Sarah had been a teller at a branch of a large financial institution for 6 years. Nothing about the paperwork seemed right that morning — the invoices did not match the shipping documents, and the business owner’s sudden interest in importing luxury watches from overseas raised red flags she could not ignore. Thanks to her recent anti-money laundering training which included a microlearning course on trade-based money laundering, she knew exactly what steps to take next.
Stories like Sarah’s are becoming increasingly common across Canada’s financial landscape, as criminal organizations, particularly drug cartels, devise more sophisticated methods to wash their illicit profits through legitimate trade channels.
The recent RCMP assessment has pulled back the curtain on a troubling reality: Canada’s trade system has become a preferred vehicle for international money laundering operations. For many AML professionals, the intricacies of international trade might seem like a distant, almost unknowable problem. But trade-based money laundering is a growing threat as it touches every corner of the global financial system, and Canada provides a target rich environment.
Table Of Contents:
- The Threat of Trade-Based Money Laundering
- Why Trade-Based Money Laundering Is Hard to Catch
- How Canada Is Fighting Back
- Challenges and the Modern Landscape of TBML
- Training your frontline and back-office staff
The Threat of Trade-Based Money Laundering
Imagine raindrops falling on the shingles of your roof (not on your head as the song goes). Oh, they seem harmless enough, but water is patient, persistent, and clever in finding the paths of least resistance. And Canada has a leaky roof right now, and we have not done nearly enough to plug the holes that have left us vulnerable. A minor leak today can escalate into a big problem tomorrow, and Canada’s trade system is leaky and has emerged as a hotspot for international money laundering, impacting the global financial system. Addressing this vulnerability promptly is crucial, so awareness of the severity of the situation needs to grow.
Real-World Example: The Surrey, BC Case
A recent case in Surrey, BC, illustrates the seriousness of the problem, where the civil forfeiture office is pursuing legal action against an alleged drug trafficking operation.
Three individuals residing in a $2.2 million home were reportedly in communication with the Sinaloa Cartel . Court documents indicate their interaction was with Ismael “El Mayo” Garcia, an alleged high-ranking leader within the organization.
Mexican passports are displayed on Wednesday, Nov. 13, 2024. (Ben Nelms/CBC)
How Cartels Use Trade-Based Money Laundering
The Canadian Border Security Agency (CBSA) acknowledges the daily occurrence of trade-based money laundering in Canada, particularly in major cities. The full scope of the issue remains largely undisclosed.
The Surrey case reveals several methods, including direct communication with the head of the Sinaloa Cartel, aimed at importing cocaine from Mexico to Canada.
Beyond the real estate component, authorities are seeking forfeiture of numerous assets allegedly purchased with illicit proceeds, including six vehicles, a vintage 1950 Ford, four motorcycles (three customized), an Azure boat, jewellery, and more than $15,000 in cash. The group also potentially utilized front companies to purchase goods using funds derived from criminal activities.
The group altered customs documents which involved modifying the declared values or descriptions of the traded products.
Other Tactics
- Wire transfers: Payments for imported and exported items provided justification for the rapid transfer of illicit funds.
- Phantom Shipments: Money was laundered in transactions where goods might not have existed.
- Multiple Invoicing: A single shipment might have been accompanied by multiple invoices, while the payments remained disproportionately large.
They likely utilized the Black Market Peso Exchange for currency conversion, while also leveraging cryptocurrency transactions. The Financial Crimes Enforcement Network regularly provides insights into such activities.
Laundered money was allegedly used to acquire various properties and assets. This further facilitated the washing of illicit funds, making them appear legitimate.
Chinese Underground Banking
The group collaborated with Chinese money launderers who managed significant amounts of drug money in U.S. dollars, particularly around the Los Angeles area.
They strategically structured assets to circumvent FINTRAC reporting requirements, employing sophisticated methods. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) plays a critical role here.
Why Trade-Based Money Laundering Is Hard to Catch
Trade-based money laundering poses a challenge due to its diverse nature and varying methods across different regions. TheAsia/Pacific Group on Money Laundering (APG) addresses these challenges.
As technology advances, criminals adapt, making the detection of trade-based money laundering an ongoing and difficult battle. Constant vigilance and adaptation are necessary in this fight.
How Canada Is Fighting Back
Despite the challenges, measures are being taken worldwide, including in Canada where Fintrac has proposed amendments to regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
Traders may soon be required to report imports and exports to the CBSA . This measure aims to enhance the detection, prevention, and deterrence of trade-based financial crimes, including TBML.
Better Tools Are Needed
Leveraging technology to automate the identification of red flags is essential. Automation should be widely adopted to bolster our defenses.
Beyond technology, educating staff is vital in preventing TBLM in your financial institution. Comprehensive training programs are critical for empowering personnel.
Staff must receive thorough training to effectively identify suspicious indicators of money laundering.
Microlearning courses prove valuable as they provide focused knowledge to help identify specific areas of vulnerability, like trade-based money laundering.
How did this trade-based money laundering scheme work?
The scheme allegedly employed by the Surrey, BC-based drug trafficking organization (DTO) involved several sophisticated methods:
- Direct cartel connections: The group reportedly negotiated directly with Ismael “El Mayo” Garcia, the reputed head of the Sinaloa Cartel, to arrange cocaine importation from Mexico to Canada.
- Use of front companies: The DTO likely used complicit import/export companies to purchase goods destined for or coming from Canada using proceeds of crime
- Customs document manipulation: The group allegedly manipulated customs documents by fraudulently overvaluing or undervaluing goods, as well as potentially altering weights and descriptions.
- Wire transfers: The import/export of goods created a pretext for the criminal syndicate to wire funds as “payment” for said goods at source or destination
- Phantom shipments: In some cases, money was laundered with no physical goods being shipped.
- Multiple invoicing: The scheme may have involved issuing a single invoice but receiving multiple payments.
- Black Market Peso Exchange: This method was likely used to facilitate currency exchange between pesos and dollars.
- Cryptocurrency: The group allegedly used cryptocurrency transactions to move drug money.
- Real estate and luxury purchases: Laundered funds were used to buy property, luxury items, and pay for tuition.
- Chinese underground banking: The DTO partnered with Chinese money launderers to process large amounts of drug proceeds in U.S. currency in the Los Angeles area.
- Structuring: The group allegedly structured assets to avoid federal financial reporting requirements.
Criminals persistently seek out vulnerabilities and opportunities. Trade-based money laundering schemes adapt and evolve over time and vary between countries.
Maintaining awareness is crucial in combating the flow of illicit funds through legitimate trading networks. TheFinancial Action Task Force (FATF) provides guidance on combating these schemes.
Challenges and the Modern Landscape of TBML
If it were so simple to catch, it wouldn’t be an estimated multi-trillion dollar problem. It’s worth thinking through *why* trade-based money laundering is so tough to crack. TBML remains an attractive method to place, layer, and integrate criminal proceeds globally. Here is the data supporting the current issues facing law enforcement:
“Trade-based money laundering activity varies between regions, as they adapt to different law enforcement practices and the existing regulatory environment. As technology becomes more sophisticated, so too, organized crime and terrorist financiers (such as those present in some Middle East and African countries), evolve to their TBML methodologies, which makes identifying their movements increasingly difficult.
Training your frontline and back-office staff
Technology is not enough. Financial Institutions need to focus on educating frontline and back-office personnel about TBML. If employees don’t know what trade-based money laundering is and looks like, they will not be able to spot it. Frontline and back-office employees can sharpen their focus to detect TBL schemes and protect their communities.
Tamlo International has designed a library of microlearning courses, including one focused on trade-based money laundering. This could be a valuable addition to your annual training. These microlearning courses provide key insights to safeguard client’s as well as your financial institution by identifying and reporting suspicious indicators.
Remember: trust your training! If something seems unusual, take the extra time to dig a little deeper.
Conclusion
Trade-based money laundering poses a significant threat globally, affecting not only Canada but also other countries. It is crucial to bear in mind the shared details regarding how this issue manifests in different regions.
Maintain a proactive stance in learning and combating criminal activity. Never assume safety or innocence, utilize available tools, education, and awareness to foster a cleaner economy and society.
ABOUT Flag Financial Crime Microlearning Series
The Flag Financial Crime Microlearning series is designed to keep a broad range of financial crime topics front and centre. This library comprises 48 five- to ten-minute modules that expand learners’ understanding of financial crime. Once enrolled in the library, learners can receive monthly reminders of a microlearning course to review. Notifications come directly to their inbox with a link to jump into the training module, and these sessions are quick and impactful, offering solutions to keep current with regulatory developments, Fintrac operational alerts , and specific financial crime trends.
