Money laundering and terrorist financing is frequently associated with the use of financial system.
However, the international trade system may also be used to transfer value across international borders and disguise the illicit origins of unlawful proceeds.
As we witness an increase in white collar crime, tax evasion and use of tax havens, financial institutions need to beware of this trade-based money laundering – seemingly-legal business entities and trade transactions used to conceal ill-gotten wealth.
The physical movement of goods through the trade system is used by entities and individuals to move money so as to disguise its origins and integrate it into the formal global economy. The three methods commonly used are:
1. Using the financial system by means of multiple cash deposits, cheques, credit cards, investment products, wire transfers and insurance.
2. Physically moving cash through agents acting as couriers or through cash smuggling.
3. Using the area of international trade to perpetrate money laundering, tax evasion and fraud.
Most anti-money laundering legislations focus on the first and second methods by which fraudsters move money but more needs to be done in the area of trade-based money laundering that is extremely complex. Trade-based money laundering schemes may include misrepresenting the price and quantity of goods and services (over and under invoicing) and invoicing the same goods or services more than once (double invoicing).
Financial institutions are expected to report instances relating to suspected trade-based money laundering to the Financial Intelligence Authority (FIA), notwithstanding the difficulty in identifying these activities, given that they focus on (see) only the documents related to a transaction and not the goods themselves.
In this, therefore, it’s of importance for financial institutions to be cautious of the following redflag indicators of potential trade-based money laundering:
1. Misrepresentation of price, quantity or quality of merchandise involved in a trade transaction processed through a financial institution. This highlights the need for financial institutions to keep abreast with current business trends.
2.Thirdparty payments for goods or services made by an intermediary (either an individual or an entity) apparently unrelated to the seller or purchaser of goods. This may be done to obscure the true origin of the funds.
3. Amended letters of credit without reasonable justification.
4. A customer’s inability to produce appropriate documentation (like invoices) to support a requested transaction.
5. Significant discrepancies between the descriptions of the goods on the transport document (bill of lading), the invoice, and other documents like certificate of origin and packing list.
6. International wireelectronic transfers received as payment for goods into bank accounts or processed through correspondent or intermediary accounts, especially where the ordering party (importer of goods) of the wire does not live in the country from which the wire originated.
7. Significant discrepancies between the value of the commodity or goods reported on the invoice and the fair market value. For example, gold jewellery being exported at $500 an ounce when the market rate is approximately $950 per ounce.
8. The size of the shipment appears inconsistent with the scale of the exporter or importer’s regular business activities.
9. Companies that use similar names to establish brand names and obtain goods on credit or prefer to use credit finance through financial institutions. This is currently on the increase.
10. The goods are shipped through one or more jurisdictions or unconnected subsidiaries for no apparent economic reason.
11. The transaction involves the use of trusts or front (or shell) companies.
All financial institutions (as accountable persons) are under obligation to pay special attention to suspicious activities related to complex, unusual or large transactions, whether completed or not, and to all unusual patterns of transaction that have no apparent economic or lawful purpose and must report the suspicious transaction to the Financial Intelligence Authority within two working days.
Individuals failing to do so may attract a jail term of up to five years andor Shs a Shs 660m fine, while offending firms may be fined up to Shs 1.4bn. As the standards applied to other money laundering techniques become effective in Uganda, the use of trade as a means of laundering proceeds of crime will become increasingly attractive.
It is, therefore, paramount that financial institutions put in place well-thought-through anti-money laundering programs. This area is a vulnerable channel for money laundering activities and needs to be continuously monitored by financial institutions and relevant government authorities through:
1. National and international sharing of information between competent authoritiesrelevant stakeholders in order to identify glaring anomalies, such as the volume of trade between Uganda and Country Y, differing drastically.
2. The need for concerted action between financial institutions, regulators, law enforcement agencies and the tax authority. This involves sharing information among these key players and taking quick action on suspected cases of money laundering.
3. Focusing on training programs to best identify trade-based money laundering techniques.
The author is a certified anti-money laundering specialist (CAMS) and works with Uganda Revenue Authority.
Source : The Observer