Trade-based money laundering, typically through trade mis-invoicing, has become the main vehicle for illicit financial flows (IFFs) around the globe. This form of money laundering involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs. Global Financial Integrity (GFI), the non-profit research and advisory organization focused on illicit financial flows studies, estimates that 87% of IFFs are due to fraudulent trade mis-invoicing, which results in a loss of billions in revenues, especially in developing nations. The Economist calls it, “the weakest link in the fight against dirty money.” Latin America and the Caribbean is a focal point for inflows and outflows of this particular type of financial crime. Given that trade based money laundering is a significant issue, let’s take a look at the details to better understand how to reduce illicit financial flows.
Trade Mis-invoicing in Latin America and the Caribbean
As a hub for the latest corruption scandals (check out our previous Accuity insight blogs on the Panama Papers and the Odebrecht scandal), it is no surprise that the region presents high levels of trade-based money laundering. The Economic Commission for Latin America and the Caribbean (CEPAL) released a study in 2017 called “Illicit Financial Flows in Latin America and the Caribbean.” This is an extremely important piece of research given the scarcity of detailed information and data on the issue. Data presented in other studies do not go to the required level of analysis to truly understand the issues. Reports like these present vital data for enforcement authorities and policymakers.
Here are some highlights of the data from 2004 to 2013:
The Role of the Public Sector in Reducing IFFs
Studies like this one organized by CEPAL and others, such as GFI, are important policy-making tools to identify sectors and destinations that generate the largest outflows of illegal money. This is essential information for designing public policies to reduce tax losses caused by this phenomenon.
These are three main public policy recommendations that governments could adopt to curb the increases in trade-based money laundering. Some of these recommendations are also endorsed by the Financial Action Task Force (FATF).
Your Company’s Role in Reducing IFFs
The private sector, principally financial institutions, has a vital role in the detection of trade-based money laundering. As such, the business community has to evaluate how effectively it can identify the risks associated with trade finance activities as well as the adequacy of mechanisms to handle it.
Understanding how IFFs circulate in Latin America and the Caribbean is essential for businesses involved in financing or participating in trade. More and more businesses in this line of work need trustworthy intelligence and tools to complete due diligence checks and, therefore, reduce IFFs.
Trade finance has traditionally relied on manual processes, but the need to meet the highest levels of compliance and customer service in an operationally efficient way has encouraged rapid automation. Automating screening processes is now a high priority for banks and companies. Trade-based money laundering is a complex phenomenon that can only be prevented by applying best practices, identifying high-risk goods and knowing how to identify “red flag” indicators.
With Accuity, you can complete all your compliance checks in one place. This screening includes vessels, ports and dual-use goods, as well as the companies and banks involved in a trade transaction. Businesses can significantly reduce the time required to assess a transaction while ensuring you’re compliant with the necessary regulations.
How can Accuity help?
Strong due diligence and risk assessments continue to be critical to protect companies and financial institutions. Identifying these risks is complex and requires good expertise. The use of big data and analytics has become the most reliable solution for accurately detecting risks.
These headlines have increased the perception of risk and companies are focusing on doing proper due diligence and conducting investigation activities.
Online Compliance is an easy-to-use online tool and can be a valuable instrument for your company to have accurate and comprehensive sanctions, politically exposed persons (PEP), adverse media, and enforcement data in a single source.
Author: Carolina Lessa, Director of Government Affairs Latam at RELX