International Trade: The Anti-Money Laundering Achilles’ Heel

Money laundering risks in Singapore have come under intense scrutiny in the recent months following the revelation of a billion-dollar money laundering scheme in Singapore. The case, involving ostentatious purchases left a poor aftertaste with Singaporeans surprised at how easily billions of dollars had made its way into Singapore. As the country is now very much focussed on tightening anti-money laundering (AML) initiatives generally, it would be an opportune time to shine some light on the insidious risk hidden in the paper documentation that underpin international trade where fraud/money laundering can flourish.

Trade Fraud and Trade Based Money Laundering

Trade fraud and trade base money laundering often co-exist due to the same vulnerabilities in the international trade system. International trade offers a unique proposition for any fraudster – a falsified invoice or shipping document could justify unlocking millions of dollars in financing and transferring it across borders under the guise of legitimate trade structures. The single act of an operations staff doctoring, altering or duplicating invoices or shipping documents, is all that is needed for trade fraud and trade-based money laundering to occur hidden in plain sight.

A more worrying concern for law enforcement agencies is when staggering sums of money move across a web of companies in different jurisdictions; on paper, trading counterparts but in reality corporate vehicles to perpetrate the fiction of trade for the purposes of moving funds illicitly.

The nature of international trade and the fault lines between trade and finance, creates this vulnerability where large sums of money can move around with poor or no correlation to the actual underlying goods. This is because international trade is still predominantly paper based and a string of parties between the exporters and importers, can obscure the ownership trail of these goods. The paper nature of the documents leaves it susceptible to the common methods of trade based money laundering: over/under invoicing, multiple invoicing of the same goods, over/ under declarations of shipments and false description of goods. More savvy operators have realised that simplicity might be key – instead of painstakingly creating fake shipping documents that can be discovered, using photocopies of the exact shipping documents like a bill of lading might give the appearance of involvement in a legitimate trade.

By creating invoices for goods that were never owned or overinflating the value of goods, or raising multiple invoices for the same goods, the “trader” might then avail itself to bank financing through discounting facilities. Such facilities work to provide immediate cash on a receivable or payment instrument like a letter of credit due on a later date. The net result is that a fake trade has created real cash disbursed by a bank. The sums can be staggering; receivables are typically the only asset some traders hold, running into the hundreds of millions each year. These receivables can be easily monetized but difficult to verify against the actual goods traded. Between the actual exporter and importer of goods, lies not just the high seas but at times, also a world of fiction where billions of dollars are generated out of thin air. In short, the problem arises from poor fragmented information flows, the ease of manipulation of paper documents and the use of corporate vehicles to mask illicit activities.

The Ground Up Solution: Nominee Directors & Whistleblowing

The solution requires a multi strategy approach. On a macro-level, the authorities in Singapore have been pro-active in pushing for data sharing platforms for international trade alongside a digitalisation drive. Such initiatives, such as SGTradex should create much needed transparency on asset movement and by extension its related money flows. Even with the infrastructure in place, effecting changes in behaviour would still be slow without the necessary legislation to direct users to digitalize.

But a more effective solution to this menace comes from a ground-up approach by focussing on the individuals who are in the driving seats of these corporate vehicles. Fraudsters need companies to create the mirage of arms’ length dealings; and a company needs individuals to carry out its acts even if for falsifying accounts, doctoring documents or signing off on financial statements. 

Singapore’ s business friendly approach means companies can be incorporated by locals and foreigners in a matter of days, with the minimum legal requirement being the appointment of a local resident director, in effect to be answerable to the authorities for the actions of a foreign owned Singapore company.  A nominee director is in a curious position. He or she acts as the face of the company, signing accounts and documents but is typically not involved in any operations of the companies. For a fee, a local can lend his or her name as a nominee director, sometimes even with an indemnity from the company. Recent crackdowns by the authorities have given a glimpse of the proliferation of nominee directors, where in one case a local resident was a nominee director of 980 companies at the same time. It is one of the most striking contrasts in our line of work, to see frauds perpetrated by foreign individuals using Singapore companies with local nominee directors, most of whom are modest people living in public housing unaware of how they might have unwittingly aided some dubious actions by the companies they have been asked to be a director of.

The authorities have astutely noticed this vulnerability in our business friendly environment – acting on the recommendations of the Financial Action Task Force (FATF), proposals to amend Singapore laws are being considered to address such AML vulnerabilities. Amongst them are proposed changes to require nominee directors and shareholders to disclose their nominee status and identify their nominators which ACRA will make publicly available. For experts dealing in trade fraud like us, such changes could not come fast enough and would shine much needed light on the dark corners of trade.

Removing the ease in which corporate vehicles are used to facilitate illicit activities goes hand in glove with prosecution of local and foreign individuals involved in trade fraud. In the aftermath of a collapsed insolvent company accused of falsifying documents, there may be little impetus to investigate individuals responsible and prosecute them. Foreign actors may simply vanish while local ones reinvent themselves under the auspices of a different company. Without rigorous prosecution, there is little reason to expect behaviours to change on the individual level who appear content to leave the corporate shell carrying the can of liability for their acts.

Reducing vulnerabilities in our corporate regime is one useful approach that Singapore can embark on but why not empower the very individuals who are made to execute these illicit tasks? Pav Gill’s remarkable story of his whistleblowing experience of Wirecard’s fraud is a stark reminder that behind every companies’ embezzlement of funds or overstating of assets, lies an employee, who knows wrong is being done.  In every commodities fraud case I was involved in, empowering the individuals pressured to falsify information, with a protected forum to whistle blow could have made all the difference. To that end, a robust national whistle-blowing regime would put the power back into the hands of the very people that might feel unfairly pressured to commit wrongs – and in doing so, protect not just their interest but the national interest of Singapore as a trade and financial hub as well.

*This article was published in the Singapore Business Times on 19 March 2024

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