Powered by the pandemic: Why illicit trade and money laundering is thriving during COVID-19

 By RICHARD CARRICK

When the COVID-19 pandemic hit South Africa in March, the government responded with heavy-handed measures that included a prohibition on alcoholic drinks and tobacco. It was hoped that the strict restrictions would reduce violent crime, social gatherings for a weekend of binge-drinking, and health issues.

While the ban made headway in reducing crime, with murder rates reported to have been reduced by 63%, it also partly backfired. Illicit trade of alcohol is now booming in the country as organised crime groups have pounced, smuggling in contraband products for a quick profit.

The production of counterfeit alcohol has also increased, becoming a potential health threat. Before the pandemic hit, it was estimated that South Africa lost about US$3.8 billion to the illicit trade of alcohol annually.

This year, the South African Treasury reported that it has already lost US$5.7 billion in alcohol and tobacco taxes in the first four months alone – money badly needed to fight COVID-19.

With the pandemic showing no signs of slowing down, plenty of goods have seen their demand spike since countries closed their borders and disrupted global supply chains. This has fuelled widespread illicit trade. This has led to another crime to blossom: trade-based money laundering. It is increasingly having a sizable impact on government revenues, as countries pour vast resources into fighting the pandemic.

COVID-19 has brought many activities to a halt, but not crime. Illicit trade is thriving – driven largely by the restrictions of legitimate products. As government expenditure increases to battle COVID-19, the duty and taxes they require badly are disappearing into the pockets of criminals. We need to take urgent action to resolve these issues.

Criminal double trouble Illicit trade will continue to prosper as the pandemic continues to wipe out jobs. With less money to spend, more people will look for cheaper, illegal goods. Trade-based money laundering is powering it all, with many gaps for illicit traders to exploit.

Invoices and trade documents can be falsified, quality and quantity of goods undeclared, and movement of these goods easily obscured. Front companies – legitimate businesses used to disguise illegal financial activities – are also easy covers for illegal distributions.
 

Malaysia is no exception to the proceedings. Malaysia’s geographical position in addition to the economic troubles that has been brought about by COVID-19 makes it even more vulnerable to illegal trade.

There are definite concerns over the porousness of borders that have been compromised by illegal syndicates determined to take advantage of growing demand.

As the country faces its worst ever economic recession since the 1990s, organised criminal groups would be on the lookout on how to further exploit the expected increase in demand for goods that are in short supply or have a hefty price differential due to differing excise taxes or regulations imposed, such as tobacco and alcohol products.

Even with strict border lock-downs in place during the current Recovery Movement Control Order (RMCO) period which ends on 31 December 2020, illegal syndicates continue to eagerly stockpile their illicit inventory to meet demand, despite border and travel restrictions.

This can only take place with a very organized and systemic mode of smuggling. The supremely high levels of contraband cigarette trading, which is estimated to exceed over 60% of the market or approximately 12 billion sticks a year, could only happen through large scale container shipment smuggled through key entry points, possibly aided through the system by unscrupulous elements.

Illicit traders are extremely resourceful, making use of existing supply chains to move their goods. Many have reinvented themselves by harnessing e-commerce platforms as borders closed. In April, French police removed over 70 fraudulent websites claiming to sell COVID-19 treatments.

In July, authorities in Europe took down Encrochat, an encrypted communications network used by criminals to distribute illicit goods and launder money. Given the sophisticated nature of their activities, addressing the problem will require a risk-based targeted approach to enforcement supported by strong policies.

In this regard, it is pertinent that several industries have proposed greater containment of organised “channels of smuggling” in Malaysia, as an example the use of transshipment facilities through ports that have been abused for contraband smuggling.

This policy proposal is worthy of consideration. Smuggling activities will lead to enormous economic implications. The World Economic Forum estimates that over US$2.2 trillion (S$3 trillion), or 3 percent of the global GDP, will be lost to illicit trade in 2020.

Malaysia’s reputation as an economy is also at risk, as it will fall under increasing scrutiny from foreign companies. Investors’ confidence will waver.

Adapting to the fight To fight these ever-evolving threats, we need to adapt and find new ways of dealing with them.

First, public and private sectors need to harness data analytics to fight trade-based money laundering. Just like how criminals are turning to technology, we must also use it to fight crime.

With data analytics, authorities can compile and analyse trade documents from banks, exporters, and importers onto a single platform, to get a big picture of the trades that are actually being done. They can easily scrutinise customs information and bills of lading to see if any freight carriers had been previously associated with illegal activities, and flag them accordingly when they come to port.

Second, we need closer public-private partnerships. Having regular dialogue and feedback sessions will allow trade associations and consortiums to share data or provide timely feedback on any new government policies or taxes being considered with the relevant law enforcement and government bodies.

Doing so makes them more proactive rather than reactive in eradicating such crimes. The World Customs Organisation is an example of how governments, academics, and private organisations can come together to fight illicit trade.

Another example can be seen in Crime Stoppers Asia’s collaboration with industry and law enforcement partners. We take in anonymous tips and analyse the information against various primary, third-party, and open source data sources to generate an overview of criminal activity that can be pursued by our law enforcement partners.

Despite a looming economic recession, authorities need to convince bargain-hunting online shoppers that procuring cheaper, banned or non-duty paid goods from the black market is not a victimless crime. The profits earned by organised criminal groups will likely fuel more serious crimes like drugs, weapons or human trafficking, and even terrorist networks.

The pandemic may have expanded the criminal battle space, but these unprecedented times have also called for even more global collaboration and cooperation to address these threats.

Our response will determine how successfully we can further curb the nexus of illegal trade and money laundering in the post COVID-19 world. - DagangNews.com

* The writer is the CEO of Crime Stoppers Asia, an international non-profit organisation committed to supporting law enforcement and preventing crimes through anonymous reporting.