7 Practical Tips to Detect Trade-Based Money Laundering

21 Jun 7 Practical Tips to Detect Trade-Based Money Laundering

Trade-based money laundering (TBML) is a growing concern globally, with estimates suggesting that it accounts for up to 80% of illicit financial flows, costing economies billions annually. Detecting TBML is crucial for maintaining the integrity of financial systems and preventing criminal activities. This blog will provide seven practical tips to help businesses identify and combat TBML. We will explore essential practices such as knowing your customer, monitoring trade documentation, utilising advanced monitoring tools, implementing robust internal controls, and training staff regularly. These strategies will enhance your ability to detect and prevent TBML effectively.

Understanding Trade-Based Money Laundering

Trade-Based Money Laundering (TBML) is a method used by criminals to disguise the proceeds of illegal activities and move value through the use of trade transactions. Unlike other forms of money laundering, which might involve cash transactions or financial institutions, TBML exploits international trade to transfer funds surreptitiously.

Common mechanisms of TBML include over- and under-invoicing, where the price of goods or services is manipulated to transfer value undetected. Multiple invoicing involves issuing more than one invoice for the same shipment to receive multiple payments. Falsely described goods and services involve misrepresenting the quantity, quality, or type of goods and services traded to launder money.

The global impact of TBML is profound, undermining economic stability and integrity. It distorts trade statistics, harms legitimate businesses by creating unfair competition, and facilitates other criminal activities, including terrorism financing. Effective detection and prevention of TBML are crucial to maintaining robust economic and financial systems.

Practical Tips to Detect TBML

1. Know Your Customer (KYC) and Business Partners

Thorough KYC procedures are essential in detecting and preventing TBML. By rigorously verifying the identities and backgrounds of customers and business partners, businesses can better assess potential risks and identify suspicious activities early.

Practical Steps:

• Customer Identification Program (CIP): Collect comprehensive information on customers, including names, addresses, dates of birth, and identification numbers. Verify this information using reliable, independent sources.
• Risk Assessment: Classify customers and business partners based on their risk levels. Consider factors like the nature of their business, geographic location, and transaction patterns.
• Enhanced Due Diligence (EDD): For high-risk customers, conduct in-depth checks, such as verifying the source of funds and scrutinising transaction history.
• Ongoing Monitoring: Continuously monitor customer transactions for suspicious activities and update customer information periodically.
• Screening Against Sanctions Lists: Regularly check customers and business partners against international sanctions lists, politically exposed persons (PEP) lists, and other relevant databases.

2. Monitor Trade Documentation

Scrutinising trade documents is critical in detecting TBML. Discrepancies or inconsistencies in trade documents can be red flags indicating potential TBML activities.

Practical Steps:

• Invoice Verification: Ensure invoices are consistent with the value and quantity of goods or services provided. Watch for over- or under-invoicing.
• Bill of Lading Checks: Verify that the information on bills of lading matches the details on the invoices, focusing on discrepancies in shipment weights, quantities, or descriptions.
• Letter of Credit Scrutiny: Examine letters of credit for consistency with trade terms and conditions. Ensure amounts and terms match other trade documents.
• Comparative Analysis: Compare transaction values with market prices to identify significant deviations that could indicate TBML.
• Freight and Shipping Costs: Assess whether freight and shipping costs are reasonable and correspond to the type and volume of goods being transported.
• Multiple Invoicing Detection: Look for evidence of multiple invoices for the same shipment.
• Goods and Services Descriptions: Ensure descriptions of goods and services are accurate and detailed.
• Consistency Across Documents: Cross-check all trade documents for consistency.

3. Use Trade Finance Monitoring Tools

Advanced monitoring tools play a crucial role in detecting TBML by automating the analysis of large volumes of trade data. These tools can identify patterns and anomalies indicative of illicit activities.

Practical Steps:

• Adopt Specialized Software: Implement trade finance monitoring software like Acuris Risk Intelligence or FICO TONBELLER to analyse transaction data in real-time.
• Automated Alerts: Set up automated alerts for transactions that deviate from established norms or thresholds.
• Data Analytics: Use data analytics to track and analyse trade flows, identifying trends and outliers.
• Machine Learning Algorithms: Employ machine learning algorithms to improve the detection of complex TBML schemes over time.

4. Implement Strong Internal Controls

Strong internal controls are essential to prevent and detect TBML within an organisation. These controls ensure trade transactions are properly reviewed and approved.

Practical Steps:

• Segregation of Duties: Ensure no single employee has control over all aspects of a trade transaction.
• Regular Audits: Conduct regular audits of trade transactions and documentation to identify and address discrepancies.
• Approval Processes: Establish clear approval processes for high-value or high-risk transactions.
• Policy and Procedure Reviews: Regularly review and update policies and procedures related to trade transactions.

5. Train Staff Regularly

Regular training equips staff with the knowledge and skills needed to detect and prevent TBML. Well-informed employees are better able to recognize red flags and take appropriate action.

Practical Steps:

• Comprehensive Training Programs: Develop training programs covering TBML basics, red flags to watch for, and procedures for reporting suspicious activities.
• Frequency of Training: Conduct training sessions regularly, at least annually, and more frequently for high-risk areas or when there are significant regulatory changes.
• Interactive Workshops: Use interactive workshops and real-life case studies to enhance understanding and retention.
• Assessment and Feedback: Include assessments to gauge the effectiveness of the training and gather feedback for continuous improvement.

By implementing these practical tips, businesses can significantly enhance their ability to detect and prevent trade-based money laundering, thereby safeguarding their operations and contributing to the integrity of the global financial system.

Conclusion

Detecting TBML requires vigilance and a multifaceted approach. By implementing thorough KYC procedures, monitoring trade documentation, using advanced monitoring tools, establishing strong internal controls, and training staff regularly, businesses can significantly enhance their ability to combat TBML. To further strengthen your team’s capabilities, consider enrolling in KYC Lookup’s specialised courses on AML and compliance. These courses provide comprehensive training on best practices and regulatory requirements, equipping your staff with the knowledge and skills needed to stay ahead of illicit activities. Stay vigilant and proactive to safeguard your operations and contribute to the integrity of the global financial system.