Money Laundering Techniques #6 - Trade based money laundering (TBML), The art market & Cuckoo smurfing

Once a month, let's discover new money laundering, terrorist financing and fraud techniques as well as ancestral methods. ??

On today's menu we have:

? Trade based money laundering (TBML), one of most efficient ML techniques out there

?? The art market, a great way to launder money and avoid taxes

???? Cuckoo smurfing, an ingenious method to avoid suspicion

I hope you will like it and do not hesitate to contact me ?? if you have any suggestions for changes in the format or topics to cover. Enjoy your reading! ??

Trade based money laundering or TBML ?

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?? TBML is one of the most commonly-used, and one of the most difficult to detect, methods of money laundering.

According to a study conducted in the U.S. ????, it is even increasing, ironically due to improved compliance by American financial institutions.

For example, the volume of cash seizures has dropped ?? in recent years, most probably because criminal organizations have pivoted to TBML.

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?? The international Financial Action Task Force, or FATF, has identified TBML “as one of the primary means that criminal organizations use to launder illicit proceeds.”

Criminal enterprises utilize TBML to disguise the origin of criminal proceeds by integrating it into the formal economy through a trade transaction.

Common forms of TBML include:

?? Over- and under-invoicing goods and services

?? Multiple invoicing of goods and services

?? Over- and under-shipments of goods and services

?? Falsely describing goods and services

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?? Trade transactions are particularly difficult to monitor due to their complex nature and volume.?

Often, banks do not receive trade documents that might indicate whether criminal activity is afoot and trigger a duty to report or investigate further.?

For example, in open-account trade, the transaction is completed between a buyer and seller and the bank’s only role is to submit payment on behalf of its client, which is often done through automatic payment systems.?

In such a situation, a bank is often blind to the purpose, intent, and more importantly the documents, underlying the transaction.

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?? The FATF states that the use of trade based money laundering can be expected to become increasingly attractive.

The main reason is that? the standards applied to other money laundering techniques become increasingly effective.

However, there are still ways to detect it, such as:

?? Significant discrepancies in bills of lading

?? Discrepancies between invoices and apparent fair market value of the goods being transported

?? Discrepancies between the shipment and the importer’s or exporter’s stated business purpose

?? The use of potential shell companies ??

There is also hope in new prevention methods like:

?? The retrospective review of data on imports and exports, suspicious financial activity, and legal investigations which can help to identify patterns and anomalies in trade transactions ???

?? The use of a blockchain ?? to improve supply chain visibility and integrity, both for regulatory agencies and market participants

?? The automation of the documents review process for trade finance transactions

The art market ??

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?? Works of art have long been identified as ideal ways for criminals to launder money and wealthy people to avoid taxes.

It is indeed particularly convenient as the industry allows people to anonymously acquire expensive paintings through large cash deals.

Funny story, the Mexican government ???? passed a law in the early 2010s to require more information about buyers, and limit the amount of cash that could be spent on a single piece of art.

The market cratered ??, as sales dipped 70 percent in less than a year.?

Many believed that was because Mexican cartel rings had previously been the biggest buyers in the market.

Nevertheless, it is believed that the amount of money laundered through the art market is still in expansion ?? as regulations on other asset classes, from real estate to foreign exchange, tighten up everywhere.

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?? There are many art related scheme used by criminals to launder money, sometimes even terrorists.

ISIS members have notably been known for their intensive laundering of cultural antiquities. ??

Even after being forced out by the army, the group still controls millions of dollars, possibly hundreds of millions, thanks to this trade.

Here is how the terrorist organization turned these artifacts into revenue:

1?? ISIS affiliated jihadists were finding relics at local digging sites in Iraq ???? and Syria ????

2?? They were selling them at a discounted price to ISIS officials

3?? The goods were then sold to independent middlemen who smuggle them out of the country, into border countries like Lebanon ???? and Turkey ????

4?? Finally, the goods found their way to warehouses in Europe ???? where they awaited Western buyers

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?? Some other methods are more straightforward, such as leveraging the secrecy and tax advantages of freeports.

Criminals can for example buy an expensive painting at an auction and store it in a high security storage space near an airport.

Then, it can be anonymously sold and the original buyer has now money from what is considered a legitimate business deal. ??

In Geneva alone ????, experts estimated that the freeport could hold more than $100 billion worth of art.

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?? Knowing this, there are still people who are opposed to tougher regulation of the sector.

They argued that the art market would suffer if the tracking of sales and purchases was enhanced.

Other schools of thought consider that it would only dry up the illegal transactions and protect honest traders. ??

Cuckoo smurfing ??

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?? Current bank regulations require banks and other financial institutions to report cash transactions exceeding €10,000, sometimes even less, on a suspicious activity report.

To avoid this, criminals use smurfing, a money-laundering technique involving the structuring of large amounts of cash ?? into multiple small transactions.

“Smurfs” often spread these small transactions over many different accounts, to keep them under regulatory reporting limits and avoid detection.

The term "smurf" appears to be borrowed from illegal drug manufacturers, who use multiple accomplices to evade the legal purchasing limits of drug components. ??

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???? The Australian financial crimes watchdog recently issued a warning to the finance sector about a certain local typology called “cuckoo smurfing”.

Money launderers use it to move illegal funds into and out of Australia by leveraging legitimate transactions made between oblivious individuals and businesses.

Most of the time, they partner with a complicit middle-man in order to plant dirty money into a legitimate account without the owner's knowledge. ??

The name is inspired by the cuckoo bird ?? which is known to lay its eggs in the nest of other birds.

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?? The process usually goes like this:

1?? People overseas, willing to transfer funds to Australia, reach out to a financial institution, unaware of of its involvement with an Australian criminal organization?

2?? The financial institution transfers the transaction details (amount, name and account number) to the criminals

3?? Then, they use “smurfs” to make small cash deposits into the destination account, effectively transferring the expected amount

4?? At the same time, the corrupted financial institution redirects the legitimate funds to the criminals’ account, often located offshore ??

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?? The worst part is that if someone detects the cash deposits, it makes it look like the recipient of the funds is the accomplice, which can lead to the account being frozen.

To avoid this, there are several good practices:

?? Closely monitoring consecutive cash deposits to the same account within a short period of time ??

?? Taking into consideration the account owner’s situation (international students are more likely to receive money from abroad)

?? (For individuals) Keeping an eye out ?? for structured payments when you expect a transfer from overseas