1. finance

Reducing the Risks of Trade Based Money Laundering
by Leveraging Global Best Practices
Henry Balani
Head of Innovation
19th March 2015
Trade Based Money Laundering Seminar
India Habitat Centre, New Delhi
#AccuityTradeFinance
Cross Border Flows of Illegal Money are
Damaging to Emerging Economies
The developing world lost US $946.7 billion in
illicit outflows in 2011.
The capital outflows stem from crime,
corruption, tax evasion, and other illicit activity.
Trade based money laundering (TBML)
provides criminals an easy way to move
illegal money.
#AccuityTradeFinance
2
TBML is a Serious Issue Around the World
“Anything that can be priced can be mispriced,
and false pricing is done every day, in every
jurisdiction, on a large percentage of import and
export transactions. TBML ‘is the most
commonly used technique for generating and
transferring dirty money—money that breaks
laws in its origin, movement and use’.
“Trade finance is a key
component in maintaining a
competitive and productive
economy”
UK Financial Conduct
Authority
Asia Pacific Group on Money Laundering
“Singapore’s openness as an international
transport hub and financial center exposes it
to inherent cross-border ML/TF risks”
Monetary Authority of Singapore
“A few years ago American
customs investigators
uncovered a scheme in which a
Colombian cartel used proceeds
from drug sales to buy stuffed
animals in Los Angeles”
The Economist
#AccuityTradeFinance
3
Even in India, There Have Been Recent Scandals
Involving Trade
#AccuityTradeFinance
4
The Latest AML Violation:
#AccuityTradeFinance
5
Fines and Careers are a Serious Concern Too
#AccuityTradeFinance
6
OFAC Enforcement Action Against BNP Paribas
Recently highlighted trade finance as a key money laundering concern.
“BNPP Suisse and BNPP Paris negotiated a variety of trade
finance instruments on behalf of or that involved parties
subject to U.S. sanctions on Sudan, Iran, Cuba and Burma…”
#AccuityTradeFinance
7
Consider the Risks Inherent in Trading Diamonds
Under/over valuation of diamonds is
particularly easy
Low level of awareness by law enforcement
Simple to hide millions of dollars worth of
diamonds which can be converted easily to
other monetary instruments – it is a “liquid
asset”
Main process to launder money is through
under/over valuation…the high subjectivity
of diamonds, a long production chain
involving many parties and the ability of
diamonds to change form makes it
particularly vulnerable
#AccuityTradeFinance
8
India’s Diamond Trade is High Risk for
Money Laundering
#AccuityTradeFinance
9
Leveraging Red Flags
- Best Practices to Reduce TBML
The UK’s Financial Conduct Authority (FCA)
The FCA regulates the financial services
industry in the UK
They have rule making, investigative and
enforcement powers to protect consumer’s
access to financial services
Published a report regarding banks’ control
of financial crime risks in trade finance
#AccuityTradeFinance
11
The UK’s Financial Conduct Authority (FCA)
#AccuityTradeFinance
12
The FCA Visited 17 Major Banks and Found the
Following:
While banks had effective controls related to sanctioned individuals and
entities, controls over screening dual-use goods were generally weak.
There was an inconsistent approach to risk assessment and only
a few banks had conducted a specific trade finance money laundering
risk assessment.
About half the banks had no clear policy or procedure for dealing with
trade based money laundering risks.
Trade processing staff made inadequate use of customer due diligence
information gathered by other departments including relationship
managers and trade sales teams.
Included were also a number of international banks based in London.
#AccuityTradeFinance
13
The FCA Visited 17 Major Banks and Found the
Following:
Little or no management information on financial crime risks in the
trade finance business.
No specific financial crime training related to trade finance; money
laundering risks were typically not considered.
More training required to review sanction alerts and understand when
to clear or escalate.
FCA’s Main Conclusion: The majority of banks….are not taking adequate
measures to mitigate the risk of money laundering and terrorist financing in
their trade finance business
- Conclusions 1.3.8 Page 5
#AccuityTradeFinance
14
Typical Red Flags
Consider the following when implementing a TBML policy:
Customer
Is the nature of the trade consistent with the
customer’s business?
Documentation
Are documents lacking? Is there loose terminology?
Transaction
Could there be tax avoidance or money laundering?
Sanctions
Is the buyer, seller, vessel, or banks involved in the
trade on a sanctions list?
Good
Are goods identified on Dual-use or Controlled Lists?
#AccuityTradeFinance
15
Customer Red Flags
Requires understanding of the customer, their business,
and their network of suppliers and buyers.
Typical red flags include:
The trade doesn’t fit with the customer’s business.
Deviates from historical trades, or there is a trend toward ever-increasing
value trades.
Shell companies.
Both supplier and buyer of the goods are related to the intermediary or
the buyer.
KYC processes applied during the
on-boarding stage help to drive risk profiles.
#AccuityTradeFinance
16
Documentation Red Flags
Requires deeper scrutiny.
Typical red flags include:
Inconsistencies across trade documents, i.e., shipping and customs
documents differ from what was actually shipped.
Changes in documents across versions.
Container numbers are lacking, sequential, or are incompatible with
shipment size.
Future dated bills of lading.
Misrepresentation of quantity, quality or type of goods and services.
For example, what size and number of containers
would be required to ship a ton of wheat?
#AccuityTradeFinance
17
Transaction Red Flags
May identify possible tax evasion or illicit trades.
Typical red flags include:
Shipping location inconsistent with buyer or seller.
Suspicious wording in L/C.
Over invoicing or under invoicing.
The third-party located in a third-jurisdiction acted as an intermediary.
Risk exposure of the factoring company does not commensurate with
expected norms
Intermingling of different types of trade finance arrangements for different
segments of trade transactions.
Tax avoidance was cited as the greatest concern among
Accuity’s recently polled banks in the Gulf region.
#AccuityTradeFinance
18
Real Examples of Over/Under Valued Shipments
Metal Tweezers from Japan
$4,896/unit
Camshafts from Saudi Arabia
$15,200/unit
Plastic Buckets from Czech
$972/unit
Radial Truck Tires to UK
$11.74/unit
Toilet Bowls to Hong Kong
$1.75/unit
Prefabricated Buildings to Trinidad
$1.20/unit
Source: http://www.acfcs.org/trade-based-money-laundering-the-next-frontier/
#AccuityTradeFinance
19
Sanctions Red Flags
Requires a comprehensive screening solution.
Typical red flags include:
The country faces an embargo.
A vessel is sanctioned or owned by company which is sanctioned.
The shipper or consignee is sanctioned.
The bank involved in the transaction is a sanctioned bank.
The port of discharge or loading belongs to a sanctioned country.
The above run the highest risk of punitive action (fines)!
#AccuityTradeFinance
20
Goods Red Flags
Requires exhaustive and technical reference data.
Typical red flags include:
Dual-use goods and export control items, which are used for civilian
purposes, but can also have military applications.
Restricted goods list as included by the government’s Foreign Trade Policy.
Certain goods are high-risk by nature and susceptible to money laundering,
i.e. rough diamonds, electrical equipment.
This is the toughest area for banks to monitor and review.
#AccuityTradeFinance
21
Typical Red Flags
Consider the following when implementing a TBML policy:
Customer
Is the nature of the trade consistent with the
customer’s business?
Documentation
Are documents lacking? Is there loose terminology?
Transaction
Could there be tax avoidance or money laundering?
Sanctions
Is the buyer, seller, vessel, or banks involved in the
trade on a sanctions list?
Good
Are goods identified on Dual-use or Controlled Lists?
#AccuityTradeFinance
22
Summary: Develop Policies and Procedures for
Trade Operations
Develop a discrete trade finance screening procedure
explicitly for AML issues.
Procedures must include a specific review and escalation processes for high
risk transactions. As well as specific responsibility must be assigned.
Screen for:
Port of lading
Destination
Interim ports of call
Shipping company
Vessel
Beneficiary bank
Goods shipped
#AccuityTradeFinance
23
Aspire to Successfully Eradicate TBML
Through synchronized compliance and trade finance operations.
AML Compliance
Trade Finance
Compliance experts
Trade finance experts
Specialized sanction knowledge
Specialists in various instruments
(L/C, open account, etc.)
In tune with industry trends & ML
best practices
Understands the process flow
Lack trade finance knowledge
Lack ML and sanction knowledge
#AccuityTradeFinance
24
Contact
Thank you
Henry Balani
Head of Innovation, Accuity
henry.balani@accuity.com
Tel: +1.847.933.8160
#AccuityTradeFinance
25