Reaching beyond banks: how to target trade-based money laundering and terrorist financing outside the financial sector.

• Author: Delston, Ross S.
• Position: The World Conference on Combating Terrorist Financing

Anti-money laundering and combating the financing of terrorism (AML/CFT) measures have succeeded in restricting the two traditional avenues of money laundering, namely, the abuse of financial intermediaries and the physical movement of money across borders. Consequently, international criminal and terrorist organizations have turned to trade-based money laundering (TBML) to conceal and legitimize their funds, as this is a channel that remains relatively untouched by AML/CFT efforts internationally. This abuse of the global trade network has received increasing recognition from the Financial Action Task Force, the international standardsetter, as the next front in AML/CFT. Because TBML methods may be used not only to launder money, but also to finance international terrorism, to facilitate weapons proliferation, and to conceal and transport WMDs, this article proposes a far-reaching solution--that those in the international supply chain be required by law to adopt AML/CFT safeguards to protect their businesses, including filing suspicious activity reports, identifying their customers, and designating an AML/CFT compliance officer.

1. INTRODUCTION

   The international fight against money laundering began in the 1960s, but with the signing of the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances in December 1988, (1) efforts to target money laundering became a major international focus. Since its inception in 1990, (2) the Financial Action Task Force (FATF), an intergovemmental organization formed to help countries combat money laundering and terrorist financing, has focused considerable attention on the role of financial institutions, and, more recently, (3) the physical movement of money across borders. (4) The fight against money laundering and international terrorism in recent years has highlighted a third method by which illicit funds may be transferred across borders: abuse of the international trade system. (5) The FATF has signaled its interest in Trade-Based Money Laundering (TBML) by its publication of a report entitled "Trade Based Money Laundering" (TBML Report) in June 2006. (6) Subsequently, in June 2008, the FATF issued its "Best Practices Paper on Trade Based Money Laundering" (FATF Best Practices Paper), providing more detail about TBML and how to prevent it. (7)

   The TBML Report and the Best Practices Paper (collectively, the FATF Reports) identify TBML as one of the three main avenues of money laundering, (8) and define TBML as the process of legitimizing the proceeds of crime by moving value through trade transactions to disguise their illicit origins. (9) The FATF Reports describe several examples of TBML that have occurred in the laundering of drug profits and terrorist financing. (10)

   TBML can be accomplished in a variety of ways and commonly occurs through the deliberate misrepresentation of the price, quantity, or quality of traded goods. (11) TBML techniques display a wide range of complexity, from simple fraudulent invoicing to the sophisticated integration of the trade in goods into complicated financial transactions that obscure the source of funds. (12)

   With the more traditional avenues of money laundering being increasingly scrutinized, criminals attempting to hide the proceeds of their crimes are turning to other methods of money laundering, including activity in real estate as well as TBML. (13) The stakes are rising as well--TBML may involve not only predicate crimes, (14) such as narcotics trafficking, human trafficking and terrorist financing, but may also disguise the logistical support for terrorist activities, such as the movement of weapons of mass destruction and the materials used to make them. (15)

   Each year, more than twenty million containers enter the U.S. by sea, rail and truck, from foreign countries, including those with porous law enforcement and regulatory regimes. (16) Of those twenty million containers entering the U.S. annually, fewer than five percent are physically inspected. (17) Consequently, this is not just a matter of combating money laundering and terrorist financing, but also of combating terrorism itself and the threats it poses to our national security.

   Whether the FATF will add a forty-first Recommendation to its current 40 (40 Recommendations) (18) or a tenth Recommendation to the 9 Special Recommendations on Terrorist Financing (9 Special Recommendations; collectively the 40+9 Recommendations), (19) has yet to be announced. (20) Moreover, what an additional Recommendation might look like is also unknown. But in order for any new Recommendation to be effective, the FATF needs to go further than it has in the past.

   Any new Recommendation on TBML should encompass not only the financial institutions and designated non-financial businesses and professions (DNFBP) currently addressed in the 40+9 Recommendations, (21) but also all those involved in the international trade supply chain. This includes importers and exporters, freight forwarders, shippers, and air couriers--companies referred to as "traders" in the Best Practices Papery And because most of the largest multinational industrial companies also fall within the definition of "traders," an effective TBML proposal would need to encompass a whole new category of non-financial companies that currently may not be paying close attention to the AML/CFT safeguards embodied in the 40+9 Recommendations.

   If adopted, a new Recommendation should require governments to ensure, among other things, that traders adopt a customer identification program, conduct customer due diligence, increase the scope and quality of record keeping, and file suspicious activity reports or suspicious transaction reports, just as financial institutions and DNFBP must do under current AML/CFT standards. In the United States, this would include the four pillars of an AML program under Section 352 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act): (1) internal policies, procedures, and controls; (2) designation of an AML compliance officer; (3) ongoing employee training; and (4) an independent audit function to test the AML program. (23)

   In order to demonstrate that a TBML Recommendation that imposes new obligations on traders should be added to the 40+9 Recommendations, this article will first highlight the ability of soft law to generate effective coordination in banking and financial issues. From there, the focus will shift to the FATF Recommendations in order to show that the object and purpose of the FATF (24) encompasses efforts to stop TBML. Finally, this article will discuss compliance programs designed to reduce liability for TBML, both under existing AML/CFT laws and regulations, as well as under a new FATF Recommendation or other international action on TBML.

2. THE USE OF SOFT LAW IN THE INTERNATIONAL SPHERE TO COORDINATE FINANCE AND BANKING REGULATION

   International efforts to coordinate finance and banking regulation rely overwhelmingly on the use of soft law to generate common policies. (25) The use of lex ferenda, as opposed to lex lata, (26) serves several important functions in achieving the desired result of international coordination. Among these functions are speed, flexibility, and simplicity. (27)

   Because soft law contains neither explicit remedies nor binding enforcement mechanisms, (28) in areas of common concern, soft law can be more quickly and easily developed than agreements that impose specific sanctions for violations of particular provisions. (29) Furthermore, the lack of explicit remedies or enforcement mechanisms makes soft law particularly well-suited to generate common policies in areas of complex national regulation or new and emerging issues. (30)

   For new and emerging issues such as money laundering, (31) the lack of specific sanctions in soft law can be an asset. (32) Because soft law avoids recourse to litigation over non-compliance, the language and content of soft law provisions do not require the same degree of consensus as hard law; (33) in other words, crafting soft law permits a degree of speed and flexibility unusual for internationally enforceable agreements such as the 1988 Vienna Convention. As a result, soft law allows states to address new and emerging issues while "provid[ing] an opportunity for experience and experiment," which in turn encourages the flow of information among the parties in order to better address the issue and coordinate in the future. (34)

   For issues that already receive national treatment in virtually every country, such as the basic elements of bank regulatory law, both the public and private sectors understandably are reluctant to add another layer of specifically enforceable measures onto an already burdensome and often byzantine system of regulation. (35) By relying on soft law to set international standards for national efforts, the overall aim can be achieved, e.g., the criminalization of money laundering, while the methods by which this goal is accomplished remain open. As such, "compliance may be improved by increasing opportunities to engage in desirable behavior." (36)

   Furthermore, soft law can increase the involvement of non-state actors. (37) "In the area of trade and finance, where the private sector predominates and is the primary target of norms, non-binding instruments, despite their non-binding character, become appealing vehicles through which states can establish expectations." (38)

   Consequently, for an issue such as TBML, which involves both trade and finance and needs to involve a variety of non-state actors, the FATF 40+9 Recommendations can take advantage of the flexibility and range found in soft law instruments to great effect. And although a soft law instrument would preclude certain enforcement efforts that hard law would allow, soft law has been the vehicle of choice in international...