Trading with the Enemy: Trade-Based Money Laundering is the Growth Industry in Terror Finance

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Chairman Fitzpatrick, Ranking Member Lynch and members of the Task Force to Investigate Terrorism Financing, thank you for the opportunity to testify today.  It is an honor for me to be here.

Not long after the September 11 attacks, I had a conversation with a Pakistani entrepreneur.  This businessman could charitably be described as being involved in international grey markets and illicit finance.  We discussed many of the subjects addressed in this hearing including trade-based money laundering, terror finance, value transfer, hawala, fictitious invoicing, and counter-valuation.  At the end of the discussion, he looked at me and said, “Mr. John, don’t you know that your adversaries are transferring money and value right under your noses?  But the West doesn’t see it.  Your enemies are laughing at you.”

The conversation made a profound impact on me.  I knew he was right.  At the time of the conversation, the U.S. government and the international community had not focused attention or resources on the misuse of international trade to launder money, transfer value, avoid taxes, commit commercial fraud, and finance terror.  It was completely under our radar screen.  Our adversaries − terrorists, criminals, kleptocrats, and fraudsters − were operating in these areas with almost total impunity.  And unfortunately, many years after that conversation and the tremendous expenditure of resources to counter illicit finance, trade-based money laundering and value transfer are still not recognized as significant threats.  Perhaps as the Pakistani businessman inferred, it is because the subterfuges are “hiding in plain sight.”

The Financial Action Task Force (FATF) has declared that there are three broad categories for the purpose of hiding illicit funds and introducing them into the formal economy.  The first is via the use of financial institutions; the second is to physically smuggle bulk cash from one country or jurisdiction to another; and the third is the transfer of goods via trade.    The United States and the international community have devoted attention, countermeasures, and resources to the first two categories.  Money laundering via trade has for the most part been ignored.

Trade-based money laundering and value transfer (TBML) is a very broad topic. FATF defines 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 key word in the definition is value.