Fighting terrorist financing with analytics
Former US Treasury Special Agent John Cassara on an effective fix for trade-based money-laundering
By John Cassara
Shortly after 9/11, I had a conversation with a Pakistani businessman involved with the criminal underworld and the "gray" markets of South Asia and the Middle East. He said, "Mr. John, don't you know that the criminals and terrorists are moving money and transferring value right under your noses? But the West doesn't see it. Your enemies are laughing at you."
I had spent much of my career as a Special Agent for the US Treasury Department conducting investigations in the areas of the world where many of our adversaries operate. His words infuriated me because I knew he was right. I knew firsthand that our enemies were taking advantage of what the late Osama bin Laden called "cracks in the Western financial system." One of the primary cracks is trade-based money laundering. It involves the transfer of value via commodities and trade goods. In addition to customs fraud, trade-based value transfer is oftentimes used to provide "counter-valuation," or a way of balancing the books in many global underground financial systems – including some that finance terrorist activities.
As long as parties in an international trade transaction don't get too greedy and cause noticeable trade anomalies, their chances of detection by bankers, customs services, law enforcement and other authorities are miniscule.
What is trade-based money laundering?
According to the US State Department, this practice has reached "staggering" proportions in recent years. Although the problem is difficult to quantify precisely, TBML is found globally, including in the US.
In fact, some experts believe the majority of US money being laundered abroad is moved out of the country via undervalued exports. The Treasury Department estimates that the Black Market Peso Exchange, a TBML method found in the Western hemisphere, launders billions of drug dollars every year.
How does TBML work?
Fig.1 Click to enlarge.
However, money laundering through simple invoice fraud and manipulation is most common. The key element of this technique is the misrepresentation of the trade good in order to transfer value between importer and exporter. The quantity, quality and description of the trade goods can be manipulated. The shipment of the actual goods and the accompanying documentation provide cover for payment or the transfer of money.
Invoice manipulation made simple
Sharing and analyzing trade data
For example, this diagram shows the fluctuating value associated with thousands of refrigerators exported from Country A to Country B. The dark color represents the declared value of the refrigerators upon export from Country A, and the light color represents their declared value upon arrival in Country B. The horizontal axis represents time and the vertical axis represents value.
In this example, the data came from the respective countries' customs services. Obviously, the declared export price should match the declared import price (with some recognized variables). In this case, the difference between the peaks and the valleys or the difference in price between the dark and light colors (declared imports and exports) represents the transfer of value in the form of refrigerators. In this case, the value transfer represented by the shipments of refrigerators masked the laundering of the proceeds of narcotics.
As demonstrated above, by comparing one country's targeted imports or exports against the corresponding data of another country, trade anomalies can be detected that could be indicative of customs fraud, tax evasion, contraband smuggling or trade-based money laundering. The data could even be the back door into underground financial schemes, including those linked to terror finance. Of course, data analysis will only go so far. Investigations in the field are also needed.
Where we go from here
Bio: John A. Cassara spent more than 25 years as a Treasury Department special agent and is author of several books on money laundering. He also is an industry adviser to SAS Federal LLC.
This story appears in the Third Quarter 2012 issue of