Trade Based Money Laundering - Capturing Risks, Mounting an Effective Response

Trade Based Money Laundering – Capturing Risks and

Mounting an Effective Response

Henry BalaniHead of Innovation

June 2nd 2015

Association of Certified Financial Crime Specialists webinar

#AccuityTradeFinance

Certification, News,

Guidance, Training,

Networking

CFCS Certification

The Credential That Demonstrates

Competency and Skill Across the Financial

Crime Spectrum

About the Speaker

Henry Balani (CAMS)

Head of Innovation

Accuity


Introduction to Accuity

Accuity focuses on the needs of banks, financial services and

corporations to ensure efficient payment transactions while

minimizing regulatory compliance risks

Poll Question 1

What is the role of your institution in a trade

finance transaction in most cases?

A) Issuing bank

B) Advising/confirming bank

C) Both

D) None of the above


Poll Question 2

Does your institution review money

laundering risks at a transactional level?

A) Yes, at every transaction

B) Yes, only when a customer trades new

goods or is new to a structure

C) Not necessarily, unless there are

concerns about the customer/trade

D) No


Current Regulatory Landscape

Cross Border Flows of Illegal Money are

Damaging to Emerging Economies

The developing world lost US $6.6 Trillion in

illicit outflows between 2003 and 2012

Illicit outflows increasing at an alarming rate of

9.4% on average per year

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.

Source: Global Financial Integrity Report Dec 2014

10#AccuityTradeFinance

“Singapore’s openness as an international

transport hub and financial center exposes it

to inherent cross-border ML/TF risks”

Monetary Authority of Singapore

“Trade finance is a key

component in maintaining a

competitive and productive

economy”

UK Financial Conduct

Authority

“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’.

Asia Pacific Group on Money Laundering

“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

Trade Based Money Laundering is a Serious

Issue Around the World


Fines and Careers are a Serious Concern Too


The recent OFAC Enforcement Action Against BNP Paribas

highlights 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…”


Regulations forcing change -

Russian sanctions affect all

aspects of Trade Finance

Russian industries are targeted

Energy firms

Arms

Travel Bans

State owned banks

Parties that levied sanctions

USA

EU

Canada

Norway

Australia

Japan

Switzerland

Ukraine

Exports of dual use equipment for military

use in Russia are banned

Ban on exports of some oil industry

technology and services

Russia hits back with additional sanctions

Embargoed western (Canada, EU, US,

Australia) agricultural imports and

individuals

14

Russian state banks are excluded from raising long-term

loans

Compliance continues to be a major issue for

Trade Finance operations

15

Surveyed 298 banks in 127 countries

39% closed correspondent relationships citing

AML/KYC concerns

68% declined transactions citing compliance

issues

41% reported sanctions compliance restricted

Trade Finance operations

60% felt lack of compliance standard

harmonization

99% saw Compliance as the biggest obstacle

Source: ICC Global Survey on Trade Finance 2014


Poll Question 3

Do you feel that AML regulations are

required for trade finance?

A) Yes, they are important to keep our

clients safe

B) No, they simply increase the cost of the

trade


Key challenges for banks in the face of

increasing regulatory compliance pressureRelying on staff’s experience (or lack of) and intuition to review

potentially risky trade transactions.

Documenting how and why decisions are made in a consistent,

efficient and auditable manner.

Inefficient process of checking multiple sources. Data exists in silos.

Inability to screen dual use goods.

Poor/no escalation process.

Need to check additional areas of risk including fraud, open accounts.


For Trade Operations key drivers are time and

cost – regulatory compliance tends to be at odds

with these key drivers

“Regulation is only going to increase in the financial world and the cost of doing business is going up. The cost of compliance is going up.” Recognised international legal

counsel


The UK Financial Conduct Authority (FCA)

highlights Dual Use goods as an issue

“We found that banks had generally developed effective controls to ensure they were not dealing with sanctioned individuals and entities. However, policies, procedures and controls to counter money laundering risk were generally weak and most banks had inadequate systemsand controls over dual-use goods.”

FCA’s ‘Banks’ Control of Financial Crime Risks in Trade

Finance’ report (page 4)


This additional need to check for Dual Use Goods

continue to cause headaches for Trade Finance

operatons

“Ball bearings, navigators and switches can be dual use or not. These are challenges. We don’t get enough information about what use they are being put to, so we can’t make a decision…”

Tier 1 international bank


Poll Question 4

Which party in the trade transaction should

be responsible for ensuring AML

compliance?

A) Banks

B) Buyer/seller

C) Shipper

D) All parties


Leveraging Red Flags

- Best Practices to Reduce TBML

There are many sources that highlight best

practices in regards to TBML


Amalgamating the various AML guidance papers

highlights the following related to trade finance:

1. While banks have effective controls related to sanctioned individuals and

entities, controls over screening dual-use goods are generally weak.

2. There is an inconsistent approach to risk assessment and very few

banks conduct a specific trade finance money laundering risk

assessment.

3. A majority of banks have no clear policy or procedure for dealing with

trade based money laundering risks.

4. Trade processing staff typically make inadequate use of customer due

diligence information gathered by other departments including

relationship managers and trade sales teams.


5. For financial crime risks, little or no management information typically

exists in the trade finance business.

6. Money laundering risks are typically not considered. No specific

financial crime training related to trade finance;

7. Additional training is typically 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- FCA Thematic Review Conclusions 1.3.8 Page 5


Amalgamating the various AML guidance papers

highlights the following related to trade finance:

Poll Question 5

Where does the responsibility of banks lie in

screening trade transactions?

A) We check only the documents

B) We check everything, including the goods

C) Somewhere in the middle

Typical Red Flags – Consolidation of best practices

CustomerIs 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?

SanctionsIs the buyer, seller, vessel, or banks involved in the

trade on a sanctions list?

Goods Are goods identified on Dual-use or Controlled Lists?


Consider the following when implementing a TBML policy:

Source: http://www.acfcs.org/trade-based-money-laundering-the-next-frontier/

Real Examples of Over/Under Invoicing from/to the

USA

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


Poll Question 6

Which of the risk areas has the most

significant impact on your review of a trade

finance transaction?

A) Customer risks

B) Country risks

C) Product risks

D) Delivery/distribution channel risks

Case Study of an effective Trade

related screening program

Shipment of graphite from Hong Kong to Dubai


Poll Question 7:

How many Red Flags are there in this shipment?

32

A) 2

B) 5

C) 7

D) 8


Did you spot 7 or 8?


Screening the transaction through a single source database

highlights all the risky elements in one step


Let’s also dig down into the possible connections

Al Mataf Shipping

Mataf Star

CKLBCNBJ

Graphite


36

Mataf Star is a sanctioned entity because of its links to Iran


SCT (aka Sorinet Commercial Trust) is also

a sanctioned entity due to links with Iran


39

Both SCT and Hong Kong Intertrade Company

are linked to the National Iranian Oil Company


40

It looks like both shipper and consignee have

the same ultimate beneficial owner

Also, we cannot forget what they are shipping

41

Picture of Pripyat – near

Chernobyl, a graphite moderated

nuclear power plant



In summary

Regulations related to trade transaction screening

are increasing

Developing a ‘red flag’ checklist is key to ensuring

compliance with regulations

There are less obvious connections between

seemingly unrelated entities that may be suspicious

that need to be investigated

Using an automated screening solution will ensure

consistency and reliability in a cost effective manner


Q&A

Thank you Henry Balani

Head of Innovation, Accuity

[email protected]

Tel: +1.847.933.8160


Contact

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Trade Based Money Laundering - Capturing Risks, Mounting an Effective Response

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