Combating Trade Based Money Laundering

The FATF has defined “Money Laundering” as the processing of criminal proceeds to disguise their origin in order to legitimize the illegally-gained proceeds; and “Trade Based Money Laundering” (TBML)as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.

In recent years, global and regional regulators have implemented stringent measures pertaining to Anti-Money Laundering & Terrorist Financing, which has made it difficult to launder money through the traditional channels. Due to the same, the Money Launderers are using more sophisticated methods like TBML especially since it is very difficult to set red flags for detection of illicit funds. This can be supported by a report from International Narcotics Control Strategy Report (INCSR) of 2003 which states that hundreds of billions of dollars are laundered annually by way of Trade-Based Money Laundering (TBML).

How does TBML works
FATF, in its report on TBML in 2006, states that the international trade system is subject to a wide range of risks and vulnerabilities that can be exploited by criminal organizations and terrorist financiers. Some of the examples for carrying out TBML includes misrepresentation of price, quantity or quality of imports or exports or through fictitious trade activities or front companies etc. It also stated that the various techniques used for executing TBML are complex in nature and can be frequently used in parallel with other money laundering techniques. Some of the basic techniques have been highlighted below:

Over- and under-invoicing of goods and services;

Multiple invoicing of goods and services;

Over- and under-shipments of goods and services; and

Falsely described goods and services.

Steps to identify Trade Based Money Laundering

As highlighted above, TBML is one of the most supplicated tools which is difficult to identify due to complexity and possible layering of the transaction, hence it is important to highlight some of the key steps for identifying TBML related transactions, including but not limited to:

Screen the parties – Banks and Finance Houses should check on true identity and beneficial ownership of customers, customer’s customer, suppliers, agents counter partiesrties.

Review bill of lading, invoices, certificate of origin, packing list and such other documents to check on any mismatch in details.

Examine cargo movements by checking bill of lading details in Shipping company tracker or raising for International Maritime Bureau reports.

Compare export information with tax declarations to detect discrepancies.

Pay particular attention to trade transactions that display known red flag indicators of TBML activity.

Sanctions check on parties to the transaction.

Conduct EDD for High Risk Clients at various intervals.

Take appropriate follow-up action when anomalies and discrepancies in trade and financial transactions are identified.

TBML Process – Case in Point
Case study from APG Typology Report on Trade Based Money Laundering – 20th July 2012

ROUND TRIPPING OF FUND TRANSFERRED THROUGH HAWALA BY RECEIVING THE FUND BACK AS EXPORT EARNINGS.

Red flags

Advance received for export without justifiable reason

Diversion from existing line of business.

Sudden increase in volume by new exporter.

Export of goods without any corresponding purchase of raw materials or finished goods.

Acceptance of trade related documents by Bank, which are not duly authenticated by export regulatory agencies.

Integrated Approach for Combating TBML

For combating the risk of TBML, we propose the FIs/Banks to focus on the following three area of priorities

Policy and Control Framework
As part of our integrated approach, the first step is to develop a robust risk and control framework for identification and monitoring of TBML related issued. Banks/FIs should focus on developing/updating the following areas to strengthen its policies against TBML:
Master Data Base
The second step of our solution focuses on creating an internal Master Data Base for all the clients based on Rule/Client/Hybrid approach. This process enables the Bank/FIs to facilitate quick turnaround on review and trade execution. The importance of this approach is that it enables the Banks to maintain the transaction history of the client, which can enable them to enhance the profiling of the customers at the time of renewal and also focuses on the trend analysis of the customer’s transaction.

Governance & Escalation
The last step entails to put governance and escalation matrix in place for ensuring compliance with the industry norms, regulatory requirements and internal policy. Periodic review of the process ensures that the control framework implemented is effective. As part of the third step, the key focus areas include:

Map the Key requirements of the product requirements as per Industry norms, regulatory requirements and internal policies of the Bank/FIs

Identify the key responsibilities of stakeholders within each of these process and bring transparency and accountability

Formulate the approval authority matrix including limit setting

Implement an exception, variances reporting including SAR to compliance team of the Bank/FIs

Periodically assess the adequacy of the controls implemented

There are other controls like Monitoring Dual Usage Goods and Transaction Screening processes, which can be implemented at any stage during the review process.

Alos Read : Trade Financing GAP for Small-Mid Enterprises
Conclusion
FATF stated that “Any strategy to prevent and combat TBML needs to be based on dismantling TBMLstructures, while allowing genuine trade to occur unfettered”. In this regards, we encourage organization to take a holistic view of setting up policy & framework while aligning the same with the existing CDD/ EDD process for client onboarding/ renewal. The focus for Banks/Fis should be to enhance the robustness of its control framework and monitor the red flags on an ongoing basis. This approach also enables the bank to enhance the profiling of the customers and ensure a robust approach is adopted for combating TBML.

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