The proliferation of the trade-based money laundering (TBML) is directly related to the growing complexity of international trade systems, where new risks and vulnerabilities emerge and are seen as favorable among terrorist organizations seeking for the additional sources of funding. The trade system attractiveness for the related fraud activities is associated with increasing amount of international trade flows, particularly observed during pandemic times where local supply in many trade categories was unable to compensate increasing demand requirements of consumers.
As the demand progressed, the number of unprotected foreign transactional exchanges and sporadic financial agreements increased, which were tied to the computerized environments and therefore could be tracked and infiltrated under the lack of underpinning security requirements. Furthermore, it was admitted that the lack of thoughtful verification procedures that promote transparent customs data exchange between the countries also contributes to the emerging risks of TBML during pandemics, when the number of relevant transactions exponentially increased. Considerably, with the increasing number of trade transactions while decreasing involvement of customs agents and controlling authorities, it is easier to simulate legal trade transactions that are poorly controlled throughout the whole supply chain.
The attractiveness of TBML for money launderers is also explained through existing issues of tax avoidance and evasion natural to the contemporary international trade systems. For instance, when the tax rates are differed on the incentives to move taxable income between jurisdictions with high to low tax values, it eventually manifests in either over- or under-invoicing of imports and exports between foreign and domestic organizations. Consequently, the majority of company profits are shifted to the low-tax jurisdictions or affiliates, where the surplus of corporate operational profits eventually attracts attention of money launderers because of the dynamically increasing number of financial operations.
Furthermore, in multinational environment it primarily happens when headquarters source products from the countries with low import duties, which are mostly developing and might have a lack of legal base to protect financial operations from fraud efforts. Eventually, TBML also exploits the vulnerability of companies in protecting user data when maintaining global operations massively, since personal data appears to be linked to the common personal account and integrated with multiple payment systems that do not provide the same confidence in implementing security protocols.
The trade system issues led to the evolution of the following TBML techniques. First, the over- and under-invoicing method is based on misinterpreting the price of good and service resulting into a transfer of a difference value between exporters and importer, where the ‘fair market’ price is considered as a starting point of laundering for both parties. Another approach is having a multiple invoicing, where supply chain activities are associated with different financial transactions received through varying payment methods, while one is often hindered with legitimate explanations of payment terms or similar shipments of the same good.
The over and under-shipment is another fraudulent practice, where the money launderer overstates or understates quantity of shipped goods while being protected by unknowingly involved financial institutions, which is also referred to as ‘phantom shipment’. Finally, the false classification of goods or services provides another advantage for launderers, since upon the delivery completion additional costs such as shipping or delivery time may arise and money recall might require additional costs related to the foreign market exchange.
Money launderers benefits from the discussed techniques in the following manner. The over- and under-invoicing helps to hide the real operations from the audit and accounting representatives and therefore perform financial transactions for personal welfare at a cost of a company. Multiple invoicing allows developing a money laundering networks that operates outside of the taxation and reporting standards, which supports illegal tax avoidance.
The over and under-shipment allows collecting produced goods without actual supply action, which brings the benefits of reselling one to another customer at a different price. Finally, false classification saves the stock of goods and allows manipulating the price of product depending on the market exchange fluctuations.