Russian oil embargo indicates tighter TBML detection is critical

03.09.2023 | By Mark Speyers

A February 2023 article in the Leaders section of The Economist makes an impressive case that the West’s oil sanctions on Russia are not as effective as they’re made out to be. The publication notes that the sanctions are, in fact, the largest ever imposed on a single country. In addition to their complete import ban, Europe has prohibited shippers and other facilitators from enabling the sale of Russian crude to others, dependent upon a $60 per barrel price cap.

But as the article further reveals, these heavy sanctions have not curbed the sale of Russian crude. Shipments have resumed at higher levels than before, but not to Europe. Instead, they are being directed to China and India.

Advocates of the price cap claim the sanctions are working because the goal was to keep global markets stable by maintaining the flow of crude while limiting profits for Russia’s war efforts. However, the article argues that this new flow of crude successfully hides price reporting. Whereas European refiners share data with price trackers, India does not.

And because agencies can no longer rely on once public shipping cost indicators to estimate transportation rates between Russia’s western ports and Europe’s oil terminals, available data is highly suspect. In addition, rates for shipping oil from Russia to Asia are set in private.

Sanctions-targeted countries such as Russia are quickly learning that trade-based money laundering (TBML) is the least detectable way of evading sanctions. Legitimate trade among countries provides the perfect veneer of legitimacy for Russian money laundering within the web of countries noted above.

How TBML works

In simple terms, TBML utilizes international trade transactions to move illicit funds across borders. Not so simple, however, is the detection of TBML. Traditional anti-money laundering (AML) measures, such as know-your-customer (KYC) rules and suspicious transaction reporting, are far less effective when it comes to TBML because trade-based transactions are complex, sophisticated and involve multiple parties.

TBML can involve the manipulation of invoices, ultimately resulting in laundered money from the importer at a fraction of the actual cost. It can also involve the manipulation of goods, with exporters supplying fewer or more goods instead of changing invoices. This allows the importer to further manipulate actual money transfers.

TBML is nothing new to Russian oligarchs, who have for years used this method to fund their country’s overseas activities. And the new political climate makes it almost certain that Russia will further ramp up their trade-based money laundering activities, especially with allies such as China and North Korea.

The case for stronger TBML discovery

The only true way to combat TBML is to massively strengthen AML measures globally. Implementation of highly advanced analytics and machine learning algorithms to identify suspicious patterns is essential. Greater cooperation and information sharing among regulators across jurisdictions is also critical.

The regulatory framework for international trade needs to be beefed up, as well. This means greater transparency and oversight of trade interactions as well as increased accountability. Stricter due diligence measures and tougher penalties are also in order.

For a more in-depth look at the challenges of TBML, download our white paper here.

Banks must remain vigilant 

Because Russian oligarchs are accustomed to using TBML to fleece the system, and because they are so closely entwined with those who rule their country, it is to be expected that Russia will step up their TBML activities to evade the crippling sanctions placed against them. As long as Russia’s allies continue to trade with them, it’s almost a foregone conclusion that sanctions will not have the desired effect.

Due diligence is the key to thwarting Russian-based TBML. Financial institutions must closely monitor trade among Russia and its allies using the most-advanced technological solutions available to them.

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