Summary Proposal

Establish and possibly link an international network of country Trade Transparency Units (TTUs), loosely analogous in concept to the Egmont Group of Financial Intelligence Units. The purpose of the TTUs is to identify anomalies in international trade transactions from customs data. These identified anomalies could be an indicator of trade-based money laundering, financial crimes and/or terrorist financing. An international system of trade transparency, working in conjunction with current financial transparency reporting requirements, could alleviate many other previously intractable trade related problems. An international system of trade transparency could also potentially provide revenue to governments around the world. This initiative, builds upon, but does not duplicate previous U.S. initiatives.

Defining the Problem

Over the last generation, the United States has championed the concept of financial transparency for the formal financial sector including banks, conventional wire remitters, casinos and other formal financial sectors. Working primarily with the Financial Action Task Force (FATF) and its regional bodies, the Egmont Group of Financial Intelligence Units, and exerting bilateral and regional leadership around the world, the United States has helped create anti–money laundering programs and policies that have been implemented around the world.

The events surrounding September 11, however, demonstrate anew the threats posed by financial flows outside the formal sectors, including trade-based money laundering and alternative remittance systems. Trade-based money laundering and terrorist financing systems can bypass, in whole or part, the Bank Secrecy Act and other anti–money laundering and financial crimes regulations. Trade-based systems act as a kind of a parallel method of transferring money and value around the world. Systems such as hawala, the black market peso exchange, and the use of commodities such as gold and diamonds that are not captured by current financial reporting pose tremendous challenges for law enforcement using current financial reporting requirements. Moreover, many of these alternative remittance systems are ethnic-based, making them even more difficult for U.S. investigators to understand and target. As the United States and other countries around the world tighten the noose of financial regulation and reporting for the formal and even informal financial sectors, the use of trade-based money laundering and alternative remittance systems will assuredly grow. It is essential, therefore, that we work to put into place an international mechanism capable of detecting trading anomalies that could point to money laundering, terrorist financing, and other financial crimes.

Investigating Trade-Based Money Laundering

Experience has shown the best way to analyze and investigate suspect trade-based activity is to have systems in place that can monitor specific imports and exports from/to given countries. In fact, U.S. Customs pioneered this approach through its creation of the Numerically Integrated Profiling System (NIPS), a computer system that uses U.S. trade data, examines suspect anomalies, and identifies likely targets of investigation. Unfortunately, the opportunities presented by NIPS have never been fully exploited. NIPS, using U.S. data alone, also has limitations, the most important of which is that, to be most effective, NIPS analysts need to compare trade data from other countries. Moreover, it is difficult to follow the trade flow when goods are transshipped from country X to Y via Z. An additional challenge occurs when the U.S. wishes to monitor suspect trade that does not enter into the commerce of United States, for example, following suspect trade related to terrorist financing that may move goods from Karachi to Dar Es Salaam via Dubai.

If country X exports goods to country Y, in theory country X's export records regarding price, quantity, and general description should match (with some recognized variables) the corresponding import records of country Y. Unfortunately, there is a growing worldwide trend towards trade fraud. For example, concern over the sale of conflict diamonds from the Gambia to Belgium resulted in a comparison of trade data that showed the Gambia exported $100 million worth of diamonds to Belgium between 1996 and 1999, even though the Gambia has no diamond production. U.S. Customs has used this same technique of examining trade anomalies to combat the Colombia black market peso exchange, to examine suspect gold shipments from Guyana, and examine transshipped textiles from the Middle East. In these instances, Customs was able to match U.S. trade data with cooperating countries' trade data and look for suspicious indicators.

The desired trade data are already collected in every country around the world. All countries have customs services and all countries impose tariffs and duties for revenue purposes. In fact, lesser-developed countries are dependent on customs duties to generate revenue. Although there are some differences in the way trade data are gathered and warehoused, the U.N. and the IMF are promoting uniform standards such as ASYCUDA that collect and manage customs data in approximately 80 (primarily lesser developed) countries. ASYCUDA is a computerized customs management system which covers most foreign trade procedures including manifests, customs declarations, transit procedures, etc. (NIPS is fully compatible with ASYCUDA). In addition, acting on a U.S. initiative, the G-7 proposed the adoption and implementation by customs services worldwide of a standard data and reporting format. The World Customs Organization (WCO) developed the WCO Data Model with a Global Standard Format. The EU subsequently made a political commitment to adopt the WCO Data Model, which is also supported by the Asia Pacific Economic Cooperation (APEC). The U.S. has also committed to making its Automated Commercial Environment (ACE) system compatible with world norms. Thus over the last few years a foundation has already been established governing customs compatibility. The below proposals do not deviate from U.S. policy and initiatives, but rather seek to use the above foundation as a point of departure that will give law enforcement enhanced tools concerning the misuse of global trade.

1. Proposal 1: The U.S. should actively promote in appropriate forums the concept of “trade transparency” whereby countries agree to collect, automate, and disseminate under appropriate restrictions and guidelines customs trade data in order to combat trade-related crime. The data would capture specific declared shipments, inbound and outbound. Countries' trade data systems should be made compatible with an international norm.
2. Proposal 2: Borrowing from the successful Financial Intelligence Unit (FIU) model, the U.S. would build upon the NIPS program to establish the world's first Trade Transparency Unit (TTU) that will collect, analyze, and disseminate suspect trade data. The U.S. should work towards the establishment of a worldwide TTU network (Proposal 3 below).

A U.S. TTU would be charged with looking for trade anomalies that could be indicative of a wide variety of predicate offenses, including trade-based money laundering, customs fraud, alternative remittance systems, and even terrorist financing. The TTU would act in a similar manner to an FIU; its primary purpose would be to support law enforcement by responding to requests to further investigations and by looking proactively for anomalies that would indicate likely targets of investigation. (The value of the TTU analytical product would undoubtedly be enhanced if the information was cross-checked with an FIU.)

A TTU would be able to obtain trade data of interest directly from another TTU or “pull-down” the data of interest from an administrative gatekeeper. (See Proposal 3 below governing TTU Group administrative functions.) For example, if the U.S. TTU was interested in examining suspect trade anomalies between India and the United States, the U.S. TTU could contact the Indian TTU and arrange for the exchange of the data. By comparing declared imports and exports from both sides, it is a relatively simple process to determine indications of possible overinvoicing, underinvoicing, fictitious invoicing, export incentive fraud, etc. Over- and underinvoicing, for example, are often used in money laundering and alternative remittance systems such as hawala. In another example, if the U.S. TTU was concerned with the possibility of terrorist financing via trade that does not enter into the commerce of the U.S., the same TTU system would have access to the needed trade data, either directly from the concerned countries or through the administrative gatekeeper.

The Egmont Group of Financial Intelligence Units (FIUs) was created in 1995 as a kind of “club” where likeminded FIUs could gather periodically to discuss common concerns about the collection, analysis, and dissemination of financial intelligence. When Egmont was formed, there were only 12 FIUs. By mid-2003, there will be over 80 members in the Egmont Group. Egmont does not have a permanent secretariat. There are no dues. Egmont is totally separate from the FATF and other money laundering organizations. Membership in the Egmont Group is completely voluntary.

1. Proposal 3: Following the Egmont model, a completely voluntary TTU network could associate themselves into a Group that would share specific trade data with Group members upon request. The Trade Transparency Group would develop procedures for admitting new members, protocols for exchanging trade data, secure methods for transmitting the data, etc. As with Egmont, there is no need for a permanent secretariat or affiliation with an international organization. However, as was true during the first years in the development of Egmont, the U.S. TTU may have to play a key role in the administration of the Trade Transparency Group.

Customs has already pioneered the technique of customs data exchange with other countries based on the NIPS platform. For example, Customs currently shares some trade data with [countries redacted]. [Other countries redacted] already engage in a two-way exchange of customs data with the U.S. The exchange of data has resulted in major cases and the collection of millions in revenue. However, the exchange of customs data is not adequately coordinated nor part of comprehensive U.S. policy. The exchange of customs trade data has also not been systematically examined for indications of terrorist financing. (Customs Container Security Initiative —CSI—is addressing some of these issues, and protocols have been established under the CSI program that may prove valuable with trade transparency.) Yet countries are enthusiastic about the trade transparency concept, and if a Trade Transparency Group were developed, there are indications that countries would line-up to join.

The costs involved with developing a TTU in the United States would be minimal. Customs already has most of the reporting and analytical systems in-place. In the post–September 11 environment, TTU location, agency protocols, organization, staffing and budget will hopefully not become major obstacles. Developing TTUs in other countries will be dependent on many variables. However, the technology exists to engineer trade transparency compatibility and any costs incurred in other countries will be more than compensated for by immediate returns. In lesser-developed countries, particularly those judged to be at risk for terrorist financing, the U.S. could offer technical assistance in automating their trade data and making it available for TTU interface.

If we adopt a system of international trade transparency modeled on the above, many benefits could result:

• It would be an excellent tool to help monitor and combat trade-based money laundering. There is currently very little available data on money laundering systems that involve trade nor effective countermeasures.
• It would help more fully identify and disrupt the Colombian black market peso exchange (BMPE), the largest narcotics-related money laundering methodology in the Western Hemisphere. An international trade transparency network would be particularly helpful in combating BMPE networks where there are transshipments through multiple countries, for example, goods exported from Italy to Colombia via Panama.
• Since traditional hawala is trade based (commodities are used to provide countervaluation) it could have a dramatic impact on some forms of hawala transactions.
• It could help reduce the misuse of the international gold trade, an embedded money laundering methodology that has stymied criminal investigators around the world.
• Customs fraud would be reduced.
• Many countries would be better able to combat export incentive fraud.
• Tax and tariff revenue would increase.
• It would be an effective analytical tool for monitoring trade quotas.
• An international system of transparent trade would help monitor the trade in conflict diamonds, conflict timber, etc.
• There would be a reduction in many forms of smuggling, including narcotics.
• We could better control trade diversion schemes.
• It would give law enforcement agencies better tools to combat the worldwide trade in counterfeit goods.
• It would help detect trade-related capital flight.
• Transparency in trade would help reduce multilayered corruption.
• Trade transparency could help give trade sanctions teeth, by making trade flows easier to monitor. This could help give policy makers additional options in international conflicts.

Although there will undoubtedly be skeptics, trade transparency will be attractive to governments around the world because it will protect the integrity of their markets and provide tax and tariff revenue. Many times countries do not take action to combat money laundering or terrorist financing, but when it is demonstrated that action on transparency enhances revenue, those same countries become very interested. Moreover, a system of trade transparency could provide infusions of tax and duty dollars for the USG. Academic studies show that the U.S. Treasury is routinely shortchanged billions of dollars every year via methods to circumvent required trade reporting.

In the dissemination of financial intelligence, there is always a balance struck between enforcement and privacy concerns. Although there is not as great an expectation of privacy with trade, it is crucial to the success of these proposals that we build in appropriate steps to safeguard sensitive data. For example, the data will be used only by government agencies. Private industry will not have access to the information. In the United States, business already gives much the same information to government agencies including Customs, the I.R.S. and sometimes Commerce. Moreover, if a particular industry or company feels that the inadvertent release of transactional data could jeopardize business, software rules could be written whereby sensitive or identifying information in the data fields would not have to be included. In addition, the dissemination of trade data does not mean the blanket release of information for “fishing expeditions.” Rather, as with FIU analysis, specific queries would be formulated either in response to a request from law enforcement or perhaps a category or field would be analyzed proactively searching for anomalies that might warrant subsequent investigation. The above should actually be attractive to most international U.S. business interests. Transparency will help foster fair competition, and U.S. business excels on a level playing field in the international arena.

Conclusion

So long as there are profits to be made, or zealotry to be pursued, systemic money laundering, financial crime and terrorist financing will continue. To the extent that we deny these criminals the front door of the domestic and international formal financial systems, they will utilize informal and trade-based systems. In order to identify and attack these non-formal systemic abuses, we must create mechanisms, akin to the Bank Secrecy Act, the USA Patriot Act and other anti–money laundering regulations and reporting, that will capture the possible use of trade to finance crimes. We must advocate and press for an international mechanism to attain international trade transparency as a complement to that of financial transparency.

As described above, the basic idea of trade transparency is simple and straightforward. For a variety of enforcement and revenue enhancing reasons, trade transparency is already attractive to many governments around the world. The costs involved establishing a transparency network would be minimal. The information already exists. The potential returns are enormous.

The war on terrorist financing is stalled. The USG emphasis thus far has been to concentrate on money moving through traditional financial institutions. The results have been mixed at best. It is time we systematically addressed trade-based crime. The trade transparency proposals outlined above do not duplicate existing programs but rather use the infrastructure already in place as a point of departure. The April 2003 edition of the Homeland Security Journal states, “The ideal would be actions to encourage other nations to share information with the United States so that it can be evaluated using NIPS, with the eventual goal of trade transparency. This is an efficient means of expediting a counter-terrorist action to understand the scope of the problem faced by the United States and the world.”

If adopted, the proposals outlined above will launch us toward this “ideal.”