Trade-Based Money Laundering
Money laundering is the process of making illicit income seem legal. Various schemes are used to disguise the real source of “dirty” money, but one thing stays the same: the money that is being “laundered” is always the money that was obtained by illegal means, e.g. via drug sale, tax evasion or corruption.

Trade-based money laundering (TBML) is becoming increasingly more popular among perpetrators. For example, billions of dollars are siphoned off from Russia every year through fake transactions. Our goal is to demonstrate how such schemes work, and to encourage government agencies to seriously tackle this problem.
How money is laundered through foreign trade
TBML does not really necessitate moving goods across the border. If, however, the deal does take place, and there is an actual movement of goods, then the perpetrators either overstate or understate the cost of the goods, their amount, or both; invoice the same shipments of the goods multiple times; or state wrong characteristics for the goods to cheat the customs control.

TBML is essentially deliberate movement of illicit income across the border. As with any type of laundering illicit funds, this is necessary to disguise the real criminal source of the money in question, as well as its owners. This can be done within the state borders, but international trade provides more opportunities for such operations. Besides, a perpetrator doesn’t just get their money laundered, they also get it on a bank account in a foreign jurisdiction.
The chief goal of TBML is moving illicit income that needs to look legal (rather than goods) from point A to point B.
The Financial Action Task Force (FATF) experts pointed out in their reports from 2006 and 2020 that this method of laundering of illicit proceeds has not been scrutinized enough. From the FATF 2019 mutual evaluation report.
The ML NRA identifies embezzlement of public funds, crimes related to corruption and abuse of power, fraud in the financial sector, and drug trafficking as the prevalent types of criminal activity with the potential to generate illicit proceeds.
The Russian Federation’s measures to combat money laundering and terrorist financing, FATF Mutual Evaluation Report 2019
In Russia, counteracting money laundering is a duty of the Federal Financial Monitoring Service of the Russian Federation (Rosfinmonitoring). Rosfinmonitoring noted in their report that perpetrators usually invest the money they siphon off abroad into luxury items, into purchasing and renting residential and commercial real estate, and into legitimate business; they also keep this money on deposit accounts in foreign banks. To disguise the real owners of illicit funds, launderers use companies registered offshore.
From the outside, TBML looks like normal international trade. Company A enters into a contract with a foreign Company B involving, for example, medical equipment. It’s impossible to simply pay for the goods by transferring the money from one bank account to another: a bank has to receive documents for customs currency controls from the buyer – company A. The money can only be transferred to the account of company B after the bank verifies the authenticity of the documents and approves the payment. By this time, the goods will have already been shipped to the buyer.

However, if TBML takes place, companies A and B are in collusion, or they can even belong to the same person or organization. The data in customs declarations will be distorted, and goods will never really cross the border. Meanwhile, the laundered money, disguised as payment for the goods, will be sent to the perpetrators’ bank account in another country, where it will be spent to buy a villa, a yacht, or a Claude Monet painting.

Money laundering can be disguised as trading any kind of goods. According to FATF, however, it’s mostly used in the schemes involving:
gold, gemstones and minerals
cars and spare parts
agricultural products and groceries
clothing, second hand textiles
portable electronic devices
building materials
factory equipment
fuel and energy products
FATF clarified that perpetrators often choose the types of goods that are difficult to thoroughly inspect at the customs. This might include large shipments of cheap goods, such as clothing and second hand textiles. The idea is that verifying information in the documents for the entire shipment would take a disproportionate amount of time.

If the goods cross more than one border on their way to the buyer, disguising their origin becomes easier. For the goods with widely varying costs, it’s hard to determine if their price was overstated (or understated) in the documents or not. Finally, precious metals and minerals that were derived illegally are attractive for perpetrators because after laundering they themselves can be used instead of money.
Case 1

A group of Russians siphoned off about 19 million dollars abroad by forging customs documents. Customers of the perpetrators, interested in siphoning off money from Russia, were transferring the money to the accounts of front companies registered to homeless people, as well as to people addicted to drugs and alcohol. Next, these companies imitated importing copper powder and detergents into Russia. In reality, there were no foreign suppliers, and all the documents were forged by the perpetrators.

According to the customs declarations, 40 kg of copper powder cost 168 million dollars, and the detergent cost more than 1.9 million dollars. When the customs caught a whiff of that, a merchandising examination was conducted. It showed that the copper powder’s real price was about 3.6 thousand dollars, and the detergents only cost about 290 dollars. In 2018, five perpetrators were sentenced 7 years and 6 months and a fine of 600 thousand rubles (around 9700 dollars) each under Article 193.1, Section 3 of the Criminal Code of the Russian Federation.
Case 2

From 2012 to 2017, four Peruvian nationals used front companies to purchase from criminal organizations gold that was illegally derived in Chile and Peru. They forged documents to disguise the real source of the metal, which they later sold to a refinery in Miami. Americans were likely aware of where the metal was really coming from, but still paid for it via banking transactions back to Chile.

The organized international criminal group managed to ship 3.5 billion dollars worth of criminally derived gold into the US. This money was laundered. After a joint investigation conducted by the US FBI and the Chilean police, the citizens of Peru were indicted of organizing a money laundering scheme – involving not only illegal mining of gold, but also drug sale, bribery, smuggling and other violations of US customs law. This investigation was the topic of one of the episodes of the Netflix documentary series Dirty Money.
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How big are the Russian budget losses
Reports by Russian government agencies don’t include the precise amount of money that the budget loses annually due to TBML. However, one can indirectly guess the scale of the problem.

In 2016, Accounts Chamber conducted an examination to see how efficiently customs and tax services, The Central Bank of the Russian Federation and Rosfinmonitoring were controlling compliance with currency legislation in 2013-2015. The auditors established that during these three years, around 40 billion dollars was siphoned off abroad through illicit trade.

The Central Bank of the Russian Federation annually publishes a report on the amount of dubious bank transactions. Among these, the Central Bank highlights those that have signs of siphoning off money abroad. Of around 1 billion dollars siphoned off from the country in 2019 via dubious transactions, some were directly related to import. Those were advance payments for imported goods, used to siphon off around 277 million dollars, and importing goods within The Eurasian Economic Union (around 184.6 million dollars).
Article 193.1 of the Criminal Code of the Russian Federation

“Performance of foreign currency or Russian currency transfers to accounts of nonresidents with the use of falsified documents”,

along with the Article 174 of the Criminal Code of the Russian Federation “The Legalisation (Laundering) of Funds and Other Property Acquired by Other Persons Illegally”, is used by law enforcement agencies to prosecute persons involved in money laundering. Starting with 2014, when the Article was introduced to the Criminal Code, it was invoked 178 times, and 108 persons were convicted under it.

*According to data by the Dostoevsky service
How to fight TBML
FATF regularly publishes recommendations for both public and private sectors on how to improve anti-money laundering legislation. Rosfinmonitoring actively participates in FATF’s work and improves its practices in accordance with these recommendations. FATF’s latest report, which is dedicated to TBML, also includes a number of recommendations based on already-existing developments by various countries:
  • Raising awareness
Understanding how TBML schemes work is essential for fighting this phenomenon. This concerns both the government bodies whose duty is to uncover and to stop such crimes, and the private sector: banks, their customers and companies that engage in international trade and might become victims of perpetrators due to lack of information.

In 2018, Rosfinmonitoring published their first national risk assessment of money laundering and terrorist financing. This document, made in accordance with FATF recommendations, describes the risk of laundering of illicit income and clarifies measures that can be taken to mitigate it.
As a result of the measures taken, the volume of cross border suspicious financial transactions has been reduced more than 20 times from about 1.7 trillion rubles to 77 billion rubles in 2017.
According to the national risk assessment of money laundering and terrorist financing by Rosfinmonitoring
  • Information gathering and analysis by financial intelligence units
Financial intelligence units collect a lot of valuable data that might help trace TBML. Mainly it’s suspicious transaction reports (STRs), which various organizations and government agencies are obliged to report when they notice signs of suspicious activity by their customers. The more precise and high-quality such reports are, the more efficiently can financial intelligence units work at investigating various money laundering schemes. Suspicious transaction reports provided by lending institutions, non-financial intermediaries (notaries, auditors and accountants), as well as businesses that are involved in international trade, are especially important.

Information technologies are indispensable while processing large amounts of data by financial intelligence units. Construction of graphs, artificial intelligence and machine learning help analyze information, identify patterns and find data inconsistencies that hint at bogus transactions.
  • Cooperation of agencies within one country
Customs authorities have exclusive access to international trade documents, have deep understanding of traffic of goods, supply chains and structure of import and export. This makes their participation in identifying the products whose sale might be used to disguise money laundering especially important.

Constant growth of international trade increases the burden on custom services. To help them efficiently counteract money laundering, it’s reasonable to create special departments within their structure that would fight money laundering.

Automatic data exchange between agencies and coordination of their actions help discover money laundering schemes. This would also suit the interests of law enforcement agencies: behind each attempt to launder money, there is a predicate offence whose profits the perpetrators are now trying to launder.
  • International cooperation
To fight international TBML schemes, it’s very important for competent authorities of different countries to cooperate. Dynamic exchange of information and experience as well as creation of interdepartmental groups help discover all the details of a scheme that goes through several jurisdictions.
In 2017, Russian financial intelligence managed to arrest around 172.4 million dollars worth of assets
Criminals often combine TBML with other methods of laundering of illicit funds, such as using shell companies and straw men as well as transferring money through banks under their control. Therefore, uncovering one element of a crime might lead to disclosing the whole scheme. However, this is only possible with combined efforts from agencies of several countries, as well as well-established dynamic exchange of information between them.

Translation: Nikolay Gorelov
Advocacy and Legal Advice Centre
If you suspect someone has involved in trade-based money launering schemes, please report us
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