A case study of trade-based money laundering

Case study*

A Maltese individual, a management consultant, owns a company registered in Malta. It has no employees and holds a bank account in Romania. The entity was established a month prior to purchase of used specialised construction equipment from a supplier in Germany. The equipment was purchased for €6 million on credit. In view of the fact that the equipment was highly specialised, its market value is not easily verifiable.

There was no available documentation with respect to technical and commercial due diligence undertaken by the Maltese entity prior to the acquisition of the equipment. Only very limited correspondence with representatives of the German entity was noted. The equipment was immediately re-sold by the Maltese entity to a customer located in Turkey for €6.1million, with the same credit terms.

The equipment was shipped directly from Germany to Turkey. The proceeds were channelled to the Maltese entity by the Turkish customer, with a commission held by the Maltese entity prior, to transferring the remaining funds to the German supplier. Delays were encountered in the scheduled payments for both the purchase and resale of the equipment without valid due notice, justification and follow up.

Desktop research reveals that the German supplier has a website stating that it is an established player in the construction industry. Correspondence reviewed, however, indicates that the German supplier shares the same legal advisors and also a correspondence address with the Turkish customer.

Red flags

An analysis of this transaction renders it suspicious. Various red flags have been noted, such as:

• The ultimate beneficial owner of the Maltese entity is a management consultant and holds no previous experience in trading in specialised construction engineering equipment;
• The Maltese entity was only recently set up and immediately entered into a significantly large transaction;
• No technical due diligence on the equipment was carried out prior to the acquisition by the Maltese entity;
• The lack of correspondence with the supplier and due diligence undertaken may be indicative that the Maltese entity is acting on behalf of someone else;
• The bank account of the Maltese entity is held with a Romanian bank;
• The German supplier uses the same correspondence address and legal advisors as the customer located in Turkey. This renders a connection between the supplier and the customer, raising concerns that the transaction is not at arm’s length;
• The purchase and sales agreement are drawn upon back-to-back terms. The expected financial safeguards against credit risk are not in place;
• The late changes to the payment arrangements for both the purchase and sale of the equipment are made without sufficient reason and justification.

The implementation of an effective anti-money laundering compliance programme requires subject persons to understand the intricacies of various TBML schemes and red-flag indicators in order to combat money laundering effectively. Customer due diligence must extend beyond identification and verification. Subject persons are expected to understand their customers’ business, which includes building a customer profile to determine the expected volumes and values of trade that are expected to be carried out by their customers. Monitoring actual customer activity against the customer profile should be exercised throughout the business relationship as part of its ongoing monitoring programme. The application of professional scepticism throughout the whole due diligence and monitoring process will render the effort more meaningful and effective.

(*) The case study is based on a real case in Malta.Changes were made to the names, products, places and sequence of events to preserve confidentiality.

The article/case study was written jointly by Alan Craig and Rebekah Barthet. Alan Craig is the advisory partner at Forvis Mazars in Malta, specialising in internal audit, governance, money laundering and regulatory compliance. Rebekah Barthet is a forensic investigation and compliance senior manager at Forvis Mazars in Malta, specialising in investigation assignments and regulatory compliance.

This article first appeared in The Accountant magazine, issue 2 of 2021 of the Malta Institute of Accountants.