Trade-based money laundering threat to economy

US bank failures and role of central banks

Trade-based money laundering (TBML) is a silent killer that is undermining the very foundations of Bangladesh's economic growth. As an emerging economy and, more so, an expanding trading nation that is going through LDC graduation, Bangladesh is particularly vulnerable to TBML. This illicit activity is weakening financial institutions, eroding foreign currency reserves, and undermining international trade, leaving the country's economy in shambles and stakeholders in despair.

TBML, also known as trade mis-invoicing, has become rampant primarily to evade taxes and hide the source of illicit funds. By using over-invoicing technique, the value of goods or services is artificially inflated, allowing the launderer to move more money out of the country than would otherwise be possible.

The opposite of this trade involves artificially deflating the cost of goods or services on invoices, thereby evading tax. Mis-invoicing is also largely used where goods or services are misclassified on invoices to avoid customs duties or taxes. For example, declaring a shipment of machinery as "machinery parts" instead of "machinery".

Another way is using trans-shipment, which involves shipping goods to an intermediary destination before they are shipped to their final destination. This can be done to inflate the value of goods or avoid duties or taxes. Ghost-shipping, multiple invoicing, and falsifying trade documents are also commonly used to avoid taxes and tariffs and conceal the true nature of the transactions.

These methods can be quite difficult to detect. The lack of good governance and weak regulatory oversight in Bangladesh is exacerbating the problem of TBML. The Bangladesh Financial Intelligence Unit (BFIU) and the National Board of Revenue (NBR) have primary responsibilities for scrutinising trade transactions for TBML, but they may be under-resourced and lack the necessary expertise to detect and prevent TBML.

One of the preventive measures that can be implemented is to carry out due diligence on trade transactions, especially in high-risk sectors, trade routes and parties involved. Banks can significantly contribute by doing know-your-customer checks as part of increased due diligence while onboarding new clients.

Technological advancements, particularly in the areas of big data and analytics, can aid in making connections and preventing and combating TBML. The use of Artificial Intelligence and data analytics can help give banks and financial institutions a complete picture of their client data. Moreover, the use of blockchain technology can be helpful in detecting TBML by providing transparency and immutability of trade transactions.

Raising public awareness and providing training and capacity-building for law enforcement agencies, financial institutions, and trade-related businesses on how to detect and prevent TBML can also be effective in preventing TBML. Analysts working with TBML alerts frequently struggle to comprehend challenging paperwork, complicated items, and pricing-related concerns. The anti-money laundering compliance teams need to engage in specialised knowledge building and training.

The role of the customs officials is also very important because they may compare the amount and quality of the goods with the price that the trader has specified and look for discrepancies in the product description and pricing.

TBML poses a significant threat to the economy and society of Bangladesh. To effectively prevent it, a comprehensive approach that combines multiple strategies is needed. This includes significant investments in resources and technology, strengthening regulations and oversight, enhancing transparency and information sharing, and enhanced cooperation between government, private sector, and international partners, and, maybe, more importantly, political commitment and business accountability.

The author is an economic analyst


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