Previously, we have discussed the large, though often overlooked, role that trade-based money laundering (TBML) plays in the movement of illicit funds worldwide. Goods ranging from precious metals, to MP3 players to fruit juice can all be instruments in money laundering, terrorist financing and tax evasion. As the FFIEC writes in their BSA/AML Examination Manual, “The international trade system is subject to a wide range of risks and vulnerabilities...with a relatively low risk of detection...The involvement of multiple parties on both sides of any international trade transaction can make the process of due diligence more difficult.”
So what can be done and what tools can service providers like Sigma Ratings bring to the table to assist in these efforts?
For its part, the Department of Homeland Security established a number of Trade Transparency Units to analyze trade data to detect trends and possible cases of TBML. As the name would suggest, increasing transparency in trade is key. In December 2020, FATF released a report documenting the current state of affairs with TBML and highlighted how both the public and private sectors have a role to play in mitigating the risks: “In the context of TBML, these goals [of combating it] could include increasing understanding of vulnerabilities of the trade and financial systems and improving information sharing.”
Analysts, whether at DHS or in a private financial institution, have an important datapoint to rely on in these efforts: Harmonized System (HS) Codes. We have already discussed the importance of HS Codes in safeguarding national security by allowing for tracking of dual-use goods. These six- to ten-digit numbers allow for consistent classification of items in global commerce and assist in statistical measurement, assessment of duties and - most importantly for financial crime management - trade transparency.
Hence, their importance in the fight against TBML cannot be understated. For instance, the use of HS Codes are key in “mirror-gap analyses” that can help law enforcement and researchers in identifying high-risk sectors and products for fraudulent trade activity. For the private sector, these HS Codes can prove vital in Know Your Customer efforts and in using that trade transparency for improved risk management.
As FATF noted in their abovementioned report, the goods used in TBML fit into a wide range of sectors. However, there are certain product categories that stand out, including precious metals, automobile parts and handheld electronics (on the high-value side) and second-hand textiles and foodstuffs (on the low-value side). By combining knowledge of both the countries involved as well as a more granular description of the product, analysts at financial institutions have a much better shot at detecting suspicious activity or catching onto trade document falsification.
At Sigma we are happy to be able to provide data integrations that seamlessly provide trade transparency for our clients. By automatically flagging high-risk goods, clients can have another important datapoint to use in their own, in-house risk rating methodologies. On its own 7108.13.55 (undecorated gold bars) may seem like just a random string of numbers, but we look to bring these digits to life so as to assist in the risk-rating processes at the heart of financial crime management.