Introduction to illicit financial flows and global trade

By Philip TAKYI (Dr.)

Illicit financial flows in Global Trade is a consolidated enlightenment of the advanced world of illicit financial activities, with a particular focus on the insidious phenomenon of trade-based money laundering (TBML).

This article delves into the introduction of complex mechanisms employed by perpetrators to exploit legitimate international trade transactions for the purpose of disguising the illicit origins of funds.

The narrative unfolds against the backdrop of a rapidly evolving global economy, where the financial ecosystems have provided both opportunities and challenges for those seeking to manipulate the financial landscape.

Through meticulous secondary research and case studies, this article aims to demystify the methods employed in TBML, illuminating the various disguises, trade structures, and financial instruments utilized by money launderers.

The article further seeks to contribute to the ongoing discourse on anti-money laundering efforts, urging stakeholders to collaborate in creating a more robust and resilient financial ecosystem that upholds the principles of transparency, integrity, and accountability.

In addition to showcasing the dynamics of TBML, the study offers a forward-looking perspective, proposing innovative solutions and policy recommendations aimed at fostering the resilience of the global financial system against the ever-evolving tactics of money launderers.

Contemporary dynamics in money laundering

The term “money laundering” describes a range of practices used to disguise the source of illicit profits and integrate them into the legitimate economy. Simply put, a process through which individuals or entities attempt to disguise the origin of illicitly obtained funds, making them appear to be derived from legal sources.

This practice allows perpetrators to integrate “dirty” money into the legitimate financial system, making it challenging for authorities to trace and identify these proceeds (Walker, C., 2018).

According to the Financial Action Task Force (FATF) (FATF, 2006) there are three primary methods of money laundering:

• Via financial institutions and non-bank financial institutions. Generally, the ‘placement’ phase of money laundering involves this method, with criminal proceeds deposited in banks, frequently using ‘structuring’ techniques to avoid arousing suspicion. Financial institutions are also frequently used in the ‘layering’ phase (e.g. through ‘wiring funds to multiple accounts in multiple jurisdictions’), as well as in the ‘integration’ phase (e.g. through investing criminal proceeds in the stock market).
• Cash smuggling between jurisdictions. This frequently forms part of the placement phase, with cash physically moved to jurisdictions where it can be inserted into financial institutions in jurisdictions where the risk of detection is lower.
• TBML and other forms of value transfer (e.g. using traditional banking systems such as hawala – a form of informal value transfer compliant with Islamic law, which involves a network of brokers and does not require the movement of cash or telegraphic transfer – which is not covered by this report.

The IMF and the World Bank, for example, have estimated that some 2-4 percent of the world’s GDP stems from illicit sources. (Agarwal and Agarwal, 2004 & 2006), using regression analysis and forecasts, suggest an even higher level of 5-6 per cent.

At this rate somewhere between $2.0-2.5 trillion should flow through the money laundering market on an annual basis. Walker (1999, 2004, 2007) however, claims that this is too low a figure and, using input-output and gravity models, proposes that the true amount is more like $3 trillion per annum.

Each estimate is subject to some criticism (cf. Reuter 2007) and are variously said to be overblown–either by media hype, or measurement errors–by as much as /-20 per cent (Schneider,2008). Despite all this, the consensus remains that the market for money laundering is a significant one.

According to the United Nations Conference on Trade and Development (UNCTAD), Africa loses US$88.6 billion annually to IFFs (Illicit Financial Flows). In the case of Latin America and the Caribbean, the United Nations Economic Commission for Latin America, and the Caribbean (UNECLAC) estimates that from 2004-2013, illicit financial outflows represented 1.8% of regional gross domestic product (GDP) and 3.1% of regional trade, with losses totaling US$765 billion for the 10-year period. Ultimately, IFFs undermine institutions, contribute to insecurity, harm communities and the environment, and deprive countries of much-needed tax revenues.

One of the most prevalent channels for IFFs is through the international trade system. As of 2021, GFI (Global Financial Integrity, United States) estimates that the annual value of trade related IFFs in and out of developing countries amounted to, on average, about 20 percent of the value of their total trade with advanced economies.

The global value of money laundering is frequently quoted as being in the order of 2–5% of global gross domestic product (GDP), which would imply a figure between US$800bn and US$2tn annually.

This ‘consensus estimate’ gained popularity following a 1998 speech by the IMF director general (Camdessus, 1998) and later studies have provided similar estimates (e.g. UNODC, 2011). While this figure appears plausible, it is important to acknowledge that the evidence underpinning it is inevitably highly limited, making it little more than a reasonable best guess. Moreover, this figure may not include TBML (Cassara, 2020)

There is a fine line between TBML and other money laundering methods and in practice, they often overlap. TBML may also result in evasion of income tax and excise and involve other financial crimes, although tax evasion may not be the primary objective. For clarity of analysis and to assist in the understanding of TBML and its ramifications.

Conclusion

Trade-based money laundering (TBML) is a complex and dynamic challenge that requires ongoing research and practical solutions to enhance our understanding and counter measures against this illicit financial activity. This article makes significant contributions to both knowledge and practice in the field of TBML which is essential for developing effective strategies to detect, prevent, and combat this form of money laundering.

Additionally, one of the significant highlights is the need for stakeholders to ensure practical solutions include capacity-building initiatives for law enforcement agencies, financial institutions, and customs authorities. It goes without mentioning that capacity programs can equip professionals with the knowledge and skills needed to effectively detect and develop futuristic anti-money laundering tactics to combat TBML.

Beyond the need for policy amendments, the article establishes and suggests public-private partnerships (PPP) as crucial in practice. Conferences, workshops, and collaborative initiatives bring together government entities, financial institutions, and businesses to share information, expertise, and best practices in combating TBML.

About the Author                                                

Dr.  Takyi, a seasoned Financial Security Expert and SBS Swiss Business School -Switzerland graduate, with over 20 years of experience in safeguarding financial assets, corporate governance, and risk management. A Fellow of several prestigious institutions, including the Chartered Institute of Leadership and Governance (USA), Forum for Democratic and Accountable Governance, and the Chartered Institute of Financial and Investment Analysts (Ghana), he is a recognized authority on financial security, fraud prevention, and digital transformation. www.linkedin.com/in/drphiliptakyi2020

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