Cleaning up trade’s dirty laundry

Criminal groups launder drug money through the purchase of legitimate goods which they then on sell. Scams like this are seen all over the world, with trade used to legitimise dirty money.

"Can banks alone [stop money laundering] without transforming themselves into specialised investigative units?"
Abhishek Vyas, Associate Director, Trade Products, Institutional, ANZ

According to PwC, the amount criminal enterprises launder annually equates to 2 to 5 per cent of global GDP. And 80 per cent of illicit financial flows from developing countries are accomplished through trade-based money laundering.

In an environment where there is less tolerance of tax evasion – as we saw with the leaking of the Panama Papers – regulators are now getting increasingly serious about trade-based money laundering (TBML).  

Banks are best positioned to be in the forefront of any efforts to combat the flow of illicit funds. But the question is: can banks alone achieve the results desired without transforming themselves into specialised investigative units?

MISUSE OF GLOBAL TRADE

Trade-based money laundering is typically done through mis-invoicing by representing incorrect values or quantities of goods.

Real-world examples of abnormal prices include plastic buckets at $US970 each, prefabricated metal buildings valued at $US50.78 each or Vitamin E at $US30,334.36 per kilogram.

By deliberately inflating or deflating the invoice value, the perpetrator can transfer illicit funds, or value (through goods) across borders.

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Trade based money laundering can mainly be used for:

• Laundering criminal proceeds across borders;
• Tax and customs duty evasion by under-invoicing the goods or over-invoicing exports to get tax incentives; and
• Illegal investments or financing including terror financing, or avoiding capital controls.

MISUSE OF TRADE FINANCE PRODUCTS

The most critical aspect of money laundering is legitimising the proceeds. Trade products, particularly documentary trade (letters of credit and collections) can be used ‘conveniently’ to show profits are from a seemingly innocuous trade transaction and funds are received though a reputed bank.

Approximately 80 per cent of the world’s current trade flows is financed by some form of trade credit (inter firm credit) and about one third of global trade is bank-intermediated trade finance.

The sheer volume of trade finance, coupled with the inherently complex process, makes it clear attraction to someone who is looking to leverage this complexity and volume to hide and obscure their ill-gotten funds.

EMERGING FOCUS AREA FOR REGULATORS

Industry bodies like Wolfsberg Group and Financial Action Task Force (FATF) have identified trade-based money laundering as a critical area for countries and banks to enhance focus on.

TBML is fast becoming a key enforcement area for regulators and a priority to address for the global banking industry. In recent times, regulators across the globe have enhanced their focus on this area. Some of those include:

• The Monetary Authority of Singapore (MAS) published a guidance paper on TBML for banks, listing detailed measures that should form part of banks control environment.
• The Hong Kong Association of Banks (HKAB) published a similar guidance paper (with inputs from HKMA) for banks and FIs on TBML controls.
• The Financial Intelligence Unit (FIU) in India have required banks to strengthen their Trade based money laundering transaction monitoring framework, including specific guidance on red flag indicators.
• The US department of treasury published national money laundering risk assessment in 2015 which highlight five vulnerabilities, TBML among them.
• The UK Financial Conduct Authority (FCA) report has highlighted a number of deficiencies in the control environments for surveyed banks.

These initiatives reiterate and recommend several aspects of a good governance framework on TBML.

ROLE OF TECHNOLOGY

Transaction monitoring is possibly the most important aspect of good TBML governance for banks.

ICCs recently published Trade Finance Survey shows 90 per cent of the respondents cited cost and complexity of compliance requirements as a significant impediment to trade finance.

This implies an increasing need to deploy scalable transaction monitoring solutions that not only takes into account the transactional red flags but also adequately address investigation, reporting and oversight requirements.

There are many such solutions available today specialising in identifying suspicious behaviours from trade transactions. These solutions deploy various technologies starting from good old OCR to intelligent text mining, complex network analytics and shipment validation tools to include a few.

However, no one solution can fit the requirements all banks and their systems.

For any technology to effectively provide desired results, a good quality of data input is critical. As banks enhance the quality of available data, the potential of results derived through automated solutions should improve visibly. The data is not only limited to bank’s own systems, but also external and market information.

Trade is increasingly moving towards a digital era with product solutions like, e-documentation, bank payment obligations (BPO) and the much talked about - blockchain.

While not mainstream yet, interest in these digital trade solutions is steadily increasing due to the obvious efficiencies and benefits.

Increasing digitisation of trade will undoubtedly bring immense benefits to TBML investigations by contributing essential data elements for a better investigation consistently.

SOLUTION BEYOND BANKING INDUSTRY

While banks should be leading the way to combat this threat where trade financing is involved, a definitive solution would require synchronised efforts across the banking industry, regulators and other partners across trade value chain.

The ICC Trade Finance Survey shows 65 per cent of the respondents indicated lack of harmonised compliance standards across jurisdictions as a great challenge to the trade finance industry.

An essential factor to achieve greater success in combating TBML is to improve transparency across Trade value chain.

This could include mutual information sharing not only amongst banks but also dynamic information exchange between financial institutions, regulators, customs agencies, law enforcement agencies, and tax authorities.

Clear and consistent compliance standards by Regulators across jurisdictions would also provide the much needed support and confidence, while addressing due concerns on data privacy.

Progress is evident in positive direction with regulators and industry bodies increasingly recognising TBML as an important area of attention and increasing efforts to provide guidance and enhance awareness across trade value chain.

Other measures like setting up a network of Trade transparency unit (TTUs) reflect the focus on financial transparency, international cooperation and increased use of data analytics.

As these initiatives grow in size and scope, along with increasing transparency and partnership across the physical trade value chain, detection and prevention of trade based financial crimes should become more effective.

Abhishek Vyas is Associate Director, Trade Products, Institutional at ANZ