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Banks warned as trade-based money laundering proliferates

Richard Serrano, a retired IRS-Criminal Investigation special agent who is currently the interim head of investigations at Citibank, says the nature of cargo movement allows age-old trade-based money laundering to proliferate, and that banks need to upgrade their customer due diligence checks to prevent the financing of illicit traders.

Speaking at the annual anti-money laundering conference in Kingston, Serrano says that 95 per cent of shipping containers are never opened for inspection, making it easy to disguise value, and causing billions of dollars in lost revenue for governments.

Trade-based money laundering, he said, describes criminal activity that is disguised as cross-border commerce. And it proliferates, he said, because of the size of the global export market, which amounts to trillions of dollars annually in legitimate commerce.

“Statistica issued a report in September 2022 in which they estimate that global export trade totalled US$24.9 trillion,” said Serrano. “That is the reason. Every day there are containers upon containers shipped, and many never get opened to ascertain the nature of the goods inside.”

At Citibank, an American bank with a branch in Jamaica, Serrano currently oversees multiple teams which investigate cases based on subpoenas or referrals.

“Our investigations are global in nature,” he said.

Serrano has been tracking illicit money flows since 1988, including as special agent with IRS-Criminal Investigation, a unit of the Internal Revenue Service, America’s tax authority.

“If you want to be successful in laundering money you have to disguise it in legitimate commerce,” he commented at the annal JBA-JIFS Anti-Money Laundering/Counter-Financial of Terrorism Conference hosted by the Jamaica Bankers Association and its affiliate, Jamaica Jamaica Institute of Financial Services, in Kingston on October 10-11.

But as to how much of the export market is illegal activity, no one can give an accurate number for money laundering via trade, he says.

Finance Minister Dr Nigel Clarke affirmed to the Financial Gleaner, when asked if his ministry had any indication of the scope of the problem for Jamaica, that no data was available and any information would be speculative.

Still, the World Economic Forum has said that trade-based money laundering and associated tax evasion contributed to almost US$9 trillion in financial losses for developing countries over a 10-year horizon, between 2008 and 2017, which averages US$900 billion per year.

But tackling the problem is complicated by various factors, including cross-jurisdiction trade, multinational companies and globalised trade pathways, the think tank says.

Various methods are utilised to cloak the value of cargo, but one of the main routes is said to be mis-invoicing.

“It involves manipulating the invoice to change the value of it. There are a lot of import duties that countries are not receiving because of this,” he said. “They are stealing trillions of dollars, because the real value is not known.”

As example, Serrano cited a report by Global Financial Integrity which found that in 2018, analysis of trade by 134 developing countries with 36 advanced economies found a ‘value gap’ of US$825 billion; while, more widely, the gap estimated for trade between the 36 advanced countries and all of their global partners was US$1.6 trillion in that same year.

“This was an estimate. They were looking at differences on invoices on the shipping side, compared to invoices on the receiving side,” Serrano said of the information documented by GFI. “This is exporting, not internal trade.

“They are not moving money,” he said of the illicit activity. “They are moving value.”

Other methods of hiding value include:

● Under-invoicing, which involves manipulating the price of invoiced items to lower the value of the shipment;

● False description of goods and services, for example, describing five Mercedes-Benzes as five Toyotas; and

● Undershipment, where the price of the goods are correctly stated but the number of units or volume is mis-stated.

To avoid backing such illegal activity, said Serrano, banks must be willing to check every detail and cross-check records.

“Check invoicing. Look at the bill of lading and documentation from the receiving end,” he said, while noting that there are usually more than one actor involved in illicit transactions.

“The key to all of this is that both parties are in agreement as to how these things play out. Two parties are involved, if not more. The seller, the buyer, transporters and the third parties who may be actually funding this,” he said.

“You, as a bank, need to know your customer. When you onboard the client, what information was obtained? What is the structure of the company and who is the true beneficial owner? What type of business is the client involved in? Will the client be doing international transfers and to which countries?”

“If you are exporting to Jamaica, I should see money coming from Jamaica; not Russia or Cyprus. How often and how large will these wire transfers be? This is information which should be sought. You need to constantly monitor their activity, updating KYC to ensure there have been no changes in the business,” he said.

He also advised the banks to adopt a proactive AML approach, in which they screen for unusual activity.

“If you are giving a line of credit and see unusual activity, reach out. Be careful about tipping the client off. Don’t simply ask about transactions you have concerns about. Ask for supporting documentation for every single transaction …,” said Serrano.

“Supporting documentation is not the invoice. It is the bills of lading and the shipping document, the Customs declaration. These prove the authenticity of what is involved.”

However, he cautioned the bankers that not understanding the nature of a client’s activity does not necessarily mean it’s unusual.

“It may be perfectly normal for them. That’s why you have to know your customers and know what to expect of them,” Serrano said.

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