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Trade-based money laundering – why corporates are targeted


July 2017

Criminals are out to exploit the good standing of your business in a crime worth billions each year. Find out the warning signs of trade-based money laundering in this article, written by Romila Chowdhury, Global Strategic Intelligence Lead, Barclays Financial Intelligence Unit.

You’ve entered into a trade transaction with an agreed buyer – the deal is agreed, all that’s left is for the money to arrive in your corporate account. Once checked against the relevant documentation, you’re ready to dispatch the goods/provide the services.

However, once the payment arrives, you notice it’s not from the buyer with whom you made the agreement; instead, it comes from a third party – perhaps even what appears to be a shell company: one that exists in name only and has no real physical presence, employees or genuine activities – and stranger still, the funds have been sent from a bank account in a completely different jurisdiction.

This is just one of many possible scenarios that may indicate that you’ve been unwittingly drawn into a scheme where criminals are using otherwise legitimate trade activity to launder their illicit money in what is known as trade-based money laundering (TBML). Unknown to you, the funds used for the payment may be tainted by the proceeds of crime.

Scale of the problem

Transnational crime is worth up to £1.5 trillion a year, with the value of global TBML being estimated at hundreds of billions. These funds may be profits generated by organised crime groups, drug traffickers, human smugglers, the proceeds of corruption, or even intended to buy equipment for terrorist-related activity.

Global trade is attractive to criminals for many reasons: its immense scale, multi-layered trade chains and the many legitimate trading processes and structures it presents. It provides ample opportunities to be exploited by criminals. Trade deals can be abused at any point in the process – from the arrangement to trade goods; the financing of the trade; the movement of goods; and even the settlement of accounts.

Appeal of corporate accounts

TBML can be undertaken via different methods. Where global businesses are involved, however, criminals typically seek to exploit otherwise legitimate trade activity and related payments.

The corporate account system allows sellers to extend credit to purchasers and ship goods prior and independently to payment. A widely accepted practice, it is very common to see legitimate payments coming from parties other than the recipient of the goods.

Criminals find this system particularly attractive as it creates distance between them and the improper trading activity: it removes the link between the recipient of the goods and the source of funds through using a third party.

As trade invoices are sometimes settled by a seemingly different legal entity to the buyer, or its parent or subsidiary company, it may be difficult to distinguish between those payments that are genuine and those that are made for illicit purposes. As such, unwitting businesses may become involved in money laundering through their normal corporate-account activities. It is important to be vigilant to this and know how to spot red flags.

Red flags to look out for
The origin of payments made is outside of the UK – in recent cases typically from a bank account in the Baltic region, particularly Latvia, Estonia, Lithuania, Cyprus, Hungary or the Czech Republic.
The payment will normally be made on “behalf” of the buyer company, which is registered in another jurisdiction. In most cases, this will be a shell company.
Commonly, these shell companies are UK Limited Liability Partnerships (LLPs) or Scottish Limited Partnerships (SLPs), incorporated by onshore or offshore company service providers with nominee corporate members. These nominees are located in overseas jurisdictions (such as the BVI, Seychelles, Belize, Marshall Islands, Dominica, Panama, Mauritius or Cyprus) – essentially, jurisdictions with strong secrecy rules.
There are often multiple levels of ownership involved in the shell company – such as being owned by another anonymous company (in turn owned by another and so on). Its registered address will not be a legitimate commercial trading address, instead it could be a residential address, mailbox rental centre, a trust and corporate service provider or an address shared with multiple other shell companies.
It may be that the entity has been set up through an intermediary or introducer contacting a Trust and Company Service Provider (TCSP) or Company Formation Agent. The use of these entities is to add a further smokescreen and they may even be acting as complicit partners in the TBML scheme.
The trading address and the ultimate destination of the goods is unusual, recent cases have involved former Soviet Union states.

Case study

A global corporate retailer received large orders for household appliances. The “buyer” was a collection of opaque business entities, where the company owners’ identities were not immediately clear. Over an eight-month period, around £3.5 million was paid into the retailer’s open account from third party bank accounts in Latvia and Estonia, which settled the invoices. The goods were then exported to trading entities in Georgia, Azerbaijan, Uzbekistan and Moldova. There was no obvious link between the buyer and the entities providing payment. In addition the registered addresses of the buyers and recipients of the goods match.

Upon investigation, these opaque businesses were found to be shell companies, registered in secrecy jurisdictions and to residential addresses with numerous company associations. Many had in place nominee directors put in place through TCSPs. The remitting entity did not have any obvious connection with or association to the recipient of the goods. What had occurred was that criminal funds were used as payments to settle legitimate trade invoices.

How can you help protect your business?

As a trading business, it’s increasingly easy to be caught up in TBML schemes which try to abuse the open account payment system. To avoid your organisation’s unwitting involvement or participation in such activity:

  • Conduct some internet searches – does the buyer have an online profile? You would expect a legitimate trading organisation to have made an online footprint.
  • Is it linked to jurisdictions known to be high-risk (such as those above)?
  • Has the buyer been linked to any negative or adverse news? Suspicious shell companies have been reported on previously in high-profile financial crime cases (eg. The ICIJ, OCCRP or leaks such as the Moldovan Laundromat case).
  • Check street view/maps – does the address look consistent with expectations? Is it a residential address? A residential address that does not appear to have any real commercial purpose may indicate a shell or sham entity.
  • Companies House UK is also another useful resource, and can help you identify any unusual corporate structures and any potential shell company flags. Are there lots of companies linked to the address or the named directors of the company (suggesting nominees)?
  • Consider whether the buyer/transaction is different to those which you would normally engage with, e.g. the buyer’s communication/focus, or the complexity or size of the transaction.
  • Look for discrepancies/errors between invoices and payment details. Consider stating in T&Cs/contract specific payment routings and to be notified when a payment has been remitted by a third party.

What you should do if you are suspicious

If your business is within the regulated sector, you may wish to make a Suspicious Activity Report. More information on this can be found via the NCA website^ (opens in a new window). If your business is not regulated, you should follow your business’ policies and procedures or contact your bank to raise your concerns.

If you have any questions about this article or how you can help to protect your firm from being an unwitting participant in trade-based money laundering, you can call your relationship manager.

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