Measuring the scale of money laundering is not easy! However, one thing we can safely say is that it’s a big, big problem. In fact, The United Nations Office on Drugs and Crime (UNODC) has estimated that between 2 and 5% of global GDP is laundered each year.
This means that between 715 billion and 1.87 trillion EUR is laundered yearly, as per Europol.
As a business owner, you have a responsibility to do everything in your power to prevent money laundering. This isn’t simply a moral requirement; it’s a necessity for compliance reasons too.
However, stepping into the world of Anti-Money Laundering (AML) within a supply chain can seem like a Herculean task. It’s understandable that you may be feeling rather overwhelmed by the prospect.
But, don’t worry; we’re here to tackle this beast together! Let’s ensure your business stays compliant, secure, and thriving by managing AML supply chain risks effectively.
What is money laundering
Before we get any further, it’s vital to set the foundations by explaining what counts as money laundering.
At its core, money laundering is the process of disguising where money has come from. So, money will be obtained through illicit activities, and a money launderer will make it appear as if the funds have come from legal sources.
It’s a bit of a magic act; “dirty” money is turned into “clean” money. But rather than getting a few laughs from the audience, this is an act that has far-reaching consequences.
Transaction fraud is the most common culprit
When it comes to supply chains, there’s no denying that transaction fraud is one of your biggest enemies! This type of fraud takes place when a dishonest person or entity carries out transactions with the purpose of deceiving or scamming.
It’s a very broad term, and so there are many different schemes and tactics that are used. We’ll take a look at some of the types below, as well as how to prevent transaction fraud effectively.
Different types of transaction fraud in supply chains
Some of the most common types of transaction fraud include:
- False invoicing – This involves creating invoices for products or services that were never delivered or provided. It’s a direct way of siphoning funds from a company under the guise of a legitimate business transaction.
- Double billing – Here, a vendor will issue two invoices for the same service or product. The purpose here is to hope to receive payment twice for a single transaction. It’s a simple yet effective form of fraud if it’s not caught by vigilant checks.
- Price tampering – This happens when employees or vendors manipulate the price of a service or product on the invoice. They will then pocket the difference or move money illicitly.
- Quality misrepresentation – Vendors may provide goods that are of a lower quality than what was paid for, fraudulently claiming the higher cost for better-quality items.
- Phantom shipping – In this scenario, an invoice is issued, and a payment is then made for goods, but they don’t actually exist or are never shipped. It’s a pure paper trail with no real goods changing hands, which creates a financial illusion.
- Kickbacks and bribery – This type of transaction fraud involves a supplier offering a bribe or kickback to a business’s employee so that they get favorable treatment in return, for example, inflating invoice amounts or winning a contract.
You also need to be mindful of shell companies. Shell companies are basically businesses that only really exist on paper. Money launderers create complex layers of transactions, obscuring the trail back to the illicit source of the funds.
So, how can you prevent transaction fraud
Now you know more about some of the different types of transaction fraud, let’s take a look at how you can prevent this from happening.
Firstly, we recommend that you start off by strengthening your internal controls. So, this means conducting regular and surprise audits of financial transactions and records so you can spot any irregularities.
You should also make sure that there’s not one single person who has control over every element of a financial transaction. Delegate! Another tip is to implement a stringent approval process for transactions, especially those that exceed a certain threshold.
Of course, you can make the most of technology too. Fraud detection software is a must. It will help you spot any unusual patterns, ensuring you receive an instant alert whenever something doesn’t seem quite right! Digital verification is another great tool. With this, you can ensure documents are authentic, from receipts to invoices.
Next, it’s all about creating that culture of transparency. Security cannot be handled by just one tool or one person. Everyone needs to be on board! So, this starts with educating your employees. Make sure they know all about the different types of transaction fraud, things to look out for, and the vital role they play in preventing fraud from happening in the supply chain. Awareness is one of the most powerful tools against fraud.
You can also establish whistleblower policies. So, put together a clear and confidential channel that employees can use to report suspicious activities. It’s important that your workforce feels safe to do this without any fear of retaliation. Vet your vendors too!
Thorough background checks on your vendors and suppliers are a must. This can help you to dodge a bullet, ensuring you don’t team up with a supplier with a shady reputation.
Exploring other AML supply chain risks you need to manage
One of the things that makes AML supply chain risks so difficult to manage is that they’re coming at you from all angles. We’ve already spoken about transaction fraud, but there are some other potential money laundering techniques that require diligence on your part. Let’s look at some examples.
Trade-based money laundering (TMBL)
As the name indicates, this involves using trade transactions so that you can disguise where the illicit money originally came from! Techniques include:
- Over- and under-invoicing for goods and services
- Shipping products that are different from what’s been declared
- Over- and under-shipment of goods
Sanction evasion
This occurs when a business inadvertently or deliberately engages with companies that are subject to international sanctions.
A risk like this is especially high when it comes to global supply chains, i.e. where the intermediary parties or end-users are located in or connected to a sanctioned entity or territory.
Terrorist financing
Supply chains can also be misused to fund terrorist activities. This could involve shipping goods that directly support terrorist acts or using a supply chain’s financial transactions to channel funds to terrorist groups.
A lot of countries have published their own guidance about the risks of terrorist financing in their nation and across different industries. These are excellent resources. You’ve got the 2024 National Risk Assessments on Money Laundering, Terrorist Financing, and Proliferation Financing from the U.S. Department of the Treasury, for example. The UK’s HM Treasury also has a similar document that provides guidance and facts on the matter.
Corruption and bribery
We’ve already mentioned bribery when speaking about transaction fraud. However, it does extend a lot further than this. Bribery and corruption are very broad terms, which simply involve the exchange of money, goods, or services for any type of preferential treatment within the supply chain. This is deeply concerning, as it can distort market conditions and facilitate other illicit activities.
Be proactive, vigilant, and informed
So there you have it: an insight into some of the different AML supply chain risks businesses face, as well as the steps you can take to be protected.
By understanding the risks, implementing robust controls, and creating a culture of compliance, you can safeguard your company against money laundering.
FAQ about money laundering
How often should I conduct a risk assessment? It’s advisable to conduct a risk assessment once per year, or whenever there is a significant change in your supply chain.
Can technology completely eliminate all AML risks? Technology can significantly reduce risks, but it cannot do everything on its own. Human oversight is essential to identify and address complex or emerging threats.
What should I do if I spot a suspicious transaction? You need to inform your internal compliance team and report it immediately to the relevant authorities. Swift action is a must.
Is AML compliance necessary for businesses of all sizes? Absolutely. AML compliance is crucial for every business, no matter its size. While the complexity and scale of AML measures do vary, small businesses are certainly not immune to the risks and legal obligations associated with anti-money laundering.
Author bio
Author Bio
Kerry Leigh Harrison has over 11+ years of experience as a content writer. She graduated from university with a First Class Hons Degree in Multimedia Journalism. In her spare time, she enjoys attending sports and music events.
Article and permission to publish here provided by Kerry Leigh Harrison. Originally written for Supply Chain Game Changer and published on March 5, 2024.
Cover photo by pexels.com.