Trade and trade finance play a vital role in global economic activity, but they can also be exploited for illicit financial activities. Trade-based money laundering (TBML) allows criminal organizations to disguise illegal financial transactions within international trade, posing a challenge for financial systems worldwide.
To address this issue, the Asian Development Bank (ADB) launched a pilot initiative in collaboration with the United Nations Office on Drugs and Crime (UNODC) and financial intelligence units (FIUs) from five Asian countries. The program has demonstrated the benefits of data-driven approaches and enhanced partnerships in improving TBML detection and prevention.
Expanding the Scope of Suspicious Transaction Reporting (STR)
Conducted from January 2022 to June 2023, the pilot introduced additional trade-related data elements into suspicious transaction reports (STRs) to enhance the detection of TBML activities. The initiative also included training sessions and facilitated collaboration among key stakeholders. Bangladesh, Mongolia, Nepal, Pakistan, and Sri Lanka participated in the program, representing a range of economic and financial sector landscapes in Asia.
A key objective was to address gaps in the existing STR framework, which traditionally focuses on payment transactions and lacks the necessary trade-specific details to identify TBML risks effectively. The pilot integrated additional data fields, such as TBML indicators, transaction specifics, and trade documentation details, into the STR framework.
This enhanced framework was implemented using UNODC’s goAML software, a widely adopted reporting and analysis system used by more than 70 jurisdictions. This integration facilitated the structured collection of trade-related data and positioned the approach for potential expansion beyond the pilot countries.
Key Findings and Results
The pilot demonstrated promising results, with four out of five participating countries reporting an increase in both the quantity and quality of TBML-related STRs. Sri Lanka was an exception due to economic disruptions in 2022 that impacted financial reporting processes.
- Bangladesh recorded a 148% increase in TBML-related STRs filed by banks, identifying high-risk goods such as capital machinery, high-tax products, leather goods, and IT equipment. Trade routes involving Singapore, the United States, and the United Arab Emirates were flagged for TBML risks.
- Mongolia saw a significant improvement in STR reporting after adopting goAML in late 2022, increasing TBML-related STRs from three over two years to 28 within 20 months.
- Nepal had no prior TBML-related STRs due to the absence of a specific reporting framework. However, between 2021 and 2023, 14 TBML-related STRs were recorded, marking an important shift in awareness and reporting capabilities.
- Pakistan experienced the most significant impact, with a 398% increase in TBML-related STRs. High-risk goods included solar panels, textiles, chemicals, rice, and industrial equipment.
- Sri Lanka initially saw a decline in TBML-related STRs due to economic challenges and the transition to goAML. However, after all 30 banks integrated the new STR framework in early 2024, TBML-related STR filings increased by 156% compared to pre-pilot levels.
Insights from the Pilot
Beyond improving STR reporting, the pilot provided valuable insights into common TBML techniques. For example:
- Mongolia identified discrepancies between contract and invoice data, incomplete documentation, and the use of intermediaries in trade transactions.
- Criminals frequently engaged in under-invoicing to avoid customs duties and taxes while settling outstanding balances through foreign accounts.
- The project highlighted the importance of analyzing trade routes and goods commonly associated with TBML risks.
Strengthening Capacity Through Training and Collaboration
A critical component of the pilot was its training initiatives. Over 700 participants, including bankers, FIU staff, customs officials, and law enforcement officers, received specialized training on TBML risks and trade finance principles. Key aspects of the training included:
- Webinars on TBML red flags and best practices.
- Master classes by international anti-money laundering (AML) experts.
- Case-study workshops focusing on regulatory and enforcement strategies.
The pilot also emphasized the need for stronger collaboration among financial institutions, regulatory bodies, customs agencies, and law enforcement. Workshops facilitated discussions on country-specific TBML risks and strategies for improving inter-agency cooperation.
Future Considerations
The findings from the pilot highlight several areas for ongoing focus in TBML prevention:
- Data Quality: Ensuring accurate and detailed trade-related data remains a priority, particularly for “open account” trade transactions, which lack structured documentation.
- Ongoing Training: Continuous capacity building among financial institutions and enforcement agencies is necessary to keep pace with evolving TBML tactics.
- Regulatory Guidance: Clearer TBML-specific regulatory guidelines from national FIUs would help financial institutions identify and report suspicious transactions more effectively.
- Detection of Trade Mispricing: New technologies could improve the identification of trade mispricing schemes used for TBML.
- Enhanced Collaboration: Cross-sector cooperation among FIUs, customs, and law enforcement agencies is crucial for effective TBML investigations.
- Public-Private Partnerships (PPPs): Strengthening collaboration between the private sector and regulatory bodies would enhance TBML risk management.
- Investigation and Enforcement: Ensuring that STRs lead to concrete investigative and enforcement actions is key to strengthening anti-TBML efforts.
Conclusion
As the global economy continues to evolve, addressing TBML remains an important aspect of financial integrity and trade transparency. The ADB pilot has demonstrated that integrating trade-specific data into STR frameworks, coupled with targeted training and collaboration, can significantly improve TBML detection and prevention.
Continued efforts in data analysis, capacity building, and inter-agency cooperation will be essential in strengthening defenses against TBML, ultimately contributing to a more secure and transparent global trade system.
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