Transnational Crime and Developing World report

Global Financial Integrity published a report into Transnational Crime and the Developing World on 27 March 2017, providing a comprehensive breakdown of the various different areas of transnational crime and the estimated value of these activities. In aiming to combat such crime the report also provided a number of policy recommendations.

Of principle concern is the complex shadow financial system that enables the transnational criminal industry, with an estimated yearly value of US$1.6tn to $2.2tn, to operate without being adequately challenged. This network comprises financial institutions, intermediaries and amenable jurisdictions that enable the transfer of funds between parties.

Given the size of such a system, and the myriad of crimes that the GFI report identifies as significant, targeting this shadow financial system was highlighted as a crucial step in combating such activity.

In a press release accompanying the report GFI President Raymond Baker stated that “The fight against transnational crime needs to be redirected to combatting the money the crimes generate. This means shutting down the global shadow financial system that facilitates the moving and secreting of illicitly generated funds. None of this is technically difficult. It is a matter of political will.”

Within this shadow financial system, a key vehicle for moving such illicit funds is trade based money laundering. This is the process by which criminals use a legitimate trade to disguise their criminal proceeds from dishonest sources. The crime involves a number of schemes including:

• under or over-invoicing the value of goods
• moving illicit goods
• falsifying documents
• Hawala payment schemes
• misrepresenting financial transactions, and
• sanction circumvention methods.

The GFI report suggests four main areas that should be targeted at a governmental level, each of which would have a direct impact on the FI business model:

1. ensuring transparency of the ultimate beneficial ownership of each entity
2. flagging financial transactions involving individuals and corporations within “secrecy jurisdictions” and potentially requiring additional documentation
3. tackling trade mis-invoicing by scrutinizing import and export invoices for signs of technical or physical smuggling, and
4. improving interagency cooperation both in respect of general enforcement information but additionally using price databases to investigate suspicious transactions.

With such a rise in criminal activity it is a necessity for Financial Institutions (FIs), and increasingly corporates, to implement proper internal controls and conduct proper due diligence to avoid being used as a vehicle in financial crime.

Furthermore, regulators have become increasingly aware of trade based money laundering methods and given FIs’ principal position within the financial ecosystem, regulators have held FIs responsible and accountable to ensure adequate anti-trade based money laundering procedures.

With a regulatory trend to hold FIs liable merely for failing to prevent money laundering (as opposed to be willing and knowing) and steps by various governments to: improve the reporting of ultimate beneficial owners (such as the UK’s register of “persons with beneficial interests”), increase the scrutiny of the offshore financial network and apply greater scrutiny of financial transactions, the regulatory environment is becoming increasingly hostile.

Regulatory investigations experience tells us that regulators are looking for a culture of compliance. As a result, therefore, FIs should be increasingly aware.

Trade based money laundering is an important consideration in the arena of cross-border trade financing. Simmons & Simmons have been offering training on trade based money laundering and has published a reference guide and glossary on techniques and products in trade finance, including a new chapter on trade based money laundering.