invoice the rubber bracelets shipment.
Company B then resold the rubber bracelets at real market price and made a ‘profit’ of USD 1.5 million that could be deposited in a bank account.
Following the transaction at real market price between Company B and Company C, Company B now has trading papers that appear legitimate to substantiate the USD 1.5 million deposited at the bank.
What can we deduce?
The above transactions involved moving value (we can talk about moving money) from one country to another without going through the formal regulated system.
Company A and Company B traded rubber bracelets, a product that does not have any real fixed or certain value. This allowed them to adjust the trading price as they wished.
If we assume that the same controlling person(s) are behind Company A and Company B, it means that the criminals succeeded in moving money from one country to another through two legal structures that were both under their control.
Another similar practice is the over-invoicing of goods and services. The modus operandi is the same as under-invoicing as described above, but in this situation, the price is increased above normal market value. There are other methods that may be used for TBML that we may cover same in other articles.
Trade-Based Money Laundering during Coronavirus outbreak
Criminals adapt to changes in Laws, Regulations and today, inevitably the global economic and health status in the world due to the coronavirus. As a matter of fact, due to the global economy slowdown, trades have immensely diminished, bringing down cross border financial flows as well. It will therefore be easier to screen trade-based transactions to attempt to identify what may constitute illicit trade financing as it is almost certain that criminals will continue to have recourse to this method. During the current health crisis, special attention should be given to cross border trade finance linked to medical and pharmaceutical supplies. The demand for these types of products keep on increasing exponentially with the number of positive cases of coronavirus, with volatile prices; criminals may well try to benefit from this. Banks and non-banking financial institutions should therefore, during this pandemic period, increase the screening and monitoring on these types of transactions. Red flags may include:
- Recently incorporated companies with no or little track record in supplying medical or pharmaceutical products exporting;
- Companies having a track record in supplying medical or pharmaceutical products where there has been a recent change in the controlling structure and where the said controlling structure cannot be properly identified or appear unusually complex;
- A company shipping medical and/or pharmaceutical products to a country and there is no planned cargo flight or vessel in the specified shipping period/route;
- Trade documents that include vague description of the goods and/or their nature;
- Price of goods and/or shipment that appear manifestly excessive, or abnormally high; and
- A company receiving shipment of medical and/or pharmaceutical products has no economic or lawful justification for this transaction (example it is not the usual business activity of the company).
Criminals may also try to over price medical supplies. While this is not a crime in itself, the moreso because of the current increasing demand for these types of products, it may happen that the medical supplies are counterfeited products. Here, it is worth talking of Operation Pangea XIII, an established international effort coordinated by Interpol to disrupt the online sale of counterfeited and illicit health products. Interestingly, Interpol reported on 19 March 2020 that counterfeited facemasks, hand sanitizers and unauthorized antiviral medication were seized in Lyon, France under Operation Pangea XIII. This involved cooperation of authorities from 90 countries and resulted in 121 arrests worldwide and seizure of products worth USD 14 million.
Another example of money laundering offence (even if not directly related to TBML) and criminals trying to take advantage of the coronavirus pandemic outbreak is the arrest of a 39 years old man in Singapore for a money laundering case related to COVID-19. The Singapore authorities, who reported the case on 4 April 2020, were alerted by an overseas pharmaceutical company being defrauded of about EUR 6.64 million for the purchase of surgical masks and hand sanitizers. After the company transferred the money to a Singapore bank, the products were never delivered and the supplier could not be contacted anymore. The Police identified the man who received the payment and arrested him when he came back to Singapore. Following investigations, it was established that the man acquired the money which were the criminal proceeds and moved part of the money outside the country. The banks involved were HSBC, Standard Charted and Maybank amongst others. The Police succeeded in recovering a large portion of the money through international cooperation with the banks.
Financial institutions should ensure that their respective compliance functions are briefed about the trends and methods that criminals are using or may use during this unprecedented international health emergency. As a conclusive note, I cannot but recommend a robust compliance framework that has to adapt to the present circumstances and ensure that organizations scrutinize business dealings relating not only to medical and pharmaceutical but also to transactions in general on a case by case basis. Proper customer due diligence measures must be applied; criminals are proactive and prompt in adapting to situations, so should be financial crime specialists and compliance professionals.