Regulators Sharpening Enforcement Tools to Tackle Trade-Based Money Laundering

Trade financing and dual-use goods will be an area of heightened regulatory focus across the Asia-Pacific region in coming years as governments take a harder line on money laundering, terrorist financing and weapons proliferation. Speakers at Thomson Reuters' ASEAN Regulatory Summit in Singapore said there was significant international pressure for anti-money laundering and counter financing of terrorism ("AML/CFT") agencies to crack down on trade-based laundering. 

They said Singapore and Hong Kong were leading the charge but other countries across the region were expected to follow suit with tighter regulatory controls and more proactive supervision and enforcement action.

Nizam Ismail, partner at RHTLaw Taylor Wessing, said the Monetary Authority of Singapore ("MAS") has made it clear that it intends to take a harder line on AML/CFT supervision and enforcement. The recent closure of BSI Bank in Singapore was a stark warning to the financial sector, he said.

"The MAS is taking quite an extreme regulatory approach, revoking the licence of a bank here, referring names for criminal prosecution and making it all public. This is really unprecedented," Ismail said.

To bolster its supervision capabilities the MAS set up a new AML enforcement department in June and has already appointed around 30 staff, the conference heard.

Ismail said the team would be cracking down on trade-based laundering and proliferation financing ("PF") under its new supervision and enforcement remit. He said banks that did not have robust compliance systems and controls in place to manage these threats were risking significant regulatory and reputational damage, or even closure.

"The MAS will not hesitate to 'name and shame' for AML/CFT breaches. They are also relying on some very sophisticated monitoring tools for AML enforcement. This really means that if something is picked up by the regulator and you didn't pick it up in your system, that's a major red flag in itself," Ismail said.

Industry Guidance 

The Financial Action Task Force ("FATF") has identified trade-based money laundering as one of the main channels that criminal organisations and terrorist financiers use to move money throughout the global economy. The problem is widespread across the Asia-Pacific region where there are high levels of manufacturing, established shipping industries and a number of major financial centres.

The AML/CFT regulators in Singapore and Hong Kong have both said that confidence in the integrity of their financial centres will be undermined if financial institutions do not have effective systems and controls in place to manage these risks.

The MAS issued guidance for banks on managing trade-based money laundering controls in October 2015. The Hong Kong Association of Banks ("HKAB") issued similar guidance in February this year, with input from the Hong Kong Monetary Authority ("HKMA").

The guidance papers said it was vital that banks establish and maintain robust AML/CFT risk management systems and controls to mitigate the financial crime risks arising from trade finance and dual-use goods, which can be used in weapons manufacturing.

"For Singapore to maintain her reputation as a clean and trusted commercial, trading and transportation hub, banks must ensure that their AML/CFT controls remain effective and are commensurate with the size, nature and complexity of their business," the MAS guidance said.

"It is imperative that senior management set the right tone at the top and inculcate an appropriate risk and compliance culture amongst its staff, across all levels and functions, to ensure effective implementation of a strong AML/CFT framework," it added.

Managing Risks 

Richard Moore, managing director and group head of financial crime at DBS Bank in Singapore, said his organisation was taking trade financing, proliferation financing and vessels screening compliance extremely seriously. The bank treats trade finance the same way that it would any other AML risk: it conducts a risk assessment, identifies any high-risk segments and businesses and then develops policies and standards around managing those risks.

Moore said knowing customers and understanding their business activities thoroughly was essential to effective compliance in this area.

"We have very strong onboarding controls. When we bring on new customers we make sure that we understand the nature of their business, the geographies in which they operate and the sectors in which they operate. Then we have the right due diligence around each stage of the transaction to make sure we understand it, in light of their business profile," Moore said.

"Stemming the Flow" 

Bos Smith, chief operating officer at Seabury TFX, said governments around the world were under significant pressure to stem the flow of funds to terrorist organisations through trade financing, as well as stopping the movement of dual-use goods for military purposes. 

Smith agreed that Singapore and Hong Kong were setting the regional agenda and other Asia-Pacific jurisdictions were likely to follow suit in response to international pressure.

"Singapore is looking to set a precedent with its enforcement, creating this dedicated enforcement team division. The restructuring of the MAS sends a clear message, along with the shuttering of BSI, that banks and financial institutions need to take these AML considerations very, very seriously," he said.

Smith said the guidance in Singapore and Hong Kong was welcome in the sense that it took a strong principles-based approach, in line with precedent set in the UK.

He said the Singaporean regulator wanted to see a culture of compliance that started at the top, where policies and procedures are created, and then spread throughout the organisation with strong internal messaging, compliance programs and training. The risk-based approach meant that compliance programs should be commensurate with the size and scope of the financial institution's overall trade finance program, he said.

Regular Reviews 

The MAS guidance noted that trade finance-specific risk assessments can be conducted as part of the broader risk assessment that banks perform. The assessment should identify any risk areas in their trade finance activities and determine whether the controls are adequate. 

"The enterprise-wide risk assessment is intended to enable the bank to better understand its vulnerability to ML/TF risks, including the financial crime risks presented by its trade finance business, and forms the basis for the bank's overall risk-based approach," the MAS said.

In addition to the standard customer due diligence obligations, banks are expected to obtain further information to assess the financial crime risks specific to a trade finance transaction.

This enhanced due diligence should cover all of the parties to a transaction, including the beneficiaries of letters of credit and documentary collections, agents and third parties. Using a risk-based approach, the due diligence may cover:

  • trading partners or counterparties of the customer (including buyers, sellers, shippers, consignees, notifying parties, shipping agents, etc);
  • the nature of the goods traded;
  • the country of origin of the goods (including whether the goods originate from any sanctioned country);
  • the trade cycle;
  • the flag of the vessel, flag history and name history (to check whether it is related to any country in the list of sanctioned countries);
  • the name and unique identification number (e.g., the International Maritime Organisation ("IMO") number) of any vessels;
  • any ports of call; and
  • the market prices of any goods traded to identify over or under-invoicing.

BC Tan, a trade financing specialist at Thomson Reuters, said many banks have an over-reliance on vessel names and flags when undertaking due diligence work. He said banks should also ensure that they record the IMO number of any vessels involved in transactions that they facilitate.

"I'm surprised that in many cases banks don't have the IMO identifying information," Tan said. "Vessels can rename and re-flag almost instantaneously. They can go to a corporate registry, get a new flag – a Mongolian flag or a Panamanian flag – overnight. So using the name and the flag is almost pointless in identifying a vessel."

Tan said that in many other respects banks already hold the type of information that the regulators expect them to collect during their due diligence work. He said the obligations around trade finance, dual-use goods and proliferation financing require banks to become more effective about the way the use the information they are already collecting across various parts of the business.

"The challenge is not to reinvent everything. It's really about getting all the existing parts to work more efficiently and then add onto it any additional requirements &mash; for instance, the vessel tracking," Tan said.

Dual-Use Goods 

With regard to dual-use goods, many banks struggle to have the level of technical expertise that they need to manage their regulatory and reputational risks effectively. The regulators define dual-use items as any goods, software or technology that are used for civilian purposes but may have military applications, or may contribute to the proliferation of weapons of mass destruction.

The MAS said banks need to ensure that staff are aware of the risks of dual-use goods and the common types of goods with dual uses, such as the aluminium tubes used in centrifuges. The banks need to be capable of identifying any red flags that might suggest that dual-use goods are being supplied for illicit purposes.

Moore said a bank's best defence was the quality of its customer due diligence work and the extent to which it understands what is a normal transaction for each client. He said banks should be able to detect customers that are suddenly moving goods that are not in their normal line of business or are moving into countries where there is a heightened risk of dual-use goods being redirected for military purposes.

"You need to go back and understand the client you're doing business with, understand the products and channels that they use for the various transactions they do. If they're starting to use products or goods that differ from the nature of their business then that should raise a red flag," he said.

Periodical Reviews

Once firms have effective trade finance compliance frameworks in place, they are expected to review their policies and processes regularly, taking into account changes in the operating environment and any regulatory developments that have occurred since the last review.

"Banks should also devote attention to raising the effectiveness of their AML/CFT controls through adequate systems, processes, staff expertise and training," the MAS said in its guidance.

Moore said that even with the best compliance framework in place, however, there was sometimes no substitute for an old-fashioned site visit. 

"We do conduct site inspections, depending on the client and depending on the client's geography and the type of business they operate in. Sometimes we'll do that at the transactional level, so if someone says they have a pile of coal we may go on site and make sure it's actually present. So we do validate the goods from time to time," he said.

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Nathan Lynch is head regulatory analyst, Australia, for Thomson Reuters Regulatory Intelligence.