Possible Red-Flag Indicators of TBML

• Significant discrepancies exist between the description, quality, and quantity of the commodity on the bill of lading, invoice, and actual goods shipped.
• Significant deviation between the value of the commodity as reported on the invoice and a normal “arm's-length” fair-market price.
• The weight of the shipment does not match the listed contents.
• The shipment is inconsistent with the exporter's normal business (e.g., an exporter of consumer electronics shipping paper supplies).
• The size of the shipment appears inconsistent with the exporter's normal business activity.
• Invoices or bills of lading include inaccurate information about the product being shipped or information that is not commonly accepted (e.g., an invoice listing the square feet of granite tile being imported when the accepted norm is pricing by the ton).
• Invoices contain inaccurate or incomplete product descriptions; for example, an invoice for 1,000 kilograms of frozen shrimp is not sufficient to analyze its market value because there are multiple U.S. harmonized codes for frozen shrimp reflecting imports of different sizes.
• The commodity is being shipped to/from or through areas of “high risk” for money laundering.
• Companies are operating out of foreign countries where it is very difficult to determine the true ownership or controlling persons of the company or where the type of business is not fully apparent.
• A party is unable or unwilling to produce appropriate documentation upon request.
• Documentation appears fraudulent.
• The routing of the shipment is circuitous, not direct, is illogical, or is being transshipped through a questionable area for no apparent economic reason.
• A shipment of goods destined for an end-user has no need for the product (e.g., electronics manufacturing equipment sent to a destination that does not have an electronics industry).
• Shipments involve suspect free trade zones or special economic zones.
• The method of payment is inconsistent with the normal business practice of the parties involved, inconsistent with the characteristics of the transaction, or using advance payment for a shipment from a new supplier in a high-risk country.
• The transaction involves the receipt of cash.
• International wire transfers are received as payment for goods into bank accounts where the exporter is not located.
• The transaction involves a third party that has no apparent connection to the buyer or seller.
• Payment is made from multiple sources and/or multiple accounts.
• The transaction involves the use of front or shell companies.
• The parties involved are not transparent and use “Delaware”-like shell corporations with lack of beneficial ownership information.
• Numerous sole-proprietorship businesses or private limited companies are involved in the transaction or established by proxies or where false addresses are involved.
• The transaction and payment appear to have unnecessary and complex layers involving multiple accounts and multiple jurisdictions that combine to obscure the true nature of the transaction.
• Money services businesses or money exchange bureaus located in third countries are used as intermediaries for the transfer of goods or money.
• The transaction involves a frequently amended letter of credit.
• Shipment locations or description of goods are not consistent with the letter of credit.
• Transactions that involve payments for goods through checks, drafts, or money orders are not drawn on the account of the entity that purchased the items.
• Unusual deposits of cash, cash deposits in round numbers, or structured cash deposits under the reporting threshold into a bank account are used to fund the trade transaction.
• Sequentially numbered checks drawn on domestic bank accounts are negotiated through foreign money services businesses.
• The contract is other than an arm's-length transaction (see abusive transfer pricing).
• Related-party transactions are involved (e.g., familial relationships).
• Goods that are commonly associated with TBML schemes are involved (e.g., scrap gold, precious metals and stones, trade in tobacco, consumer electronics, automobiles, etc.).
• Goods present valuation difficulties (precious stones, artwork, scrap gold, etc.).
• A freight-forwarding firm is listed as the commodity's final destination.
• Goods involved are frequently used in bartering schemes (e.g., gasoline and tires).
• A shipment does not make economic sense (e.g., the use of a 40-foot shipping container to transport a relatively small volume of goods).
• Carousel transactions are involved—the repeated or circular importation and exportation of the same high-value commodity.
• Packaging is inconsistent with the commodity or shipping method involved.
• Upon inspection or verification, the manufacturing entity has no physical address, no or limited production capability, limited or no inventory at its business premises, and so on.
• Phantom shipment—no goods are actually shipped but payment is made. Confirmation of shipment and delivery should be requested in a suspect case of TBML.
• There are multiple invoices for suspect goods. A frequently repeated suspect pattern of numerous invoices involves the same or similar items and where the actual physical shipment is never physically verified.
• The exporter requests payment of proceeds to an unrelated third party.
• The quantity or quality of the goods is padded, or inflated.
• Counterfeit invoices are used. If an invoice looks suspicious, try to compare it with a known genuine invoice. Note any differences in the quality of the printing, company letterhead, design or other visuals, different contact numbers, e-mail addresses, or other items recorded in previous correspondence.

Prudent Steps

In addition to being familiar with TBML methodologies and the above red-flag indicators, a prudent compliance officer should consider the following steps:

• All documentation should be examined. If specific data or documents are not made available, ask for them! Depending on the financial institution and their internal policies, much of the information will be required in order to arrange financing. Legitimate clients should have no compunction about turning over requested documents for review.
• In dealing with suspect TBML activity, follow standard due diligence and KYC policies. Know your customer and know your customer's customer. The recipients or customers of the client should also be the subject of due diligence inquiries, particularly if the client is located in a suspect location.
• If possible (and appropriate), conduct unannounced visits to the company involved. Does the company actually exist? Is the company really engaged in manufacturing the subject trade goods or does it have a need for the imported product?
• Adhering to internal policies, file a suspicious activity report. Provide as much detail and explanation as possible for your suspicions and clearly indicate why you believe the transaction is representative of TBML, the BMPE, hawala, etc.
• Contact law enforcement. If a proposed trade-based transaction has obvious law enforcement or national security considerations, reach out directly to the applicable federal, state, or local government agency or department. Realistically, you might not get the feedback you desire but in many cases law enforcement authorities will use the tip and either intercept or monitor the shipment or transaction. (They might also use an undercover approach.)

Guidance

The United Kingdom's Financial Conduct Authority (FCA) has warned banks about TBML and urged them to improve their monitoring efforts. According to a recent study, many banks “had no clear policy or procedures document for dealing with trade-based money laundering risks…were unable to demonstrate that money laundering risk had been taken into account when processing particular transactions…[and] made inadequate use of customer due diligence information gathered by relationship managers or trade sales teams.”⁸ I imagine the above shortcomings hold true for most countries around the world.

I'm convinced that TBML is the next frontier in international money laundering enforcement. There will undoubtedly be increasing regulatory pressure applied to financial institutions involved with trade-finance. I urge prudent trade organizations and financial institutions to become familiar with TBML methodologies, establish best practices regarding risk in the trade finance system, and develop analytics-focused AML/CFT monitoring capabilities to identify suspicious TBML transactions.