Trade-Based Money Laundering (TBML) is a form of money laundering that uses international trade transactions to disguise the illegal origins of funds. In the UK, businesses—especially those involved in trade finance, logistics, legal services, and accounting—are prime targets for criminal elements looking to exploit international trade systems. Recognizing the red flags associated with TBML is essential for businesses to protect themselves from inadvertently participating in money laundering activities.
Here, we will examine the top 7 red flags for trade-based money laundering that UK businesses must watch out for, along with practical steps to detect, prevent, and report suspicious activities.
1. Over-Invoicing and Under-Invoicing
One of the most common techniques used in TBML is manipulating the value of goods on trade invoices. This method involves over-invoicing, where the value of goods or services is inflated to move illicit funds across borders, or under-invoicing, where the price is deliberately understated to reduce the funds that are declared.
How It Works:
- Over-Invoicing: A company may declare goods as being worth more than they actually are, thereby transferring the difference to an overseas account.
- Under-Invoicing: Conversely, under-invoicing may occur when a company reports lower prices for imported goods, allowing more funds to be funneled out of the UK.
Example:
A UK-based electronics distributor imports goods valued at £100,000 but receives an invoice for £150,000. The extra £50,000 is paid to the foreign supplier and serves as a vehicle for laundering money.
Red Flags to Look Out For:
- A consistent pattern of over-invoicing or under-invoicing in transactions with the same trading partner.
- Discrepancies between the cost of goods in comparison to similar goods in the market or industry.
- Payments made to suppliers that do not align with the goods being traded.
Action Steps for UK Businesses:
- Review invoice details and ensure the pricing aligns with market standards.
- Implement audit systems to check for discrepancies between reported trade values and the goods being shipped.
- Report suspicious invoices to the National Crime Agency (NCA) if over-invoicing or under-invoicing is detected.
2. Structuring Transactions to Avoid Reporting Thresholds
Known as “smurfing,” structuring involves breaking up large transactions into smaller ones to avoid triggering mandatory reporting requirements, such as the £10,000 threshold for cash deposits or certain financial transactions in the UK.
How It Works:
Criminals avoid drawing attention to illicit transactions by dividing large sums of money into smaller deposits or payments, often under the reporting threshold, to avoid scrutiny from financial institutions or authorities.
Example:
A UK company receives a series of payments just under the reporting threshold—£49,000, £48,500, etc.—avoiding the £50,000 threshold for mandatory reporting.
Red Flags to Look Out For:
- Multiple smaller payments from the same party that aggregate to a large sum.
- Payments that occur frequently in close succession and avoid crossing reporting thresholds.
- Unusual payment patterns that deviate from a customer’s usual transaction history.
Action Steps for UK Businesses:
- Monitor for patterns where payments are made just below the regulatory reporting threshold.
- Implement automated systems to flag multiple payments from the same source within a short time frame.
- Report the activity to the NCA if a structuring pattern is detected.
3. Politically Exposed Person (PEP) Risk
A Politically Exposed Person (PEP) is someone who holds a prominent public position and is at higher risk for being involved in corruption or other illicit financial activities due to their access to public funds. UK businesses must be especially vigilant when dealing with PEPs.
How It Works:
PEPs may attempt to use their position to launder money through legitimate business activities or investments. If a business deals with a PEP, it must ensure the legitimacy of the funds and conduct enhanced due diligence (EDD).
Example:
A high-ranking foreign government official seeks to purchase a luxury property in London. Given their public position, there may be a higher risk of corruption or illicit funds being used.
Red Flags to Look Out For:
- The source of funds cannot be easily verified.
- Large-scale transactions involving high-value assets, like real estate or luxury goods, initiated by high-profile individuals.
- The client is unwilling to provide additional information or is secretive about the source of wealth.
Action Steps for UK Businesses:
- Conduct enhanced due diligence on clients identified as PEPs, including background checks, asset verification, and confirmation of the legitimacy of funds.
- Seek approval from senior management before proceeding with transactions involving PEPs.
- Report suspicious transactions involving PEPs to the NCA.
4. Shell Company Transactions
Shell companies are often used as vehicles for illicit activities, including trade-based money laundering. These companies typically have no real operations but are used to obscure the true ownership of funds.
How It Works:
Criminals may create or use shell companies to hide the true source of funds or disguise the movement of illicit money. Transactions involving shell companies are often complex and difficult to trace.
Example:
A UK law firm receives a request to process large payments originating from companies based in tax havens, without any clear business rationale or background for the payments.
Red Flags to Look Out For:
- Transactions originating from companies in high-risk jurisdictions, such as tax havens or countries with weak AML regulations.
- Payments from entities that lack transparency regarding ownership, financial status, or business activities.
- Requests for transactions with no clear commercial rationale.
Action Steps for UK Businesses:
- Verify the legitimacy of the companies involved in the transactions, especially their ownership structures.
- Conduct thorough due diligence on all shell companies and their beneficial owners (BO).
- Report suspicious activity involving shell companies to the NCA.
5. Cryptocurrency Transactions
The rise of cryptocurrencies has opened new avenues for money laundering. The anonymity offered by digital currencies like Bitcoin, Ethereum, and others is often exploited to disguise illicit funds.
How It Works:
Cryptocurrency transactions can be used to convert illicit funds into digital assets, which are then transferred or exchanged for legitimate currency. These transactions are difficult to trace due to the semi-anonymous nature of blockchain technology.
Example:
A UK real estate agent facilitates the purchase of property using cryptocurrency, with little documentation about the source of the digital assets or the parties involved.
Red Flags to Look Out For:
- Large transactions involving cryptocurrencies without adequate verification of the source.
- Requests to convert cryptocurrency into traditional currencies without a clear commercial purpose.
- Use of unregulated cryptocurrency exchanges or wallets that lack KYC (Know Your Customer) checks.
Action Steps for UK Businesses:
- Ensure all cryptocurrency transactions comply with UK regulations on virtual assets.
- Conduct enhanced due diligence on clients using cryptocurrency, ensuring the source of funds is verified.
- Monitor and report suspicious crypto transactions to the NCA.
6. Real Estate Purchases with Cash
Real estate transactions are commonly used for money laundering. Criminals often purchase properties using large sums of cash to hide the origin of illicit funds.
How It Works:
Cash transactions in real estate allow criminals to quickly and effectively launder money by converting illicit funds into valuable assets. These transactions are difficult to trace without proper documentation.
Example:
A client offers to purchase a property in London for £5 million in cash, with no clear explanation of the source of funds.
Red Flags to Look Out For:
- Large cash payments for high-value properties, especially when the funds cannot be traced.
- The buyer’s source of wealth is unclear or unverifiable.
- Transactions that deviate from normal business practices, such as cash payments for properties not usually purchased in cash.
Action Steps for UK Businesses:
- Verify the source of funds before proceeding with real estate transactions involving large sums of cash.
- Conduct KYC checks and ensure the buyer’s financial background is legitimate.
- Report suspicious real estate transactions to the NCA if cash payments are involved.
7. Unusual Client Behavior
Clients exhibiting unusual behavior—such as reluctance to provide identification, suspicious urgency in transactions, or the refusal to disclose business relationships—can indicate involvement in money laundering.
How It Works:
Criminals often display evasive behavior when questioned about the source of funds or the purpose of a transaction. This is especially true when they are attempting to disguise the nature of the transaction.
Example:
A client refuses to provide basic identification documents despite engaging in a high-value transaction, or they request urgent processing of a transaction without a reasonable explanation.
Red Flags to Look Out For:
- Clients refusing to provide necessary documentation or providing inconsistent identification.
- Unusual urgency in completing a transaction, especially when the request seems unwarranted.
- Clients who are evasive or defensive when questioned about the transaction details.
Action Steps for UK Businesses:
- Refuse to proceed with transactions if clients fail to provide required documents or if the behavior is suspicious.
- Report the situation to the NCA via a SAR if unusual client behavior persists.
- Review client profiles regularly and ensure that they match their usual transaction patterns.
Conclusion
Trade-Based Money Laundering (TBML) presents significant risks to UK businesses. By identifying the top 7 TBML red flags outlined above, businesses can effectively detect suspicious activities and implement safeguards to protect their operations. Regularly monitoring transactions, conducting thorough due diligence, and reporting suspicious activities to the authorities are essential steps in preventing TBML. For more detailed training on identifying and reporting money laundering risks, visit ABM Digital Training and take the next step in strengthening your compliance efforts.
