Preventing trade-based money laundering

A 2024 white paper prepared during the current interim government estimated annual trade-related outflows from Bangladesh at $16 billion, equivalent to 3.4 percent of GDP-more than the nation's total yearly health budget.

TBML primarily occurs through mis-invoicing of international trade transactions, or trade mis-invoicing. By fraudulently misreporting the price, quantity or quality of goods, criminals can quickly move substantial amounts of money or value from one jurisdiction to another. Both the importer and the exporter are usually involved in such misrepresentation. TBML also takes place when parties over- or under-ship goods. This includes "phantom shipments," where no product is moved at all. By overstating or understating the quantity of goods shipped or services provided, the buyer and seller can transfer value at the time of payment. Another common method is multiple invoicing of goods and services. This technique involves re-using existing documents to justify multiple payments for the same shipment. Parties engaged in multiple invoicing often use several financial institutions to increase the complexity of the transaction and make detection difficult.

The extent of TBML is a serious concern. The Global Financial Integrity estimated the gap between developing and advanced economies' export and import declarations at $8.7 trillion for 2008-2017, a figure that indicates the approximate extent of TBML worldwide.

Financial institutions engaged in trade need to be vigilant and implement specific control frameworks to protect themselves from being exploited by criminal actors. Ineffective controls can result in serious consequences: facilitation of money laundering or terrorist financing, regulatory penalties, reputational damage, and even the loss of correspondent banking relationships. From 2019 to 2020, the number and dollar value of AML and Know Your Customer (KYC) fines nearly doubled-from $5.7 billion to $10.4 billion-highlighting the vulnerabilities of ineffective TBML management. In Bangladesh, the problem is even more acute. According to the National Board of Revenue, nearly 75 per cent of domestic money laundering occurs through trade channels.

To combat TBML, financial institutions should adopt several measures: conduct risk assessments to identify vulnerabilities based on sectors and jurisdictions; adopt robust due diligence procedures on customers and third parties, including ownership structures, to identify complex arrangements that signal TBML; screen customers and third parties using national and international regulatory and reputational risk analyzers; and provide regular employee training across the organization. A Bangladesh Institute of Bank Management (BIBM) study further recommends establishing a Trade Transparency Unit that combines customs and BFIU data, publishing a public beneficial ownership register, and expanding KYC/AML duties to freight and warehouse operators to help curb TBML.

Anwar Faruq Talukder

Economic Analyst

anwarfaruq@yahoo.com