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.

What is trade-based money laundering?
Trade-based money laundering (TBML) is the process of disguising the proceeds of crime by moving value through trade transactions.

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?
Trade-based money laundering scams take a wide variety of forms. For example, it could be a simple bartering or a commodity-for-commodity exchange. In certain parts of Afghanistan and Pakistan the going rate for a kilo of heroin is a color television set. Drug warlords exchange one commodity they control (opium) for others that they desire (luxury and sports utility vehicles).

Fig.1 Click to enlarge. 

This graph illustrates TBML by invoice fraud. The difference between the declared value of refrigerators upon export from Country A (the dark color), and their declared value upon arrival in Country B (the light color) represents a transfer of value in the form of refrigerators.

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
To move money out: Import goods at overvalued prices or export goods at undervalued prices. To move money in: Import goods at undervalued prices or export goods at overvalued prices It is important to understand that when a buyer and seller are working together, the price of the item can be whatever they want it to be. 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.

Sharing and analyzing trade data
Customs and law enforcement investigations have demonstrated that the most effective way of combating TBML is to analyze imports and exports between countries.

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.

Countermeasures
Every country in the world has a customs service and keeps track of what comes in and what goes out. In fact, in many parts of the world customs duties are the primary source of government revenue. So although there are differences in the way governments gather and store trade data, enough similarities exist to conduct effective analysis and TBML investigations. Such investigations require three basic elements:

1. Access to import and export data. Moreover, if the trade data can be augmented by combining it or overlaying it with other data – such as financial, travel, commercial or law enforcement – following the suspect activity will be further enhanced.
2. The ability to promptly exchange data (adhering to standard international safeguards and privacy concerns) with other countries.
3. Expertise in analyzing and investigating TBML.

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
US law enforcement and intelligence communities agree that one of the most effective countermeasures against organized crime, terrorists, systematic corruption, fraud and many other types of serious crime is to "follow the money trail." In the years to come, using sophisticated data analytics, we will increasingly learn to "follow the value trail."

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.