Trade-Based Money Laundering: U.S. Government Has Worked with Partners to Combat the Threat, but Could Strengthen Its Efforts

TBML involves the exploitation of international trade transactions to transfer value and obscure the origins of illicit funds. Various observers have noted that although TBML is a common form of international money laundering, it is one of the most difficult to detect due to the complexities of trade transactions and the sheer volume of international trade, among other things.

This report examines (1) what the available evidence indicates about the types and extent of international TBML activities, (2) the practices international bodies, selected countries, and knowledgeable sources have recommended for detecting and combating TBML, and (3) the extent to which ICE has effectively implemented the TTU program and steps the U.S. government has taken to collaborate with international partners to combat TBML. GAO analyzed U.S. agency and international body data and documentation, conducted a literature review, and interviewed U.S. officials and selected knowledgeable sources.

Different types of criminal and terrorist organizations use trade-based money laundering (TBML) to disguise the origins of their illicit proceeds and fund their operations. TBML schemes can rely on misrepresenting the price, quantity, or type of goods in trade transactions, but other methods are also used. For example, some drug trafficking organizations from Latin America have used a type of TBML scheme known as the Black Market Peso Exchange (BMPE) to launder funds. BMPE schemes involve merchants who—wittingly or not—accept payment in illicitly derived funds, often from third parties to a trade transaction, for exports of goods. In carrying out TBML schemes, criminal and terrorist organizations use various goods, including precious metals and automobiles (see fig.). U.S. officials and other sources have identified a number of countries as being at particular risk for TBML schemes. Available evidence indicates that the amount of TBML occurring globally is likely substantial. However, specific estimates of the amount of TBML occurring around the world are not available.

Officials and reporting from relevant international bodies and selected partner countries, and knowledgeable sources recommended various practices for countries to consider to combat TBML, which GAO grouped into five categories: (1) partnerships between governments and the private sector, (2) training, (3) sharing information through domestic interagency collaboration, (4) international cooperation, and (5) further research on challenges to combating TBML.

The U.S. government's key international effort to counter TBML is the Trade Transparency Unit (TTU) program under the Department of Homeland Security's (DHS) Immigration and Customs Enforcement (ICE). ICE set up TTUs in 17 partner countries with the goal of exchanging and analyzing trade data to identify potential cases of TBML. While TTUs have played a role in some TBML investigations, the TTU program has experienced various challenges, including lapses in information sharing between ICE and the partner TTUs, differing priorities between ICE and partner TTUs in pursuing TBML investigations, and limitations in the data system that ICE and the TTUs use. However, ICE has not developed a strategy to increase the effectiveness of the TTU program or a performance monitoring framework to assess the results of its work with partner TTUs. As a result, ICE does not have a clear guide on how best to operate the TTU program and cannot make management decisions based on program results. In addition to the TTU program, the U.S. government collaborates with partner countries and international bodies through a range of other activities, such as developing international anti-money laundering standards, providing training and technical assistance, establishing information-sharing methods, and providing ongoing law enforcement cooperation.

GAO recommends that DHS develop (1) a strategy to maximize TTU program effectiveness and (2) a performance monitoring framework for the TTU program. DHS concurred with the first, but did not concur with the second recommendation, citing data it already collects and challenges it faces. GAO continues to believe the recommendation is valid, as discussed in the report.

Transnational criminal organizations and terrorist groups generate  hundreds of billions of dollars every year from their illegal activities in the  United States and around the world. These organizations use a variety of  different money laundering schemes to disguise the illicit origins of this  money, including through trade-based money laundering (TBML). TBML  involves the exploitation of international trade transactions to transfer  value and obscure the origins of illicit proceeds. While international trade  promotes economic growth around the world, international trade  transactions face a range of risks and are vulnerable to abuse by criminal  and terrorist organizations.

TBML incorporates a range of different techniques with varying levels of  complexity. TBML can involve an exporter and importer who collude to  misrepresent the price, quantity, or type of traded goods or services in  order to shift the value of illicit proceeds from one location to another.  Another well-known TBML scheme, known as the Black Market Peso  Exchange, involves merchants who—wittingly or not—accept payment in  illicitly derived funds, often from third parties to a trade transaction, for  exports of goods. Various observers have noted that although TBML is a  common form of international money laundering, it is also one of the least  understood and most difficult to detect because of its complexity.

In addition, various observers have highlighted the risks that TBML poses  to U.S. national security and the need to ensure that U.S. agencies are  effectively combating this threat. U.S. agencies have taken certain steps  to address the threat posed by TBML, including working to establish  partnerships internationally, such as through U.S. Immigration and  Customs Enforcement’s (ICE) Trade Transparency Unit (TTU) program.

You asked us to examine the extent of international TBML activities and  to evaluate U.S. agencies’ efforts to work with international partners to  detect and combat TBML. Specifically, this report examines (1) what the  available evidence indicates about the types and extent of international  TBML activities, (2) the practices international bodies, selected countries,  and knowledgeable sources have recommended for detecting and  combating TBML, and (3) the extent to which ICE has effectively  implemented the TTU program and the steps the U.S. government has  taken to collaborate with international partners to combat TBML. This  report is in addition to our December 2019 report to you on U.S. efforts to  counter TBML-related vulnerabilities in the U.S. financial and trade  systems. We will also be issuing two additional reports in the future,  addressing other aspects of your request for us to examine the U.S.  government’s efforts to combat TBML.

To address these three objectives, we analyzed relevant documentation  from the Departments of Homeland Security (DHS), Justice (DOJ), State  (State), and the Treasury (Treasury), including relevant assessments of  TBML threats, and interviewed officials from each of these agencies in  Washington D.C. who are knowledgeable about U.S. government efforts  to combat TBML. We also analyzed documentation from key international  bodies that play a role in combating TBML, including the Egmont Group  of Financial Intelligence Units (the Egmont Group), the Financial Action  Task Force (FATF), the United Nations Office on Drugs and Crime  (UNODC), and the World Customs Organization (WCO).

To support our work on all three objectives, we also selected a  nongeneralizable sample of six countries. We conducted fieldwork in  three of these countries: Colombia, Paraguay, and the United Kingdom.  During our fieldwork in each country, we interviewed U.S. embassy and  host country officials. For the other three countries we selected— Australia, Mexico, and Singapore—we conducted work remotely. We  interviewed U.S. embassy officials in Australia and Mexico, and obtained  written responses from U.S. officials at Embassy Singapore. To select  these six countries, we considered several criteria, including (1) the type  and extent of TBML risk, (2) the types and level of U.S. collaboration with  the country, (3) the presence of U.S. agencies that work on TBML in the  country, (4) the extent to which the country had implemented  recommended practices to identify and combat TBML (with a goal of  covering a range of levels of adoption), and (5) the country’s location  (with a goal of covering a range of geographic regions).

To gather further information about the types and extent of international  TBML and recommended practices for combating it, we conducted a  literature review to identify relevant studies. We also interviewed selected  individuals knowledgeable about TBML and efforts to combat it, identified  through initial research and building on recommendations from those we  interviewed. We conducted a total of 15 of these interviews with academic  researchers, think tank officials, private sector representatives from trade  organizations and individual companies, and former U.S. government  officials. Throughout this report, we refer to these individuals as  “knowledgeable sources.”

To assess the extent to which ICE has effectively implemented the TTU  program, we collected information on the TTU program, including  information on TTU partner countries and the TTU program’s operations.  We evaluated ICE’s management of the TTU program by comparing the  steps it had taken to establish a strategy and performance monitoring  framework to requirements that DHS has established related to planning,  programming, budgeting, and execution. To identify the steps ICE had  taken, we interviewed ICE officials and reviewed relevant documentation  on the TTU program. To gather further information on the steps the U.S.  government has taken to collaborate with international partners to combat  TBML, we analyzed State and Treasury foreign assistance data. To  assess the reliability of these data, we reviewed available documentation  and interviewed knowledgeable U.S. officials. We determined that the  data were sufficiently reliable for our purposes to present summary  information on funding for assistance programs. For more information  about our scope and methodology, see appendix I.

We conducted this performance audit from January 2019 to April 2020 in  accordance with generally accepted government auditing standards.

Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Transnational criminal organizations and terrorist organizations use a  variety of money laundering schemes to disguise the origin and  destination of their illicit proceeds and integrate their assets in legitimate  financial entities. According to the U.S. government’s 2018 National  Strategy for Combating Terrorist and Other Illicit Financing, the criminal  activities in the United States that generate the largest share of illicit  proceeds for laundering are fraud, drug trafficking, human smuggling,  human trafficking, organized crime, and government corruption.

FATF has identified three primary methods of money laundering: the  laundering of money through the financial system, the physical movement  of money (such as through cash couriers), and TBML. FATF has defined  TBML as “the process of disguising the proceeds of crime and moving  value through the use of trade transactions in an attempt to legitimize  their illicit origins.”

The volume of international trade is significant and has grown over time.  According to the World Trade Organization, in 2018, there was $19.67  trillion in international merchandise trade and $5.63 trillion in international  services trade. Although international trade offers many economic  opportunities for the United States and other countries around the world,  the number and complexity of international trade transactions present a  number of risks and vulnerabilities that make them susceptible to abuse  by criminal and terrorist organizations. For example, the large volume of  international trade complicates detection of individual illicit transactions. In  the United States alone, on a typical day in fiscal year 2019, almost  79,000 containers and $7.3 billion worth of goods entered the country  through ports of entry, according to U.S. Customs and Border Protection  (CBP). Similarly, different studies have noted that the increasingly  complex nature of international trade—with the movement of goods and  services around the world and the use of various financing and payment  structures—makes detecting suspicious transactions difficult.

The Use of TBML to Launder Funds and Transfer Value

TBML schemes can involve misrepresenting the price, quantity, or type of  goods or services in trade transactions, but other types of TBML  schemes, such as the Black Market Peso Exchange, do not need to rely  on this type of misrepresentation. In misrepresentation schemes, the  parties involved in the trade transaction may under or over invoice goods  or services; issue multiple invoices for the same goods or services;  provide more or less goods or services than the declared amount,  including in some cases providing no goods or services; or falsely  describe the types of goods or services provided. Through these types of  misrepresentation, value can be transferred from one party to another  and the illicit origins of criminal proceeds obscured.

In a hypothetical TBML scheme involving the misrepresentation of the  price of goods, a criminal organization in Country A needs to launder the  proceeds from its criminal activity and move these proceeds to Country B.  To accomplish this, the criminal organization will use the illicit proceeds to  purchase 100,000 cell phones worth $100 each. The criminal  organizations will then make arrangements to export the 100,000 cell  phones to a co-conspirator in Country B. However, the criminal  organization in Country A, will fraudulently invoice the cell phones at $10  each rather than $100 each. Thus, the co-conspirator in Country B pays a  total of $1 million for the cell phones, rather than their true value of $10  million. The co-conspirator then sells the cell phones at their true market  value of $10 million in Country B resulting in the criminal organization  having successfully transferred $9 million in value from Country A to  Country B through TBML. Figure 1 illustrates how such a price  misrepresentation scheme works.

Similarly, the criminal organization can transfer value through  misrepresentation of the quantity or type of goods being exported. For  example, the criminal organization can invoice its co-conspirator for  50,000 cell phones, but actually ship 100,000 phones, or it can claim that  it is shipping different, lower value items such as USB flash drives.

Under a hypothetical Black Market Peso Exchange scheme, a criminal  organization operating in Country A, which uses dollars, will take the  dollar proceeds of its criminal activities to a currency broker’s  representative that has access to currency reserves from Country B  (pesos). At the same time, in Country B, an import company will contact  the currency broker seeking dollars to pay for goods that it wishes to  import from Country A. The currency broker uses the dollars provided by  the criminal organization to pay exporters in Country A on behalf of the  importer in Country B. The importer receives and sells the goods in  Country B and pays the currency broker in pesos. The currency broker  then pays the criminal organization in Country B in pesos, completing the  transfer of its proceeds. Thus, the criminal organization has successfully  shifted the value of its proceeds from Country A to Country B without  having to physically move money, or transfer funds through the banking  system, from Country A to Country B. Figure 2 shows such a Black  Market Peso Exchange scheme involving the United States and  Colombia.

TBML differs from other crimes, such as trade or customs fraud, that may  occur in connection with trade and the movement of goods, according to  Treasury officials. Organizations and individuals involved in TBML exploit  vulnerabilities in international trade to move value across international  borders in an attempt to disguise the origin, nature, or source of illicit  proceeds, which may derive from a variety of predicate crimes.  According to Treasury officials, while offenses like smuggling and fraud  may resemble TBML, they differ in purpose. For example, smugglers  attempt to evade detection or the payment of custom fees, duties or taxes  while moving legitimate, illicit, or restricted goods across borders.  Similarly, in frauds involving the (purported) purchase or sale of goods,  one of the parties to the transaction seeks to deceive another one for  financial gain. In TBML, the scheme may be accomplished using  fraudulent documents, such as false invoices, but this is not a necessary  part of the scheme, nor does it alone represent TBML. In TBML schemes  that involve misrepresenting the price, quantity, or type of goods, both the  buyer and seller normally understand that the goods shipped or funds  paid may differ from what is stated in the supporting documents.

Legal and Regulatory Framework for Combating TBML

Within the United States, a number of laws and regulations are used to  combat TBML. The Bank Secrecy Act, which was passed in 1970, and  implementing anti-money laundering (AML) regulations provide the legal  and regulatory framework for preventing, detecting, and deterring money  laundering in the United States. The Bank Secrecy Act regulations  generally require banks and other financial institutions, such as money  service businesses, securities broker-dealers, and certain types of  insurance companies, among others, to, for example, collect and retain  various records of customer transactions, verify customers’ identities at  the time of account opening, maintain AML programs, and report  suspicious transactions or cash transactions over a certain amount. In  addition, the Trade Facilitation and Trade Enforcement Act of 2015,  signed into law in 2016, addressed trade facilitation and trade  enforcement issues such as import safety, the protection of intellectual  property, and the prevention of the evasion of duties, among other  things. Further, individuals can be prosecuted under U.S. law, such as  section 1956 of title 18 of the United States Code, for money laundering,  including TBML schemes. For example, under section 1956, defendants  can be prosecuted for money laundering activities, including those  involving falsely classifying goods or entering goods by means of false  statements.

U.S. Agencies Involved in Efforts to Combat TBML Internationally

Within the U.S. government, a number of agencies play a role in working  with international partners to combat money laundering more broadly, as  well as TBML specifically. These include DHS, DOJ, State, and Treasury  and their component agencies and offices.

DHS: Within DHS, ICE’s Homeland Security Investigations (HSI)  investigates financial crimes and money laundering cases, including  those involving TBML. HSI has established a TTU that seeks to  identify global TBML trends, provide investigation support to HSI and  other law enforcement efforts, and conduct ongoing analysis of trade  data provided through partnerships with TTUs that it has helped  establish in other countries. CBP is responsible for enforcing U.S.  trade laws, facilitating compliant trade, collecting revenue, and  protecting the U.S. economy and consumers from harmful imports  and unfair trade practices. As part of its mission, CBP conducts  targeting of high-risk shipments that may involve trade violations,  including violations linked to TBML schemes.

DOJ: The Drug Enforcement Administration (DEA) and the Federal  Bureau of Investigation both conduct investigations of criminal  organizations that may use TBML to launder their illicit proceeds. In  addition, the DOJ Criminal Division’s Money Laundering and Asset  Recovery Section and U.S. Attorney’s Offices throughout the country  prosecute cases involving money laundering crimes, including TBML  schemes.

State: State’s Bureau of International Narcotics and Law Enforcement  Affairs (INL) leads State’s AML technical assistance efforts with  international partners. In this role, INL works in global and regional  forums to promote the implementation of international AML standards.  INL also funds AML assistance programs in countries around the  world. Finally, INL publishes the annual International Narcotics  Control Strategy Report, which includes an analysis of countries  identified as “major money laundering countries.” In addition to INL,  State’s Bureau of Economic and Business Affairs and Bureau of  Counterterrorism also play a role in State’s AML and countering the  financing of terrorism (CFT) efforts.

Treasury: Treasury’s Financial Crimes Enforcement Network  (FinCEN) collects, analyzes, and disseminates the financial  intelligence information it collects pursuant to the Bank Secrecy Act to  support efforts to combat financial crime, including money laundering.  FinCEN is responsible for administering the Bank Secrecy Act and  coordinating with federal and state regulatory agencies on AML/CFT  efforts. Additionally, FinCEN serves as the Financial Intelligence Unit  (FIU) of the United States, which entails gathering and analyzing  Suspicious Activity Reports (SAR) and other financial information  relevant to money laundering, terrorist financing, and other financial  crimes, as well as disseminating the results of this analysis to law  enforcement and other competent authorities. A number of other  Treasury agencies and offices also play a role in efforts to combat  money laundering, including TBML. For example, Treasury’s Office of  Technical Assistance (OTA) provides assistance to partner countries  to help strengthen their efforts to combat economic crimes. Treasury’s  Office of Terrorist Financing and Financial Crimes is the policy  coordination office for illicit finance and develops and implements U.S.  government strategies to combat all forms of illicit finance  domestically and internationally. Internal Revenue Service Criminal  Investigation investigates tax crimes and other financial crimes,  including those associated with TBML schemes. It has lead authority  for investigating criminal violations of the Bank Secrecy Act.

International Bodies Involved in Efforts to Combat TBML

Internationally, the U.S. government participates in a number of bodies  that address issues related to TBML, including the Egmont Group, FATF,  UNODC, and the WCO.

The Egmont Group: The Egmont Group, formed in 1995, is  composed of FIUs from 164 jurisdictions. The organization seeks to  foster information exchange among its members to support efforts to  combat money laundering and terrorist financing. In addition, the  Egmont Group provides training and technical assistance to its  member FIUs. FinCEN represents the United States at the Egmont  Group. The Egmont Group’s Secretariat is located in Canada.

FATF: FATF is an intergovernmental body, formed in 1989, that sets  internationally recognized standards for developing AML/CFT regimes  and assesses the ability of member jurisdictions to meet these  standards. In addition, FATF works to identify specific money  laundering methods and promotes international cooperation in  disrupting and dismantling those money laundering schemes. FATF’s  membership includes 37 jurisdictions and two regional  organizations—the European Commission and the Gulf Cooperation  Council. Treasury’s Office of Terrorist Financing and Financial Crimes  heads the United States delegation to FATF. The FATF Secretariat is  located in Paris, France.

UNODC: UNODC is an agency within the United Nations, formed in  1997, that works to combat illicit drugs and other international crime in  more than 150 countries throughout the world. As part of its mandate,  UNODC carries out the Global Program against Money Laundering,  Proceeds of Crime and the Financing of Terrorism. Through this  program, UNODC seeks to strengthen the ability of United Nations  member states to implement measures against money laundering and  the financing of terrorism and to assist them in detecting, seizing, and  confiscating illicit proceeds. State is the lead agency representing the  United States at UNODC. UNODC is headquartered in Vienna,  Austria and has field offices in 20 countries, as well as liaison offices  in New York and Brussels, Belgium.

WCO: The WCO, established in 1952, is an intergovernmental body  whose mission is to enhance the effectiveness and efficiency of  customs administrations around the world and to help them in their  dual role of facilitating international trade while also promoting  security. WCO’s membership includes customs agencies from 183  countries. CBP is the lead agency representing the United States at  WCO. The WCO’s Secretariat is located in Brussels, Belgium.

Criminal and Terrorist Organizations Use a Variety of TBML Schemes, but Specific Estimates of TBML’s Extent Are Unavailable A Variety of Criminal and Terrorist Organizations Use TBML to Disguise the Origins of Their Illicit Proceeds and to Fund Their Operations

Different types of criminal and terrorist organizations use TBML to  disguise the origins of their illicit proceeds and fund their operations. In  some cases, these organizations may manage the TBML schemes  directly, and in other cases, they may enlist the services of professional  money launderers.

Drug trafficking organizations. Drug trafficking organizations  throughout Latin America, including in Colombia and Mexico, have  used TBML schemes for decades to launder the proceeds from illegal  drug sales. These organizations make billions of dollars from the sale  of illegal drugs in the United States and elsewhere. Although much of  these revenues remain with the ultimate sellers of the illegal drugs in  the United States, significant amounts of illicit proceeds are sent back  to drug trafficking organizations in supplier countries, including  through TBML schemes. For example, in a 2017 reporting cable on  Colombia’s cocaine economy, State noted that U.S. law enforcement  agencies and independent economists have estimated that  somewhere between $5 billion to $10 billion in cocaine proceeds are  laundered back to Colombia each year, frequently using TBML  schemes. U.S. government reporting, including Treasury’s 2020  National Strategy for Combating Terrorist and Other Illicit Financing  and DEA’s 2019 National Drug Threat Assessment,  and various U.S.  officials noted that a key trend related to TBML that has occurred in  recent years is the increasing involvement of Chinese criminal  organizations in TBML globally, including in the United States.  Chinese money laundering networks are working increasingly with  Mexican drug cartels to assist the cartels in laundering drug proceeds.  In addition, U.S. government reporting, including the 2018 National  Money Laundering Risk Assessment, and U.S. officials noted Chinese  criminal gangs are using TBML schemes to repatriate proceeds from  the sale of synthetic opioids in the United States and around the  globe.

Other criminal organizations. In addition to drug trafficking, criminal  organizations have used TBML schemes to launder proceeds from a  range of other crimes, including illegal mining, human trafficking, and  the sale of counterfeit goods. For example, criminal organizations in  Colombia have used TBML to disguise the origins of illegally mined  gold, in exchange for funds, according to U.S. Embassy Bogotá and  Colombian government officials we interviewed.

Corrupt government officials. In certain countries, senior  government officials and government entities have used TBML  schemes to disguise profits derived from corrupt practices, according  to U.S. government reporting. For example, FinCEN has reported that  senior government officials in Venezuela have used TBML as part of  schemes to steal money from the Venezuelan government’s food  distribution program.

Terrorist organizations. Terrorist organizations, including Hezbollah  and the Revolutionary Armed Forces of Colombia (known by its  Spanish acronym FARC), have also used TBML schemes to launder  funds. For example, a number of U.S. officials and knowledgeable  sources have noted that Hezbollah operates a number of TBML  schemes in the Tri-Border Area in South America, where Argentina,  Brazil, and Paraguay meet, which help to fund the terrorist  organization’s activities around the world.

Criminal and Terrorist Organizations Use a Range of TBML Schemes Involving Many Different Goods and Services

Criminal and terrorist organizations use a range of TBML schemes with  varying levels of complexity. In many instances, these organizations  combine TBML techniques with other forms of money laundering, such as  bulk cash smuggling and the laundering of funds through the banking  system. The U.S. government, foreign governments, and international  bodies have identified a number of different examples of the types of  TBML schemes that occur. For example:  In one case described in Treasury’s 2018 National Money Laundering  Risk Assessment and ICE press releases, HSI led an investigation,  known as Operation Fashion Police, which targeted businesses in the  Los Angeles Fashion District that were suspected of being involved in  Black Market Peso Exchange schemes to launder the proceeds of  illegal drug sales on the behalf of international drug cartels. As a  result of the investigation, two owners of a textile company pled guilty  to using the business to receive bulk cash that they knew or believed  to be the proceeds of narcotics trafficking and part of a Black Market  Peso Exchange scheme. The two individuals received approximately  $370,000 in cash delivered on four separate occasions as payment  for goods shipped to Mexico, Guatemala, and other countries in Latin  America. Operation Fashion Police, along with several related  investigations, also resulted in the seizure of tens of millions of dollars  in bulk cash stashed at warehouses in the Los Angeles area.

In one case identified by Treasury, DOJ indicted seven co- conspirators for participating in an international TBML scheme. The  individuals are alleged to have used family-owned import-export  businesses in Long Island and Miami and to launder millions of dollars  in illegal drug proceeds. As part of the scheme, the defendants are  alleged to have taken in bulk cash deliveries from drug dealers in the  United States and disguised the transfer of money to South America  and elsewhere through the actual and purported purchase and export  of mobile phones.

In another case, according to U.S. government information provided  to FATF, Colombian drug cartel representatives in the United States  deposited proceeds from illegal drug sales into the U.S. financial  system. The cartel then used these funds to buy gold from Colombia,  which it imported into the United States. The cartel representatives in  the United States then melted down the gold and recast and  enameled the gold to disguise it as low value items such as nuts and  bolts. The cartel then exported the disguised gold back to Colombia  where it was melted down once again and the process was repeated.  Through this scheme, the cartel was able to use the same gold to  justify multiple payments to its representatives in Colombia, thus  transferring proceeds from its U.S. operations.

In Australia, according to U.S. Embassy Canberra officials, Chinese  criminal organizations give Australian dollars from drug sales to  individual Chinese nationals, known as Daigou shoppers, who pose  as retail shoppers and use the funds to purchase various items in  Australia on behalf of buyers in China who want to purchase higher  quality foreign goods. The Daigou shoppers then ship the items to the  buyer or deliver them by hand. The buyers in China then pay the  Chinese criminal organizations, in Chinese yuan, for the items.  Through this TBML scheme, the criminal organizations are able to  move their proceeds to China without going through the financial  system.

Finally, in Benin, Lebanese financial institutions linked to Hezbollah  were involved in schemes that used TBML to launder funds and move  criminal proceeds through West Africa and back to Lebanon,  according to State reporting in its 2015 International Narcotics Control  Strategy Report. The criminals using these schemes wired funds from  Lebanon to the United States to buy used cars, which were then  shipped to Benin and sold throughout West Africa. The criminals then  combined the profits from the sale of these cars with the proceeds  from drug sales in Europe and subsequently sent the funds back to  Lebanon via bulk cash smuggling and deposited the funds into the  Lebanese financial system.

According to information from different U.S. agencies, international  bodies, and partner countries, criminal and terrorist organizations use a  wide variety of goods in TBML schemes, but HSI analysis has found the  most common items are precious metals, automobiles, clothes and  textiles, and electronics (see fig. 3). As of 2018, HSI reported that  approximately 70 percent of its TBML-related casework involved these  four types of goods. However, criminal and terrorist organizations use any  number of different goods in TBML scje,es. For example, U.K.  government officials told us about a scheme involving the  misrepresentation of dental equipment as books in a series of exports  from the United States to the United Kingdom.

In addition to international trade in goods, available evidence indicates  that TBML schemes, at times, involve international trade in services.

According to HSI, under some TBML schemes, shell companies are  created that issue invoices for consulting or other professional services  which are used to justify the international movement of funds as payment  for the invoiced services. U.S. agencies and other sources have noted the  potential for TBML schemes involving services such as consulting,  accounting, and web design, among others.

Various U.S. agencies, international bodies, and knowledgeable sources  have identified a number of “red flags” that may indicate TBML schemes.  For example, table 1 includes a list of nine red flag indicators that HSI has  identified related to TBML schemes.

Many Countries around the World Face TBML Risks

U.S. agencies have identified a number of countries around the world as  being at risk for money laundering more generally and TBML specifically.  For example, State’s annual International Narcotics Control Strategy  Report (INCSR) identifies “major money laundering countries,” as  required by the Foreign Assistance Act. Over the last 5 years, the INCSR  has identified, on average, almost 80 countries as being major money  laundering countries. In addition, State has identified countries that face  TBML-specific risks in the country reports included within the INCSR each  year. For example, in our review of the 2019 INCSR, we found that State  had cited TBML risks in 26 countries or territories in a number of different  regions of the world. Previously, HSI conducted an analysis of TBML- related SARs filed by financial institutions with FinCEN in fiscal year  2012. Of the 474 TBML-related SARs that financial institutions filed during  this period, HSI found that 93 different countries or territories were  referenced with the five most frequently mentioned being Nigeria, Hong  Kong, Mexico, Venezuela, and Panama. More recently, in 2019, HSI  identified Mexico, China, Colombia, the United Arab Emirates, Ecuador,  Peru, Venezuela, and the United Kingdom as its key countries of TBML  concern.

In addition to identifying different countries that are vulnerable to money  laundering, the U.S. government and FATF, among others, have  identified free trade zones as particular areas of risk for TBML. In a  2010 report on money laundering vulnerabilities in free trade zones, FATF  identified approximately 3,000 free trade zones located in 135 countries  and noted they had systemic weaknesses making them susceptible to  money laundering and terrorist financing. These weaknesses included  less stringent AML/CFT reporting requirements, relaxed oversight by  responsible government authorities, and weak procedures for inspecting  goods, among other things. Similarly, the 2019 INCSR notes that the 114  free trade zones in Colombia are vulnerable to TBML due to inadequate  regulation, supervision, and transparency.

Specific Estimates of the Amount of TBML Globally Are Unavailable, but Evidence Suggests It Is Likely Substantial and Has Increased in Recent Years

Available evidence from the U.S. government, international bodies, and  knowledgeable sources suggests that the amount of TBML occurring  globally is substantial and has increased in recent years. State has  reported that the amount of money laundered through TBML schemes  may potentially be up to hundreds of billions of dollars globally, every  year. Some U.S. officials and knowledgeable sources believe that, based  upon available evidence, TBML is likely one of the largest forms of money  laundering. In addition, as countries have strengthened their controls to  combat other forms of money laundering, various U.S. government  reports and officials, as well as knowledgeable sources have stated that  there are indications that criminal organizations and terrorist  organizations have increased their use of TBML to launder their funds.  For example, FinCEN has reported that since the Mexican government  increased restrictions on U.S. dollar cash deposits at Mexican financial  institutions in 2010, Mexican drug cartels appear to have increasingly  turned to TBML as an alternative means of repatriating profits from U.S.  drug sales. Similarly, in Australia, as controls on large cash deposits at  ATMs have increased since 2017, criminals have increased their use of  TBML to hide their profits, according U.S. officials at Embassy Canberra.  In addition, the 2020 National Strategy for Combating Terrorist and Other  Illicit Financing notes that there has been a steady decrease in seizures  related to bulk cash smuggling from 2012 through 2018 and states that  this decrease could indicate that criminal organizations are increasingly  turning to other means to move illicit money, including TBML.

Although various observers believe the magnitude of TBML is large,  specific estimates of the amount of TBML occurring around the world are  unavailable. A number of academic studies have sought to quantify  various aspects of illicit financial flows and money laundering. Although  the results of such studies can shed light on the potential volume of  TBML, none of those we identified in our literature review sought to  develop estimates of TBML specifically. In addition, the studies we  reviewed all had certain methodological limitations.

We found, based upon our review of relevant literature, that academic  studies seeking to quantity potential illicit financial flows do not provide  the exact extent of TBML. These studies capture activities that are  generally broader than TBML, such as tax avoidance, trade price  manipulation, or trade misinvoicing, which demonstrates the difficulty in  estimating the exact magnitude of TBML activity. For example, one  academic researcher analyzed U.S. Census Bureau trade data over time  to estimate money moved in and out of the United States through trade  price manipulation, which involves prices showing up outside of an  expected range. The stated objectives of trade price manipulation in this  study include not only TBML, but also income tax avoidance or evasion,  among other things. Therefore, measurement of trade price manipulation  is generally broader than that of TBML. For 2018 alone, this researcher  estimated that trade price manipulation accounted for approximately $278  billion moved out of and $435 billion moved into the United States.

Global Financial Integrity, a nonprofit organization dedicated to studying  the cross-border flow of illegal money, has analyzed International  Monetary Fund and United Nations data to develop an estimate of  potential trade misinvoicing between developing and advanced  economies. In a 2019 report, it calculated the illicit financial flows to and  from 148 developing countries from 2006 to 2015. For 2015, it estimated  that potential trade misinvoicing to and from these 148 developing  countries were between $0.9 trillion and $1.7 trillion. Global Financial  Integrity defines trade misinvoicing as a method for moving money illicitly  across borders that involves the deliberate falsification of the value,  volume, or type of commodity in an international commercial transaction  of goods or services by at least one party to the transaction. Therefore,  measurement of trade misinvoicing is generally broader than that of  TBML. Appendix II provides additional details on our literature review  and efforts to quantify illicit financial flows, including TBML.

Certain international bodies, such as UNODC, and other organizations  have produced estimates on the amount of criminal proceeds and the  volume of money laundering more broadly. For example, in 2011,  UNODC conducted a meta-analysis of the results of various studies and  estimated that in 2009 the amount of funds available for laundering,  including TBML, was likely around 2.7 percent of global gross domestic  product, or $1.6 trillion. However, the report’s authors noted that the  studies reviewed in the meta-analysis contained a range of  methodological issues and information gaps.

FinCEN data on SARs related to TBML can also provide an indication of  the potential volume of TBML activity that financial institutions have  detected. In 2010, FinCEN issued an advisory on TBML that found that  financial institutions had filed over 17,000 SARs related to potential TBML  between January 2004 and May 2009, involving over $276 billion worth of  transactions. In addition, we analyzed FinCEN data from more recent  years, using a different methodology, and found financial institutions had  filed 7,044 SARs related to TBML from 2014 to 2018, including 1,673 in  2018. FinCEN officials noted that the number of TBML-related SARs is  a small portion of the total of 9.6 million SARs it received over this period.  However, FinCEN officials also acknowledged that financial institutions  may not have enough information on many trade transactions to  determine whether there is suspicious activity and whether that  suspicious activity is potentially related to TBML schemes. In addition,  FinCEN officials noted that suspicious activity related to TBML schemes  could be reported under different categories.

Officials and Studies Recommended Various Practices that Countries Could Adopt to Detect and Combat TBML

Officials and reporting from relevant international bodies and selected  partner countries, and knowledgeable sources have recommended that  governments consider a number of different practices to strengthen their  efforts to detect and combat TBML. After reviewing and analyzing these  sources, we identified and grouped these recommended practices into  the following five categories: (1) partnerships between governments and  the private sector, (2) training in detecting and combatting TBML, (3)  sharing information through interagency collaboration, (4) international  cooperation through information and knowledge sharing, and (5) further  research on challenges, such as potential impediments to combatting  TBML. In addition, we identified examples of steps the United States and  other countries have taken in line with these practices. Officials and  knowledgeable sources also noted some potential difficulties to  implementing some of the recommended practices that have been  identified.

Partnerships between Governments and the Private Sector

Reporting from relevant international bodies and certain partner countries,  and knowledgeable sources have proposed that governments develop  partnerships with the private sector to combine and collectively analyze  information needed to identify potential TBML schemes and trends.  Through these partnerships, representatives from the private and public  sector could meet on a regular basis to share information on suspicious  activity that may warrant further investigation. For example, FATF’s  guidance paper Best Practices on Trade Based Money Laundering  stated that governments should consider conducting periodic joint  meetings with the private sector to discuss emerging TBML trends.  Governments can also provide feedback to private sector entities on what  information is helpful as they conduct investigative work. FATF standards  on information sharing state that anti-money laundering authorities should  provide feedback to financial institutions to assist them with complying  with AML requirements in the countries in which they are operating. For  example:

U.S. example: In 2017, FinCEN publicly launched the “FinCEN  Exchange” to enhance information sharing between FinCEN, law  enforcement agencies, and financial institutions. FinCEN invites  financial institutions to voluntarily participate. As of December 2018,  FinCEN had convened more than a dozen briefings with law  enforcement agencies across the country, involving more than 40  financial institutions. According to FinCEN officials, through the  FinCEN Exchange, the U.S. government and the private sector are  able to exchange information on priority illicit finance threats, including  TBML. For example, according to Treasury officials, FinCEN  convened a FinCEN Exchange focused on TBML in San Antonio,  Texas in April 2018. According to Treasury’s 2018 National Strategy  for Combating Terrorist and Other Illicit Financing, the information  provided by financial institutions through the FinCEN Exchange  briefings has assisted FinCEN in targeting TBML networks.

Other country example: In 2015, the United Kingdom established  the Joint Money Laundering Intelligence Task Force as a collaborative  mechanism between the U.K. government and the private sector to  share and collectively analyze information on money laundering and  economic crime threats. The task force brings together a range of  private and public sector organizations, including law enforcement  agencies and financial institutions. According to U.K. officials, TBML is  one of the four priority areas of the task force. The task force has  established six expert working groups led by representatives of the  financial sector, including a TBML expert working group. Among other  things, the TBML expert working group offers experts witness  statements on TBML to support criminal prosecutions.

In addition to sharing information with and providing feedback to financial  institutions, several knowledgeable sources and reports from international  bodies stated that these partnerships should also include a broad range  of private sector entities involved in international trade. Several  knowledgeable sources have highlighted the need for other private sector  entities involved in international trade, such as shipping companies,  freight forwarders, and customs brokers, to play a role in working with  governments to identify TBML activities. One knowledgeable source  noted that broader partnerships are important because banks and other  financial institutions have a limited ability to detect indicators of potential  TBML in a majority of trade transactions. For example, according to the  Wolfsberg Group, 80 percent of international trade is conducted through  open-account trade. With open-account trade, the transaction is not  financed by a bank. Banks are generally not involved beyond processing  the buyer’s payment to the seller and do not typically receive supporting  documentation related to the transaction. Thus, financial institutions have  limited visibility over open-account transactions and thus limited ability to  identify suspicious activity.

Several knowledgeable sources and reports from certain partner  countries also acknowledged that challenges exist to creating  partnerships with the private sector. They emphasized that for these  partnerships to be successful, governments should ensure all participants  trust that any information they share will be handled appropriately. For  example, one knowledgeable source noted that countries could develop  standards for information sharing between banks, while providing  assurances about data security, privacy, and confidential commercial  information. In addition, several knowledgeable sources and reports from  partner countries stated that countries should address challenges related  to privacy laws that prohibit banks from sharing client information or  barriers restricting government agencies from sharing intelligence  information with private sector partners.

Training for Government Agencies and Private Sector Entities Involved in Detecting and Combating TBML

Relevant international bodies, including FATF, and knowledgeable  sources stated that given the complexity of and difficulty in detecting  TBML, governments could consider providing additional training to  relevant government officials on techniques to detect and counter the  threat. Governments would provide the training to government agencies,  such as customs and tax collection agencies, tailored to meet the specific  requirements and needs of different government authorities.

Several knowledgeable sources and reports from international bodies  noted that governments should also conduct events and other outreach  activities to educate private sector entities. Some stated that such events  and outreach activities could help increase the capacity of personnel at  banks and other financial institutions to identify the characteristics,  emerging trends, and new methods of TBML. According to FATF’s  guidance paper on TBML, governments could organize conferences on  the topic, or develop materials to help inform staff of various private  sector organizations who monitor suspicious financial activity and  potential TBML risks. For example:

U.S. example: In 2018, FinCEN organized a conference on TBML for  several U.S. agencies involved in combatting TBML, including HSI,  CBP, and Internal Revenue Service Criminal Investigation, in addition  to government officials from partner countries and non-government  participants. The conference provided presentations on a range of  issues related to TBML, such as the vulnerabilities in the gold industry  that make it susceptible to TBML and the evolution of the Black  Market Peso Exchange. In 2019, FinCEN organized an additional  conference focused on TBML and bulk cash smuggling.

Other country example: The Mexican government is working with  State/INL to develop anti-money laundering experts and to build an  AML task force. INL also created a training program to certify  compliance officers, state auditors, prosecutors, analysts, and  regulators in Mexico City on TBML.

Several U.S. embassy officials noted that some partner countries needed  to account for additional factors when creating TBML-specific training.  They stated that before receiving TBML training, some partner countries  needed to build more basic foundational skills. For example, U.S.  embassy officials in Colombia stated that their priority is to provide  Colombian prosecutors with more basic training on prosecutorial skills,  such as presenting oral arguments, before offering advanced training,  such as how to build a TBML case.

Sharing Information through Interagency Collaboration

Several knowledgeable sources, partner country officials, and  international body reports we reviewed recommended that governments  share information and data through domestic interagency collaboration to  combat TBML. According to United Kingdom officials and an international  body report, sharing trade data and relevant financial information, such as  SARs, through an interagency approach is critical because TBML and its  predicate crimes often cut across multiple agencies and their authorities  and responsibilities. Agencies also bring different skill sets to  investigations, such as expertise on customs enforcement, financial  crimes, and trade data analysis. To foster interagency collaboration,  several knowledgeable sources stated that governments could consider  creating multi-agency task forces or mechanisms to address the  challenges posed by TBML. For example:

U.S. example: The El Dorado Task Force is an interagency  investigative body that consists of 55 law enforcement agencies in  New York and New Jersey, including federal agents, state and local  police investigators, intelligence analysts, and federal prosecutors.  The task force contains 12 groups, including one focused specifically  on TBML. Officials from the El Dorado Task Force stated that as an  interagency task force, it is able to utilize the respective expertise of  various agencies and analyze multiple sources of information, such as  international trade and Bank Secrecy Act data, in its investigative  work.

Other country example: The United Kingdom created the National  Economic Crime Centre, which involves officials from multiple  agencies, including law enforcement and regulatory bodies. The  National Economic Crime Centre’s mission is to strengthen and  prioritize the U.K. government’s coordination efforts by combining  operational capabilities, data, and intelligence to target economic  crime. To target specific crimes, the National Economic Crime Centre  has created working groups, including a TBML one, to further  cooperation and build expertise.

Several U.S. embassy officials and host country officials stated that some  countries may be hesitant to share information with all of the agencies  involved in combatting TBML. These officials noted that issues such as  corruption and lack of trust between agencies might limit the willingness  and ability of countries to share information. For example, several  Colombian government officials stated that corruption in their government  limits the number of counterparts from other agencies that they can trust  to collaborate with on combatting TBML.

International Cooperation through Information and Knowledge Sharing

Several officials from certain partner countries, knowledgeable sources,  and reports we read stated that trade partners could share trade data and  relevant financial information with each other through bilateral or  multilateral partnerships. Officials and international body reports also  emphasized how important it is for countries to see both sides of trade  transactions in order to detect anomalies that might reveal TBML  activities. FATF reports noted governments could work together to create  a secure system or mechanism that countries could use to exchange  trade data and financial information. According to the Asia/Pacific Group  on Money Laundering’s APG Typology Report on Trade Based Money  Laundering, governments could coordinate international capacity  building efforts with partner country counterparts, such as sharing  strategies on combatting TBML and emerging trends related to TBML.  For example:

U.S. example: As part of its TTU program, HSI has established a  formalized bilateral mechanism with a number of partner countries,  particularly in the Western Hemisphere, to exchange and conduct  ongoing analysis of trade data to facilitate the detection of suspicious  TBML-related activities. By sharing these data, HSI and each of its  partner TTUs are able to see import and export data for goods moving  between the United States and the partner country.

Other country example: The Paraguayan government has taken  initial steps to coordinate with several countries in the region to try to  increase the sharing of trade information, including Chile, Uruguay,  and Argentina. According to a U.S. embassy official in Paraguay, the  Paraguayan government also participates in a regional security  mechanism with Brazil, Argentina, and the United States to address  broader regional security threats, including money laundering  activities. Figure 4 shows photos from Ciudad del Este, Paraguay, on  Paraguay’s border with Brazil and Argentina, a region that has been  identified by U.S. and Paraguayan officials as a key hub of TBML  activity.

U.S. officials and knowledgeable sources, however, noted several  challenges to international cooperation related to technology and data  uniformity. For example, officials from HSI stated that while international  cooperation is critical to combat TBML, changes in government  administration and technological limitations affect the continuity and the  commitment to information sharing with foreign partners. In addition, U.S.  officials and reports we reviewed stated that countries could consider  enhancing and creating more uniformity in their data collection efforts so  that they could use the data more effectively to combat TBML. For  example, U.S. embassy officials and knowledgeable sources stated that  countries need a common formatting or trade transactions identifier to  allow countries to match import and export data more easily. HSI and  partner country officials noted that, without a common identifier, they have  faced difficulties connecting the import and export sides of trade  transactions as they have sought to analyze trade data to identify  potential cases of TBML.

In addition, while some U.S. officials and knowledgeable sources see  arrangements for sharing trade data between multiple countries as a  possible means of improving detection of TBML-related activities, U.S.  officials said that a lack of trust among countries complicates such efforts.  U.S. officials and officials from countries we visited noted that countries  might be reluctant to share their trade data more widely through  multilateral mechanisms due to perceived risks the sharing of such  important information might have on their commercial competitiveness.  These officials noted the difficulty in creating a multilateral TTU because  of these limitations.

Conducting Further Research on Challenges to Combatting TBML

Multiple knowledgeable sources, as well as reports from international  bodies, stated that governments could conduct further research on  challenges that reduce their ability to combat TBML effectively, including  potential impediments. According to the Asia/Pacific Group on Money  Laundering’s report on TBML, developing a comprehensive strategy  would help governments to address key challenges to combat TBML  while also facilitating legitimate trade. In addition, one partner country  report highlighted the need for an ongoing assessment of TBML to  address challenges as the threat continues to evolve. For example:

U.S. example: In 2015 and 2018, Treasury produced the National  Money Laundering Risk Assessment, identifying the money  laundering threats and risks, including TBML, which confront the  United States. The assessments also identify the challenges U.S.  agencies face in combating money laundering. For example, the 2018  assessment found that merchants sometimes knowingly accept illicit  payments in exchange for trade goods without reporting the  transactions and individuals can abuse their professional position at  financial institutions by ignoring suspicious transactions.

Other country example: In 2017, the Government of Singapore  worked with private sector entities to identify and assess key issues  that Singapore faced related to money laundering. As a result of that  study, in 2018, the government produced the Best Practices for  Countering Trade-Based Money Laundering report. The study found  that, for example, banks should periodically conduct a risk  assessment on risk factors related to TBML and test TBML red flags  for effectiveness.

Several knowledgeable sources stated that international bodies could  examine any challenges and provide additional guidance to member  countries on combatting TBML. According to Treasury officials, FATF is  currently examining operational challenges related to TBML to provide  additional guidance to member countries on combatting it. These officials  indicated that this new study should provide an updated definition of  TBML to better distinguish money laundering activity from other criminal  activity. Additionally, an official from Treasury’s Office of Terrorism and  Financial Intelligence said the best practices in FATF’s 2008 report were  still relevant and that FATF has produced other reports since then related  to TBML, such as its 2010 report on money laundering vulnerabilities in  free trade zones. In the report, FATF noted a number of challenges  related to combating TBML in these zones. For example, it reported that  relaxed oversight and lack of data collection in free trade zones make  them vulnerable to these schemes.

Knowledgeable sources and reports from international bodies and a  partner country also recommended further research about other  impediments that challenge the ability of governments to combat TBML.  For example, reports from international bodies and a partner country  highlighted the ease with which shell companies can be established in  many jurisdictions and the lack of transparency regarding the beneficial  owners of such shell companies. According to FATF and various U.S.  officials, criminal organizations can use shell companies to funnel illicit  money through accounts that obscure the source of the funds. FATF  recommends in its international standards that countries take measures  to ensure relevant authorities have timely access to information on the  ownership and control of legal persons.

U.S. Agencies Have Taken Steps to Partner with Countries and International Bodies to Combat TBML, but Opportunities Exist to Enhance the TTU Program

U.S. Agencies Provide a Range of Support to Partner Countries Related to Combating TBML Establishing Information- Sharing Methods

DHS, DOJ, State, and Treasury provide a variety of support to partner  countries to assist in combating TBML, including establishing information- sharing methods, funding training and technical assistance, and providing  ongoing law enforcement cooperation.

The U.S. government’s primary partnership effort focused specifically on  combating TBML is HSI’s TTU program. Under the program, HSI has set  up TTUs in 17 partner countries. HSI established the first TTU with  Colombia in 2005 and the most recent one with New Zealand in 2019.  HSI’s goal with the TTU program is to exchange trade data with its  partner TTUs to allow agencies in each country to work together to better  identify anomalies in trade data that may indicate TBML. For example,  through the analysis of shared trade data, HSI and a partner TTU may be  able to determine if there is a discrepancy between the reported value of  goods when they leave the United States and the reported value of the  goods when they arrive in the partner country (and vice versa). There are  four key steps that HSI and a partner country undertake in establishing a  TTU, according to HSI officials:

As a precondition for setting up a TTU, a country must have a  Customs Mutual Assistance Agreement or similar information sharing  agreement in place with the United States.

HSI then negotiates a memorandum of understanding (MOU) with the  relevant counterpart agency setting out the details of the partnership.

Once the partner country signs the MOU, HSI provides the partner  TTU access to its specialized system for analyzing trade data—the  Data Analysis and Research for Trade Transparency System  (DARTTS).

HSI also provides training to the partner TTU on the system’s use.

Table 2 shows the partner countries participating in the TTU program and  how often HSI and each country share data.

In addition to the TTU program, U.S. agencies have established other  methods for sharing information with partners overseas that support  efforts to combat money laundering, including TBML. For example, U.S.  officials at Embassy Canberra reported that HSI had set up a pilot  program in which the U.S. government shares its Reports of International  Transportation of Currency or Monetary Instruments with the Australian  Border Force. By comparing the U.S. information with what the  Australian Border Force collects, the Australian Border Force has been  able to identify and apprehend a number of bulk cash smugglers,  according to Embassy Canberra officials.

U.S. agencies have also worked to organize a number of ongoing or ad  hoc forums for sharing information related to transnational crime,  including money laundering and other economic crime. For example,  DOJ’s Office of Overseas Prosecutorial Development, Assistance and  Training has organized, with State support, two sessions of the  Transnational Criminal Organizations Working Group, which brings  together officials from the United States, Colombia, and Mexico to  participate in specialized training and to develop joint strategies and best  practices for combating transnational criminal organizations that threaten  the three countries. According to an Office of Overseas Prosecutorial  Development, Assistance and Training official at Embassy Bogotá,  combating money laundering, including TBML, was a focus of the group’s  most recent session in June 2019.

Funding Training and Technical Assistance

State and Treasury’s OTA have funded a range of foreign assistance  programs in partner countries that provide training and technical  assistance related to combating money laundering and economic crimes.

State allocated approximately $90 million in fiscal years 2014 through  2018 to programs to counter financial crimes and money laundering  throughout the world. According to State, this funding supported a range  of programs, including programs to assist countries in drafting legislation  and regulations; training bank regulators and examiners, financial  investigators, prosecutors, and judges; and strengthening the ability of  FIUs in partner countries to receive, analyze, and disseminate suspicious  activity reports, among other things. Although State has not funded any  programming that focused exclusively on TBML during this period, it  reported that it allocated approximately $5 million in fiscal years 2014  through 2018 for programs that included a substantial amount of  information on the investigation, enforcement, or prosecution of TBML.  For example, according to State, it has funded a series of projects to  reform Peru’s criminal justice system that, among other things, helped  strengthen the country’s ability to fight TBML. More recently, in fiscal year  2019, State noted that it has allocated approximately $5 million to the  WCO for a project focused specifically on TBML. According to State,  through this program, WCO will build the capacity of customs agencies to  detect and deter smuggling and misreporting used to facilitate TBML.

Treasury’s OTA allocated approximately $20 million in fiscal years 2014  through 2018 for projects to counter economic crimes throughout the  world. Through these projects, OTA funds advisors—either a resident  advisor who remains in the host country for several years, or a group of  intermittent advisor who travel to the host country for short-term  assignments. According to Treasury, these projects support the  implementation of AML/CFT legal and regulatory regimes, as well as host  government institutions, that are able to combat economic crimes.  Although OTA has not funded any projects focused specifically on TBML,  it stated that OTA advisors routinely discuss with their country partners  the different methods that criminals use to launder money, including  TBML. According to OTA, its assistance has addressed TBML to varying  degrees in a number of projects. For example, OTA helped Peru’s tax  and customs authorities to develop training for the Peruvian National  Police Money Laundering Unit on how to best use customs databases to  identify potential leads in TBML cases.

Law enforcement agencies, including DEA, HSI, the Federal Bureau of  Investigation, and Internal Revenue Service Criminal Investigation, have  also posted personnel overseas that collaborate with law enforcement  officials from the host country to work on cases related to TBML. For  example, according to HSI data, the agency has opened TBML  investigations supported by its personnel at embassies in a number of  countries, including Colombia, Mexico, the United Kingdom, the  Netherlands, the Dominican Republic, Singapore, and Spain. U.S. law  enforcement personnel have also set up U.S.-supported vetted units in  partner countries. For example, DEA has established Sensitive  Investigative Units in a number of countries, such as Colombia and  Paraguay. DEA partners with these units to investigate and disrupt  various aspects of drug trafficking organizations’ operations, including  money laundering activities.

HSI Has Shared and Analyzed Data with Partner TTUs, but the TTU Program Faces Various Challenges that Limit Results

Over time, HSI’s work with partner TTUs has helped in the successful  disruption of certain TBML schemes. For example, HSI reported that the  Panamanian TTU provided analysis to support an investigation that  successfully disrupted an illicit tobacco smuggling ring involving several  Panamanian companies. The investigation led to four arrests and the  seizure of over $10 million in cigarettes. In another case, HSI reported  that HSI and the Peruvian TTU worked together to support an  investigation that disrupted a TBML scheme involving the import of  illegally mined gold into the United States from Peru.

While HSI and other U.S. government officials have stated the TTUs in  some countries have played an important role in certain investigations,  the TTU program has faced challenges that limited its results in disrupting  TBML schemes, including:  Insufficient resources or support for the partner TTUs. In recent  years, the U.S. government has not provided any funding directly to  partner TTUs to support their activities, according to HSI officials. These  officials noted that while HSI does not obligate funds to directly support  partner TTUs, the agency will fund the travel expenses for its personnel to  travel to a foreign country to provide training to a partner TTU. Previously,  State had provided a limited amount of funding to certain partner TTUs,  including for training and the purchase of computer software, according to  State officials. However, State officials reported that State has not  provided any funding for partner TTUs since fiscal year 2013, because  insufficient evidence of the program’s effectiveness and various  programming obstacles have led the department to prioritize funding for  other anti-money laundering and crime prevention programs over the TTU  program. For example, State officials noted that limited support from  some U.S. embassies and a lack of HSI staff posted at them negatively  affected the TTU program at times. However, State officials noted that  they are generally supportive of the TTU concept and would consider  providing further funding for the program, if HSI can demonstrate program  results. HSI officials noted that they have not sought State funding for the  TTU program in recent years, but would be interested in discussing  State’s expectations regarding program results and pursuing State  funding going forward.

U.S. and partner country officials also noted that host governments have  not always dedicated the necessary personnel and information  technology resources to ensure the effective operations of the TTUs. For  example, HSI officials stated that a lack of funding for partner TTUs has  contributed to technology gaps between U.S. and partner country  systems.

Slow expansion of program and limited geographic range. Although  HSI has established the goal of expanding the TTU program, the  expansion has slowed over the last few years and it operates mainly in  Latin America, despite the range of countries around the world that face  risks related to TBML. HSI officials stated they have had discussions with  several additional countries about establishing TTUs, but have not yet  been able to finalize agreements with a number of these countries,  resulting in only two new TTUs being set up over the last 3 years.

Delays in launching partner TTUs and lapses in their operation. The  TTU program has experienced delays in launching TTUs after HSI and  the partner governments have signed the MOUs. For example, HSI  officials at Embassy Canberra noted that HSI signed the MOU with  Australia to establish its TTU in 2012, but it did not become fully  operational until 2017. According to HSI officials, this delay was due to  significant coordination challenges within the Australian government.  Several TTUs have also experienced lapses in their operations. For  example, the TTU in Argentina launched in 2006, but the two countries  halted information sharing between 2011 and 2015. According to HSI  officials, this halt in information sharing was because of U.S. concerns  with corruption in the Argentinian government at that time.

Differences in objectives between HSI and partner TTUs. HSI officials  noted that one limitation in the TTU program is that partner TTUs  frequently focus on revenue collection issues and place less priority on  disrupting TBML schemes than HSI does. For example, partner TTUs  may seek to identify instances of customs fraud, which can reduce duties  collected by customs agencies on imported goods, but they may not  pursue the investigation further to disrupt the criminal organizations  involved in the scheme.

Limited authorities and lack of interagency coordination in TTU  partner countries. Partner TTUs generally operate within their countries’  custom agencies, which frequently do not have their own law  enforcement authorities, according to HSI and other U.S. officials. As a  result, they must coordinate with law enforcement partners within their  countries to be effective. However, HSI officials noted that such  coordination does not always take place. For example, HSI officials in  Mexico stated that the Mexico TTU has had limited effectiveness because  of a lack of sufficient cooperation between Mexican customs and law  enforcement officials. Similarly, in Brazil, HSI officials noted information  sharing with that country’s TTU has been delayed because the TTU lacks  ready access to trade data and must purchase it from a different Brazilian  government agency.

Data sharing and connectivity. HSI and partner government officials  have also noted issues about uploading partner trade data into DARTTS  and ensuring these data are in a compatible format. For example, an HSI  official in the United Kingdom described a delay of several months in  uploading data from the United Kingdom into DARTTS because of data  formatting issues. In addition, U.S. officials at Embassy Canberra noted  that the Australian TTU has frequently experienced connectivity problems  with DARTTS that have challenged the TTU’s ability to upload its data to  the system.

In addition, HSI and partner TTU officials noted that there are certain  limitations in DARTTS, including difficulties in working with cross-border  data, that reduce its effectiveness as a tool for HSI and partner TTUs to  use in identifying potential cases of TBML. DHS noted that details on  these limitations are sensitive and we did not include the specifics in this  report.

HSI Has Not Taken Key Management Steps Related to the TTU Program

Although the TTU program has faced a number of challenges, HSI has  not taken key management steps that could help guide its efforts,  including developing a strategy and a performance monitoring framework.  Because the TTU program involves partnerships between HSI and  foreign governments, HSI has varying levels of ability to address these  challenges through independent action. However, by developing a  strategy and a performance monitoring framework, HSI could assess how  best to plan for and address these challenges in order to maximize the  program’s effectiveness.

HSI officials stated that they have not produced any sort of planning or  strategy documents specifically for the TTU program. HSI has produced a  strategic plan for fiscal years 2016 through 2020 that references the TTU  program. For example, the strategy notes that HSI plans to, “continue to  provide operational, analytical, technical, and targeting support on trade- based money laundering and illicit funding investigations being conducted  by HSI field offices and partner TTUs.” However, the strategy includes  only limited references to the TTU program’s operations. According to  HSI officials, for the TTU program specifically, they only conduct informal,  periodic planning, such as identifying countries that they would like to  prioritize for inclusion in the TTU program. DHS Directive 101-01  establishes requirements for planning, budgeting, programming, and  executing for the department and its component agencies. Among other  things, the directive requires agency heads, including the Director of ICE,  to establish planning processes and methods to oversee program  management and risk management activities for the programs and  operations under their purview. HSI officials noted that in addition to the  HSI strategic plan, they have used some documents, such as FATF’s  2008 report on best practices for combating TBML, to guide the TTU  program, but have not prioritized the development of a strategy for the  TTU program because of resource constraints. Without such a strategy,  however, HSI lacks an important tool to guide its operations, including  how best to work with its partner TTUs to identify potential cases of  TBML, prioritize potential cases for further investigation, and successfully  conduct these investigations. In addition, without a strategy, HSI cannot  effectively plan how to grow the TTU program, where appropriate, and  establish TTUs in additional priority countries. Although developing a  strategy would require an investment of resources, a strategy would help  ensure HSI is utilizing its limited resources effectively to achieve the TTU  program’s goals over the long term.

According to HSI officials, the HSI TTU tracks some information on the  results of domestic investigations, including the number of TTU-related  cases initiated and arrests made, but it does not have a performance  monitoring framework, with specified metrics, that allows it to track the  results of its work with partner TTUs. HSI officials also stated they have  not conducted any evaluations of the factors that increase or decrease  the TTUs’ effectiveness. As part of its requirement on planning,  programming, budgeting, and execution, DHS Directive 101-01 states  that, among other things, the objective of the execution phase is to  account for cost and performance to determine if value has been  delivered to stakeholders. The directive also notes that annual analysis  and reporting of financial expenditures and performance measure results  are key deliverables during the execution phase. HSI officials  acknowledged that a performance monitoring framework would be  beneficial, but they have prioritized other operational issues because of  limited resources. In addition, they noted designing a performance  monitoring framework that would allow HSI to measure and evaluate the  results achieved through its work with partner TTUs would be challenging  because, among other things, enforcement efforts of partner TTUs are  not within their control and they do not have access to all partner country  information. According to HSI officials, they instead rely on measures  such as the number of trade records uploaded into DARTTS and the  number of foreign users of DARTTS, among other things. However,  without a performance monitoring framework for the TTU program, HSI  lacks important information on what successes the program has achieved  and how to replicate them with other partner TTUs. In addition, HSI lacks  key information on areas where the program is not achieving its intended  results and what adjustments to make in response. As with the  development of a strategy, working to establish a performance monitoring  framework would entail an investment of resources, but once completed it  could help HSI in assessing how to maximize the impact of its resource  investments in the TTU program. In addition, the performance monitoring  framework could help demonstrate results to other stakeholders, such as  State, that may wish to consider providing support to the TTUs in partner  countries.

U.S. Agencies Have Worked With International Bodies to Develop International Anti-Money Laundering Standards, Share Information, and Strengthen Countries’ Ability to Combat TBML FATF

The U.S. government has worked with FATF, the Egmont Group,  UNODC, and the WCO to combat TBML. Among other things, the U.S.  government has worked with these international bodies to develop anti- money laundering standards, share information regarding TBML methods  and specific cases, and provide training and technical assistance to  strengthen the ability of countries to combat TBML.

As a member of FATF, the U.S. government has supported the  organization’s efforts to develop internationally recognized standards for  combating money laundering, terrorist financing, and the financing of the  proliferation of weapons of mass destruction. FATF’s standards, updated  in 2019, include 40 recommendations. According to FATF, it designed  these recommendations to set out the critical measures that countries  should establish to:  identify the risks, and develop policies and domestic coordination; pursue money laundering, terrorist financing, and the financing of apply preventive measures for the financial sector and other establish powers and responsibilities for the competent authorities  (such as investigative, law enforcement and supervisory authorities)  and other institutional measures; enhance the transparency and availability of beneficial ownership  information of legal persons and arrangements; and  facilitate international cooperation.

To date, FATF’s standards do not include any specific reference to TBML.  However, Treasury officials from the U.S. government’s delegation to  FATF stated that the standards are designed to provide a robust  framework to help competent authorities prevent, detect, and mitigate  against the misuse of global trade and combat all forms of money  laundering, including TBML. For example, the officials noted that FATF’s  third recommendation identifies the need for countries to criminalize  money laundering, which would include TBML activity.

The U.S. government also works with FATF to conduct mutual  evaluations of member countries. FATF designed these evaluations,  which are periodic peer reviews for each country, to provide a detailed  assessment of a country’s technical compliance with the FATF standards  and the effectiveness of its AML/CFT systems. These evaluations may at  times highlight issues related to TBML in countries. For example, FATF’s  2014 mutual evaluation of Spain found a significant number of cases  involving TBML, particularly those associated with value added tax or  other tax fraud schemes.

The U.S. government has also supported FATF’s development of several  reports on TBML, including a 2006 report on types of TBML schemes and  a 2008 report on best practices for detecting TBML. More recently, FATF  published various other reports addressing issues relevant to combating  TBML, including the 2010 Money Laundering Vulnerabilities of Free  Trade Zones, the 2015 Money Laundering/Terrorist Financing Risks and  Vulnerabilities Associated with Gold, and the 2018 Professional Money  Laundering. These reports provide a range of guidance to countries on  how to detect and combat TBML.

FinCEN has worked with its fellow FIUs in the Egmont Group to exchange  tactical, operational, and strategic information to assist in efforts to  combat money laundering, including TBML. As part of its work with  Egmont Group partners, FinCEN shares information on particular cases  in response to requests from fellow FIUs, proactively shares relevant  information with other FIUs, and requests information from FIUs.  According to FinCEN officials, Egmont Group membership is critical to  information sharing in support of FinCEN analysis and U.S. law  enforcement cases because it provides assurances that members have  the appropriate policies and procedures in place to respond to and protect  sensitive information. FinCEN and its FIU counterparts follow the Egmont  Group’s Principles for Information Exchange Between Financial  Intelligence Units, in addition to the law of each jurisdiction, to foster  cooperation while sharing information securely. Generally, Egmont  Group members use a dedicated computer system that the organization  has developed, the Egmont Secure Web, to share information securely.  FinCEN officials stated that they respond to about 1,000 information  requests a year from other Egmont Group members. For example, at the  request of a foreign FIU, FinCEN conducted research on an import/export  company suspected of involvement in TBML, summarizing relevant SARs  and identifying other relevant information on the subjects. FinCEN’s  assessment determined the potential use of a TBML scheme and use of  shell companies to obfuscate the flow of funds.

FinCEN has also supported the Egmont Group’s efforts to provide training  to member FIUs on issues related to money laundering and terrorism  financing. For example, FinCEN has helped develop and deliver Egmont  Group-sponsored training to FIU analysts on how to understand complex  financial data. However, Treasury officials stated that the Egmont Group  has not provided any TBML-specific training. Although the Egmont Group  has not sponsored TBML-specific training for FIUs, FinCEN officials noted  that FinCEN has hosted officials from several partner FIUs at the TBML  conferences it held in 2018 and 2019 and has provided its own TBML- related training to partner FIUs. For example, in October 2019, FinCEN  provided TBML-related training to Mexico’s FIU.

Finally, FinCEN has supported the Egmont Group’s development of  relevant guidance documents. For example, the Egmont Group  developed, in partnership with FATF, a 2013 report called Money  Laundering and Terrorist Financing through Trade in Diamonds.  According to the report, the two bodies decided to undertake the research  because they had (1) never conducted in-depth research on the diamond  trade and associated money laundering and terrorist financing risks and  (2) a number of participants in the bodies had noted indications that the  diamond trade was being exploited for money laundering and terrorist  financing purposes. More recently, in July 2018, the Egmont Group  produced an additional report with FATF, Concealment of Beneficial  Ownership, which also discussed certain TBML schemes.

The U.S. government also partners with UNODC in its work to combat  illicit drugs and international crime, including TBML. Among other things,  State has provided funding to UNODC’s Global Program against Money  Laundering, Proceeds of Crime and the Financing of Terrorism. Through  the program, UNODC has provided training and technical assistance to a  range of member states throughout the world. For example, as part of the  program, UNODC places AML experts in countries for up to a year to  serve as mentors. These mentors provide a range of support, such as  helping countries establish functioning FIUs. UNODC also conducts  shorter-term workshops and training sessions, such as mock trial training  for law enforcement officers, prosecutors, and judges to enhance their  ability to investigate and prosecute money laundering cases. In addition,  according to UNODC, under the program, it has developed model  legislation that United Nations members can use in setting AML/CFT legal  regimes in their countries that are consistent with FATF standards.

The U.S. government has also supported certain UNODC programs that  have specifically addressed issues related to TBML. According to a  UNODC official in Colombia, UNODC has worked with State INL and HSI  to provide training for governments in the region to increase expertise on  TBML. The official said that UNODC is prioritizing TBML-specific  trainings, particularly to build TBML knowledge amongst new prosecutors.  In addition, UNODC headquarters officials noted that State INL has  supported the development of a program on TBML that UNODC is  planning in the Caribbean.

The U.S. government also works with the WCO to develop and  strengthen the role of customs administrations in tackling TBML. Among  other things, CBP has supported WCO’s efforts to develop enforcement  tools, guidance and best practices, and training for member countries. For  example, CBP has supported the WCO’s development of its Cargo  Targeting System. The system, which is available to all WCO members,  is designed to assist customs agencies in conducting automated risk  assessments of import, export, and transshipment cargo in order to  identify high risk shipments that warrant further investigation. With WCO  support, several customs agencies also developed the “Compendium of  Customs Operational Practices for Enforcement and Seizures,” a tool that  provides practical examples for improving enforcement and seizure  practices.

With CBP support, WCO has produced a number of guidance and best  practices documents that can support efforts to combat TBML. For  example, in a 2018 report, the WCO described a number of best practices  that customs administrations could consider for combating illicit financial  flows via trade misinvoicing. In addition, in 2019, the WCO and the  Egmont Group developed a Customs-FIU Cooperation Handbook that  provides their members guidance and best practices for enhancing global  collaboration efforts between customs agencies and FIUs.

Finally, the WCO has provided training for its member countries to deter  illicit activities and combat TBML. For example, through the WCO, HSI  special agents with AML and TBML expertise have conducted workshops  to assist WCO member countries in their operational efforts. The WCO  also organized a joint workshop with the Organization for Economic Co- operation and Development in 2019 that was designed to raise  awareness among customs agencies, FIUs, and law enforcement  agencies about TBML related to gems and precious metals. In 2019, the  WCO also agreed to launch a two-year counter-TBML effort entitled  “Project TENTACLE,” according to CBP officials. The project will include  the delivery of TBML workshops to WCO members through 2021, as well  as five operational customs activities that follow each workshop. This  project will focus on the Asia/Pacific, Africa, and South America regions.  State INL has provided funding for Project TENTACLE, in coordination  with experts from ICE and CBP. WCO officials noted the lack of training  that many customs administrations have on TBML, and the need for  regularized training on the subject.

TBML poses significant national security risks to the United States.  Criminal and terrorist organizations use TBML schemes to disguise the  origins of billions of dollars in funds generated by their illicit activities.  Given the national security threat that TBML poses, it is crucial that the  U.S. government develop an effective response to combat it. Because  TBML is international in nature and frequently involves complex, difficult  to detect schemes that cut across international borders, it is important  that the U.S. government respond through domestic efforts and  collaborate with partner countries and international bodies to address the  problem. As the U.S. government’s primary partnership program focused  on combating TBML, the TTU program plays a key role in these efforts to  collaborate with other countries. Although the TTU program has achieved  some successes, it has also faced a number of challenges. However, HSI  has not taken key management steps to address those challenges and to  strengthen the TTU program. HSI, for example, has not established a  strategy for the TTU program. Because HSI does not have such a  strategy, it lacks an important guide for its efforts to maximize the  effectiveness of its existing TTU partnerships and to prioritize efforts to  expand the program to other countries. HSI also does not have a  performance monitoring framework that tracks the results of its work with  partner TTUs. Without such a framework, HSI does not have a means of  systematically tracking progress toward program goals and identifying  areas that need adjustments to improve program results.

We are making two recommendations to DHS:  The Secretary of Homeland Security should direct the Director of ICE to  develop a strategy for the TTU program to ensure that ICE has a plan to  guide its efforts to effectively partner with existing TTUs, and to expand  the program, where appropriate, into additional countries.  (Recommendation 1)

The Secretary of Homeland Security should direct the Director of ICE to  develop a performance monitoring framework for the TTU program that  would enable the agency to systematically track program results and how  effectively it is achieving the program’s goals. (Recommendation 2)

We provided a draft of the report to DHS, DOJ, State, and Treasury.  DHS, State, and Treasury provided technical comments, which we  incorporated as appropriate. DOJ noted that it had no comments on the  draft. DHS also provided written comments, which are reproduced in  appendix III. In its comments, DHS stated it concurred with our  recommendation that the Secretary of Homeland Security direct the  Director of ICE develop a strategy for the TTU program, but did not  concur with our recommendation to develop a performance monitoring  framework for the program. In its response to our recommendation  regarding a strategy for the TTU program, DHS noted that HSI has a  strategic plan for fiscal years 2016 through 2020 that addresses the TTU  program. However, it stated that the TTU program would develop, as a  complement to the HSI strategic plan, a document that outlines emerging  threats and challenges, as well as existing metrics that are used to track  program results for the TTU.

In noting it did not concur with our recommendation to develop a  performance monitoring framework for the TTU, DHS stated the TTU  program already collects a number of statistics each fiscal year related to  its program results and can use these statistics to demonstrate program  results. DHS also stated that while the TTU program’s primary mission is  to establish partnerships and provide foreign law enforcement with  information tools to facilitate the exchange of data between TTUs, HSI  has limited ability to track the activities of partner TTUs and cannot dictate  the enforcement actions partner countries take. In our report, we  acknowledge that the HSI TTU tracks some information on the results of  domestic investigations, as well as other information, such as the number  of records in DARTTS. We also acknowledge that because the TTU  program involves partnerships between HSI and foreign governments,  HSI does not have the ability to independently control all aspects of the  program’s performance. However, we believe that further action by HSI to  establish a performance monitoring framework is warranted for the  following reasons. First, although HSI has noted examples of statistics it  can use to measure the performance of the TTU program, it does not  have a formally documented framework or process for measuring its  performance or reporting performance results. Second, while the TTU  program has identified a few indicators it uses in assessing performance,  it has not established any indicators with goals for which to measure its  results against, making it challenging to assess whether HSI is making  progress to achieve the program’s goals. Third, even though HSI has  some measures, such as the number of TTU-related cases it has initiated  or arrests made, HSI officials acknowledged that the agency does not  track information on what role the TTU actually played in these cases. As  a result, HSI cannot establish the extent to which the TTU, rather than a  different HSI office, has contributed to any of the measures. Fourth,  although we recognize that HSI does not have the ability to dictate what  actions partner TTUs will take and may not have access to all relevant  partner country information, HSI does have opportunities to take further  action to monitor the outputs of its work with partner TTUs. For example,  HSI could work with partner TTUs to collect information more  systematically on successful cases that they have initiated. HSI could  also collect information on factors that reduced the ability of partner TTUs  to successfully pursue cases. Other U.S. agencies have conducted  performance monitoring and evaluations on programs that rely on  partnership and collaboration with foreign governments.

We continue to believe in the need for a rigorous performance monitoring  framework for the TTU program, a key U.S. government effort in  combatting TBML. We note that HSI could potentially integrate a  performance monitoring framework into the strategy it plans to develop in  response to our first recommendation. For example, DHS stated in its  comments that HSI plans to document the metrics it will use to measure  the TTU program’s results in that strategy.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Acting Secretary of Homeland Security,  the Secretary of State, the Secretary of the Treasury, and the Attorney  General. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.

If you or your staff members have any questions about this report, please  contact me at (202) 512-8612 or GianopoulosK@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff who made contributions to  this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

This report examines (1) what the available evidence indicates about the  types and extent of international trade-based money laundering (TBML)  activities, (2) the practices international bodies, selected countries, and  knowledgeable sources have recommended for detecting and combating  TBML, and (3) the extent to which U.S. Immigration and Customs  Enforcement has effectively implemented the TTU program and the steps  the U.S. government has taken to collaborate with international partners  to combat TBML.

To address all three objectives, we analyzed relevant data and  documentation from the Departments of Homeland Security (DHS),  Justice (DOJ), State (State), and the Treasury (Treasury). For example,  we reviewed U.S. government documents that discuss risks associated  with TBML, including Treasury’s 2015 and 2018 National Money  Laundering Risk Assessment and 2015 and 2018 National Terrorist  Financing Risk Assessment and the Drug Enforcement Administration’s  annual National Drug Threat Assessment. In addition, we reviewed U.S.  government strategy documents that provide information on the extent  and types of TBML, including Treasury’s 2018 National Strategy for  Combating Terrorist and Other Illicit Financing and State’s annual  International Narcotics Control Strategy Report (Volume II). We also  analyzed other U.S. government reporting on TBML, including TBML- related advisories from Treasury’s Financial Crimes Enforcement Network  (FinCEN), selected cables from U.S. embassies describing TBML issues  in their host country, and summary analyses from Immigration and  Customs Enforcement Homeland Security Investigation’s (HSI) Trade  Transparency Unit (TTU). Finally, we conducted interviews with officials  from DHS, DOJ, State, and Treasury in Washington, D.C.

We also selected a nongeneralizable sample of six countries to study in  greater depth. We conducted fieldwork in three of these countries:  Colombia, Paraguay, and the United Kingdom. During our fieldwork in  each country, we interviewed U.S. embassy officials from DHS, DOJ,  State, and Treasury. In each country, we also interviewed host country  officials, including TTU, law enforcement, financial intelligence unit, and  financial regulatory agency officials. In addition, in Paraguay, we traveled  to Ciudad del Este to observe commercial activity and border operations  on Paraguay’s border with Brazil and Argentina. For the other three  countries we selected—Australia, Mexico, and Singapore—we conducted  work remotely. We interviewed, via telephone, U.S. embassy officials in  Australia and Mexico, and obtained written responses from U.S. officials  at Embassy Singapore. To select these six countries, we considered  several criteria, including (1) the type and extent of TBML risk, (2) the  types and level of U.S. collaboration with the country, (3) the presence of  U.S. agencies that work on TBML in the country, (4) the extent to which  the country had implemented recommended practices to identify and  combat TBML (with a goal of covering a range of levels of adoption), and  (5) the country’s location (with a goal of covering a range of geographic  regions). The team also considered additional factors based on  recommendations from knowledgeable sources, such as selecting  countries with differing levels of capacity to respond to the TBML threat.

To determine what available evidence indicates about the types and  extent of international TBML, we analyzed documentation from relevant  international bodies including the Egmont Group of Financial Intelligence  Units (the Egmont Group) the Financial Action Task Force (FATF), the  United Nations Office on Drugs and Crime (UNODC) and the World  Customs Organization (WCO). For example, we reviewed these reports:  FATF’s 2006 Trade Based Money Laundering and 2008 Best Practices  Paper on Trade Based Money Laundering; the Egmont Group’s and  FATF’s 2013 Money Laundering and Terrorist Financing through Trade in  Diamonds; UNODC’s 2011 Estimating Illicit Financial Flows Resulting  from Drug Trafficking and Other Transnational Organized Crimes; and  WCO’s 2018 Illicit Financial Flows via Trade Mis-invoicing.

To gather further information regarding the types and extent of  international TBML activities, we conducted 15 interviews, covering a  nongeneralizable sample of individuals knowledgeable about TBML and  efforts to combat it, including academic researchers, think tank officials,  private sector representatives from trade organizations and individual  companies, and former U.S. government officials. Throughout this report,  we refer to these individuals as “knowledgeable sources.” In selecting  these knowledgeable sources, we conducted initial research to identify  individuals or organizations that had conducted research related to TBML  and prioritized those whose work was frequently cited by other sources.  We also requested recommendations from U.S. agencies and the  knowledgeable sources we spoke with regarding other individuals or  organizations we should meet with during our work. In selecting these  knowledgeable sources, we sought to choose people with different types  of experiences studying and working on issues related to TBML to get a  range of perspectives.

We also conducted a literature search for studies from peer-reviewed  journals, conference papers, dissertations, government reports, industry  articles, and think tank publications that sought to quantify the amount of  TBML activities. We also asked for recommendations on relevant  publications as part of our initial meetings with U.S. agencies and  knowledgeable sources. We examined summary level information about  each piece of literature, and then from this review, identified articles that  were germane to our report. A GAO economist then evaluated the  methods used in the research and a GAO methodologist performed a  secondary review and confirmed the summarized research findings. We  reviewed 10 studies published between January 2009 and July 2019 that  were relevant to our research objective on what the available evidence  indicates about the extent of international TBML activities. We also  reviewed one additional article published in 1999, which was frequently  cited in other articles as a pioneer of measuring money laundering and  included it in our review.

To identify the practices international bodies, selected countries, and  knowledgeable sources have recommended for detecting and combating  TBML, we conducted a literature review to find relevant studies and other  reports prepared by international bodies, industry groups, think tanks,  academics, and foreign governments. We then analyzed these studies  and reports to identify recommendations they made regarding practices  for detecting and combating TBML. To gather further information  regarding recommended practices for detecting and combating TBML and  potential challenges in implementing such practices, we interviewed U.S.  representatives of FATF and the Egmont Group, conducted interviews  with UNODC officials, and obtained written responses to a set of  questions from the WCO. We also spoke with U.S. embassy officials in  five of the countries we selected for our nongeneralizable sample and  obtained written responses from U.S. embassy officials in the sixth  country. In addition, we spoke with host country officials in three of those  countries. Finally, we spoke with selected knowledgeable sources.  Through our work, we identified a range of recommended practices  related to detecting and combating TBML. We grouped these  recommended practices into five categories. We also identified examples  of the steps that the U.S. government and other countries have taken to  implement practices in each of these five categories.

To examine the extent to which U.S. Immigration and Customs  Enforcement has effectively implemented the TTU program, we collected  information on HSI’s TTU program, including data on HSI’s TTU partner  countries, the details on the TTU program’s operations, and  documentation on the data system HSI developed to support the TTU  program—the Data Analysis and Research for Trade Transparency  System (DARTTS). We also evaluated HSI’s management of the TTU  program by comparing the steps it had taken to establish a strategy and  performance monitoring framework to requirements that DHS has  established related to planning, programming, budgeting, and execution.  To identify the steps HSI had taken, we interviewed HSI officials and  reviewed relevant documentation on the TTU program.

To examine the steps U.S. agencies have taken to collaborate with  international partners to combat TBML, we also obtained and analyzed  foreign assistance data, for fiscal years 2014 through 2018, from State on  financial crimes and money laundering assistance programs it funded and  from Treasury’s Office of Technical Assistance (OTA) on economic  crimes assistance programs it funded. To assess the reliability of these  data, we reviewed available documentation and interviewed  knowledgeable U.S. officials. We determined that the State and Treasury  OTA assistance data were sufficiently reliable for our purposes to present  summary information on funding for assistance programs.

We also reviewed other relevant U.S. government documentation  describing training, technical assistance, or other support that U.S.  agencies provided to partner countries to assist them in combating TBML  or money laundering more broadly. For example, we reviewed selected  performance reports for State anti-money laundering programs and  selected end-of-project reports for Treasury OTA economic crimes  programs. To gather information on the U.S. government’s collaboration  with international bodies, we reviewed documentation from the Egmont  Group, FATF, UNODC, and WCO describing the key activities of the  bodies. Finally, as part of our work for this objective, to learn more about  U.S. agencies’ work with partner countries and international bodies to  combat TBML, we also interviewed U.S. officials in Washington, D.C. and  interviewed U.S. embassy and host government officials in partner  countries.

We conducted this performance audit from January 2019 to April 2020 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Results of Literature Review on Trade-Based Money Laundering

To determine the extent of trade-based money laundering (TBML)  activities, we conducted a literature search for studies that sought to  quantify potential illicit financial flows, including TBML. We considered  existing studies from peer-reviewed journals, conference papers,  dissertations, government reports, industry articles, and think-tank  publications identified through searches the GAO librarian conducted of  various databases, such as EconLit, Social SciSearch, and Scopus. We  also asked for recommendations on relevant publications as part of our  initial meetings with U.S. agencies and knowledgeable sources. After  conducting the searches and relying on recommendations, we started the  review with 82 studies. To assess the methodological quality of the  studies, we relied on generally accepted social science standards. We  examined summary level information about each piece of literature, and  then from this review, identified 14 articles that sought to quantify  potential illicit financial flows, including TBML. A GAO economist  evaluated the methods used in the research, eliminated some research if  the methods were not appropriate or not rigorous, and then summarized  the research findings. In addition, a GAO methodologist performed a  secondary review and confirmed our reported analysis of the finding. We  further eliminated four studies and eventually identified 10 studies  published between 2009 and 2019 that were relevant to our research  objective on what the available evidence indicates about the extent of  international TBML activities. We also identified one additional article  published in 1999, which other articles frequently cited as a pioneer  method of measuring money laundering, and included it in our review.  See table 3 below for the list of studies included in our analysis.

We found that estimating the extent of money laundering is a challenging  task given that criminals seek to hide their illegal activities. Still, economic  and statistical models have been developed that attempt to quantify the  extent of such activities using various published datasets. However, none  of the studies we identified in our literature review sought to develop  estimates of TBML specifically and all the studies we reviewed capture  activities that are generally broader than TBML to include tax avoidance,  trade price manipulation, or trade misinvoicing, which demonstrates the  difficulty in estimating the magnitude of TBML activity. In addition,  according to the literature we reviewed, the studies we identified all had  certain methodological limitations.

We found that studies seeking to quantify potential money laundering  activities, including TBML, have typically relied on one of four methods:  (1) Walker gravity model, (2) unit price analysis, (3) trade mirror analysis,  or (4) a theoretical model.

One of the first researchers that attempted to measure money laundering  is John Walker. In a paper published in 1999, he used what became  known as the Walker gravity model to estimate the amount of money  laundering globally. The gravity model states that the amount of trade  from place A to place B depends on the size of the population in A, the  “attractiveness” of B to people based in A, and the distance between the  two places. The Walker model based the “attractiveness” of a place on  four assumptions: (1) foreign countries with a tolerant attitude towards  money laundering will attract a greater proportion of the funds than more  vigilant countries; (2) high levels of corruption or conflict will deter money  launderers, because of the risks of losing their funds; (3) countries with  high levels of gross national product per capita will be preferred by money  launderers, since it would be easier to “hide” their transaction; and (4)  other things being equal, geographic distance, and linguistic or cultural  differences, work as deterrents to money launderers.

According to the literature we reviewed, the Walker gravity model has  several limitations. First, because the flows of money laundering are  unobservable, it is not possible to assess the quality of the formula.  Second, although some factors in the attractiveness indicators are  plausible, they are still arbitrary. Third, the researcher acknowledged that  these figures represent only an interim set of results to show the types of  output that would be derived from a fully developed model. These  estimates are not his best and final estimates of money laundering  around the world. Because of these limitations and considering the  estimates are based on data that date to 1995, we did not present the  estimates in the report. However, considering the importance of the  Walker gravity model in the literature on measuring money laundering, we  discussed this model in the report to provide context on methods used to  quantify potential money laundering activities.

A researcher used the unit price analysis to analyze U.S. trade data to  quantify the magnitude of suspicious trade transactions. The database  contains information at the transaction level that is reported to the U.S.  Census Bureau from Shipper’s Export Declarations and U.S. Customs  Service Entry Summary forms. The model follows the International  Revenue Service’s definition of suspicious prices, which, according to the  researcher, is defined as prices that are outside of the upper- or lower- quartile price range for each commodity in each country. He then  aggregated the total dollar amount to come up with an estimate of the  amount of suspicious trade. The researcher found that in 2018, total  money moved out of United States through under-valued exports and  over-valued imports was approximately $278 billion. Total money moved  into the United States through over-valued exports and under-valued  imports was approximately $435 billion.

According to the literature we reviewed and information we received from  the Census Bureau, we found that the unit price analysis approach has  several limitations. First, the Census Bureau edits raw trade data received  from Customs and Border Protection by automatically correcting unit  prices that fall outside of its price parameters, which it establishes using  industry analysis, input from public and private entities, and trend data. Of  the total amount of export and import records in a specific month, roughly  18 percent to 22 percent contain some type of editing, according to the  Census Bureau. The edited data with some extreme unit prices (those  that fall outside of price parameters set by the Census Bureau) already  “corrected” creates issues for the unit price analysis, which relies on  identification of extreme unit prices.

Second, the use of lower- or upper-quartile as price filters is somewhat  arbitrary. For example, another study noted a fundamental weakness is  that unit price analysis depends on the existence of a benchmark against  which “abnormality” can be assessed. A lower benchmark would, in most  product categories, produce more prices flagged as suspicious.

Moreover, estimates from the unit price analysis also include other types  of illicit activities in addition to TBML, such as income tax avoidance or  evasion, among others. Therefore, this measurement of suspicious trade  is generally broader than that of TBML. In addition, because of their focus  on identifying suspicious prices, these estimates exclude other types of  TBML that may not utilize over- or under-invoicing techniques, such as  the Black Market Peso Exchange.

The third approach, adopted by Global Financial Integrity and several  other scholars, uses trade mirror analysis to estimate the amount of trade  misinvoicing. This approach compares what country A reports as an  export to country B and what B reports as an import from A (or vice  versa). The calculation assumes the price and volume declared to both  countries authorities would match after accounting for insurance and  freight costs, and that any further difference between the trades reported  by the countries indicates trade misinvoicing.

In its latest report, Global Financial Integrity measured trade misinvoicing  using two datasets. First, Global Financial Integrity relied on the  International Monetary Fund’s (IMF) Direction of Trade Statistics and  selected bilateral trade reports for 148 developing countries trading with  36 advanced economies from 2006 to 2015. Global Financial Integrity  calculated potential trade misinvoicing as the import and export gaps,  netted of the insurance and freight costs differentials. Second, Global  Financial Integrity used United Nations Comtrade data to calculate trade  gaps, where Comtrade gaps are calculated for each of the Harmonized  System six-digit commodity classes available. Global Financial Integrity  found that over the 10-year period of this study, potential trade  misinvoicing amounted to between 19 and 24 percent of developing  country trade on average. For 2015, it estimated that potential trade  misinvoicing to and from these 148 developing countries were between  $0.9 trillion and $1.7 trillion.

According to the literature we reviewed, the Trade Mirror Analysis  approach also has several limitations. First, alternative, legitimate reasons for import and export gaps may exist. For example, a researcher  noted that “price volatility, transit and merchant trade, and the use of  bonded warehouses can result in large trade data discrepancies arising  from legitimate trade.” Another researcher also noted that major  differences in customs import valuation methodologies and customs  administration fees could contribute to trade data discrepancies.  Moreover, accurate records may not always exist, especially in  developing economies.

Second, according to one researcher, the IMF and the United Nations,  whose data these studies draw on, warn that the statistics cannot be  reliably used in this way. The IMF says, “we caution against attempting to  measure  by using discrepancies in macroeconomic  datasets…. fficial estimates of trade misinvoicing cannot be derived by  transforming trade data from the IMF Trade Statistics and/or United  Nations Comtrade, either by individual country or in aggregate.”

Moreover, Global Financial Integrity defines trade misinvoicing as the  fraudulent manipulation of the price, quantity, or quality of a good or  service to shift money across international borders. Therefore, this  measurement of trade misinvoicing is generally broader than that of  TBML. However, certain types of TBML schemes are likely not included in  the estimate of trade misinvoicing. For example, Black Market Peso  Exchange schemes are likely not included because they do not require  falsification of the price, quantity, or quality of a good or service.

Another study sought to account for various factors that may lead to  simple import-export discrepancies. The analysis focuses on under- reporting of Italian exports and over-reporting of Italian imports. The  authors used a linear mixed model, where the dependent variable is the  discrepancy in mirror statistics. The authors adopted a “residual  approach,” in which the model controls for the main legal determinants of  mirror statistics gaps, and the estimate residuals are proxy measures of  the illegal component of such discrepancies. Using this approach, the  authors were able to calculate irregular trade flows at country-sector level  and rank countries and sectors by their risk levels.

This approach uses economic theory to determine how much launderers  would launder if they acted in an economic rationally manner. One study  developed a theoretical model for estimating money laundering in the  United States and the 15 countries that were in the European Union at  the time. According to a researcher, the model assumes that “agents  have the option to work partly in the legal economy and partly in the  illegal economy. They face transaction costs in the legal sector and costs  of being detected in the illegal sector. Two types of firms produce with two  different technologies a legal good and an illegal good. The government  sets fines, can influence the probability of detection, and can influence the  liquidity of the economy. There is a liquidity constraint. If households want  more liquid funds, they must engage in the illegal sector. The ‘optimal’  money laundered depends on the labor services allocated to the legal  and illegal sector and on the prices and on the quantities of both goods.”  The model uses parameters for the U.S. economy and for the European  Union macro area and creates simulations to generate equilibrium  allocations for money laundering.

According to one study, this model has the advantage of having a solid  micro-foundation, which helps to identify rational laundering behavior.  However, the model is highly theoretical and has various unrealistic  assumptions. For example, according to the model, without liquidity  constraint in the economy, there would be no money laundering.

Moreover, one of the parameters used in the model—the probability of  being detected—is calibrated using data for the Italian economy from  1998 through 2000. Given the limitations discussed above and because  the data date to 1998, we did not present the estimates in the report.  However, considering that the theoretical model is one of the methods  frequently discussed in the literature on measuring money laundering, we  discussed this model in the report to provide context on methods used to  quantify potential money laundering activities.

Appendix III: Comments from the Department of Homeland Security

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Juan Gobel (Assistant Director),  Ming Chen (Assistant Director), Ryan Vaughan (Analyst-in-Charge),  Joyce Y. Kang, Pamela Davidson, Leia Dickerson, Neil Doherty, Toni  Gillich, Jeff Harner, Georgette Hagans, Grace Lui, Dan Luo, and Aldo  Salerno made key contributions to this report.

Some criminal and terrorist organizations use trade-based money laundering to disguise illicit proceeds and fund their operations. These kinds of schemes can rely on misrepresenting the price, quantity, or type of goods in trade transactions.

To help fight this practice, Immigration and Customs Enforcement’s Trade Transparency Unit has partnered with 17 countries to exchange and analyze trade data. The program has faced challenges. For example, other nations may collect trade data in different formats, making comparisons difficult.

We made 2 recommendations, including that ICE develop a strategy to make these partnerships more effective.