1 A category of the FATF’s typology of “trade-based money laundering” (FATF Study on Trade Based Money Laundering (2006), available at <https://www.fatf-gafi.org/media/fatf/documents/reports/Trade%20Based%20Money%20Laundering.pdf> (all Internet-based resources in this article were last accessed on 4 August 2022).

2 Please see note 30 below for details of the literature review undertaken.

3 The discussion in this section is based on J Chuah, Law of International Trade (6th edition, London, Sweet & Maxwell 2019) chs 2 and 11.

4 Smart contracts should be distinguished from smart legal contracts. Smart legal contracts are legally enforceable contracts partially expressed and/or executed in code and thus involve the enforcement of legal rights and obligations. A smart contract, on the other hand, is used to specify software code that is typically stored, verified and executed on a blockchain. See UK Jurisdiction Taskforce, “Legal Statement on Cryptoassets and Smart Contracts” (2019) at p 8.

5 See SE Chang, YC Chen and TC Wu, “Exploring Blockchain Technology in International Trade (2019) 119 Industrial Management & Data Systems 1712; see also the UK Jurisdiction Taskforce, ibid.

6 Chang et al, ibid.

7 FATF amended Recommendations (2018, Recommendation 15 and Glossary).

8 <https://www.bbva.com/en/bbva-and-wave-carry-first-blockchain-based-international-trade-transaction-europe-and-latin-america/>.

9 “Blockchain-based” means that the letter of credit is embedded in the blockchain but funds are not transferred using the blockchain.

10 <https://gendal.me/2016/04/05/introducing-r3-corda-a-distributed-ledger-designed-for-financial-services/>.

11 Usually the banks.

12 Akin to the KYC system to be discussed further below.

13 Reported at <https://www.forbes.com/sites/tomgroenfeldt/2017/03/05/ibm-and-maersk-apply-blockchain-to-container-shipping/#b8f6e73f05ec>; archived materials with Maersk.

14 The facility would be transacted through Maersk Trade Finance A/S incorporated in Copenhagen, Denmark, part of the Maersk Group. Its website describes its workings in the following way. (1) Goods shipped through Maersk will be taken as collateral. They will be LIBOR (London Interbank Offered Rate) linked (and when LIBOR is finally abolished, this will change to the relevant interest rate benchmark in question). (2) Pricing is transparent – there are no hidden costs. (3) Shipment must be done through Maersk (although it is possible to use the trader’s own current forwarder/Customs House Agents for logistics management). (4) Assignment of receivables needs to be done by the exporter. (5) A credit facility will be sanctioned for a designated period <https://fs.maerskline.com/faq>. It is important to note that the finance produce can be offered to both buyers and sellers. For sellers, the financing is offered as pre-shipment financing, and the seller may still require the buyer to pay by letter of credit. The proceeds from the letter of credit would be used to service the pre-shipment financing.

15 <https://www.maersk.com/news/articles/2019/07/02/hapag-lloyd-and-ocean-network-express-join-tradelens>.

16 The FATF describes itself in the following terms: “The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. With more than 200 countries and jurisdictions committed to implementing them. The FATF has developed the FATF Recommendations, or FATF Standards, which ensure a co-ordinated global response to prevent organised crime, corruption and terrorism” <https://www.fatf-gafi.org/about/>.

17 FATF 2006, p 25.

18 ibid.

19 Asia-Pacific Group on Money Laundering, Typology Report on Trade Based Money Laundering (2012) at para 27.

20 The FATF said: “[trade-based money laundering] has received considerably less attention in academic circles than other means of transferring value”; FATF 2006, p 3.

21 C Sullivan & E Smith, “Paper 115: Trade-based money laundering: Risks and regulatory responses” (2011) at pp 4–5; see also the Asia-Pacific Group on Money Laundering (FATF) Typology Report on Trade Based Money Laundering (2012) p 39 at <http://www.fatf-gafi.org/media/fatf/documents/reports/Trade_Based_ML_APGReport.pdf>.

22 See, for example, FATF, Best Practices on Trade Based Money Laundering (2012); US GAO, Report to Congressional Senate “Trade Based Money Laundering” (2020) at pp 19–22.

23 That subparagraph (a) generally provides for production, manufacture, sale, distribution, transport, import, etc., of illicit narcotic drugs.

24 ibid.

25 See Art 6.

26 See FATF, Trade Based Money Laundering (2006).

27 ibid, at 3.

28 FATF 2008, p 1.

29 In its Best Practices Paper, FATF (2008, p 2) defined a “trader” as “anyone who facilitates the exchange of goods and related services across national borders, international boundaries or territories. This would also include a corporation or other business unit organized and operated principally for the purpose of importing or exporting goods and services (eg import/export companies).” It follows that participants in a domestic trade transaction appear not to be included.

30 The literature surveyed includes: J Zdanowicz, “Trade-based Money Laundering and Terrorist Financing” (2009) 5(2) Review of Law and Economics 855; S McSkimming, “Trade-based Money Laundering: Responding to an Emerging Threat” (2010) 15(1) Deakin Law Review 37; M Forstater, Illicit Financial Flows, Trade Misinvoicing, and Multinational Tax Avoidance: The Same or Different? (Center for Global Development, Policy Paper 123, 2018); Global Financial Integrity, Illicit Financial Flows to and from 148 Developing Countries: 2006–2015 (2019); J Walker and B Unger, “Measuring Global Money Laundering: The Walker Gravity Model” (2009) 5(2) Review of Law and Economics 821; M Soudijn, “A Critical Approach to Trade-based Money Laundering” (2014) 17(2) Journal of Money Laundering Control 230. As to policy and research papers published by international bodies, a survey was carried out in respect of the FATF documents (the Trade Based Money Laundering Report (2006) and Best Practices Paper on Trade Based Money Laundering (2008)); UNODC, Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes (2011); and WCO, Illicit Financial Flows via Trade Mis-invoicing (2018). US GAO, Report to Congressional Senate “Trade Based Money Laundering” (2020) was also consulted.

31 The US Financial Crimes Enforcement Network.

32 US GAO, Report to Congressional Senate “Trade Based Money Laundering” (2020) at pp 19 (emphasis added).

33 See FATF Best Practices (2006); these red flags might relate, for example, to where the goods are said to be coming from or entering, the presence of any free ports, the type of goods, the corporate structures of consignors and consignees, trade patterns, etc.

34 FATF 2006, p 4.

35 This case has led to multiple legal claims involving competing ownership rights. It is made worse by the fact that there is a lack of legal clarity as to where the assets are located for the purposes of redress and seizure. The port of Qingdao was also sued for failing to spot the fraud, thereby causing substantial losses to the banks. CNBC reports that the losses suffered by banks and trading houses were in the region of USD 900 million <https://www.cnbc.com/2014/08/03/legal-fight-chills-china-metal-trade-after-port-fraud-probe.html>.

36 See generally CDD and KYC principles described by the FATF (see section D, FATF Recommendations (updated 2019) at <http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf>); note that CDD and KYC requirements will differ from jurisdiction to jurisdiction.

37 For example, as part of a trade-based money laundering scheme to over-declare the quantity of the goods (see above).

38 See <https://www.bloomberg.com/news/articles/2020-01-16/venezuela-s-crypto-mandate-spurs-some-to-pause-oil-purchases>; Bloomberg also reports that “[m]ost companies taking Venezuelan crude no longer pay cash. Instead, they engage in swap transactions, where they take crude oil in exchange for gasoline or diesel. Others, like Eni SpA and Repsol SA, get oil in payment for old debts.”

39 Drug Enforcement Administration (DEA), 2017 National Drug Threat Assessment (2017) p 130.

40 This explains why it is less commonly used by terrorist groups that are more geographically restricted, such as Boko Haram. Groups such as Hamas, Hezbollah and al Qaeda, whose presence is found in numerous geographical locations across the world with several points of transfer between the initial source of funds and the ultimate beneficiary, would find the use of cryptocurrencies more viable; see ZK Goldman, E Maruyama, E Rosenberg, E Saravalle and J Solomon-Strauss, “Terrorist Use of Virtual Currencies: Containing the Potential Threat” (2017) p 27 at <https://www.lawandsecurity.org/wp-content/uploads/2017/05/CLSCNASReportTerroristFinancing-Final.pdf>.

41 FSB, Addressing the Regulatory, Supervisory and Oversight Challenges Raised by “Global Stablecoin” Arrangements: Consultative Document (2020); the FATF explains in its Report to the G20 on Stablecoins (2020) at <https://www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-Assets-FATF-Report-G20-So-Called-Stablecoins.pdf>: “the value of a so-called stablecoin may be pegged, for instance, to the value of a fiat currency or a basket of assets that may include fiat currencies, digital currencies, investment securities, commodities and/or real estate. A so-called stablecoin may also employ algorithmic means to stabilise its market value” (para 23).

42 This latter feature is called “chain hopping” and could allow for multiple layering of illicit funds within a short timeframe, thereby allowing a more sophisticated disguise of the origins of funds (ibid, at para 35).

43 The ban is extensive and the sanctions are harsh – even crypto mining and ancillary investor-related services are banned. Source: PRC State Council, “Liu He presided over the 51st meeting of the financial stability and Development Commission of the State Council” [刘鹤主持召开国务院金融稳定发展委员 会第五十一次会议] (21 May 2021) <http://www.gov.cn/guowuyuan/2021-05/21/content_5610192.htm>.

44 See the service’s website at <https://bsnbase.io/g/main/index>.

45 The PRC’s BSN Development Association, Blockchain-based Service Network: Introductory White Paper (2019) at chs IV and V.

46 ibid, at p 8.

47 Law of the PRC on Anti-money Laundering (2006) No. 56 (Adopted at the 24th session of the Standing Committee of the 10th National People’s Congress).

48 A survey of the IMF, Staff Country Report for the PRC: Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism (No. 19/172; 2019), and IMF, Staff Country Report for the PRC: Report on the Observance of Standards and Codes-FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (Country Report No. 19/173; 2019).

49 See Reuters’ report dated 22 October 2020 at <https://www.reuters.com/article/us-china-currency-digital-explainer/explainer-how-does-chinas-digital-yuan-work-idUSKBN27411T>.

50 See, for example, regs 10–15 of the UK Money Laundering Regulations 2017 as amended by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019.

51 See the EU’s 5th Anti Money Laundering Directive generally; see also Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (UK).

52 Called “virtual asset service providers” by the FATF.

53 The travel rule is not a new tool; indeed, it was applied in the USA in 1990s in relation to wire transfers (Title 31 of the Code of Federal Regulations 1995, Section 103.33(g)). See also Annex A to the FATF, 12-Month Review of the Revised FATF Standards on Virtual Assets/VASPs (2020).

54 R.16, FATF (2019).

55 ibid.

56 See Section D (FATF Recommendations 2019).

57 Where the participants are in a trade-related blockchain, it should be recalled that the information would be generally available.

58 Section B (FATF Recommendations 2019).

59 R.4, ibid.

60 RR. 36–40 Section G (FATF Recommendations 2019).

61 Directive (EU) 2018/1673 on combating money laundering by criminal law.

62 These predicate offences include the so-called white-collar crimes such cybercrimes, tax crimes, insider trading and market manipulation and fraud, as well as more traditional crimes such as human trafficking, piracy, kidnapping, theft, etc.

63 These are offences that, to an appreciable extent, conform to the FATF’s definitions. The main provision is Art 3(1) Directive 2018/1673: “Member States shall take the necessary measures to ensure that the following conduct, when committed intentionally, is punishable as a criminal offence: (a) the conversion or transfer of property, knowing that such property is derived from criminal activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an activity to evade the legal consequences of that person’s action; (b) the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of, property, knowing that such property is derived from criminal activity; (c) the acquisition, possession or use of property, knowing at the time of receipt, that such property was derived from criminal activity.”