Guide to Trade Based Money Laundering in India

The global trade system is subject to various risks and vulnerabilities ranging from the tremendous volume of trade activities to the limitations of customs agents in detecting suspicious trade transactions.
It has been observed that trade based money laundering techniques are highly complex and are almost always used in conjunction with other money laundering methods to build a complex web around the origin of funds in order to camouflage the criminal act at the root of it all. Seeing the exponential growth of trade in the global scenario, trade based money laundering poses an immediate threat as a significant channel of criminal activity and exposes countries to the risk and vulnerabilities of being involved in terrorist financing.
Because stringent standards and policies are implemented and enforced to keep in check traditional methods of money laundering, trade based money laundering tactics are expected to be exploited by criminals which appear lucrative due to the relatively lax norms governing them.
Global transnational crime, in the form of trade based money laundering is estimated to be around hundreds of billions of dollars annually. These funds are often generated through organized crime activities such as drug trafficking, corruption activities or even terrorist funding.
It is highly difficult to detect early signs of trade based money laundering because these complex web of trade transactions are often hidden amongst massive volumes of legitimate trading and often involve multiple parties spread across several jurisdictions.
It is often difficult to assess the accurate price of a commodity such as luxury goods and artworks because they are subjective and are often quoted at a price much more than their actual worth. Proving that the paid price is significantly high and that funds are being laundered is a challenge for the investigating authorities.

Trade Based Money Laundering

Trade based Money Laundering, the newest arm of Money Laundering is known to cause a loss of billions of dollars annually throughout the world. The modus operandi ranges from creating fictitious documentation of legitimate trade transactions to moving illicit goods. These tactics of converting tainted money into clean economy are complex and it is extremely challenging to detect the red flags of these activities.
Financial Action Task Force (FATF) defines Trade Based Money Laundering (TBML) as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin”. In simple words, trade based money laundering is the process of disguising proceeds of crime and converting them, through the use of trade transactions, into legitimate sources of funds.
These methods involve a number of creative schemes to make the fraudulent act appear legitimate. These methods include incorrect documentation of legitimate trade transactions like falsifying documents, misrepresenting financial transactions and also over or under invoicing of goods. These methods are also used to move illicit goods around the world.
These tactics are often disguised to appear genuine and the onus of proving the fraud befalls upon the compliance officers who ought to be updated with the latest Anti-Money Laundering Technology and other detection methods to be able to combat these fraudulent activities.

Common Practices in TBML Schemes

The most common technique used in trade based money laundering is the over and under invoicing of goods and services. This scheme generally involves a collusion between the buyer and the seller, often working for subsidiaries of the same parent company.
In instances of over invoicing of goods, seller will charge the buyer a price which is way above the fair market value, resulting in increased value for the seller. Similarly, in an under invoicing scheme, the seller will charge the buyer with a price below market value, allowing the buyer to resell the goods and receive additional gains resulting from the difference between fair market value and the actual price paid for the purchase.
Phantom Shipments are another common method of trade based money laundering. Phantom shipments are those where the exporter invoices the buyer for goods which are not sent.
False description of goods and services is also a widely used scheme for money laundering. Inexpensive and ordinary goods are often invoiced as expensive and luxury items, causing more money to be paid for them as compared to their actual worth.
A major hurdle in the identification and investigation of money laundering schemes is the inability of organizations to share information across jurisdictions, owing to the confidentiality and privacy clauses specific to each organization globally.

Role of Financial Institutions

Financial institutions often help to facilitate or finance international trade transactions and may unknowingly be implicated into criminal activities channelled through trade based money laundering schemes. Some of the common instruments through which financial institutions get involved in trade transactions are provision of trade finance, processing of wire transfers and issuance of letters of credit or guarantees.
The enormous volume of trade flows can camouflage the individual criminal transactions and provide easy avenue for criminals and terrorist organizations to transfer goods and funds across borders. The complexity associated with foreign exchange transactions is further fuelled by involvement of multiple resources spread across various jurisdictions. The challenge of recognizing illicit fund transactions from legitimate trade business is further intensified due to the presence of limited resources in the hands of investigators and enforcement agencies. There is no concrete mechanism in place for the sharing of customs data between countries without violating multiple laws and regulations.