Trade-Based Money Laundering: The US Ranks First in Destination for Illicit Money from Latin America

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[1], which results in a loss of billions in revenues, especially in developing nations[2]. The Economist calls it, “the weakest link in the fight against dirty money.”[3] 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.”[4] 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:

Regional Numbers

  • IFFs from trade mis-invoicing has increased on average 9% per year in the region.
  • These IFFs represented 1.8% of the regional GDP and 3.1% of total foreign trade.
  • CEPAL estimates that trade mis-invoicing represented US$ 101.6 billion in 2013.

Country Highlights

  • IFFs from mis-invoicing is mostly focused on the large economies in the region, with the exception of Costa Rica. Costa Rica represents 1% of the regional GDP, but almost 8% of total outflows of IFFs and the
    third largest in volume.
  • Mexico has the highest volume of IFFs. In 2013, Mexico represented US$48 billion in illicit flows or 48% of total outflows of the region. Brazil places second with a total of US$18 billion, equivalent to 18% of the total outflows of the region.
  • The main destination of outflows of illicit money is the United States, with 38% of accumulated total from 2004 to 2013, and China, with 19% of the accumulated total. Not all dirty money flows out of the region. For example, Mexico and Brazil are also destinations of IFFs from other countries in the region.

Sector Highlights

  • Mis-invoices are concentrated in two main production chains: electronics and automobiles.
  • Costa Rica and Mexico have elevated volume of outflows of IFFs given the involvement of both countries in global chains of production: semiconductors, electronic machinery and automobiles.


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)[5].

  1. Training programs for competent authorities: Countries should offer specific programs to educate all authorities that deal in trade-based money laundering. These include: customs agencies, law enforcement agencies, financial intelligence units, tax authorities, prosecutorial authorities and banking supervisors. These programs would improve their ability to collect and use data to identify and investigate these types of cases. For countries with reduced budgets for trainings, multilateral organizations could provide technical support. Ideally these programs would include the participation of foreign experts, as well as the use of new technologies that assist in identifying and investigating cases.
  2. Awareness programs for the private sector: These is still limited knowledge and awareness on the extent of the issue in the region. Countries can include more information on this issue into their presentations, workshops and seminars. It is important for government officials to talk about how trade finance is vulnerable to this type of abuse, the impact on economic development as a result of de-risking and how the private sector has a role to play.
  3. Require financial institutions to include trade-based money laundering in their internal training programs: Not only include this issue into their internal training, but create mechanisms for feedback from the private sector on their challenges on this front and how they have handled trade finance cases.

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