The growing challenge of trade-based money laundering


INSIGHT
Published
Jun 3rd '24
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Trade-based money laundering (TBML) is an insidious threat that undermines the integrity of the global financial system. By exploiting the complexities of international trade, criminal organisations are able to launder billions, fuelling activities such as drug trafficking and terrorism. This article delves into the intricacies of TBML, highlighting recent high-profile cases, the limitations of traditional detection methods, and the revolutionary potential of artificial intelligence (AI) in combating this global issue.

 

Understanding trade-based money laundering

TBML involves the manipulation of trade transactions to move illicit funds across borders. Common tactics include:

 

  • Over- or under-invoicing: misrepresenting the price of goods to transfer value illicitly.
  • Misrepresentation of goods: falsifying the quality or quantity of products.
  • Use of shell companies: creating complex ownership structures to obscure the origin and destination of funds.

 

These methods allow criminals to integrate dirty money into the legitimate financial system, posing significant challenges for detection and enforcement.

 

 High-profile cases highlighting the threat

The 2018 Danske bank scandal is a stark example of TBML in action. Allegations surfaced that the bank had facilitated the laundering of $230 billion through its Estonian branch, involving numerous shell companies and complex trade transactions. This case underscores the urgent need for robust measures to counter TBML.

 

The limitations of traditional detection methods

Traditional methods of detecting TBML, such as keyword filters and basic anomaly detection, are often inadequate. The sheer volume of global trade transactions and the sophistication of criminal tactics make it difficult to identify suspicious activities. Furthermore, the lack of standardised data and cross-border information sharing exacerbates the problem, creating blind spots in enforcement efforts.

 

 The role of artificial intelligence in combating TBML

AI offers a transformative solution to the challenges posed by TBML. Unlike traditional methods, AI can process vast amounts of data, including trade finance documents, emails, and social media communications, to uncover hidden patterns and connections. Here are some ways AI can enhance TBML detection:

 

  • Advanced anomaly detection: AI can identify unusual trade activities by analysing patterns in data that may escape human analysts.
  • Network analysis: AI can map out complex ownership structures and trade relationships to detect red flags indicative of TBML.
  • Natural Language Processing (NLP): by understanding human language, AI can analyse communication data to uncover suspicious phrases and terminologies.

 

International efforts and regulatory measures

The international community recognises the gravity of TBML. The combating cross-border financial crime act of 2023 is one such measure, proposing the establishment of a central hub for information sharing and coordinated investigations. Public-private partnerships also play a critical role, bringing together financial institutions, law enforcement agencies, and customs authorities to leverage AI for a stronger defence against TBML.

 

Expanding the reach of AI in TBML detection

AI’s potential extends beyond financial institutions to include:

 

  • Customs authorities: AI can analyse trade data to detect anomalies in pricing, quantity, and origin of goods, AIding in the identification of suspicious shipments.
  • Law enforcement agencies: AI can sift through financial records, trade documents, and communication data to uncover connections within TBML networks.
  • Trade finance providers: by integrating AI into their risk assessment processes, these institutions can better identify transactions linked to TBML, protecting themselves from financial and reputational risks.

 

 

Case study: AI in action

Consider a scenario where a transnational criminal organisation uses shell companies to inflate invoices for commodities like oil and minerals, laundering funds derived from drug trafficking. Here’s how AI can disrupt this network:

 

  1. Anomaly detection: an AI-powered system flags unusual trade activities involving a company with a limited trading history.
  2. Network analysis: AI uncovers connections to other shell companies and inconsistencies in shipping information.
  3. Investigation and disruption: based on AI-generated alerts, the bank reports the activity to authorities, who then use AI to analyse communication data, leading to the dismantling of the TBML network.

 

The human element

While AI offers significant advancements, human expertise remAIns crucial. Human analysts provide contextual understanding, interpret AI-generated alerts, and make strategic decisions. Ethical oversight ensures AI is used responsibly, mAIntAIning compliance with regulations and ethical principles.

 

Conclusion

Combating TBML requires a symbiotic approach that harnesses both cutting-edge technology and human expertise. By embracing AI, fostering international collaboration, and prioritising continuous improvement, stakeholders across the public and private sectors can build a robust defence against TBML. This collective effort not only protects the global financial system but also promotes a secure and transparent trade environment.

 

If you have AML or KYC needs, please contact us.

 

How we can help

At LS Consultancy, our consultants are industry experts that interpret the rules, regulations and spirit of the industry guidelines by assisting you “the client” in implementing a compliance programme that you can be confident is mitigating the risk of financial crime. What we can do:

 

  • We analyse the relevant jurisdictions legislation, regulation and industry guidance to ensure that your controls adopt the highest standard possible
  • Analyse and/ or Enhance your Business Wide Risk Assessment to ensure we consider money laundering and relevant predicate crimes
  • Assessment of your Customer Onboarding and/ or Periodic KYC reviews rely on independent documentation and supported by credible information from your customer – as this is key to your compliance programme.
  • Robust Transaction Monitoring and Screening whilst utilising your up-to-date KYC documentation/ information are fundamental.
  • Greater emphasis on training – why not go through live examples with your RM’s, Operational Teams and Compliance – discuss the areas of concern and come up with compliant solutions.
  • Ensuring your Compliance Monitoring Programme is conducted on a regular basis
  • Engagement with senior management through relevant committees

 

For further information please contact us where our industry experts will be happy to answer your questions.

 

 

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