Two college instructors have created Global Price Matrix, a service that uses international trade information to help banks and their customers spot money laundering and other international currency irregularities.
The service, developed by Florida International University professors Simon Pak and John Zdanowicz and marketed through their company Trade Research International, Miami, Fla., combines import data from the U.S. Customs Service and export data from the US Department of Commerce to determine the range of prices at which commodities normally trade. Using the past 12 months of data, Global Price Matrix calculates the average, mean and interquartile range for commodity trades between the U.S. and a specific country and for those between the U.S. and the rest of the world. Interquartile ranges, also used by the IRS to spot transfer pricing, delineate the price range excluding the highest-priced and lowest-priced trades.
Using this information, bankers and companies involved in international commerce can better identify trades lacking economic justification, such as those involved with money laundering, capital flight, income tax evasion, avoidance of customs or duties, and dumping. Suspicious trades include over-invoiced imports, such as the import of raw cane sugar into the US for $1,000 per kilo, and under-invoiced exports, such as the export of luxury watches for $5 each.
Pak and Zdanowicz also have a system to identify commodity shipments having a suspiciously low or high weight, such as a shipment of 4-lb. spark plugs. "But weight data is more difficult to do," said Pak, citing the need for access to detailed shipping documents.
Global Price Matrix, currently offered for on-site installations, is slated for online availability in June 2001.
Trade-based money laundering is on the uptake, a result of stricter anti-money laundering controls at banks. "Originally money launderers did it all through the financial system," said Pak." The reporting requirements made it difficult for them, and moving cash out of Miami in an airplane was difficult, so now they move into trade," said Pak.
Evidence of this phenomenon was apparent when the Swiss government obligated banks to notify authorities about suspicious transactions starting in 1998. Shortly thereafter, according to Pak and Zdanowicz, Switzerland saw a marked increase in the incidence of under-invoiced exports and over-invoiced imports compared to past years. "Instead of going through the regular banking system, they're taking the trade route," said Pak.
While banks in the US are not obligated to report unusual trade activity to regulators, doing so might be considered part of extended due diligence and know your customer policies within a bank, said Pak. Also, recent Congressional hearings on money laundering may lead to more stringent requirements. Already, the training manual for bank examiners with the Office of the Comptroller of the Currency suggests looking for trade-based money laundering activity.