Trade based money laundering: current issues · Bicycles Instant Coffee Mustard Gas Rocket Fuselage Biological Weapon Lyophilizer Triethanolamine TEA “We are being asked by our

Trade based money laundering: current issues

Henry BalaniGlobal Head of Strategic Affairs, Accuity Deutscher Exporttag

Topic outline

Current trade challenges

Trade based money laundering

Identifying Red Flags for trade transactions

Trade is important to many countries in Europe

EU average at 82 % of GDP

Importance of trade to economic growth means that many countries want to ensure open, efficient processes that will encourage trade

Source: World Bank & OECD national accounts data

0

50

100

150

200

250

300

350

400

450

Trade as % of GDP - 2015

Current geopolitical trends put greater pressure on protectionist policies

Apart from global economic conditions, compliance issues challenge trade finance

Rising compliance costs due to:

Screening for terrorist

financing & money

laundering

Screening for Dual

Use Goods

Screening for sanctioned

goods and vessels

Rising compliance costs due to:

Enhanced due

diligence requirements

De-risking by

correspondent banks

Screening for ultimate

beneficial owners

Which ultimately results in fewer correspondent banks willing to finance trade

0

50000

100000

150000

200000

250000

300000

350000

400000

41000

42000

43000

44000

45000

46000

47000

2013 2014 2015 2016

Insti

tuti

on

s

Total No. Institutions vs. Total Corr Relationships

Total No. Institutions Total Corr Relationships

Institutions include Depository Financial Institution, Commercial Bank, Savings Bank, Savings & Loan Association, Credit Union, Industrial Bank, Private Bank, Thrift & Loan,

Cooperative Bank, Deposit Taking Institution, Retail Bank, Wholesale Bank, Building Society

Source: Accuity Global Payments File. 2016 data as of Aug 26 2016

39% drop in

number of

correspondent

banking

relationships

since 2013

Correspondent Banking de-risking is impacting various banking functions including trade finance

IMF Staff Discussion note: The Withdrawal of Correspondent Banking Relationships

Withdrawal of correspondent banking relationship is a key issue for the Pacific Islands & other high risk regions

Reasons given:

• Presence of

offshore sectors

• Concern over

legal frameworks

• Higher risk

customers

• Lack of

profitability

• Money

Laundering/

• Terrorist

Financing risks

De-risking affects economic growth

Remittances cannot be

sent back to home

countries

Trade cannot be financed

A Closer Look at Trade Based Money Laundering

Trade based money laundering continues to be an issue globally

Source: Global Financial Integrity 2015 – Illicit Financial Flows from Developing Countries

Between 2004 to 2013, developing countries lost US $7.8 trillion to illicit financial outflows of which 84% was laundered through trade misinvocing

Exporter Importer

Mexico USA

Goods: $ 1 Million

Payments: $ 10 Million

$ 9 Million moved from US to Mexico

Goods

are over

invoiced

Goods actual value is $ 1 per unit

Goods invoiced at $ 10 per unit

Both Exporter and Importer are colluding!

How does trade mis-invoicing occur?

Mis-invoicing of trade transaction

Real examples of over/under invoicing from/to the USA

• Imports of Metal tweezers from Japan to the USA

€ 4.475/unit

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

1 USD = € 0,914


• Imports of Camshafts from Saudi Arabia to the

USA

€ 13.909/unit


1 USD = € 0,914


• Imports of Plastic buckets from Czech Republic to

the USA

€ 889/unit


1 USD = € 0,914


• Exports of Radial truck tires from the USA to the

UK

€ 10/unit


1 USD = € 0,914


• Exports of Toilet Bowls from the USA to Hong

Kong

€ 1,60/unit


1 USD = € 0,914


• Exports of Prefabricated Building from the USA to

Trinidad

€ 1,09/unit


1 USD = € 0,914

A Closer Look at Red Flags in Trade Finance

Best practices related to identifying TBML continue to mature over the years

FATF Typologies on Proliferation Financing

Jun. 2008

The WolfsbergGroup Trade

Finance Principles

2009

FATF Targeted Financial

Sanctions related to terrorism and terrorist financing

Jun. 20132006 2011 2016

EAG WG

International TBML report

Dec.2009

EAG WG ML in Foreign

Trade Transactions

Dec. 2010

UK FCA Thematic

Review: control of financial

crime risks in trade finance

Jul. 2013

JMLSG Guidance,

Trade Finance

Nov. 2014

OCC AML Exam

Manual TBML

Activities Overview

Nov. 2014

US FINCEN

SAR/TBML Advisory

Feb. 2010

APG TBML Typologies

Report

Jul. 2012

MAS

AML CFT Controls in

Trade Finance

Oct. 2015

HKAB

Guidance paper on

TBML

Feb. 2016

FATF

Trade-based Money

Laundering report

2006

There are many sources that highlight best practices in regards to identifying TBML

The customer engages in transactions that are inconsistent with the customer’s business strategy or profile, or make no economic sense*

*BAFT Guidance for Identifying

Potentially Suspicious Activity in Letters

of Credit and Documentary Collections

Sources: FATF, FCA, FFIEC, Wolfsberg

e.g. an agricultural

company that starts

dealing in paper products

Customer shipping items to, through, or from higher money laundering risk jurisdictions, including countries identified by FATF as ‘non-cooperative jurisdictions’

Sources: FATF, FCA, FFIEC#AccuityTradeFinance

“The payment terms, tone or structure

are inconsistent with the goods or

unduly complex.”

Sources: FATF, FCA, FFIEC, Wolfsberg

e.g. perishable items

normally converted in 180

days but suggesting >365

days financing

Sources: FATF, FCA

The transaction appears to involve the use of front or shell companies for the purpose of hiding the true parties involved

29Sources: FCA

Transactions that involve obvious dual use goods

Dual-use Goods include a wide range of

goods that are designed for commercial

applications but can also have military

applications or potentially be used as

precursors or components of Weapons

of Mass Destruction

Identifying Dual Use Goods can be tricky

“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 systems and controls over dual-use goods.”

Banks’ control of financial crime in trade finance

“Banks should…determine

whether the underlying

goods financed are

embargoed goods and

there should be special

attention paid to dual-

use goods”

Guidance on anti-money

laundering and

countering the financing

of terrorism controls in

trade finance and

correspondent banking

Dual-use goods are increasingly under the regulator’s spotlight

“While this is a complex area,

AIs should nevertheless have

measures in place, as part of

their risk-based systems and

controls that can assist in the

identification and escalation

(for further review) of dual-

use goods in trade

transactions, taking into

account other relevant red

flags in

a transaction.”

Guidance Paper on

Combating Trade-based

Money Laundering

Carbon Fiber

Shampoo

Bicycles

Instant Coffee

Mustard Gas

Rocket Fuselage

Biological WeaponLyophilizer

Triethanolamine

TEA

“We are being asked by our auditors to explain the combination of chemicals to create explosive devices.

We are just bankers, not chemists!”

Key Takeaways

Key Takeaways

Declining global trade and rising compliance costs puts pressure on Trade Finance

Trade Based Money Laundering is a global issue

Identifying Red Flags in a trade transaction reduces criminal trade activities

Henry BalaniGlobal Head of Strategic Affairs, Accuity

[email protected]

@hbalani

#AccuityHenry

Henry Balani

Contact

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Trade based money laundering: current issues · Bicycles Instant Coffee Mustard Gas Rocket Fuselage Biological Weapon Lyophilizer Triethanolamine TEA “We are being asked by our