Globally trillions of dollars worth of goods and services are moved from different countries. International trade is one of the major source of movement of value. International Trade creates huge value for the financial institutions to generate the fee based income from the trade transactions. However, 80 percent of trade activity is considered to be open account trade. An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is not documented, thus offering no banking documentation to determine the authenticity.
Due to privacy and confidentiality considerations, some jurisdictions don’t allow sharing information across borders. Limitations and restrictions in the international trade creates conducive environment for the criminal activities such as trade-based money laundering (TBML). Billions of dollars of illegal money is transferred through these trade transactions.
With sums of that magnitude, it’s no surprise that TBML is highly sophisticated. And, as it hides its activities amongst massive volumes of legitimate trade, it’s difficult to uncover. Techniques such as under- or over-invoicing, falsifying documents, and misrepresenting financial transactions, are difficult to trace as they can involve multiple parties, jurisdictions and transactions.
Consider Diamonds; as diamonds are subjective, how could compliance officers prove that the price paid for buying the diamonds was to hide funds, if the Customs Authorities have failed to address the discrepancies. Value of the commodity is driven by the market and can not be regulated. Diamond may cost $300 or $30000. Additionally, true value is often difficult to set accurately. It is difficult to find out if someone is overpaying for a purpose to hide illicit funds or is that what they think its worth?
There is no definite price for international transactions. Compliance officers assigned the role of uncovering TBML face a distinct lack of information for specifics that can help determine accurate pricing. Even if more information about the quality of the product is available, it’s difficult for compliance officers to be experts in the price variances of multiple industries.
As International Trade grow bigger it creates larger opportunities for the Multinational Banks who will not want to burden legitimate trade but can’t afford to pay fines for the non compliance with AML Laws.
Due Diligence from TBML Perspective
In order to effectively detect and prevent the Trade Based Money Laundering transactions it is important that the compliance officers do their due diligence. Pricing is one of the important issues in combating the TBML. Compliance Officers can collect information from their business clients about the product range and pricing during the due diligence process. When the volume involved is large it is also important to research online to check the accuracy of the data. After completion of online research, you can check transactions against that data to ensure they are in line with expectations.
In higher risk situations, an actual on-site visit can illuminate more information about the nature of the client.
Few cases of Trade Based Money Laundering witnessed by the Indian Bankers suggest that in addition to learning the pricing one should know little bit more about the clients themselves. It is always helpful to know who are they doing business with? Third party due diligence policies, screening and processes (Know Your Customers Customer or KYCC) are necessary to mitigate your risk.
While the tactics needed to properly vet against TBML require more extensive analysis, fortunately the overall strategy is well-known – or more precisely Know Your Business (KYB), as we are talking about business entities. Note that the second step of KYC is to understand the nature of the client’s activities.
What is your company’s appetite for risk and what risk does that client pose for TBML? There are certain industries, such as used cars that pose a much higher risk for TBML, or certain countries that pose a higher risk. In these high-risk situations, enhanced due diligence procedures (EDD) are in order to fully check the background, ownership and business dealings of the client.