Detecting Trade-Based Money Laundering Through Red Flags
Detecting Trade-Based Money Laundering Through Red Flags
Trade-based money laundering is a method through which financial criminals seek to launder their illicit money by moving funds or value through trade transactions. Understanding the red flags that indicate trade-based money laundering helps in its detection. The occurrence of one or more of these red flags should prompt Relevant Persons regulated under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) to closely examine their business relationship with their customers and report the same through Suspicious Activity Report (SAR) to the UK Financial Intelligence Unit. In this infographic, we will discuss these red flags.
Red flags indicating trade-based money laundering include the following:
Complicated Corporate Structure
Customers with highly complex legal structures with no rationale. Shell companies may also be involved in the corporate structure.
A Lack of or Inconsistent Online Presence
The customer does not have an online presence, or such an online presence is not consistent with the customer’s business. Often, in such cases, the customer’s website may be copy-pasted from other websites, indicating that the customer has no actual knowledge of the industry they purport to be in.
Adverse Media Against the Customer
The customer has adverse media associated with itself, its Senior Management, Beneficial Owners, etc. This adverse media may be related to financial crimes or predicated offences such as fraud or corruption.
Inconsistencies in Invoices and Other Trade
Trade-related documents and invoices have inconsistencies. For example, invoices are not consistent with normal market prices, are misaligned with economic considerations, have vague descriptions, etc. The transaction documents may have missing transactions, and the documents may be counterfeit documents, modified, altered, misleading, etc.
Trade Transactions Are Unusually Complex
Trade transactions may be unusually complex, involve multiple intermediaries, use complicated financial products such as letters of credit, involve multiple shipping routes, etc.
Customer is Associated with High-Risk Third Countries
The customer, its Beneficial Owners, or any of its senior management or branches are associated with high-risk third countries. High-risk third countries are those that have been Blacklisted or Grey Listed by the Financial Action Task Force (FATF).
Customer Registered in Mass Registration Address
A customer is registered at an address that is a mass registration address without reference to a particular unit. Mass registration addresses are places with a large number of post-box addresses, commercial complexes, residential buildings, etc.
Inconsistent Business Practices:
The customer does not have notable trading activities or regular transactions related to employee salaries, operational costs, electricity or rent bills, etc. The customer may also have inconsistencies with respect to its trading volume and number of staff it employs. Customers may also have inconsistencies in their stated address. For example, a customer may be registered at a residential property.
Nominee Beneficial Owners
The customer has beneficiary owners who are nominees and have no real connection to business management, business-related transactions, or trading activities.
Misalignment between Business of the Customer and Trading Activity
Trading activities undertaken by the customer and their stated business operations are not aligned. For example, a customer is selling products that are unrelated to their business operations, the purchases made by the customer do not match their economic profile, etc.
Red Flags Indicating Trade-Based Money Laundering: Concluding Thoughts
The red flags discussed in this infographic can facilitate the prompt identification of trade-based money laundering. These red flags can also be integrated into AML software systems, such as transaction monitoring to enhance detection. Further, incorporating these red flags in staff awareness and training equips employees of the Relevant Persons with the knowledge to be alert and better positioned to identify and report trade-based money laundering.