The term ‘money laundering’ is said to have originated from mafia ownership of Laundromats in the US. Gangsters there were earning huge sums in cash by extortion, prostitution, gambling and bootleg liquor. They needed to show a legitimate source for these monies.
Money launderers now resort to the use of apparently legitimate commercial transactions to camouflage their laundering activities. There has been an increasing amount of interest of late in commodity trade-based money laundering. Deception is the heart of money laundering. This is being increasingly used to move the cash proceeds through a process by which the transactions appear very genuine.
Commodity trade-based money laundering has been growing as an alternative remittance system that allows illegal and unaccounted money with an opportunity to earn and move the proceeds disguised as legitimate trade. Increasingly, the domestic commodity trade is being used for bribing politically-exposed persons (PEP) and government officials.
In India, sometimes the task is achieved by purchasing commodities (above the market price, ‘placement’) from a so-called genuine supplier (often a conduit of PEP or relatives of officials), transferring them to another entity where the commodity is sold (‘layering’) and the proceeds are remitted to the intended recipient (‘integration’).
The large companies (with bigger reputation and brands) sometimes use the channels to oblige the powerful. Since the size is often small compared to other genuine transactions, this never gets discovered.
Trade flow volumes have increased significantly as a result of globalisation. Exchange-based transactions in India is also showing double digit growth. Such large trade flows and paper trade growth provide ample channel, through which transactions can be obscured due to the presence of complex transactional structures including foreign exchange transactions, trade finance and co-mingling of illicit funds with the cash flows of a legitimate business.
Global trade is used by larger criminal and terrorist organizations to move value around the world through complex and sometimes confusing documentation, that is frequently associated with legitimate trade transactions. The illicit trades are often blended in with legitimate ones, which make them difficult to single out and the source of their funding hard to trace.
The scope and prevalence of the practice is tough to determine with any precision, but it is clearly on the rise. Values have moved through this process by false-invoicing, over-invoicing and under-invoicing commodities that are transacted in the domestic market (no more restricted to imported or exported commodities).
Relaxed oversights by domestic authorities along with weak procedures to inspect goods and register legal entities provide sufficient opportunity for such activities. Moreover, inadequate information technology systems and lack of adequate coordination and cooperation between regulators often lead to misuse by the launderers.
As money laundering methods become complex and sophisticated, it is necessary that agencies, authorities, investigators and prosecutors alike should equip themselves with the evolving knowledge of money laundering typologies. Instead of just issuing instructions to abide by PMLA (Prevention of Money Laundering Act, 2002), the regulators must equip themselves with the market-based forensic knowledge of such activities.
Investigations have shown that one of the most effective ways to identify instances and patterns of trade-based money laundering is through trade data for anomalies that would only be apparent by examining both sides of a trade transaction. Sometimes commodities being traded do not match the business involved and on other occasions, false reporting provide adequate indicators of trade-based money laundering.
The Economic Times, 28/01/11