The Financial Action Task Force or FATF, is an intergovernmental organization that develops and promotes policies to combat money laundering, terrorist financing, and other related threats to the integrity of the international financial system. One of the key areas of concern for the FATF is trade-based money laundering (TBML), which involves the use of trade transactions to disguise the movement of illicit funds across borders.
To address this issue, the FATF has issued guidance on TBML, which provides recommendations to governments, financial institutions, and other stakeholders on how to detect and prevent this type of illicit activity. The guidance is designed to help countries implement effective measures to identify, assess, and mitigate the risks of TBML, and to ensure that financial institutions have the necessary tools and procedures in place to detect and report suspicious trade transactions.
FATF Guidance on Trade-Based Money Laundering
The Recommendations of FATF require countries to identify, assess, and understand their ML/TF risks and implement subsequent preventative and mitigating measures commensurate with the identified risks.
This could include threats and vulnerabilities linked to trade-based money laundering or terrorist financing. Countries often meet this requirement by developing National Risk Assessments or NRA for ML/TF, some of which are publicly available in full or sanitized form. These are primarily driven by public sector bodies but can incorporate feedback from the private sector as part of the assessment development process. While there are multiple ways of assessing ML/TF risk exposure to create the NRA, a country assesses several different inputs, including intelligence reports, suspicious transaction reports or STRs, threat assessments, investigation outcomes, economic and social indicators, and the level of the threat and existing vulnerabilities.
The overarching theme from public sector contributors to this report was the association of TBML with a range of domestic and foreign predicate offenses. This includes offenses resulting in the smuggling of illicit or restricted commodities, such as drug trafficking, arms dealing, or tobacco smuggling, with Organized Criminal Groups or OCGs and Professional Money launderers or PMLs exploiting the supply chain used to smuggle the goods to launder their criminal proceeds.
TBML schemes are associated with predicate offenses not reliant on commodity smuggling, such as tax evasion. These schemes require the development of new supply chains and financial intermediaries to exploit. These TBML schemes were often multi-jurisdictional, exploiting trade sectors in the originating jurisdiction and impacting others through the exploitation of corporate services.
A handful of respondents referenced both actual and potential Trade-Based Terrorist Financing or TBTF abuse, and this insight is covered later in this section. However, most did not see abuse of the trading system in moving funds to facilitate terrorist acts or on behalf of individual terrorists or groups.
Every country in the world is involved in the trade. TBML or TBTF can therefore occur anywhere. Contributors noted that TBML/TF enabling activities, such as the misuse of corporate structures, can occur in many jurisdictions.
Criminals, including money launderers and terrorists, exploit potential loopholes or gaps. The benefit of the NRA is challenging countries to consider risk exposure in terms of threat and vulnerability.
Having identified and understood the exposure to ML/TF risks, the FATF Recommendations require jurisdictions to use insight to inform mitigating actions and drive effective cooperation across AML/CTF system.
Jurisdictions should adopt a risk-based approach to supervision. In the context of TBML, this might mean financial institutions with large trade finance divisions or significant cross-border payment activity require additional oversight from supervisory bodies to ensure the effectiveness of any threat mitigation strategy. Jurisdictions with specialist company formation sectors and accountancy service providers should also consider the potential for these firms to be exposed to TBML or TBTF, again ensuring the robustness of any threat mitigation strategy.
Overall, the FATF guidance on TBML provides a comprehensive framework for addressing this critical issue, and emphasizes the need for a coordinated and multi-disciplinary approach involving governments, financial institutions, and other stakeholders. By implementing the recommendations set out in the guidance, countries can enhance their ability to detect and prevent TBML, and ensure the integrity of the international financial system.