Did you know that the annual value of transnational crime is estimated at $2.2 trillion? In my analysis, these organizations must conceal their illicit gains to reap benefits within the legal monetary system. Trade-based money laundering (TBML) moves and hides illegal funds through legitimate commercial channels. However, large-scale fraud and the international transfer of restricted items can also fall under this category.
Foreign exchange continues to entice criminals as a viable option for ‘cleaning’ their money despite the proliferation of other, more secure methods. When I researched, I found that it is now more time-consuming and costly to launder money via conventional financial systems. This is due to strict controls and regulations established in recent years by numerous jurisdictions and the adoption of novel technology. Here, let us discuss the trade finance fraud prevention measures and how to mitigate the risks.
Standard Methods Used in Trade Finance Money Laundering
Some of the common ways through which money is laundered are:
Mispricing
Businesses can send and receive huge amounts of money while sending virtually worthless goods. One prevalent tactic is mispricing, also known as over-invoicing or under-invoicing, in which products are declared at an inaccurate value. This generally involves exaggerating the product’s quality to impact its market value on the invoice.
Multiple-invoicing
Creating many invoices for a single shipment of goods- multiple-invoicing artificially inflates the value of financial transactions. Inflated credit can be established and obtained for the collateral products via multiple-invoicing fraud schemes.
Under or over shipment
Under or over-shipment occurs when the seller sends more goods than was agreed upon with the importer, resulting in a greater value transfer to the importer, or when the exporter sends fewer goods than was agreed upon, resulting in a more significant value transfer to the exporter. Differences in the reported standard of the goods might also lead to price differences.
Misleading transports
Some OCGs will bill for non-existent or never-occurring shipments of items. Because the industry relies so heavily on paper documentation, OCGs can easily forge shipping documents to trick victims into thinking their items have been sent.
Challenges in Evaluation & Preventing Fraud in Trade Finance
A few of the challenges faced in preventing fraud in trade finance are:
Fewer constraints from the government
Financial institutions still struggle to tackle TBML effectively by monitoring and implementing company controls. There is still a lack of transparency in many jurisdictions with regard to compliance demands and regulatory expectations. There are still knowledge gaps in operationalizing and implementing these rules, despite standard setters like The Financial Action Task Force (FATF) giving critical help through best practices and sharing risk typologies.
Because of its status as a significant international trading, transportation, and financial centre, Singapore is very susceptible to the money laundering concerns associated with trade financing.
The Monetary Authority of Singapore (MAS) was an early proponent of stricter guidelines for the financial industry. Inspections of banks’ trade finance operations were conducted by MAS from 2012 to 2015. After the inspections were completed, it published recommendations and notes on spotting TBML issues and taking action to lessen the dangers they pose. Given the inherently transnational nature of international trade, it will be impossible to effectively combat TBML threats without uniform worldwide norms, regulatory expectations, and technology capabilities.
The disparity in access to information
Keeping the financial system and the physical commerce world on the same page can be difficult. While financial institutions like banks may be well-versed in financial compliance norms like sanctions screening, know-your-customer, and transaction monitoring, they may be woefully ignorant of the inner workings of the physical trading world. They could miss warning signs that are clear to individuals with experience in physical trade. For this reason, it frequently takes specialized knowledge to ascertain if the underlying physical exchanges are viable. Criminals take advantage of gaps between trade finance and physical trade caused by a lack of interdisciplinary knowledge.
Also Read: Solutions for Blockchain Adoption in Trade Finance
Learn How Technology Helps in Identifying & Combating Fraud
By disrupting illicit networks, technology has the ability to significantly improve trade compliance. First and foremost, it is to push the business to abandon paper records storage like in the financial services industry. When this occurs, breakthrough automation and overlay technologies can be implemented rapidly.
Analyzing patterns
Complex challenges, like those involved in international trade, often yield to the use of modern technologies. Some service providers use relevant danger typologies and related trade patterns to train machine learning models, creating more precise red flags and alerts whenever inconsistencies are detected. In the same way, machine learning and artificial intelligence technologies may detect inappropriate transaction behaviours in the financial services business; they can also detect questionable trades. Since the trade-finance industry can rely on technology to assess the legitimacy of the suggested trade transactions, this has the potential to significantly alleviate the issues associated with information asymmetry.
Openness in the supply chain
Several companies ‘secret sauce’ is their supply chain data. Companies might withhold such details if they believe doing so will give their rivals an unfair advantage. But this needs to change if businesses and consumers are to feel safe conducting business with one another online. For internal and external transparency in a supply chain, businesses must be aware of activities occurring farther upstream. Greater overall resilience is achieved through supply chain visibility, allowing for more effective control of issues, including third-party, disruption, and concentration risks.
This can be automated with the use of technology like blockchain to eliminate threats to a company’s supply chain. Some place more importance on suppliers’ financial health, ESG and criminal records, while others prioritize technological risk. Transparency in the supply chain enabled by technological advancements can help reduce TBML by facilitating the detection of criminal networks and the exposure of illicit players, while also increasing supply chain efficiency and decreasing risks.
Know your customer procedures
The current state of affairs is that businesses create vendor and supplier profiles and subsequent risk assessments at a fixed point. It will be necessary for businesses to adopt a perpetual Know Your Customer (pKYC) model in which ongoing reviews replace periodic third-party reviews.
The technology behind KYC/ AML compliance allows complete automation of the periodic KYC assessment procedure. Companies in supply chains are routinely acquired and sold, sometimes for good reasons and sometimes for bad. Greater transparency of growing risk will be unlocked through the continuous monitoring of firms and changes in conduct and ownership. Even though we are a way off from this paradigm becoming permanent and effective, the technology to assist data collection and analysis already exists.
End note
In my opinion, one of the biggest problems facing the financial sector is trade-based money laundering (TBML). In TBML, engaging in fraudulent activities such as overcharging, undercharging, over-shipping, and transporting faulty goods is standard practice. Some difficulties in combating fraud in trade finance include inequalities in access to information and the lack of governmental controls. I have observed that technological analysis of trends, increased supply chain transparency, and a push away from paper records storage are all ways to enhance trade compliance. By making it easier to identify criminal networks, increased supply chain transparency can aid in the fight against TBML. An effective response to TBML dangers is impossible without standardized global norms, regulatory expectations, and technological capacities. You can reach out to the Triterras Kratos platform for better guidance to take fraud prevention measures for your organization.
