One method of laundering illicit proceeds is trade-based money laundering (TBML). TBML often involves multiple currencies, over- or under-invoicing, and purchase of goods. The basic premise of a TBML system includes the purchase of a high-value commodity (such as Ford Explorers) with illicit proceeds, and the export of that commodity which will then be sold to the local market. The owner of the foreign currency, owner of the local currency, a broker or middle-man, and complicit exporter are involved in the transaction. Following are brief descriptions of three TBML systems in South America.
TBML exists wherever there are black market currency exchanges, such as Venezuela, Argentina and Brazil. For example, the Brazilian Doleiro system exists because there is little access to foreign currencies. Brazil has a 6% tax on capital inflow, increasing the need for a black market system. Acting officially, many people don’t get their money in time, or cannot provide all of the required documents. The Brazilian Doleiro is most often used for remittances, similar to a hawala transaction.
The Venezuelan Black Market flourishes as Venezuelans traveling abroad are limited to USD500 and internet purchases of USD400. Furthermore, the government of Venezuela can’t keep up with the number of businesses and individuals dealing in US dollars. The shortage of foreign currencies keeps the price of black market dollars at 8 to 10 times the official rate.
In Argentina, citizens are only allowed to purchase US dollars in amounts up to 25% of their monthly incomes. They also can only buy currencies of the country to which they are traveling. Due to this lack of access to foreign currency, similar to the Venezuelan situation, ‘blue’ dollars sell above the official rate.
There are two different ways of calculating trade transactions involved in TBML. Free-on-board, or f.o.b., is the value of goods before they’re loaded on the ship, non inclusive of shipping and insurance costs. Cost, Insurance and Freight, or “c.i.f.”, includes freight and service charges, and is where most of the mispricing in the transaction now occurs.
TBML is very difficult to detect. To identify a TBML transaction, an analyst needs purchase and shipping documents, import and export documents, payment information, analysis of the commodity unit price, and wire transfer activity. Trade and financial data are not usually compared, and it is difficult to compile all of the necessary documents and information to detect a TBML transaction.
However, there are some red flag indicators to keep an eye out for. Any third party payments, use of front companies, and payments for services or shipping charges are indications of a TBML transaction. TBML systems adapt to market needs, and lifting foreign currency restrictions will not stop black markets.