TRADE-BASED LAUNDERING SCHEMES, US CONGRESS MULLS BROADER TRANSPARENCY DEALS AND ROLE FOR FINCEN

To truly make a dent in the longstanding scourge of trade-based money laundering, US officials must expand agreements with foreign governments to analyze trade data, crack open corporate beneficial ownership information at home and combine these richer data sources with a powerful US Treasury database of bank filings.

Those are some of the key conclusions from a US House of Representatives Financial Services Committee hearing Wednesday entitled, “Trading with the Enemy: Trade-Based Money Laundering (TBML) is the Growth Industry in Terror Finance,” part of the broader Task Force to Investigate Terrorist Financing. To see a recording of the hearing or view prepared statements, please click here.

A bevy of Congresspersons – from Pennsylvania, New York, Texas and other major commerce and trading hubs – listened and questioned experts about the scope of the problem, a nigh incalculable number tied to incorrectly valued trade, either under or over-invoiced, that reaches into the hundreds of billions of dollars annually in US trade alone. They also asked if federal rules are needed to force companies to declare beneficial ownership information and ensure it’s available to law enforcement.

Their queries focused on how the United States could woo other countries to forge more trade transparency agreements – with the suggestion that the US could even become a regional data broker. This would allow other nations, for example in Latin America or the Middle East, to work with just one country to make more connections tied to potentially illicit trade, rather than having to enter separate agreements with each country.

The hearing has potential ramifications for financial crime compliance teams. For instance, if the US Treasury is tasked with overseeing improved trade transparency and merging that data with its Bank Secrecy Act database, it would likely mean the details in and decisions around bank trade deals could get significantly more scrutiny.

Conversely, banks may require trading firms to yield more details in trade finance deals, such as the quality of items so they can compare values with international standards.

Surprisingly, one of the most significant stumbling blocks to creating regional information trade data sharing hubs – referred to as trade transparency units (TTUs) – is that the United States uses a different trade data categorization format. The US won’t take the time or spend the money to transfer the data from other country formats into its own – officials want other countries to do that first.

Another existing challenge is that in too many cases, there are scant details about trade items that can swing wildly in value, such as gold.

For instance, a shipment listed as “gold” can actually be valued in a markedly different way, depending on if its 24-karat Italian gold, the highest quality, or 10-karat or even scrap gold. In some cases, these details may not exist when banks and authorities are attempting to uncover trade irregularities.

TBML ‘most challenging’ form of laundering

While an age-old dilemma, dating back to time immemorial when humans first started trading with each other, the enormity of the problem and potential tendrils to terror groups and their financiers has garnered the attention of the US Congress.

In a memo tied to the hearing, the document noted that in June 2015, the U.S. Department of the Treasury issued two reports related to money laundering: a National Money Laundering Risk Assessment and a National Terrorist Financing Risk Assessment.

The National Money Laundering Risk Assessment identified TBML as “among the most challenging and pernicious forms of money laundering to investigate.”

Citing information from U.S. Immigration and Customs Enforcement (ICE), Treasury described TBML schemes as capable of laundering billions of dollars annually.

An earlier advisory on TBML, issued by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in February 2010, stated that more than 17,000 Suspicious Activity Reports (SARs) described potential TBML activity between January 2004 and May 2009, which involved transactions totaling in the aggregate more than $276 billion.


What data is needed in support of an efficient, functional Trade Transparency Unit (TTU)?

  • Detailed, transactional import and export data, as well as movements of money data, for the United States and partner nations, are key.
  • Movement of goods data ideally will include bill of lading / manifest records, both for import and export for the U.S. and partner nations, as well as intermediate container movements.
  • BSA suspicious activity reports greatly enhance targeting capabilities. It is important to point out that commercially available sources of data can supplement, and in many cases replace, government data sources where key nations (or even some US agencies) choose not to participate in data sharing.
  • The targeting magic occurs when this data, and TBML-specific analytic tools, are used by knowledgeable financial analysts.

Key to strengthening the fight against TBML is expanding the creation of TTUs, a proposal originally crafted and executed in 2004 by former U.S. Intelligence Officer and Treasury Special Agent, John Cassara, and former Senior Special Agent, U.S. Customs and Border Protection, Louis Bock, who testified at the hearing.

A TTU is formed when Homeland Security Investigations (HSI) and any of the United States trading partners agree to exchange trade data for the purpose of identifying comparison and analysis.

To help analyze the data, the HSI has developed a specialized computer system, according to Cassara. Containing both domestic and foreign trade data, the system allows users to see both sides of a trade transaction, making it transparent to both countries.

TTUs can “easily identify trade anomalies that could be indicative of customs fraud, TBML, contraband smuggling, tax evasion, and even underground finance. Of course, investigations are still required. This investigative tool has been proven to be effective. Since the creation of the domestic and international TTU initiative, more than $1 billion has been seized,” he said.

Trade irregularities by the ‘buckets’

There are incredible examples of trade-mispricing.

For example, Dr. John Zdanowicz conducted a study analyzing U.S. trade data. He found plastic buckets from the Czech Republic imported with the declared price of $972 per bucket. Toilet tissue from China imported at the price of over $4,000 per kilogram. As well, data revealed bulldozers being shipped to Colombia at $1.74 each.

Of course, there are various reasons why the prices could be abnormal, experts said.

For example, there could simply be a data “input” or “classification” error. However, recalling the above explanation of over-and-under invoicing of pricey plastic buckets, the abnormal prices could also represent attempts to transfer value in or out of the United States in the form of trade goods.

At the very least, the prices should be “considered suspicious,” Cassara said. “Only analysis and investigation will reveal the true reasons for such large discrepancies between market price and declared price.”

But uncovering connections to terror groups mean expanding the existing DHS TTU focus, which is 95 percent centered South America, according to Bock.

“That perhaps made some sense given DHS’s focus on immigration and on drugs but does very little to attack the evolving terrorist threats,” he said in his statements.

“The real money flowing to ISIS involves the Middle East and frequently involves Europe including Turkey,” according to Bock. “With a proper focus on terrorist financing and trade based money laundering, with a home in a financial organization such as FinCEN, we could make a serious dent in the core funding sources of entities such as ISIS.”

He is pushing for FinCEN to take a more senior role in the fight against TBML.

“I recommend the creation of a reinvigorated TTU, with an associated line item from Congress, and move it to FinCEN under Treasury, an agency capable of addressing the nexus of TBML and tax revenue loss,” Bock said.

Giving FinCEN this focus immediately, and full access to the necessary trade data, is the “obvious right step whatever the eventual status of the TTU initiative within DHS. Let’s return to our earlier vision, focus, and effectiveness, built on a rapidly increasing number of TTU’s analogous to the Egmont Group of Financial Intelligence Units.”

“We have the opportunity to lead and help our nation and indeed the world, while generating a huge revenue surplus,” Bock said. “Let’s get back on track.”