Is tackling Trade Based Money Laundering (TBML) through stricter reporting regulation the most effective response?

Abstract

Purpose This paper (written in August 2015) aims to discuss the regulatory approach to detecting and preventing trade-based money laundering (TBML) by using the example of Financial Crimes Enforcement Network (FinCEN) and its use of geographic targeting orders. Design/methodology/approach The paper uses both theoretical and empirical reports on TBML to explore whether increased regulation will ultimately achieve the ends it claims to offer. Findings The main findings from the analysis are that increased regulation has been found to have a negative impact on improving TBML detection. There is evidence that it causes an over-defensive response from banks that leads to a decrease in useful information to financial intelligence units. Research limitations/implications The research topic is very new and an emerging topic; therefore, analysis papers and other academic writing on this topic are limited. Practical implications This paper has implications for both the regulatory and the banking/financial service sectors. Originality/value The originality of this paper is the deeper analysis of a specific TBML case, and the focus is on both the theoretical and empirical implications of the approach being used.

Foreign direct investment, anti‐money laundering regulations and economic growth

“…However, AML regulations might come with some unintended consequences such as banks exiting from providing services to firms or clients perceived to come from high‐risk segments of the economy or countries (Lowery & Ramachandran, 2015; Naheem, 2018). Again, Mohammad et al (2016) provided evidence that AML regulations impact banking secrecy, increase service cost, negatively affect the volume of deposits and act as obstacles to attracting capital.…”

Uncovering the depths of trade-based money laundering: evidence from a seaport in Bangladesh

“…Another study found that TBML can have significant economic and social impacts, such as reducing tax revenues, distorting trade patterns and undermining the competitiveness of legitimate businesses (Hataley, 2020; Naheem, 2019). Another study looked at the impact of TBML on the global financial system and found that it can lead to significant financial losses for governments and businesses and contribute to economic instability and corruption (Naheem, 2018).…”

“…Meanwhile, Hoffmann (2012) describes carousel fraud as a scheme whereby criminals fraudulently claim value-added tax (VAT)benefits from the government without physically transporting goods. In recent years, Naheem (2018) and Hataley (2020) have documented the use of a method called Black Market Peso Exchange (BMPE), which operates similarly to hundi and is used worldwide, although the term “BMPE” is typically used in Latin America and the USA. These methods have made it increasingly difficult to distinguish TBML from smuggling, as physical inspection of every shipment is impractical, and post-clearance audits may not reveal discrepancies in imported goods.…”

“…However, white-collar criminals have not stopped their illicit activities. They have shifted their focus to container shipments, but this method has proven ineffective due to the risks of carrying large quantities and being detected by trained sniffer dogs (Naheem, 2018). Instead, the trade sector has emerged as the most viable option for money launderers.…”

“…It is a complex and sophisticated financial crime that may involve multiple stakeholders, including importers, exporters, customs brokers, shipping companies and financial institutions. TBML has been dubbed the global financial system’s “Achilles’ heel” because it is difficult to identify and prevent and may be used to transfer significant amount of illicit funds across borders without drawing attention (Chao et al , 2019; Naheem, 2018; Cassara, 2016). As TBML can be hard to identify and investigate, it presents a serious issue for law enforcement and financial institutions.…”