Keeping track of illicit trade

Trade-based money laundering (TBML) is one of the most used methods of money laundering, and one of the most difficult to detect. Yet legislation in the United States (US) and other jurisdictions too often leaves authorities ill equipped to police and identify fraudulent trade.

The review of US Bank Secrecy Act regulations and guidance, on which Sēk Strategies submitted recommendations to the Financial Crimes Enforcement Network (FinCEN) in February, offers an opportunity to take steps to close gaps and address weak spots in the law. These recommendations were made with input from International Trade Alert, Inc.—a research firm led by an early founder of the term trade-based money laundering.

Some of our recommendations are obvious.

There are 9,375 export commodity codes in the 2020 merchandise trade database compared to 19,218 import commodity codes. For example, there are three different code numbers for rubies, emeralds, and sapphires in the import database, while there is only one code number for all three in the export database.

By harmonizing import and export codes, the government could detect “churning” – the practice of importing a product at a high price and exporting it at a low price – which is used to move money out of a country. It would also facilitate better trade data and analysis, and aid successful investigations.

The current number of commodity codes results in an over aggregation of product classifications. An increased number of codes would decrease the use of the classification “NESOI”- Not Elsewhere Specified Or Included, which is equivalent to the term miscellaneous.

The argument that this would lead to an overload of codes does not hold water. The Home Depot or Walmart have significantly more product codes on their systems than the US government has import and export codes. More harmonized codes would lead to more accurate product classification and make it easier for officials to identify over or under invoicing.

At the same time, the law should require financial institutions involved in financing international trade to obtain US Customs documents for pricing information.

In February 2010, FinCEN issued an advisory to inform and assist the financial industry in reporting instances of suspected TBML and concluded by requesting that financial institutions indicate TBML in the narrative section of suspicious activity reports (SARs).

Evidence shows that it is difficult for banks to identify suspicious activities and therefore report suspicious financial transactions to FinCen. Banks often do not have access to the documentation for most of the trade transactions for which they process payments.

Meanwhile, customs agencies often have difficulties identifying fraudulent trade documents which are typically mixed with legitimate trade. We have a chance to tighten rules in a way that will make it easier for customs officials to identify fraudulent trade that facilitates organized crime and costs taxpayers billions of dollars.

There are no excuses for inaction. It’s a no brainer!