Trade finance aml risks

Written by Simone Jones on Monday April 30, Ask any AML professional about the methods that pose a high-risk of money laundering and trade finance will be at the top of the list. To those on the outside, trade finance has a misconception as being almost akin to the dark arts: powerful, likely to be misused and not very well understood. At the simplest level, trade involves exchanging goods and services between buyers and suppliers. Consider the ideal situation if you were selling goods: you would want to send the payment after you have received the goods.

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Risk assessments will be unique for each financial institution based on consideration of all of these categories. High risk factors should be assessed during periodic KYC controls, but also during ongoing transaction monitoring procedures.

All banking products can be used by fraudsters to launder money, however some of them are more vulnerable than others. These products are usually marked as higher risk by the financial institutions for monitoring purposes, thereby subjecting customers utilizing these products to more frequent and thorough investigations. Such products are often associated with higher level of anonymity and involve high volume transactions or foreign currencies. In this paper we focus on two examples of high risk products: trade finance and real estate related banking products.

There is no universal list of relevant factors since the characteristics of products and services vary between jurisdictions and financial institutions. When assessing the risk posed by a particular product, banks have to consider all surrounding factors such as relevant legislation and regulation as well as the unique risk factors in each jurisdiction.

Trade finance based money laundering is an attractive method to launder money, finance terrorism or proliferation due to possibility of large cross-border transfers without raising suspicion.

Moreover, paper-based processes of the global trade finance leave it open to abuses such as forging invoices or bills of lading used as proof of transactions that never took place. Trade transactions allow therefore to hide in plain sight, under the cover of legitimate trade, business through forged documentation thereby posing significant detection challenges see also corporate banking differentiators. The United Kingdom and Singapore can be considered one of major financial centres that could be severely affected by AML risks posed by trade finance activities due to the high volumes of trade transactions going through these areas.

They range from raw materials eg, aluminium alloys to components eg, bearings and complete systems, such as lasers. In order to identify dual use goods in transactions well trained staff with specialist knowledge is required.

In such situations, financial institutions have limited knowledge regarding the underlying reasons for the transfers, and can only perform standard sanctions screening and activity monitoring. However, if the bank is involved in other aspects of the transaction such as facilitating credit or providing other trade finance services, it might have a more thorough understanding of the customer business activity and rationale for payment due to paper-based characteristic of trade finance, as previously mentioned.

In order to effectively perform sanction controls and understand the nature of the trade, banks should obtain additional information from a client regarding the nature of cargo, vessels, trading partners and ports of landing. If a customer is reluctant to provide aforementioned information, it might be an indication of foul play, and banks should refrain from facilitating such transactions.

In the same report, the FCA outlined the necessity of better training of staff and identification of higher risk customers. Banks should flag any commodity shipment to, from or through such jurisdictions as potentially posing a higher risk.

Any indication of a third party involvement, same addresses, offshore locations, shell companies or complex ownership structures might be an attempt to hide true source or destination of shipment or payment.

Banks should understand the nature of the underlying commodity and recognize dual-use goods. Such assessment requires expert knowledge which should be periodically provided in the form of internal training to all staff.

Banks lacked procedures and controls specific to trade finance, while they usually have very sophisticated control over sanction regimes. Banks should make sure their compliance officers understand trade-based money laundering and can identify and assess all risks. Deploying an instant screening tool is necessary, but this must be backed up by manual checks performed by expert staff, who are able to properly assess the rationality of the observed activity.

Suspicious Activity Reports should be raised not only if sanction breach was identified, but also for any suspicious behaviour concerning trading activity. Other products drawing increased attention from industry stakeholders are loans and mortgages because of its vulnerability to real estate related money laundering. Additionally, money laundering through real estate is believed to require a relatively lower level of expertise and sophistication compared to other laundering methods [7].

The scale of the abuse of real estate market for the purposes of money laundering is represented by the findings of law enforcement agencies across the globe. The problem is particularly accentuated in Australia - in its Annual Report, the Australian Federal Police AFP notes that it managed to restrain residential property valued at AUD5 million as part of an investigation in March In its study on money laundering through real estate, Australian Transaction Reports and Analysis Centre AUSTRAC - Australia's financial intelligence agency - lists the use of loans and mortgages among the techniques most commonly used for the purpose of abusing real estate sector for money laundering [10].

According to the study, loans and mortgages are used in order to obscure the source of illicit funds and to integrate them into assets of high value. This technique also allows for the commingling of illicit funds with funds of legitimized source. The increasing number of findings related to cases of money laundering through real estate have resulted in intensified efforts to introduce appropriate legislation that would enable law enforcement agencies and other stakeholders to prevent such abuses.

Keeping to the Australian example - a number of Australian states have introduced guidelines in order to further strengthen controls on the real estate industry. Already in October , the Government of New South Wales issued guidelines on combating identity fraud and scams in the real estate industry [11]. Moreover, the Australian Government is currently working on the second tranche of anti money laundering regulations which will relate to real estate agents[13], as recommended by FATF in its Mutual Evaluation Report of Australia[14].

Australia is not the only country in Asia Pacific targeting money laundering through real estate. The new law requires developers to conduct due diligence checks on their clients and apply appropriate record-keeping controls.

The developers are also obliged to disclose requested information to law enforcement agencies in cases where investigations or criminal proceedings are launched. Appropriate AML regulations can assist in preventing and suppressing money laundering regardless of the banking products selected by the launderers.

Often recent and upcoming legislative changes - as per presented examples for the Asia Pacific region - are targeted to address the identified vulnerabilities of specific banking products to money laundering. Increasing the awareness of the necessity of the thorough understanding of the particular risks posed by various products, as well as extending of catalogue of businesses being subject to AML regulations and imposing more stringent requirements on the background checks of customers of these firms that need to be conducted allows the impacted businesses to develop a holistic understanding of the actions undertaken by their clients and to inform relevant authorities of specific activity that does not appear to be legitimate.

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Trade finance has emerged as priority concern for anti-money-laundering enforcers and compliance officials are taking a fresh look at the channel for risk factors. Anti-Money Laundering Risk in Trade Finance. Daniel H. Connor. Managing Director. wiacek.com.au@wiacek.com.au Lauren Pickett.

Anti-money laundering is the process of financial institutions and other business entities using in-house sometimes assisted by external parties — more on this to come methods to address the risks posed by Trade-Based Money Laundering. View all articles by Ross J. Trade based money laundering is an occurrence which shows criminals using legitimate business processes to disguise the underlying criminal activity.

Risk assessments will be unique for each financial institution based on consideration of all of these categories. High risk factors should be assessed during periodic KYC controls, but also during ongoing transaction monitoring procedures.

Trade finance has emerged as priority concern for anti-money-laundering enforcers and compliance officials are taking a fresh look at the channel for risk factors as regulatory risk increases. Government officials told AML compliance officers at a conference this week that they need to study trade finance processes to sharpen their ability to spot abuses. The new emphasis on AML trade finance reflects concern among the regulators that money traffickers have shifted activity from closely watched bank deposits to more sophisticated money channels where controls are looser.

Anti-Money Laundering in Trade – An In-Depth TFG Guide 2020

Home Trade-Based Money Laundering. As anti-money laundering controls evolve, criminals find new ways to transform the financial proceeds of crime into legitimate funds. One of the most prevalent global money laundering strategies is to exploit the vulnerabilities of cross-border trade via Trade-Based Money Laundering TBML. Trade-Based Money Laundering takes advantage of the complexity of trade systems, most prominently in international contexts where the involvement of multiple parties and jurisdictions make AML checks and customer due diligence processes more difficult. TBML primarily involves the import and export of goods and the exploitation of a variety of cross-border trade finance instruments. The FATF also provides banks and financial institutions with a list of trade finance AML red flags to consider when managing cross-border transactions, these include:.

Byron McKinney, Product Manager at Accuity, discusses the latest case of suspicious shipping activity and why financial institutions need to keep a close eye on the trades they finance, including how the goods are transported. Originally published by TXF News. A number of news stories in detailed the radical methods being employed to evade sanctions controls, for example, through the transfer of commodities from ship-to-ship in international waters to avoid a vessel entering a sanctioned territory. This trend appears to have continued into , with a recent case emerging in which a ship-to-ship transfer took place in a narrow strait between Crimea and Russia. A review of satellite data has uncovered that the vessel sailed to an anchorage zone within the Kerch Straits between Crimea and Russia , where a series of smaller vessels then pulled up alongside it and transferred its cargo, discharging it at the port of Kamysj-Burun in Crimea. The delivery of this iron ore cargo therefore appears to be illegal. This example throws up a number of questions; how is this type of activity regulated, who should take responsibility for monitoring the movement of cargo as part of a trade transaction, and how can the rules be enforced to prevent further illegal activity from occurring? According to the trade finance principles published by the Wolfsburg Group, ICC and BAFT in , financial institutions have a significant role to play in addressing the risks of financial crime associated with trade finance activities and aiding compliance with national and regional sanctions and embargoes. The guidance paper published by the Monetary Authority of Singapore MAS was released in October and focused on identifying and managing red flags and risks in trade finance and correspondent banking. This paper outlined the major areas of attention to monitor as well as the best practices that banks and financial institutions should deploy, to ensure they act in compliance.