Money laundering is the process by which criminals strive to disguise illicit assets as legitimate ones. Though the act of money laundering is defined as an offence for which there is no actual presence of the victim，it leads to destabilization of the economy by exposing legitimate enterprises to the continuous penetration of illegal capital and disturbs the economic growth and financial balance of a country.

Trade-based money laundering (TBML) involves the misrepresentation of the value，quantity or quality of traded goods，according to the Financial Action Task Force，an inter-governmental policy body that seeks to combat money laundering and the financing of terrorism. Criminals make use of trade to move value with the intent of obscuring the true origin of their funds. International trade，with its enormous volumes of fund flows，has become an ideal avenue for obscuring individual transactions and providing abundant opportunities for money launderers to transfer value across borders.

In 2010，total global merchandise trade was approximately US$31 trillion，according to the 2012 Report on Trade Based Money Laundering by the Asia/Pacific Group on Money Laundering(APG). The large volume of international commerce masks money launderers' illicit money transfers. On the other hand，the increasing scrutiny of traditional avenues of money laundering，abuse of the financial system and the physical movement of cash across international borders，increases the attractiveness of the international trade system for money laundering as monitoring is relatively less strict. Hence，financial institutions and regulators need to pay more attention to irregularities and anomalies in trade-based money laundering activities that suspicious transaction reports (STRs) may help identify.

The Asia Pacific Group's Typology Report on Trade-Based Money Laundering reveals that almost 30% of the jurisdictions indicated that the input for trade-based money laundering investigations came from STRs. Regulators rely on data analysis and international trade patterns reported in the STRs to identify potential trade-based money laundering activities. Given the importance of STRs，all jurisdictions，in varying degrees，oblige financial institutions to report suspicious financial transactions or activities. As for financial institutions，detection and findings of suspicious transactions help them better identify，assess and understand the money laundering risk to which they are exposed and adopt appropriate mitigation measures in accordance with the risk level of their customers.

Financial institutions are challenged to ensure that they can identify and stop criminal activities to comply with regulatory requirements，while ensuring that legitimate customers are well served. To strike a balance between satisfying regulatory or legal demands and ensuring efficient and time-saving operations，banks simply report suspicious or unusual activity without in-depth analysis or further investigation. The legal obligation urges banks to adopt a defensive posture: to file a suspicious report rather than risk the possible sting of sanctions. Such “defensive” reporting creates lots of arguably useless information that tends to result in reduced regulatory efficiency. As Előd Takáts，Principal Economist in Bank for International Settlements (BIS)，pointed out that if banks report everything as suspicious they in effect，report nothing.

Though banks provide the bridge between the buyers and sellers and are naturally involved in international trade transactions，banks’ effectiveness in suspicious activity reporting is limited. On one hand，it is estimated that about 80% of all international trade payments are made by open accounts，which means the importer and the exporter agree to the terms of a contract whereupon the goods are delivered to the buyer，who then arranges a clean or netting payment through the banking system. Under such circumstances，the bank has no access to the terms or details of international trade transaction. On the other hand，in order to protect their own integrity and commercial soundness，banks will request a number of documents，such as commercial invoices and transport documents，to be submitted by the seller in documentary credit transactions or before the trade finance is approved. Common criminal technique is to falsify invoices by changing the value or description of the goods involved in a transaction. This entails over-invoicing or under-invoicing where the seller or buyer acquires surplus value for the goods. Even worse，all documents are false and no goods or services are supplied. It is impossible for a bank to make a visual check of goods during loading. Consequently，under none of the aforementioned situations can the bank easily detect or thwart suspicious or criminal activities.

Although money laundering disturbs the normal flow of money within the financial system and results in unfair competition，it does not inflict a commercially negative impact on banks. Since the main aim is to allow illicit proceeds to enter the legal financial system，money launderers don’t take advantage of all available discounts and bring vast sums of easy money to the banks.

Both money launderers and financial institutions are profit-oriented. Financial institutions' involvement in the struggle against money laundering is largely due to the high risk of reputational damage and legal penalties. Ironically，money launderers are making a huge amount of money from their crime，while banks are paying exorbitant sums to combat illegal activities. The Bank Policy Institute，an industry association，estimates that the world's 14 largest banks spend approximately US$2.6 billion a year on fighting financial crime. And a recent study showed that money laundering prevention measures account for 45% of the total regulatory burden and 2% of the total costs in Swiss private banking，according to entrepreneur，programmer and graph database expert Emil Eifrem，writing in the industry publication Computer Fraud and Security. Furthermore，due to the paper-based nature of many trade transactions and the limitations of automated transaction monitoring in a trade context，transaction monitoring in trade-based money laundering involves a higher level of human effort and judgment for the effective identification of unusual or suspicious activities compared to other means of money laundering. Recruitment，maintenance and training specialist staff in this field is also a huge expenditure for banks.

I suggest that banks take the entrepreneurial approach to stemming money laundering. Taking advantage of the information that banks acquire during customer identification and the know-your-customer process，compliance may be deemed as "adding value to the business." The trade data gained in the implementation of anti-money laundering will enable banks to offer tailor-made services and "solutions" to their present and prospective customers and conduct effective ongoing monitoring on a risk-sensitive basis.

For instance，let's take the example where Buyer A，as local Bank B's customer，applies to open a letter of credit to import lumber from an exporter in Country C. To mitigate the money laundering risk，banks should take relevant red flags into consideration to detect whether Country C is deemed a high-risk or non-cooperative jurisdiction by the Financial Action Task Force. They should also screen the exporter against published lists of sanctioned entities and make meaningful determinations about the legitimacy of the lumber exporting unit price. While making money as advising and financing bank to the exporter，Bank B’s correspondent bank may attain more transaction details from the exporter to share with Bank B. These steps would help Bank B ascertain the purpose of the transaction，conduct an appropriate assessment and provide more suitable services to Buyer A.

This will generally require an appropriate level of information-sharing between financial institutions during the dynamic trade cycle. In such a virtuous cycle，banks are more deeply involved in the entire transaction and become motivated to carry out in-depth transaction monitoring. They also submit reports of suspicious transactions using an investigative risk assessment approach. To some extent，the aforementioned manner helps the bank better balance commercial interests and the goal of complying with the law. For the regulators who have long been preoccupied with the problem of over-reporting and volumes of unsorted raw STR data，reports of suspicious transactions with analytical and full-cycle case studies help them extract useful information from STRs and make informed decisions in a timely manner.

Submitting STRs is not the end in combating trade-based money laundering，but rather the beginning of stricter compliance and closer attention to customers. Banks are supposed to ensure that their policies and procedures regarding post-reporting matters receive adequate guidance. Banks should set out clear red flag review and escalation procedures，including higher levels of authority for trade transactions that have been identified as having higher risk factors.

Making good use of the information in submitted STRs facilitates the enhancement of typical features in relation to trade-based money laundering and updates emerging risks. The irregular trade data found on letters of credit，invoices or other trade finance-related documents also contribute to the improvement of money laundering red flag indicators and suspicious patterns. With an amplified database updated in a timely manner，bank staff may better understand the phenomenon of trade-based money laundering and detect anomalies more efficiently without impeding legitimate trade transactions.

Take dual-use goods and technology as an example. Dual-use goods and technologies are "items，including software and technology，which can be used for both civil and military purposes." Dual-use goods may account for up to 10% of EU exports，according to a 2011 report of the Commission of the European Communities entitled "The dual-use export control system of the European Union: ensuring security and competitiveness in a changing world." Given the double nature of the use of these goods，specialist knowledge is required to determine whether or not goods have a dual use. In the meantime，the commodity including dual-use goods is a typical red flag in trade-based money laundering. In order to detect potential risk behind the transaction，banks will get access to the "Dual-use Goods List" released by their country's relevant authorities. With integration of periodically updated dual-use goods information from submitted STRs，the "Dual-use Goods List" can provide all banks with access to quality data.

As mentioned above，bank involvement in international trade transactions is limited. Financial institutions can hardly make determinations about the legitimacy of the price for the traded goods in most cases. It is pointed out that，anything that can be priced can be mispriced. False pricing is done every day，in every country，on a large percentage of import and export transactions. And false pricing is the most commonly used technique for transferring illicit money. Such value transfer through over- and under-invoicing of goods and services is a common practice in trade-based money laundering around the world. But most of the roles that banks play in international trade are limited to settlement or finance，without a full view of the trade process.

For example，Figure 1 shows the fluctuating value associated with thousands of marking-out or mathematical calculating instruments (commodity code: 901720) exported from China to Brazil via a series of shipments in 2018 and 2019. The blue line represents the declared value of the calculating instruments upon export from China，and the orange line represents their declared value upon arrival in Brazil. The horizontal line represents the time period over which these shipments occurred. The vertical line represents the value expressed in dollars. The data came respectively from the websites of the General Administration of Customs of China and the Ministry of Economics of Brazil. Though the import and export prices share the same trend，this commodity is under-invoiced most of the time. The declared export price does not match the import price. Within the same time period，the average declared export unit price of the calculating instrument is US$0.44，while the average declared import unit price of this item is US$0.30. Although the price difference is almost 40%，the low unit price of this commodity makes the discrepancy difficult to detect. Occasional price differences may be explained as "input" or "classification" error，but a two-year constant discrepancy as illustrated in this chart can't be attributed to operation error，but to tax evasion or money laundering.

Since financial institutions are not the only party involved in the international trade supply chain，other parties like customs and other government agencies may help financial institutions meet their obligations in monitoring and reporting suspicious transactions. On an international level，it is best practice for countries to be able to share trade data with their counterparts for administrative assistance. Mechanisms or systems have been established like the Customs Information System in the European Union or the Egmont Group Secure Network of financial intelligence units，providing ongoing cooperation. In the former calculating instruments case，periodic exchanges and cross-comparisons of trade data，such as declared import and export prices，may aid both countries in detecting anomalies and taking action. For the purpose of data privacy and timeliness，it is suggested using data capture mechanisms such as Electronic Data Interchange，which is a set of standards for standardizing the structure of information to be electronically exchanged between authorities，from one computer system to another，without human intervention and subject to appropriate data protection safeguards. Within the nation，a domestic mechanism to link the work of authorities responsible for collecting，analyzing and storing trade data with authorities responsible for investigating money laundering is also crucial in order to increase the scope and quality of suspicious transaction reports that banks are obliged to submit. On the basis of standardized trade data exchange and irregularities identified automatically，it is suggested that alerts be sent to relevant financial institutions，informing the banks that the transactions appear to be suspicious and require further investigation.

The author is Senior Assistant Manager of Bank of China Macau Branch