The role of freight forwarding companies in detecting and investigating trade-based money laundering
| Date | 22 July 2024 |
| Pages | 26-42 |
| DOI | https://doi.org/10.1108/JMLC-04-2024-0069 |
| Published date | 22 July 2024 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
| Author | Ilse Maritha Makkink,Blanche Steyn,Hannes Christo Bezuidenhout |
The role of freight forwarding
companies in detecting and
investigating trade-based
money laundering
Ilse Maritha Makkink
Department of Auditing, Faculty of Economic and Management Sciences,
University of Pretoria, Pretoria, South Africa, and
Blanche Steyn and Hannes Christo Bezuidenhout
Department of Auditing, University of Pretoria, Pretoria, South Africa
Abstract
Purpose –This study aims to investigate the role of freight forwarding companies in detecting and
reporting trade-basedmoney laundering. The proximity of freight forwarding companiesto shipping-related
trade-basedmoney laundering red flags places them in an ideal position to detectsuspicious transactions.
Design/methodology/approach –The study used semi-structuredinterviews with expert participants
in freight forwardingshipping and compliance aspects around freight forwarding.This study focuses on the
South Africancontext.
Findings –Freight forwarding companies are well-positioned to detect, investigate and report on trade-
based money laundering schemes.However, the companies are not always aware of the guidelines designed
to assist in identifying trade-basedmoney laundering schemes. Thus, freight forwarding companiesdevelop
internal processes to identifytrade anomalies but are often unable to link trade anomalies to illegal financial
flows and trade-basedmoney laundering schemes.
Research limitations/implications –The current regulationson money laundering can be extended to
freight forwarding companies by the respective regulators for enhanced anti-money laundering protection.
This study is limitedto freight forwarding companies in a South Africancontext.
Practical implications –Increased awareness among staff in freight forwardingcompanies can assist
them in identifying trade-based money laundering red flags to detect and prevent trade-based money
launderingschemes.
Social implications –This paper assists other role players and policymakers in the trade process to
create a better awareness of trade-based money laundering. The limited obligations on freight forwarding
companies to comply with anti-money laundering regulations lead to a more volunteer-like compliance
practice.
Originality/value –To the best of the authors’knowledge,this is the first paper that offers insight into the
role of freightforwarding companies in detecting trade-basedmoney laundering in South Africa.
Keywords Trade-based money laundering, Red flags, Freightforwarding companies, Illicit financial flows
Paper type Research paper
© Ilse Maritha Makkink, Blanche Steyn and Hannes Christo Bezuidenhout. Published by Emerald
Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0)
licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for
both commercial and non-commercial purposes), subject to full attribution to the original publication
and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/
legalcode
JMLC
27,7
26
Journalof Money Laundering
Control
Vol.27 No. 7, 2024
pp. 26-42
EmeraldPublishing Limited
1368-5201
DOI 10.1108/JMLC-04-2024-0069
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
1. Introduction
With the banking system classified as “the front door of money laundering”strongly
regulated, “the back door”international trade, remains wide open (Zdanowicz, 2009, p. 1).
Money laundering has a global impact, with international trade deemed the largest threat
(Umar, 2023). The fight against money laundering remains a concern, especially given that
South Africa ranked 13th among developing countries concerning illegal financial flows
(IFFs), which includes trade-based money laundering (TBML) (Rapanyane and Ngoepe,
2020).
TBML allow perpetrators to transform criminal proceeds into “clean money”through
figurative “laundromats”, causing the trail associated with dirtymoney to vanish (Liao and
Acharya, 2011). The typical cleaningsteps in money laundering are placement, layering and
integration (Menz, 2019). International trade platforms make money laundering an enticing
option, especially incountries with a high risk of capital flight, where political and economic
turbulence are present (Schlenther, 2016).The increased focus on detecting financial crimes
through various institutions has given rise to perpetrators exploring illegal options, like
TBML, outside the financial systems(Tiwari et al.,2024).
TBML is a “process of disguising the proceeds of crime and moving value through trade
transactions to legitimise their illicit origin”(FATF, 2018). IFFs are defined by the organisation
for economic co-operation and development as “flows generated by methods, practices and
crimes aiming to transfer financial capital out of a country in contravention of national or
international laws”(Organization for Economic Co-operation and Development, 2014). The
misrepresentation of trade transactions in IFF allows funds to move between international
jurisdictions as a layering mechanism to hide funds’illegal origin (Hetzler, 2022).
The remainder of the article is structured as follows: Section 2 provides a background
into TBML schemes, highlighting the identification challenges. Section 3 conceptualises the
literature review intothe IFFs and misinvoicing in South Africa and the financial action task
fource (FATF), anti-money laundering (AML) guidance. The country’s inability to curtail
money laundering is outlined with several examples. Section 4 addresses the methodology
adopted for the study, and Section 5 is followed by the results and discussion of findings.
Finally, the conclusionand recommendations of the study are presented in Sections 6 and 7.
2. Background to trade-based money laundering schemes
Legitimate internationaltrade systems can be used to move dirty money by misrepresenting
the price, quality or type of goods using falsified documentation(Raza and Weirauch, 2021).
Techniques by which TBML can be perpetratedinclude the under- and over-invoicing, over-
and under-shipment of goods, multiple invoicing, ghost invoicing and falsely described
goods and services (Tiwariet al., 2024).
The under- and over-invoicingof goods and services refers to where the price of goods and
services are misrepresentedto enable perpetrators to transfer the proceeds of illegal dealings
across borders (Beverly, 2017). Over-invoicing for goods is popular with government
purchases, where the value of the equipmentis inflated so more government funding can be
expatriated (Liao and Acharya, 2011). Unless freight forwarding companies (FFCs) and
financial institutions can compare prices with the goods’market value, under- and over-
invoicing will likely remain undetected.Over- and under-shipment of goods is when more or
fewer goods are shipped from the exporter to the importer than documented, resulting in a
misrepresentationof the value of goods moved between jurisdictions (FATF, 2020).
Multiple invoicing is when the same invoiceis used multiple times to move funds and, in
the process, launder money (Hataley, 2020, p. 655). Multiple invoicing can be used
successfully over an extended period by submitting duplicate invoiceswith minor changes
Investigating
trade-based
money
laundering
27
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