Combatting TBML Through Collaboration and Technology

R3’s Henry Roxas describes the complexities of trade-based money laundering in Asia and the importance of collaboration to tackle the problem once and for all.

Trade-based Money Laundering (TBML) is an issue that has long plagued the global trade industry. In 2006, the Financial Action Task Force (FATF) released its seminal study that identified TBML as one of the primary ways in which illicit actors launder illegal proceeds.

At the time, the FATF concluded that there are three main methods by which nefarious organisations move money for the purpose of disguising its origins and integrating it into the “clean” economy. These are, namely, through the use of the financial system; through the physical movement of money; and through the physical movement of goods through the trade system.

In that same year, the FATF declared that it had already begun to focus its initiatives on the first two of these methods but that, by comparison, the scope for abuse of the international trade system had received relatively little attention.

It has been over a decade now, and unfortunately, nothing much has changed—the trade finance system is still facilitating money laundering and fraudulent activity. While regulatory bodies and institutions around the world have invested time, research, and hundreds of millions of dollars in AML compliance measures for documentary trade, the amount of money being laundered has continued to rise.

Financial hubs like Singapore and Hong Kong play a pivotal role in facilitating trade flows in the region, however, perhaps predictably, this has also resulted in a heightened exposure to economic crime. In recent years, Asia has been rocked by multiple high profile scandals—including the cases of Hin Leong Trading, Coastal Oil, and the State Bank of India’s Hong Kong branch.

A 2020 report, published by Global Financial Integrity (GFI) which measured illicit financial flows from developing countries between 2008 and 2017 highlighted how five countries—China, India, Malaysia, Thailand, and Indonesia—made up five out of the top ten countries with largest average value gaps, showing how these countries face high risks of trade misinvoicing.

This rise in TBML cases in the region has been driven by a confluence of factors—including highly sophisticated criminal organisations and the sheer complexity of the international trade value chain.

Gaming the system

In 2019, banks spent over USD 180.9 billion globally combating fraud, yet more than 95% of transaction monitoring software alerts show false positives. In the US, a whopping 99.9% of illicit actors get away with money laundering—which means that only 0.1% of bad actors are successfully intercepted by financial institutions or law enforcement. In other parts of the world including some Asian countries, this success rate might be even slimmer.

Why is the apprehension of these malicious actors so elusive? First, as criminals constantly look for novel and innovative ways to exploit loopholes in the system, TBML has proven itself to be a method that is increasingly utilised by wrongdoers to move money across borders without being identified.

Some examples of creative schemes used by trade-based money launderers include over and under-invoicing, multiple invoicing, phantom shipping, and quality misrepresentation. These schemes are revised regularly, in a bid to outpace changing regulatory and security standards.

Second, the world of international trade is complex. Different industries present a multitude of trading opportunities, which, in turn, creates greater variation when it comes to TBML typologies. There are also a countless number of actors involved in trade processes—such as importers, exporters, importer banks, exporter banks, freight forwarders, insurers, inspectors, document couriers. These actors handle multiple paper-based documents like bills of lading, invoices, certificates of origin, order forms, and the like—all of which change hands numerous times, complicating the AML process.

With this in mind, it is plain to see how financial institutions have limited visibility of the physical supply chain. Entities might not be able to verify the legitimacy of documents provided, or key details such as whether the price, quantity, quality, and weight of transacted goods are accurate.

In instances where multiparty collusion occurs, documentation shared by parties might be consistent, making it difficult for compliance to detect anomalies. Furthermore, the immense volume of trade flows in and out of the APAC region have enabled criminals to reintegrate illegal funds back into the economy with relative ease.

These factors come together to make it easier for illicit actors to embezzle money and harder for authorities to pinpoint suspicious activity.

Collaboration and technology are key

The fact that the trade process is so complex strengthens the case for an end-to-end solution. This can potentially take the form of a platform where all parties (both private and public) along the value chain collaborate—sharing relevant data, standardising digital documents, and monitoring for red flags.

In this respect, emerging technologies such as blockchain, Internet of Things (IoT), artificial intelligence (AI) and machine learning (ML) serve as viable methods to enhance compliance processes and bring greater cost savings for parties involved.

The industry requires a solution that guarantees transparency, security, and automation of the traditionally paper-based trade, and blockchain technology is in a sense built to simplify complex trade processes.

Blockchain ensures that records are encrypted and immutable—eradicating the need for man-hours to consolidate and reconcile data. The technology is also able to scale and process millions of transactions.

One such example is the Spunta Project in Italy. The project, created by ABI Labs, was built to enhance interbank data transfers and settlements, and began trialling interbank transfers on R3’s Corda in 2018. Today, over 100 Italian banks (91% of the nation’s banks) have been on-boarded onto the blockchain, and the number of processed transactions is expected to exceed 350 million by the end of 2020.

Meanwhile in Asia, DBS and Standard Chartered have carried out a PoC for a digital Trade Finance Registry (TFR). The TFR was built on blockchain, enabling participating financial institutions to tap into a secure database that houses “records of trade transactions financed across banks in Singapore”.

In addition, blockchain can be paired alongside other technologies like IoT devices, to create powerful solutions that address issues throughout the trade process. As an example, the Bunker Delivery Note is a document that contains details of fuel oil delivery and is used by financial institutions to determine the validity of transactions. IoT can be used to monitor the bunkering process and generate bunker delivery notes that can then be stored on the blockchain and shared with authorised parties, bringing greater security to traditional ways of working.

The future of the bunkering industry 

As aptly summarised by Singapore’s Senior Minister of State for Transport and Foreign Affairs Chee Hong Tat, at a Future of Shipping webinar, “digitalising the shipping industry can enhance global trade, but it will require stakeholders around the world to cooperate”.

The nature of trade is never domestic, and thus, it is imperative that stakeholders throughout the supply chain and across the globe take strides towards going digital and collaborating to curb the threat of TBML.

TBML is a profound weakness in current financial systems, and has served to facilitate countless illicit and illegal activities. As a result of its leading role within the international trade economy, the APAC region has a substantial stake in helping to eliminate the opportunities for would-be-wrongdoers to game the system and launder “dirty” money.

It is time that regional actors speak seriously about cross-collaboration and tackling this problem once and for all.

Henry Roxas is Head of Trade Finance at R3.

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