1. Trade Finance (1) Company B Country 2 Country 1 Company A
Company A exports 1 million $2 each
Company B
Country 2
Country 1
Company B sells $2 each and deposits $1M
Company A
Company B disburses funds to Company A or as per Company A’s instructions
Company B remits payment for 1 million $2 each
Trade-based money laundering – an under-invoicing example
Company A exports to Company B 1 million units of a product, each of which has a fair market value of $2.
Company A invoices Company B for only half the fair market value of the products supplied. Company B pays the invoice, wiring $1,000,000 to Company A.
Company B then sells the products at their true market value of $2, making a $1,000,000 profit.
The $1,000,000 in profit is deposited by Company B and later disbursed according to Company A’s instructions (with Company B being paid a ‘consideration’ in return for its services).
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2. Copyright Lessons Learned Ltd 2016
Trade Finance (2)
Key facts
Trade-based money laundering: using trade transactions to disguise the illegal origins of criminal funds.
Basic techniques: over- and under-invoicing; multiple invoicing; over- and under-shipments of goods/services; falsely described goods and services
Global economy: increasing volume of international trade
Money launderers’ perspective
Volume of trade flows can obscure individual transactions
Complexity of ForEx and financing arrangements can ‘cover’ illicit layering activities
Opportunities to commingle illicit funds with legitimate business cash flows
Key facts
Trade-based money laundering is a generic term used to describe a range of different laundering techniques using trade transactions.
The basic techniques are as follows:
Over- and under-invoicing: where there are discrepancies between the value invoiced and the value of the actual goods received
Multiple invoicing: where a product or service is supplied once but several invoices generated - has the same overall effect as over-invoicing
Over- and under-shipment of goods: where there are discrepancies between the goods as described and the actual goods themselves (e.g., goods described as low value high street clothing items but are actually high value designer brands) – has the same overall effect as over- and under-invoicing
Falsely described goods and services: for example, where a printing company submits an invoice for services which have never in fact been requested or provided and which are then paid for using criminal proceeds.
With an increasingly global economy the opportunities for money launderers to exploit trade transactions for money laundering purposes (particularly in relation to import-export business) are also increasing.
Money launderers’ perspective
From the money launderers’ point of view the advantages of trade transactions are that they are so numerous. A single business can perform hundreds of transactions every day. It is relatively easy therefore to disguise a few spurious transactions in amongst all the legitimate ones.
The complexity of international and foreign exchange financing arrangements can also help to obfuscate what is really going on.
Illicit funds can also be commingled, concealed and transmitted alongside legitimate funds. This is particularly true of cash-intensive businesses such as certain retail businesses (e.g., jewellers), restaurants, casinos, etc.
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3. Copyright Lessons Learned Ltd 2016
Trade Finance (3)
Possible ‘red flags’
Bill of lading description of goods does not match invoice
Good described do not match the actual goods shipped
Invoiced value of goods/services exceeds fair market value
Volume/type of goods/services is inconsistent with known size/nature of the entity’s regular business activities
Business transaction does not make economic sense
Goods shipped through one or more jurisdictions for no apparent economic reason
Repeatedly amended or frequently extended letters of credit
Cash settlement of transactions from apparently unconnected third parties
Supplier and customer relationships and transactions that do not fit with the known business of the corporate entity
There are a number of clear suspicion indicators that should give cause for concern in relation to trade activities. We have listed a number of these indicators above.
Copyright Lessons Learned Ltd 2016
Copyright Lessons Learned Ltd 2007