International Trade System-Based Money-Laundering concerning the Fundamental Challenges of the Trade System of Iran

Document Type : Original Article from Result of Thesis

Authors

• Amir Jamali Hajiani ¹
• Esmaeil Abdollahi ²
• Ahmad Mirzaei ²

¹ PhD student of Criminal Law and Criminology Department, Bushehr Branch, Islamic Azad University, Bushehr, Iran

² ‌‌Assistant Professor, Department of Law, Bushehr Branch, Islamic Azad University, Bushehr, Iran

Abstract

Highlights

Introduction

The extensiveness and complexity of the international trade system have made it vulnerable to money laundering. Due to its secret methods and many adverse effects on the integrity of financial markets, trade-based money laundering has interested anti-money laundering (AML) institutions. Hence, this paper analyzes this new method of money laundering.

Methodology

This descriptive-analytical study aims to investigate trade-based money laundering through a literature review. Next, Iran’s commercial system is analyzed to address fundamental challenges threatening the business sector through trade-based money laundering in Iran.

Findings

The Financial Action Task Force (FATF) defined trade-based money laundering as the process of concealing criminal revenues and transferring funds through business transactions to make their criminal sources appear legitimate or to finance terrorism. There is another type of money laundering called service-based money laundering that involves the services sector or the trade of other intangible items. According to the research literature, the most important methods of trade-based money laundering are as follows:

• Over-invoicing or under-invoicing: In this method, the price of a product is falsified to transfer extra funds rather than real values between exporters and importers.
• Multiple-invoicing: Money launderers can make several payments by issuing multiple invoices for one business transaction. If these multiple payments are discovered, money launderers justify them with various reasons such as paying delayed fees.
• Changing the product quantity: In this method, money launderers overstate or understate the quantity of carried products. Sometimes even no goods are delivered, and the colluding exporters only present the documents on transportation and customs of nonexistent products to draw credibility in bureaucratic and financial stages.
• Unreal description of products and misrepresentation of quality: Money launderers may falsify the quality or types of products. For instance, an exporter may invoice an inexpensive product as an expensive one or send a different product rather than the invoiced one.

The following sectors are vulnerable to trade-based money laundering:

• Free-trade zones are susceptible to trade-based money laundering due to the presence of certain incentives such as tax exemptions and simple bureaucratic formalities that decrease financial and commercial supervision.
• Criminal organizations may establish transnational trade companies such as trusts and shell corporations for money laundering purposes.
• The open account technique is prone to money laundering in international trade. Banks face problems in detecting suspicious money laundering activities because they have no information regarding documents of transactions and commercial conditions of respective payments. Hence, banks know nothing about the main reasons for payments.

The following fundamental challenges have made Iran’s commercial system vulnerable to trade-based money laundering:

• Economic sanctions: Sanctions have activated an unofficial sector in Iran’s economy and complicated the monitoring of international commerce. Due to sanctions on banks and Iran’s access to SWIFT, businesspeople have resorted to currency exchange services for business transactions and fund transfers. These services are vulnerable to money laundering. Furthermore, barter can be abused at the time of sanctions, for valuation is contractual in barter. Therefore, the discrepancies in values can easily be exported or imported for money laundering through over-invoicing, under-invoicing, or falsification of the quality of exchanged products. In addition, sanctions on Iranian companies and the refusal of Western companies to cooperate with Iran have disrupted the implementation of government projects and the supply of products and equipment. Since most of the products and pieces of equipment are supplied via international business channels and through invitations to tenders, profiteers may act as front organizations to take advantage of existing constraints. They may also transfer or inject criminal revenues into the official economy through tender processes.
• Challenges raised by dual currency exchange rate: In Iran, the budget and development plans depend greatly on the currency revenues from petroleum sales. As a result, a kind of rent-based political economy has emerged that pave the way for money laundering crimes. Hence, the monopoly of Iran’s state in the allocation and redistribution of resources has caused massive economic rents in the private sector, influential public sector, publicly privatized companies and managers, and semipublic-semiprivate companies and managers. Moreover, the allocation of governmental currency reserves to import vital products has led to the distribution of economic rents among specific groups.

With the emerging challenges concerning the currency exchange rate in Iran, a new form of money laundering called commercial empty-selling (khali-forushi) is on the rise. In this method, an export license is delegated from an exporter to an importer without any currency being transferred. Therefore, some individuals having currencies from unofficial sources may seek only an export license to legitimize their currency-related expenses. This is an example of money laundering, for the source of currency is unclear. It may include criminal revenues, and the currency holder may decide to import products through a blank export license to launder the money.

Over-invoicing becomes more important when the currency exchange has dual rates. Over-invoicing is performed by presenting false documents for banking facilities, currency transfers, or money laundering. Individuals may request further governmental currency from banks and sell them at free rates by over-invoicing the imported products.

Conclusion

In international trade, Iran faces many fundamental problems that are closely related. Thus, Iran’s commercial system has become likely to be abused by money launderers. International sanctions pose a daunting challenge to Iran’s foreign trade. With the blocked access of Iran’s business sector to the world’s financial and commercial systems, this country has been forced to adopt alternative solutions such as exchanges. Due to SWIFT sanctions and restrictions on financial transactions, Iran has resorted to barter, which lays the groundwork for value transfer through commercial money laundering methods. As a result of the monopoly of the state and semipublic businesses in the economy and the governmentally determined exchange rate, massive economic rents have become available for individuals who seek illegal profit by abusing the currency exchange rate discrepancy and employing commercial money laundering methods. These individuals have triggered a chain of economic corruption and challenges in Iran by exploiting the economic sanctions.

Keywords

• Trade-Based Money Laundering (TBML)
• Economic Sanction
• Exchange Rate
• Rent
• Barter
• Over-invoicing
• Currency Exchange

Main Subjects

• Futurology
• Economic
• Iran
• Sanctions
• Islamic Republic of Iran