A pilot program led by the Asian Development Bank (ADB) has demonstrated a promising new approach to combating trade-based money laundering (TBML). This vast and underreported financial crime enables the flow of illicit funds through the global trade system.
The 18-month pilot, conducted in partnership with the United Nations Office on Drugs and Crime (UNODC), worked with the financial intelligence units (FIUs) of five countries in Asia – Bangladesh, Mongolia, Nepal, Pakistan, and Sri Lanka – to enhance the detection and reporting of TBML activities.
At the heart of the initiative was a transformation of the suspicious transaction reporting (STR) process. Traditionally, STRs filed by banks and other regulated entities have focused narrowly on payment information, providing little detail on the underlying trade transactions that can be rife with money laundering red flags.
In Pakistan, the number of TBML-related STRs filed by banks increased by 398% during this period. Bangladesh saw a 148% jump in monthly TBML reporting. Mongolia and Nepal, which previously received few if any such reports, began identifying dozens of suspicious trade transactions.
These results were thanks to new data fields introduced into the STR reporting system, requiring banks to provide granular information on the goods being traded, shipping routes, corporate identities, and other transaction details that can signal possible TBML schemes. This enriched data enabled FIUs to better identify, analyse, and act on potential money laundering risks.
Some of the most common TBML typologies and red flags identified in the pilot program were:
- Mispricing (over/under invoicing) and quantity manipulation
- Inconsistent or false documentation, including falsely described goods
- Transactions involving related parties, shell companies, and banks
Enhanced STRs also provided richer information to guide law enforcement investigations and prosecutions. Authorities were able to map out common TBML techniques, such as over- or under-invoicing, as well as identify high-risk goods and trade routes susceptible to exploitation by money launderers.
TBML enables the funding of criminal or terrorist activity, either by helping to fund such activity or by moving or hiding proceeds originating from criminal activity. According to the World Economic Forum’s estimate, the economic and tax losses from TBML in developing countries alone exceeded $9 trillion between 2008 and 2017.
Beyond financial costs, this crime has tragic human consequences. In spite of this, TBML remains a low priority for many law enforcement offices. One reason is the convoluted investigation processes, which result from the cross-border nature of the crime and the lack of reliable statistics.
The pilot’s success has prompted calls for broader adoption of the approach. The UNODC has proposed integrating the enhanced STR model into its goAML software, which is used by FIUs in over 70 countries globally.
ADB, meanwhile, is exploring opportunities to expand the program to additional jurisdictions. Their initiative has elucidated the need for tools and cross-border collaboration, in disrupting these illicit networks.
