Diamonds from South Africa are easily available in India. Mangoes from India travel across the oceans to be enjoyed by people in America. Cars manufactured in America run on European roads. Today, just as a person does not produce everything s/he needs, countries also depend on international trade to fulfill the needs and wants of their markets.
When it comes to the Global Economy, Trade Finance is a critical element. This refers to the financing of international trade by banks through financial instruments such as Letters of Credit, Open Account Financing, Export Credit Programs, etc. 80-90% of global trade depends on Trade Financing.
Unfortunately, criminals and terrorists have identified Trade Finance as a means to use legitimate trade to launder money from unscrupulous sources. More than 80% of the illegal money movement between developing countries is laundered through trade financing. Thus, Trade-Based Money Laundering has become a major concern for banks.
Challenges of Fighting Trade-Based Money Laundering
Financial criminals use very complex means to manipulate the system and launder their money through trade financing. They may under invoice or over invoice their products, provide multiple invoices for the same transaction, describe the goods being traded falsely, etc.
The steady rate at which international trade is growing and the variety of products traded are among the main reasons these criminals are hard to catch. The reliance on manually processed paperwork adds to the trouble. Another factor that makes financial criminals hard to catch is the limited exchange of information about Trade Financing between countries and banks.
Anti-Trade Based Money Laundering Practices
Trade Based Money Laundering may be difficult to catch but it isn’t impossible. There are three main elements of Anti-Trade Based Money Laundering practices.
Knowing Your Customer
The first step to reducing the risk of money laundering is for banks to identify customers with a high risk of executing such transactions. For this, banks need to establish KYC programs that allow them to:
• Create a comprehensive profile for each customer
• Understand the nature of the customer’s business and to be able to ascertain whether his/her funds are obtained legally
• Calculate the customer’s risk of being part of a money laundering scam
Some events that may raise a red flag include:
• The customer’s insistence on completing the formalities in a hurry
• Transactions between shell companies
• Transactions between parties managed by the same business entity
• Customer’s inability to source the relevant documentation
• Shipment from countries with a high risk of money laundering
Due Diligence on Trade
Based on the customer profile, the bank may choose the level of due diligence needed on trades. For each transaction the customer performs, the bank should collect sufficient documentation to answer questions such as:
• Is the type of trade and amount of goods being transported consistent with the type of business the customer is involved in?
• Has the documentation for the trade been completed?
• Is either party involved in the transaction, the bank or other elements on a sanctions list?
• Are any of the products being traded on controlled lists?
• Is there a discrepancy between the commodity’s value on the invoice and market value?
• Have the transactions been designed to be unnecessarily complex?
Fraud can occur even in cases where the customer has a good reputation and all the documentation is complete. Hence, banks need to have an effective Transaction Monitoring System wherein the system raises an alarm in case the transaction violates the Anti-Money Laundering Laws. This needs to be designed in three stages.
• Data Collection: The program must collect data relevant to the transaction from the buyer and seller. This must include container numbers, bill of lading, etc. All forms must also be digitized so that they can be easily accessed.
• Alerts: The system must sound an alert if the transaction violates Anti-Money Laundering Laws at any stage or if any unusual activity occurs. It must also have the capability of highlighting Politically Exposed People associated with the buyer or seller.
• Review: A large portion of banking forms is filled and filed manually. Thus, there is a high chance of human error. The system must be designed to be able to compare the data from these forms with data from other sources and update any errors in the customer profile. Any unusual activity must also be noted so that it can be used to make changes in the customer’s risk profile.
Maintaining a program to monitor and identify transactions being used to launder money is a must have for every banking institution today. It is only if they stay updated with the appropriate rules and follow proper documentation policies that the system can run efficiently and we can hope a cleaner global economy.