Trade-based money laundering ("TBML") continues to be a growing concern to the Financial Action Task Force ("FATF") and regulators in Asia, a consultant said. Enhanced due diligence ("EDD") on customers was insufficient and institutions needed to understand the whole transaction, including knowing one's customers, said Michael Knight-Robson, of consultancy Bovill in London.
Firms should know whether all involved in a deal were registered legal entities, and what their registered addresses were. It was only once such information was obtained that sanctions screening on the parties involved could begin, he said.
The Monetary Authority of Singapore ("MAS") issued guidance for banks on managing trade-based money laundering controls in late 2015, while the Hong Kong Association of Banks ("HKAB") followed suit with similar guidance in February 2016, with input from the Hong Kong Monetary Authority ("HKMA").
"The FATF itself is providing guidance on it and other regulators are providing guidance on it, too," Knight-Robson said. "Due diligence on customers is simply not enough because you need to understand the entire transaction and all the parties involved."
Money is effectively laundered through three means: physically through mediums of exchange, electronically or through trade.
"By far, however, the most effective and popular way to launder money is via trade … water follows the path of least resistance," said Bill Majcher, head of EMIDR, a cyber security services provider in Hong Kong.
TBML was popular given the high volume of trade between countries. "As a result, it triggers a far lower level of scrutiny per transaction and is in many respects much easier than physically moving cash, or moving funds through the regulated financial system," he said.
What is increasingly being asked for in TBML compliance is for firms to "know your customers' customers", or KYCC, despite concerns from agencies such as the FATF that the approach is a poor substitute for proper risk-based compliance.
Banks with trade finance operations should know the relevant vessel numbers and be able to check market prices, Knight-Robson said. They should be mindful that transaction monitoring algorithms were unable to monitor commons sense, he said.
"Apply the 'common sense test' because no system can ever replace the experience or trade processes of a human sense test," Knight-Robson said.
Beyond possible AML violations, those financing trade deals should be aware of possible breaches of financial and economic sanctions, notably when dealing with Iran, North Korea and Russia. In its latest guidance on trade-based money laundering, the HKMA said the document should be read alongside the territory's Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (2012), in addition to the Weapons of Mass Destruction (Control of Provision of Services) Ordinance (Cap. 526), the United Nations Sanctions Ordinance (Cap. 537) and the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575).
Additionally, information gathered for credit assessment purposes can also be used by banks to understand the financial crime risks they face. "A well thought-out risk-based approach will enable firms to concentrate on higher-risk scenarios," Knight-Robson said.
Correct use of transaction monitoring can make trade-based laundering costly and cumbersome for criminals. It includes collecting trade data from various public databases to be used as a benchmark, developing processes to capture bills of lading and container numbers from websites, and reviewing customer profiles for transaction discrepancies.
A risk-based, appropriate and proportionate due diligence approach was also important, he said.
"All trade-based transactions should be assessed individually and not just based on the customer or other factors such as the jurisdictions where goods are being shipped to," he said.
Since trade documentation can be easily forged, it must be thoroughly examined to prevent fake invoicing where goods are sold at either too high or low a price. Similarly, multiple invoicing for the same international transaction, or obfuscation, where money launderers may misrepresent the quality of goods sold by replacing inexpensive items with more costly ones, are also lingering compliance problems.
Majcher, a former Royal Canadian Mounted Police inspector, said there was a fundamental lack of recognition among authorities, financial institutions and the compliance profession on the "fundamental pillars" facilitating TBML.
He said trade-based money laundering required "people on the front lines, in bonded warehouses, on the docks, on the scales, who are involved in warehousing, shipping and processing the movement of physical goods and the documents related to those goods, to facilitate smuggling and money laundering".
Criminals may also engage in mis-shipping, whereby they overstate or understate goods shipped relative to payments received, as well as "phantom shipping", where no goods are sent at all. Often the methods used to launder money are legal and proper, such as through transfer pricing.
When items of trade are mispriced, or simply made up on a manifest or mislabelled, it becomes difficult for authorities to get a handle on the scope and scale of the problem, Majcher said.
Perhaps the hardest to detect trick in TBML is disguising the identity or company ownership structure of transacting parties by using shell companies or offshore front companies, Knight-Robson said.
"The use of these entities results in a lack of transparency and hiding the identity of the true purchasing party, which hides the risk of financial crime," he said.
Since collusion between buyers and sellers can be hard to detect, EDD on all parties in trade finance was needed. "Even if firms are not related, collusion can still occur," Knight-Robson said.
Red flag checklists should be modelled on a firm's particular business risks and exposures. Vital areas to scrutinise are customers, documentation, transactions, payments and shipments, particularly whether a deal makes economic sense, such as if large containers are being used for relatively small shipments.