Fraud and money laundering in capital markets is an ongoing problem in the United States, and it is getting worse as the years go on. A report released by the US Government Accountability Office (GAO) suggests that tougher regulations in the financial sector have caused organized crime groups to increasingly turn to trade as a means to hide payments.
The umbrella term for money laundering via trade transaction is Trade Based Money Laundering (TBML) and it is one of the primary means of cleaning money used by criminal organizations. It is believed that over-invoicing for shipments of goods is one of the primary means of TBML.
Statistics show that there has been a consistent decrease in bulk cash seizures in the United States. While some may think this is good news, the lowered numbers actually suggests that this may be due to the increased use of international funds transfers and wires across borders as part of TBML schemes.
The volume of TBML is difficult to determine. However, Global Integrity, estimates it may be worth as much as $2.2 trillion annually. The large volume of trade and the complexities of the transactions work against the limited resources of customs agencies making this an attractive avenue for criminals.
The problem is a global one and includes cash smuggling and use of shell companies for wire and transfer of goods. China’s shell companies are also known to play a prominent role in the wiring and transferring of goods. Narcotics trafficking, financial fraud and money laundering are all prevalent TBML activities.
What is Money Laundering?
Money laundering might sound complex, but it’s actually a simple concept with serious implications. It’s the process of turning cash earned through illegal means—into “clean” money that appears legitimate. Many do this by moving funds through various channels, like shell companies, foreign accounts, or luxury asset purchases, to mask their true source. The goal? To make the money untraceable and usable in the legal economy. Governments and financial institutions worldwide enforce strict laws and tracking systems to combat money laundering, protecting economies from corruption, fraud, and organized crime.
Identifying Vulnerabilities
The GAO has identified open account trading as being a target of primary vulnerability. These are transactions that are handled but not financed by the bank.
Although banks take measures to report suspicious activity, they have limited visibility to the underlying reasons behind the activity. And with open account trading accounting for 80% of international trade processed through financial institutions, the measures they are currently taking are clearly not enough.
While banks apply due diligence checks and carry out standard money laundering procedures, they do not review documents such as invoices, bills of lading or customs declarations in open account transactions. This makes detecting TBML activity nearly impossible. In fact, of the reports of suspicious activity banks filed in 2019, only .2% were related to TBML.
These banks follow Anti-Money Laundering (AML) compliance guidelines that gather intelligence, but they never pull the information together into a meaningful understanding of the risk that is posed. Therefore, many suspicious transactions go unchallenged.
Technology Can Help
Although things look bleak, there is hope in the form of technological advances. Blockchain tools are being used to provide more visible, tamper-proof information across the supply chain. Automation and document digitization review are being integrated as well.
Banks are slow to adapt to these systems, probably due to the cost of replacing legacy IT systems. However, a change is happening slowly but surely.
There is also some progress on the government level as a proof-of-concept study was conducted by the US Customs and Border Protection in 2018 trialing the use of blockchain technology in the process of document submission for cargo entry.
However, in order for technology to succeed, it must be accompanied by an information exchange between different authorities, particularly across national borders. So far, there has been little being done to facilitate these exchanges.
Experts suggest that a shared digital platform could help provide customs official with information on trade transactions in real time. It’s a doable solution but it requires getting the right institutions on board as far as implementation and funding.
The cleareye.ai Solution
Cleareye.ai has a technological solution that can work to minimize TBML and simplify banking.
They offer a Trade Finance Compliance & Screening tool that makes Trade Finance Operations and Sanctions Screening less risky.
Cleareye.ai provides a digital platform that processes transaction documents, performs automated reconciliation against UCP and ISBP rules, and seamlessly integrates with Sanctions Screening and TBLM systems. Its AI capabilities increase productivity by 70%, its flexibility makes it easy for banks to customize systems in adhering to UCP and ISBP rules, and it eliminates false positives and false negatives to minimize compliance check errors.
cleareye.ai also has a Fraud Monitoring & Detection Platform. The platform is powered by advanced analytics and machine learning, and whittles down false positives in SAR created by AML products.
Their learning algorithms use large pools of data and advanced computer patterns to detect patterns that might go unnoticed by data scientists. The technology eliminates problems that may come up when businesses work with a foreign supplier. It cuts down on fraudulent correspondence, data theft, executive and attorney representation, smurfing, mule, triage, micro-segmentation, nested accounts, and more.
TBML has become a huge problem all over the world. Fortunately, there are technological solutions available. It is hoped that these will be successful in reducing cases of fraud and money laundering in capital market space.
