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Money Laundering Under the Cover of Trading

Money Laundering Under the Cover of Trading

Faruque Mayeenuddin

Professor John Janowisch of the Department of Finance, Florida University made an interesting remark in an interview with Miami Herald newspaper, The main gate of money laundering is the banking system …………………… by closing this gate government has done a good job but the backdoor, that means, the international trade is open fully. The remark is not only applicable to our country but also the same for other countries of the world. According to the existing laws of our country by money laundering we understand the hiding of the nature of the crime of illegal income, source, position ownership and control. Or for protecting the person involved in committing the offence from the legal system with an aim to helping  in full knowledge transfer to another place, transformation or another hand, sending to a foreign country or bringing to Bangladesh from foreign countries or legally or illegally earned money or property smuggled to foreign countries.

While our banks ensure flawless system to check money laundering locally, then there also remains unprotected the wide road of smuggling money from one country to another utilizing the opportunity of international trade. Although a little bit of success in the efforts of closing trivial gap-holes of the issue of whitening the money through hard cash or cheque in internal process as the scope of sending money secretly through inland and international trade still remains unhindered, this has turned into a desired medium. So it has necessitated extensive planning and program. Because due to the enhancement of the quantum and periphery of trading worldwide opportunity and potentiality of money laundering and smuggling through this process has increased many fold.

As per estimate of World Trade Organization (WTO) the volume of global imports in 2011 amounted to 18 billion US dollars, but by 2013 it increased to 18,300 billion US dollars. In the opinion of the Western Countries the danger of money laundering through smuggling of money has enhanced many times due to the increase of trade of other zones with the Middle East only.

By trade-based money laundering we understand, making efforts for turning illegal money into a legal one through commercial transaction or hiding the source, or attempt to create a source of illegal income through tricky device for making illegal income into a legal one. The three processes (Placement, Layering and Integration) that are generally applied in the money laundering are also used in trade-based money laundering. Here by utilizing the illegal money for the purchase of any commodity it is transformed into asset (placement); afterwards for hiding that transaction one tries to make that illegal income lawful by selling it to others or in foreign countries (layering) and at the last stage by selling that commodity once again one invests in the monetary system with the sale proceeds thereof (integration).

Generally trade-based money laundering takes place through over-invoicing and under-invoicing. From the countries like Bangladesh the key technique of money laundering to the foreign countries is the over-invoicing in the case of imports and under-invoicing in exports. In the opinion of a Washington based organization that deals with the research of illegal money laundering, Global Financial Integrity (G.F.I.) the major causes that are responsible for false invoicing are as follows: Money laundering for giving legality to the wealth earned by the government officials through crime or corruption, evading customs and other revenues by showing less value of the goods imported, availing the advantage unjustly of the monetary or other incentives extended to the exporters against the export of certain goods, laundering of the capital abroad bypassing the prevailing restrictions if any on sending to the foreign countries, etc.

In different reports the organization expressed such an opinion that the trade-based money laundering is the most widely used method for laundering of big amount of money through false invoicing. In this way the money whiteners make attempts to hide the originally earned income by crime through mixing the other legally received incomes. As an example J.F.I. cited the event of Lebanese Canadian Bank of its being merged with the Society General Bank in 2013. The Bank got involved in the layering process by mixing the money of cocaine in Africa with the sale proceeds of cars in Europe by a circle of narcotic smugglers connected with the Hijbullah Group. It is to be mentioned that the Bank paid 10 crore dollar fine to Drug Control Department and other authorities in 2013. Moreover, the Bank had to count a fine of big figures to few more internationally famed Banks including HSBC and Wachovia for the same reason.

In the latest (2004-2013) report of G.F.I. it has been estimated that during this ten years an amount of 7.8 trillion dollars was laundered to the developed countries from the developing world. The most applied processes of trade-based money laundering include false (over-valued or undervalued) invoicing, more/less shipment than the declared excess value, false statement of the goods, fattening of commodity value through more than one invoicing.

It is to be remembered that in its 3 September, 2013 issue in an article, The Economist magazine had dealt elaborately on customs evasion through an open secret under-invoicing, one of the many corruptions in Bangladesh. Drawing attention to the limited concentration of the donor organizations on the corruption, it was remarked in the article that if the quantity of customs that are evaded through under-invoicing could have been resisted, the expenditure capacity of the government would be double so that in every two years a bridge like Padma Bridge could have been constructed with this money. In the article it was said with a quotation from Forest Kookson, the former money market adviser to Bangladesh that if this boisterousness of under-invoicing could have been checked, the tax-GDP ratio of Bangladesh would increase by 1.5 percent whereas although during the last one decade international trade increased four times in Bangladesh, our tax-GDP ratio still stands lowest in the world.

The intergovernmental organization formed with the purpose of prevention of money laundering Financial Action Task Force has advanced directions of long list for identifying trade-based money laundering, for example: 1. Profuse dissimilarities between the details of bill of  lading and invoice and shipment commodities, 2. big difference in commodity value of invoice and market value, 3. difference of the customs declaration with the market value in other documents, 4. incompatibility of export port, shipment terms or description of the commodities with L/C, 5. disharmony of  import goods with the regular business, practice of the exporter or importer or the tendency of importing or exporting such quantity of commodities that does not match usual trade volume, 6. abrupt involvement with high risk bearing articles like defense provisions, chemical materials, crude oil, etc., 7. transshipment of goods without any acceptable excuse (reshipment to a second port), 8.  using big container for a highly negligible valued commodity, 9. highly risky transaction, for example, paying the new seller in advance, 10. paying the value in favor of a third party unrelated to the buyer or the seller or making transactions with a third party, 11. repeated changes in the L/C and extension of time without reasonable grounds, 12. making transactions through a company which exists in name only, 13. making business unnecessarily complicated in the process of goods and value transactions.

The task of keeping watch on such matters does not rest on the bank alone and that is also not possible. But unfortunately although there exists many more organizations and institutions for keeping observation on the trade-based money laundering, till now this heavy responsibility lies with the bank. As a result, as the matter has turned like too much rules, too much violations, the banks are fallen before the face of risk as the guardian of a field only out of many layers of the money laundering process due to the existence of loose preventive system. Truth of this conception appears from a big penalty imposed upon a few internationally renowned banks. In spite of the existence of our rigorous foreign exchange law and other related laws the matter of purchasing assets by a class of people in foreign countries or the process of transfer of money for that purpose is not now a secret practice. A matter of hope is that only a few days back NBR Chairman acknowledged the fact publicly in an interdepartmental meeting that 80% of our money laundering is trade-based. If measures are not undertaken with participation of all quarters in resisting money laundering under the cover of trade, even if the main gate made closed, the rear gate would remain fully unprotected. E

* Faruque Mayeenuddin : Writer and Banker

** Translated into English by The Economy Analyst.