A review of the risks associated with Trade-Based Money Laundering (Under-Invoicing)

In trade-based money laundering, under-invoicing is a method used to move illegal money through international trade. This is done by falsely reporting the value of goods on an invoice, to make it appear that less money is being exchanged than is actually the case.

For example, a criminal organization may sell goods to a company they own in another country at an artificially low price, and then have that company sell the goods at their real market value. This creates the appearance of legitimate trade while allowing the criminal organization to move large sums of money across borders without detection.

In under-invoicing, the invoice value is lower than the actual value of the goods being traded, which creates a difference between the two values. This difference or gap is used to launder the illegal money. It allows the launderers to move the illegal money from one place to another under the guise of legitimate trade.

Red Flags in Under-Invoicing

Here are some common red flags of under-invoicing in trade-based money laundering:

1. Significant discrepancies between the invoice value and the market value of the goods: If the invoice value of the goods is significantly lower than their market value, it could be a sign of under-invoicing.
2. Inconsistencies in pricing: If the prices of goods fluctuate greatly between different transactions or between different suppliers, it could be a sign of under-invoicing.
3. Over- or under-shipment: If the quantity of goods shipped does not match the quantity stated on the invoice, it could be a sign of under-invoicing.
4. Lack of supporting documentation: If there is a lack of supporting documentation, such as bills of lading or packing lists, it could be a sign of under-invoicing.
5. Complex ownership and control structures: If the ownership and control of the companies involved in the trade are difficult to trace or are held by shell companies, it could be a sign of under-invoicing.
6. Transactions with high-risk jurisdictions: If the trade involves countries known for money laundering or other illicit activities, it could be a sign of under-invoicing.

Uniform Customs and Practice for Documentary Credits (UCP) Guidelines on Under-Invoicing:

The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules developed by the International Chamber of Commerce (ICC) that govern the issuance and use of letters of credit in international trade. These rules are widely used in international trade and are intended to provide a consistent set of guidelines for banks and other parties involved in trade finance.

UCP 600 article 16 specifically deals with the requirement of invoice and its authenticity. It states that the invoice should be genuine and not fabricated. The invoice should be issued by the shipper or the exporter or by their authorized representative.

There are several ways in which UCP 600 article 16 can help to prevent under-invoicing in trade-based money laundering. For example, it requires that the invoice be issued by the shipper or exporter, which helps to ensure that the invoice is genuine and not fabricated. The article also requires that the invoice include detailed information about the goods being shipped, such as the quantity, weight, and description of the goods. This helps to ensure that the invoice accurately reflects the value of the goods being shipped.

However, it's important to keep in mind that UCP 600 article 16 is not a regulatory framework but a set of guidelines. It's up to each financial institution to implement the rules and controls in order to prevent under-invoicing and money laundering in their operations. The effectiveness of these rules and controls will depend on the financial institution's ability to enforce them, and on the quality of the training and education provided to the staff who handle letters of credit.

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