A Critical Look at the Current International Response to Combat Trade-Based Money Laundering: The Risk-Based Customs Audit as a Solution

By Hoffmann, Laura | Texas International Law Journal, Spring 2013 | Go to article overview

A Critical Look at the Current International Response to Combat Trade-Based Money Laundering: The Risk-Based Customs Audit as a Solution


Hoffmann, Laura, Texas International Law Journal


SUMMARY

INTRODUCTION .......... 326

I. DISCUSSION OF THE PROBLEM: TYPES OF TRADE-BASED MONEY LAUNDERING .......... 328

II. A CRITICAL LOOK AT CURRENT ATTEMPTS TO COMBAT TRADE-BASED MONEY LAUNDERING .......... 330

A. The Financial Action Task Force Response .......... 330

B. Individual Country Response .......... 335

III. THE RISK-BASED CUSTOMS AUDIT AS A SOLUTION TO TRADE-BASED MONEY LAUNDERING THROUGH CUSTOMS MISREPRESENTATION .......... 340

A. Current Use of the Customs Audit to Target Tax Evasion .......... 341

B. Adapting the Customs Audit into a Risk-Based Customs Audit to Target Trade-Based Money Laundering Through Customs Misrepresentation .......... 343

CONCLUSION .......... 347

INTRODUCTION

Money laundering1 continues to pose a significant threat to countries and financial systems around the world.2 It is a fundamental enabler of criminal groups1 and is closely related to terrorism financing.4 Although terrorism financing and money laundering, frequently carried out by drug smugglers,5 are distinct activities, both raise similar concerns and use many of the same techniques to exploit vulnerabilities in countries' financial systems.6 These activities threaten the very foundation "of financial institutions and systems, discourage foreign investment, and distort international capital flows."7 Significantly, money laundering is the financial livelihood of criminal groups, and therefore enables these groups' violent and harmful activities.8

Estimates of money laundering activity worldwide run from $590 billion to $1.5 trillion annually.9 The lower amount equates to the gross domestic product of an average-sized European country.10 The full magnitude of global money laundering, however, is largely unknown as it is extremely difficult to quantify." Not surprisingly, jurisdictions that do not closely regulate their financial systems or provide for oversight are particularly attractive to money launderers because these lax regulations enable large amounts of funds to be moved without detection.12

The international trade system is susceptible to money launderers taking advantage of trade import and export transactions through trade-based money laundering (TBML).15 One TBML system, the Black Market Peso Exchange, facilitates the movement of $5 billion in drug proceeds per year from the United States to Colombia.14 TBML is defined as "the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illegal origins or finance their activities."15 Inherent weaknesses in the trade system, including considerable volume of trade flow and the ability of money launderers to integrate the proceeds into legitimate businesses, results in large-scale laundering over the long term.16 Additionally, the nature of the trade system allows criminals17 to separate themselves from the money laundering process.'" This makes it even more difficult for law enforcement officials to conduct successful investigations into the origins of the activity.19

Traditionally, countries aimed anti-money laundering (AML) and counterterrorism financing (CFT) efforts in both the public and private sectors at financial institutions.20 As a result, there is comparatively less knowledge and education concerning TBML. This makes the trade system an increasingly attractive means for criminals to transfer their illicit proceeds.21 Additionally, inherent weaknesses in the trade system itself, including volume of trade and complexity of the system, make it easier for criminals to disguise their transactions and evade enforcement.22

This Note will discuss the problems associated with TBML, particularly focusing on customs misrepresentation- the most prevalent type of TBML. It will explore the current regimes that exist to combat TBML and critically examine their strengths and weaknesses. Finally, a new solution will be proposed to combat the problem utilizing the Risk-Based Customs Audit, which balances the risks of TBML with the limited resources at countries' disposal. …

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