Combatting trade-based money laundering through beneficial ownership and enhanced transparency

The Growth of Trade-Based Money Laundering

The Financial Action Task Force (FATF) defines TBML as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illegal origin or finance illicit activities. As FATF notes in their guidance produced with the Egmont Group: “the aim of TBML - unlike trade-related predicate offenses - is not the movement of goods, but rather the movement of money, which the trade transactions facilitate.”

TBML involves acts designed to conceal or disguise the true origin of criminally derived proceeds so the unlawful proceeds appear to have been derived from legitimate origins or constitute legitimate assets. It is a highly effective way of integrating large volumes of criminal proceeds with legitimate income, and is attractive to organised crime groups because it is hard to detect, track and investigate due to its transnational nature and the complexity of the international trade system.

According to a January 2023 report from Global Financial Integrity, almost any type of merchandise can be purchased to launder illicit proceeds used in TBML schemes. The report found the most common included cars/transportation vehicles (24%), metals and minerals (17%), agricultural products (13%), and textiles (11%). This highlights that entities not regulated for anti-money laundering, such as manufacturers and retailers, can themselves become unwittingly involved in the movement of the proceeds of crime.

Indicators of Trade-Based Money Laundering

TBML uses a variety of methods to launder illicit funds. While relatively simple in nature, these methods can be highly effective. This has been made easier due to the impact on supply through COVID-19 as well as the market distortion through COVID-19 stimuli, the market impact of economic and trade sanctions, in particular those imposed on Russia, and a slowing global economy evidenced across the United States, European Union and China.

Some of the TBML methods include:

1. Over and under invoicing of goods and services - By over or under invoicing the true value of legitimate goods shipped, money launderers can transfer value from one location to another. Both the importer and the exporter are complicit in the misrepresentation.
2. Over and under shipment of goods - Parties can also 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 from one to the other at the time of payment. Again, both the importer and the exporter need to be complicit in order for this type of money laundering to occur.
3. Multiple invoicing of goods and services - This technique involves the re-use of existing documents to justify multiple payments for the same shipment of goods or delivery of services. Parties engaged in multiple invoicing often use several different financial service institutions to increase the complexity of the transaction and make the multiple payments harder to detect.

In October 2022 the TBML in Australia Financial Guide was released by AUSTRAC. It identified the following indicators that relate to a customer’s profile (this is not exhaustive):

• There is no open source footprint of the company or director/beneficial owner
• Adverse media holdings exist on the company or director/beneficial owner
• The customer is a director/beneficial owner to companies operating in seemingly unrelated industries e.g. car export and grain import
• The customer operates a complex corporate structure, which does not make any apparent business sense or the transaction involves the use of multiple shell companies
• Businesses or companies are controlled by the same group of people

The above underscores the importance of understanding the profile of a customer and beneficial owners. 

Beneficial Ownership and Enhancing Transparency

A recent report from the Global Coalition to Fight Financial Crime focussed on TBML in the Middle East and North Africa. The report detailed how front and shell companies play an important role in facilitating TBML by insulating illicit actors from their activities. In the case of anonymous companies, this can include obfuscating the identity of the company’s ultimate beneficial owners. These front and shell companies provide the ability to avoid tax, evade sanctions and move the proceeds of crime cross border.

In November 2022 the Labor Government released its paper regarding ‘Multinational tax integrity and enhanced tax transparency’ in which it announced that it would implement a public registry of beneficial ownership to improve transparency on corporate structures, to show who ultimately owns or controls a company or other legal entity. This followed the Senate Standing Committee on Legal and Constitutional Affairs (Committee) Inquiry into the Adequacy and Efficacy of Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) regime (Inquiry). The Committee made recommendations prior to the May 2022 election, that the Commonwealth Government should pursue a beneficial ownership register.

Presently, under the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 (Cth) a beneficial owner is defined as owning 25% or more of an entity directly (such as through shareholdings) or indirectly (such as through another company’s ownership). This accords with the FATF guidance on ‘Beneficial Ownership of Legal Persons’ released on 10 March 2023, which states that such a threshold should not exceed a maximum of 25%.

Despite the above, it is proposed that the public registry of beneficial ownership will apply a 20% minimum threshold for beneficial ownership, which is generally consistent with existing corporate control and takeover thresholds in Australia. While this creates two different thresholds for beneficial ownership, the public registry will further limit the use of shell companies and other complex corporate structures.

Possible Approaches to Manage TBML Risk

Entities with exposure to TBML (whether regulated or not for AML/CTF) should consider the following to address the potential risks:

1. Conduct a risk assessment to identify vulnerabilities for TBML, based on the sector and jurisdiction(s) in which it operates.
2. Adopting due diligence procedures on customers and third parties, which consider ownership and control, as a means of identifying complex or opaque structures that are indicators of TBML.
3. Screening customers and third parties through regulatory and reputational risk databases.
4. Conducting employee training across all parts of the organisation (e.g. three lines of defence) specific to TBML, and in particular its unique indicators.