Trade-Based Money Laundering

Trade-Based Money Laundering (TBML)

Trade-Based Money Laundering (TBML) is a sophisticated method of money laundering that has gained significant attention globally. It involves the misuse of international trade for the purpose of disguising illicit proceeds and integrating them into the formal economy. As an intricate form of financial crime, Trade-Based Money Laundering (TBML) not only challenges regulatory frameworks but also impacts global economic stability.

What is Trade-Based Money Laundering (TBML)?

Trade-Based Money Laundering (TBML) is defined as the process of disguising the proceeds of crime and moving value through trade transactions to legitimize their illicit origins. This complex scheme often involves misrepresentation of the price, quantity, or quality of imports or exports. Trade-Based Money Laundering (TBML) can vary in complexity and is frequently used in combination with other money laundering techniques, further obscuring the money trail.

Why is it a Global Concern?

The Financial Action Task Force (FATF) and other international bodies recognize Trade-Based Money Laundering (TBML) as a critical channel of criminal activity. With the growth of world trade, Trade-Based Money Laundering (TBML) poses an increasingly significant risk for money laundering and terrorist financing. The inherent complexities of international trade, such as diverse foreign exchange transactions and multiple trade financing arrangements, create a fertile ground for illicit activities.

Case Studies and International Efforts

Our website provides detailed case studies illustrating how criminal organizations exploit international trade systems. These real-world examples offer insights into the methods and impacts of Trade-Based Money Laundering (TBML). Additionally, we discuss the efforts made by various countries in response to Trade-Based Money Laundering (TBML), including the adoption of advanced technological solutions and enhanced public-private partnerships for better detection and prevention.

Combating TBML: A Collaborative Approach

Addressing Trade-Based Money Laundering (TBML) requires a multifaceted approach involving national authorities, financial institutions, and international cooperation. Strengthening regulatory frameworks, enhancing due diligence processes, and fostering global collaboration are crucial in the fight against Trade-Based Money Laundering (TBML).

Indicators for Business

Unusual Transactions and Parties:

1. Entrepreneur’s Knowledge: Poor understanding of the business by the entrepreneur.
2. Mismatched Transactions: Transactions in goods or services that do not align with the company’s profile.
3. Lack of Commercial Basis: Transactions without a clear commercial reason.
4. Documentation Gaps: Transactions or agreements lacking relevant supporting documents.
5. Offshore Transactions: Involvement with offshore companies.
6. Suspicious Associations: Dealings with suspected criminals or their associates.
7. Non-Transparency: Non-transparent or non-identifiable customers, creditors, or lenders.
8. Common Address: Transactions with business associates or customers sharing a common address.
9. Asset Sales Discrepancies: Sales classified as asset sales but without substantiated assets.

Unusual Money Flows:

1. Third-Party Payments: Payments to/from unrelated third parties.
2. Offshore Involvement: Payments involving unrelated offshore companies/accounts.
3. Through-Accounts: Use of the company’s bank account for passing through cash flows.
4. Money Origin: Non-transparent or non-verifiable origins of money, like cash deposits or loans.
5. Currency Anomalies: Unusual denominations or currency for the industry.
6. Undeclared Deposits: Bank deposits not declared as turnover/sales.
7. Economic Rationale: Money flows lacking economic reason or supporting documentation.
8. Credit Card/Debt Usage: Unusual use of credit cards or debt instruments.
9. Profit Sharing Anomalies: Profit sharing agreements without an economic basis.
10. Cost-Turnover Disparity: Costs incurred that don’t lead to turnover/sales.

Unusual Turnover/Sales:

1. Cash Turnover Increase: Significant rise in anonymous cash turnover/sales.
2. Large Cash Payments: For luxury goods or goods never delivered (indicating fictitious buyers).
3. Lack of Commercial Basis: Transactions with no evident commercial basis or documentation.
4. Cost-Agreement Discrepancies: Transactions and agreements without related costs or documentation.
5. Criminal Associations: Transactions with suspected criminals or their partners.
6. Profile Mismatch: Transactions in goods/services that don’t fit the company’s profile.
7. Vague Invoicing: General descriptions on invoices for high-cost items.
8. Non-Transparent Invoicing: Cost of sales invoiced by non-transparent corporations.
9. Fraudulent Associations: Transactions with known fraudulent parties, like missing traders.

Indicators for Cash

Advantages for Criminals:

1. Anonymity: Cash provides anonymity in origin, possession, and usage, making it attractive for criminals. It allows them to present the money as deriving from a legitimate source.
2. Creating False Appearances: Criminals can create fictitious loans or commingle illicit funds with legitimate sales receipts, sometimes even paying taxes to appear lawful.
3. No Paper Trail: Cash transactions often leave no connecting paper trail, and the owner’s identity is typically not recorded.

Disadvantages of Cash:

1. Suspicion: Large sums or high denominations can signal proceeds of crime. Specific currencies may hint at a country of origin where the bearer has no economic presence.
2. Practical Problems: Physical movement of large amounts of cash poses risks like counterfeiting, theft, and high handling costs. Businesses may refuse large cash payments.
3. AML Regulations: Anti-money laundering regulations requiring identification and reporting of transactions make careless spending of large cash sums risky for criminals.

Indicators of Suspicious Cash Activities:

1. Unusual Origin:
   • Cash from countries known for high corruption or political instability.
   • Deposits from countries with a developed financial system, potentially used as an alternative to cash transports.
2. Unusual Explanations:
   • Incomplete, unlikely, partly incorrect, or absent explanations for cash origin.
   • Lack of correspondence or supporting documentation.
3. Unusual Possession:
   • Amount, denomination, or currency inconsistent with the bearer’s background.
4. Unusual Transportation:
   • Concealed or risky methods of cash transportation.
   • High transportation costs compared to alternatives.
5. Unusual Destination and Spending:
   • Spending in high-risk countries or on luxury items.
   • Large withdrawals or payments without economic rationale.
6. Unusual Cash Flows:
   • Unexpected cash turnover/sales in certain industries.
   • Large increases in cash sales from unidentified customers.
   • Structuring of bank deposits (smurfing) to avoid detection.

Examples of Cash Laundering:

1. Conversion: Changing cash into other denominations or currencies via exchange offices, banks, black markets, or cash-driven businesses.
2. Physical Movement: Using couriers to transport cash by car or plane.
3. Banking System Deposits: Using straw men, cash-driven businesses, or smurfing techniques for depositing money.
4. Fictitious Appearances: Creating an appearance of legitimacy through fictitious loans or fabricated cash turnover.
5. Cash Purchases: Making purchases in cash, often for high-value items.

Indicators for International Trade

Common Techniques and Indicators:

1. Criminal Financing:
   • Goods bought with crime proceeds or stolen are exported, hiding their criminal origin from authorities.
   • Indicators: None specific to TBML but tied to the origin of goods.
2. Over- and Under-Valuation:
   • Involves manipulating the value of imports or exports, allowing capital movement and laundering via goods or money flows.
   • Methods include over- or under-invoicing in terms of price, quantity, or quality.
3. Import:
   • Over-Invoicing: Results in value transfer abroad to the exporter in money.
   • Under-Invoicing: Leads to value transfer to the homeland in goods.
   • Indicators: Unusually expensive or cheap imports.
4. Export:
   • Over-Invoicing: Transfers value to the homeland in money.
   • Under-Invoicing: Transfers value abroad in goods.
   • Indicators: Unusually expensive or cheap exports.
5. False Descriptions:
   • Discrepancy between goods on the invoice and actual goods shipped.
   • Necessitates physical verification to confirm goods match the invoice.
   • Can involve strategic goods, restricted items, or prohibited goods.
6. Multiple Billing:
   • Creating several invoices for the same shipment to justify multiple payments.
7. Fictitious Transactions:
   • Transactions where goods or services are invoiced but never delivered or performed.
   • Facilitates money movement through corporate accounts, falsification of profits, and covering illegal activities.
   • With technology, creating or modifying invoices is easy, as is setting up foreign corporations for fictitious deliveries or receipts.

Indicators of Suspicious Trade Activities:

1. Unusual Origin or Destination of Goods:
   • Transactions involving countries not known for specific goods.
   • Transactions with high-risk countries.
2. Unusual Supplier or Buyer:
   • Newly formed corporations with significant imports/exports.
   • Mismatch between the volume/type of goods and the supplier’s/buyer’s profile.
   • Use of offshore companies as suppliers or buyers.
3. Unusual Transportation:
   • Disproportionate transportation costs relative to the goods‘ value.

Indicators for the Car Trade

Indicators in Connection with Customer Behavior

Identification

• Delayed Identification: Identification is delayed (e.g., the prospect promises to submit proof of identity but does not do so).
• Termination Upon Identification Request: The prospect discontinues the transaction as soon as identification is requested or questions about an already completed identification are asked.
• Vague or Hard-to-Verify Information: The prospect provides only vague or hard-to-verify information.
• Submission of Fake Documents: The prospect presents obviously forged documents or poor-quality copies (e.g., via email) for identification.
• Lack of Proof of Beneficial Owner: No proof of identity is provided for the beneficial owner (i.e., the person on whose behalf the vehicle is being purchased).
• Uncooperative and Aggressive Behavior: The prospect behaves uncooperatively and aggressively, despite the seller explaining that these measures are legal obligations.

Sales Discussion and Contract Conclusion

• Avoidance of Direct Contact: The prospect tries to avoid direct contact more than usual.
• Lack of Interest in the Product: The prospect shows little interest in the vehicle itself (condition, equipment, etc.), but is only interested in the purchase.
• Attempts to Build Unusual Trust: The prospect tries to establish a closer relationship of trust than usual.
• Push for Quick Transaction Completion: The prospect presses for a quick conclusion of the purchase, subsequent transfer of the purchase price, and delivery of the vehicle. However, personal data or identification documents are still missing.
• Short-Term Changes in Purchase Contract: The prospect wants to make short-term changes in the purchase contract – e.g., change of payment method (cash/non-cash) or change of the contractual partner in the purchase contract.
  • Example: After the conclusion of the purchase contract, the contract is to be rewritten to other, previously uninvolved natural or legal persons.
• Inconsistent Information About Business Purpose: The prospect provides contradictory information about the business purpose and content of their company.
• Frequent Changes in Personal Information: The prospect frequently changes the given residential addresses and phone numbers or corrects information about identity multiple times.

Indicators in Connection with the Payment of a Vehicle

Cash Payment

• High-Value Vehicles Paid in Cash: The purchase price of high-priced vehicles is paid entirely or significantly in cash.
• Cash Payments by Legal Entities: Higher cash payments are made by legal entities without a plausible explanation.
• Cash Brought for Initial Offer: Cash is already brought along when obtaining an offer.
• Unusual Denomination: Payment or down payment is made in unusual denominations (e.g., only 10, 20, and 50 Euro banknotes; crumpled or worn notes).
• Unusual Transport of Cash: The cash intended for the vehicle purchase is transported in an unusual manner (e.g., in plastic bags or coat and jacket pockets).
• Insistence on Cash Payment: The buyer insists on cash payment, although „transfer“ was specified as the payment method in the purchase contract.
• Partial Transfer and Cash Payment: Down payment of the purchase price is made by transfer, but the remaining amount is paid in cash upon vehicle collection, contrary to the agreement.

Use of Dealership for Money Transfers

• Contract Reversals with Changed Repayment Terms: Requests to reverse purchase contracts or related down payments with altered repayment terms. Contract penalties incurred are accepted without objection.
• Switch from Purchase to Leasing After Cash Down Payment: Switching from purchase to leasing after a cash down payment, with a refund request for the down payment to be made to a different account.
• Transfer and Request for Repayment to Another Account: The prospect transfers money and requests a refund to a different account.

Foreign Connections

• International Transfers with Unclear Backgrounds: The purchase price is transferred from abroad with unclear backgrounds.
• Transfers from Offshore Financial Centers or Tax Havens: Transfers from countries known as offshore financial centers or tax havens, especially if the account holder is a legal entity.
• Payment in Foreign Currency: The purchase price is paid in a foreign currency.

Other Anomalies

• Immediate Payment Contrary to Economic Background: Invoice amounts are paid immediately, even though the buyer’s apparent economic background does not allow it.
• Sudden Change in Payment Behavior by Known Customers: Long-known customers suddenly change their behavior regarding payment methods without a plausible reason.
• Smurfing: The purchase price is transferred without a plausible reason in several installments (each under €10,000).

Indicators Related to Natural Persons

• Media Reports: There are media reports suggesting the interested party might be involved in criminal activities.
• Mismatched Signatures: The signatures on the purchase contract and identification do not match, and the discrepancy cannot be rationalized.
• Incongruent Age and Economic Background: The age and economic background of the person do not match the nature of the purchase (e.g., a trainee buying an expensive vehicle).

Indicators Related to Legal Entities/Companies

• Incongruent Age and Economic Background: The age and economic background of the legal entity do not fit the nature of the purchase (e.g., a newly founded company buying an expensive business vehicle).
• Opaque, Complex Corporate Structures: The purchase is made through opaque, complex corporate structures (e.g., shell companies, holding companies). The beneficial owner cannot be identified or only with great effort.
• Lack of Authorization: There is no authorization/ power of attorney/ representation for the person present, or the signature contained therein does not match the signature in the ID.

Indicators Related to Involvement of Third Parties

During Purchase

• Accompaniment: The person acting as the buyer is accompanied by someone who interferes in the negotiations, influences the business conclusion, or takes over the actual payment process. This supposed accompanying person refuses identification.
• Acting on Behalf of Another: The person acts on behalf of the actual buyer. The purchase contract is to be issued to the actual buyer, but their details are not provided despite repeated inquiries, or the buyer is not reachable at the provided address, phone number, or email.
• Third-Party Payment: The purchase price is entirely or significantly paid by third parties without apparent reason, e.g., transfer from an account not in the customer’s name.
• Registration on Behalf of Others: Without any explainable reason, the vehicle is to be registered to another person not apparently related to the buyer, especially if this person was not involved in the sales process or not present.

After Purchase

• Delivery to Different Address: The vehicle is delivered to a different address not connected to the buyer.
• Collection by a Third Party: The vehicle is collected by a third person who has no comprehensible connection to the actual buyer.
• Acting on Behalf of the Owner: The person acts, e.g., in the case of expensive repairs of trucks, classic cars, or sports cars, on behalf of the actual owner. They have neither a power of attorney nor a direct relationship to the owner (e.g., employee or truck driver). Only the owner’s ID is presented.

Indicators Related to Vehicle Export

Trade Documents

• Forged Documents: The presented trade documents (e.g., confirmation of arrival, consignment notes, or other shipping and export documents) are obviously forged.
• Contradictory Information: The invoices and trade documents contain contradictory information.
• Inconsistencies: There are inconsistencies in the trade document details that cannot be explained by common misunderstandings in filling out forms.
  • Example: The Vehicle Identification Number (VIN) in the freight papers or export documents does not match the VIN of the actual sold vehicle.

Transport Route and Destination

• Economically Unreasonable Transport: The transport of the vehicle appears economically unreasonable, e.g., due to the choice of a more expensive or complicated means of transport or export to a country with very high import duties.
• Transport Through Multiple Countries: The transport route goes through multiple countries without a plausible economic reason.

Indicators Related to Leasing and Financing of Vehicles

• Known Use by Third Parties: It becomes known that the contractual lessee allows third parties to use the vehicle permanently (e.g., during workshop visits).
• Payments by Third Parties from Offshore Locations: Leasing or financing rates are paid by third parties from countries known to the dealer as offshore financial centers or tax havens.
• Cash Payments for Special Leasing or Financing: The customer pays leasing or financing special payments in cash.
• Payments for Early Termination of Financing or Leasing: Payment of financing or leasing settlements with a significant shortening of the duration of the leasing contract.

Other Indicators

• Lack of Local Connection: No local connection (e.g., for common new cars, if the chosen branch does not offer exceptional services that would justify the choice of location; no explanation from the interested party for the choice of location).
• Use of Collective Addresses or PO Boxes: The interested party uses collective addresses or PO boxes.

Indicators for the Art and Antiques Trade

Indicators Related to the Acting Persons

• Difficulty Identifying Beneficial Owner: The identity of the beneficial owner cannot be determined or only with significant effort.
• Delayed Identification: Identification of the contracting party is delayed, or the transaction is terminated as soon as identification is requested or expanded.
• Involvement of Politically Exposed Persons (PEPs): A PEP, a family member, or another person close to them as defined in Section 1, Paragraphs 12 – 14 GwG, buys or sells art objects or antiques (hereinafter referred to as „objects“).
• Offshore or Tax Haven Connection: The contracting party lives or works in an offshore area or a country known as a tax haven.
• Incongruent Business Activity: The purchase or sale of objects is carried out by a company, although this is not covered by its business purpose.
• Criminal Investigation: It is known that the contracting party is or was under investigation for possible involvement in a property crime.
• Superficial Art Knowledge: The contracting party has only superficial art knowledge, which does not withstand questioning and contradicts the claimed professionalism.
• Frequent Changes in Contact Information: The contracting party often changes their contact details.
• Evasive Responses: The contracting party responds evasively or shows no willingness to provide information necessary for contract processing or to fulfill legal obligations.
• False Information Provided: Information provided by the contracting party appears obviously false or differs from previous statements.
• Withdrawal Upon Questioning: A prospect withdraws their purchase/sale intent when confronted with inquiries.
• Rapid Collection Building: The contracting party builds up a larger collection unusually quickly.
• Random Collection Building: The collection seems to be built up randomly or without a recognizable focus on a particular style, era, or group of artists.
• Mismatch with Income or Profession: The purchased objects or their purchase prices do not align with the income or profession of the contracting party.
• Lack of Interest in Object Details: The buyer shows unusually little interest in the details of the traded object.

Indicators Related to Involvement of Third Parties

• Third Party Involvement: A third party is involved in the transaction (e.g., a different invoice recipient, the customer is accompanied by another person without a plausible reason).
• Acting as a Representative for Unknown Third Parties: A person involved in the legal transaction acts as a representative or messenger for an unknown third party (possible straw man transaction).
• Storage in Customs Warehouse, Free Zone, or Duty-Free Warehouse: The contracting party stores their art collection long-term in a customs warehouse, free zone, or duty-free warehouse (depending on jurisdiction), with a sale preferably taking place therein.
• Third-Party Payment: The purchase price is paid by a third party or is to be paid to a third party.

Indicators Related to Pricing

• Unusual Purchase Price: The same object is purchased or sold at an unusually high or low price compared to previous auctions.
• Price Comparison: An object is purchased or sold at an unusually high or low price compared to similar objects.

Indicators Related to Purchase Price Payment

• Detailed Questions about Transaction Process: One of the contracting parties asks unusually detailed questions about the transaction process or connections to (tax) authorities.
• Preference for Cash Payment in Large Sums: One of the contracting parties prefers cash payment for large amounts.
• Inability to Explain Cash Origin: The buyer cannot or will not provide a reason for the origin of the cash upon request, responds evasively, or very generally.
• Credit Card Payment Without Cardholder Name: The buyer pays with a credit card that does not display the cardholder’s name.
• Proposing a Complex Transaction Structure: One of the contracting parties suggests an unusually complicated transaction structure.
• Change of Ownership in a Customs Warehouse, Free Zone, or Duty-Free Warehouse: The object remains within the transaction in the customs warehouse, free zone, or duty-free warehouse (depending on jurisdiction) and only changes ownership.
• Staggered Payment: The purchase price is paid in several installments, each under 10,000 euros.
• International Transfer for Payment: The transfer of the purchase price is made from a country known as an offshore financial center or tax haven or considered a high-risk country in terms of money laundering or other crimes.

Indicators Related to the Purchase Object

• Seller Offers Objects with Unclear or Incomplete Provenance: The seller offers one or more objects with unclear or incomplete provenance.
• Doubts About Export Documents: Export documents raise doubts about their authenticity or do not match the offered object.
• Possibility of Origin from a Conflict Zone: There are indications that an object may originate from a conflict zone.
• Lack of Plausible Documentation: Upon inquiry, no or only implausible documents can be presented.
• Listing in a Database for Lost or Stolen Artworks: The offered object is listed in a database for lost or stolen artworks.
• Export Ban in Country of Origin: The object is subject to an export ban in the country of origin. Documents proving the legality of import into Germany are not available or are to be submitted later.
• Concealment of Provenance: Concealment of the provenance of an object, e.g., by using descriptions such as „a gentleman’s collection,“ „private collection,“ without a plausible explanation.
• Non-Professional Preparation: The object does not appear professionally prepared, or the quality of preparation does not meet the usual professional standard.
• Frequent or Rapid Resale: An object is resold conspicuously often or after a very short time.

Indicators for the Luxury Goods Trade

Identity and Background Checks

• Unclear Beneficial Ownership: Difficulty in identifying the true owner or significant efforts required to do so.
• Mismatched Profiles: Buyers or sellers whose age and financial background don’t align with the nature of high-value transactions.
• Inconsistent Information: Frequent changes in contact details, or inconsistent information provided by the client.
• Delayed or Refused Identification: Clients who delay providing identification or withdraw from transactions when asked for it.

Transaction Patterns

• Unusual Payment Methods: Preference for cash transactions, especially in large sums, or use of complex transaction structures.
• Third-Party Payments: Payments made or received by individuals or entities not directly involved in the transaction.
• Staggered Payments: Splitting the payment into multiple smaller transactions, each below reporting thresholds.
• Offshore Transactions: Payments made from or to offshore financial centers or tax havens.

Behavioral Indicators

• Lack of Industry Knowledge: Clients showing little understanding or interest in the specifics of the luxury items they are dealing with.
• Rapid Accumulation: Building a large collection of luxury items in a short period without a clear focus or pattern.
• Incongruent Behavior: Long-standing clients who suddenly change their transaction behavior without a plausible reason.

Documentation and Provenance

• Discrepancies in Documentation: Inconsistencies or apparent forgeries in trade documents, invoices, or provenance records.
• Unclear Provenance: Luxury items offered with unclear or incomplete history, especially relevant for art pieces and antiques.

Transaction Context

• Economically Unreasonable Transactions: Transactions that do not make economic sense, such as overpaying or underpaying significantly compared to market values.
• Use of Intermediaries: Involvement of middlemen, agents, or representatives without clear or logical reasoning.
• Storage and Transport Anomalies: Storing luxury items in customs warehouses, free zones, or other locations not typically associated with their use or sale.

Post-Transaction Behavior

• Unusual Delivery Requests: Requests to deliver items to addresses not associated with the buyer or to third parties.
• Rapid Resale or Transfer: Quick turnover or resale of luxury items, especially when the resale involves different jurisdictions or offshore accounts.

Sources:

https://www.fatf-gafi.org/en/publications/Methodsandtrends/Trade-basedmoneylaundering.html

https://www.fatf-gafi.org/en/publications/Methodsandtrends/Trade-based-money-laundering-trends-and-developments.html

https://www.fatf-gafi.org/en/publications/fatfrecommendations/documents/bestpracticesontradebasedmoneylaundering.html

https://www.fatf-gafi.org/en/publications/Fatfgeneral/Remarks-presser-conf-tbml-report.html

https://www.oecd.org/ctp/exchange-of-tax-information/money-laundering-awareness-handbook.htm

https://www.zoll.de/DE/FIU/Fachliche-Informationen/fachliche-informationen_node.html

https://www.zoll.de/DE/FIU/Fachliche-Informationen/Geldwaeschepraevention-Nichtfinanzunternehmen/geldwaeschepraevention-nichtfinanzsektor_node.html