Trade-based money laundering, or money laundering through the supply chain, is a fast-growing threat for any business engaged in international commerce. By changing small details as a shipment moves through various ports, bad actors can launder money through the supply chain itself.
This can be complex to understand if you’re unfamiliar with the concept or new to international trade. So, let’s start with an example of how money laundering can occur within the supply chain.
How does money laundering occur within the supply chain?
Within the supply chain, money laundering can occur through falsifying the price, quantity, or quality of goods, or by falsifying invoices and supporting documents.
Take the following example:
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An item is legitimately valued at £10 per unit
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A bad actor falsifies the invoice and claims the item is valued at £50 per unit
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A co-conspirator “buys” 100,000 units at the inflated price of £50 per unit
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The co-conspirator has “paid” £5,000,000 for an item “legitimately” advertised at that price, therefore making it appear as though the bad actor has received £4,000,000 profit on the items (although no items have changed hands; it’s all been done on paper in an attempt to legitimise the funds)
This is a simplified 4-step example, whereas in reality, the shipment travels through various ports before reaching the final destination. During these port visits, bad actors can falsify documents to alter the item’s price. Port stays also create opportunities to add more co-conspirators to the transaction. Therefore, the seller may find that the ports visited are unusual for the goods’ route.
When using standard AML procedures, one main question is: “Is the final recipient legitimate?” As for the 4 steps above, this falls between step 1 and step 2. The bad actor legitimately buys the item for £10 per unit. The seller isn’t aware of the value change or the co-conspirators being added through the journey to the final destination. The more complex the shipment’s journey, the more chances bad actors and co-conspirators have to change the value of the items and falsify documents.
How AML can fail when dealing with supply chains
For straightforward transactions, onboarding the client correctly and then conducting periodic reviews is enough to ensure the transaction is above board and of no concern for the company. However, this simplified procedure can fall short when dealing with longer supply chains and complex trade ecosystems.
After all, having an AML process that looks like this:
“Customer >> Sanctions Checks >> Accept Payment” is different from a more complex process such as:
“Customer >> Sanctions Checks >> Goods Checks >> Route Logic >> Included Intermediaries >> Invoice Checks >> Accept Payment”.
Each additional step in the second process can create opportunities for the customer to engage in fraudulent activity. If your business uses the standard AML process, it can’t track these additional steps and is likely to miss small changes and inconsistencies, which only become visible when looking at an overall picture of the transaction.
How can you detect money laundering in the supply chain?
When completing traditional AML checks, the customer may appear legitimate, with no risks arising from conducting business with them. However, they don’t show what happens during the journey or how documents can be altered as the journey progresses. Sometimes, the only way to check is to consider everything together.
Your business may fall prey to over-invoicing, under-invoicing, phantom shipments, and multiple invoices for a single shipment. Therefore, if you simply trust that your end customer is legitimate, you may miss all of these red flags.
Managing supply chain risks
There are a few ways to manage risks throughout the supply chain. On the surface, these appear to be traditional AML checks; however, together they provide an overarching view and help you spot issues that can arise throughout the supply chain.
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Supply chain risk assessment: Risk assessments and risk appetite evaluations should be up to date and account for how customer relationships can evolve, including any new risks they may pose.
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Tracking the ultimate beneficial owner (UBO): Although your business has conducted trade with one person, is that person the end client? Intermediaries may have a clean record, whereas the UBO does not. By making the purchase through an intermediary, the UBO can hide their true identity.
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Ensure sanctions data is up to date: Sanctions lists and risk data are always evolving. An individual who conducts business with you may not be on the sanctions list; however, they may be associated with others who are, increasing the risk of doing business with them.