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Trade-based money laundering: Putting the fine into trade finance

by: (Associate Director, Research and Development) on

This blog was originally written as an article for www.kyc360.com

Over the past century the volume of international trade has risen dramatically, creating a truly global market for consumer goods and industrial outputs. An almost unimaginable variety of products is traded daily across international borders by air, land and sea.

This spectacular rise in international trade couldn’t have taken place without the services offered by financial institutions to importers, exporters and the various middlemen who serve both. From letters of credit and bills for collection to apparently simple, straight payments between counterparties, one or more financial institutions will be involved, at some point, in the international trade transaction chain.

If you think this sounds complicated and potentially confusing, you’d be right. And you’d also be thinking like a money-launderer.

Regulatory Focus

The fact that the basis and sheer size of international trade makes it attractive to the nimble-minded criminal is an issue which has not gone unnoticed.

In July of this year one of the UK’s financial services regulators, the Financial Conduct Authority (FCA), released a report entitled "Banks' control of financial crime risks in trade finance"1. The report is effectively the output of a thematic review undertaken by the FCA into how banks in the UK control money laundering, terrorist financing and sanctions risks (collectively 'financial crime risks') in trade finance business.

The results made for interesting reading.

The Findings

The full findings are available in the report, but to give you a flavour, the FCA found that:

  • there was significant room for improvement at most banks;
    policies, procedures and controls to counter money laundering risk were generally weak;
  • there was an inconsistent approach to risk assessment;
  • most banks produced little or no management information on financial crime risks in the trade finance business; and
  • there was limited evidence that banks were escalating potentially suspicious transactions for further review and more senior level sign-off on the basis of money laundering concerns.

The long and short of it is that trade-based money laundering represents a real money laundering risk – one that is not being satisfactorily mitigated because sufficiently robust systems and controls are lacking.

So, the question is whether the UK is alone: apparently, it isn’t. Let’s look at another example.

Lebanese Canadian Bank Sal

In October 2011, the US Department of the Treasury identified Lebanese Canadian Bank Sal as a “Primary Money Laundering Concern” under Section 311 of the USA PATRIOT Act. This was due to the bank’s role in facilitating the money laundering activities of an international narcotics trafficking and money laundering network.

In addition to this movement of drugs and money, it was identified that the criminal organisation involved had used international trade in consumer goods to launder funds. DEA Administrator Michele M. Leonhart said ‘the Lebanese Canadian Bank for years has participated in a sophisticated money laundering scheme involving used cars purchased in the United States and consumer goods overseas’.

The NY Times produced an excellent infographic, demonstrating how the process worked :

graphic


Old News?

The US Department of the Treasury's report on Lebanese Canadian Bank Sal identified the following key factors, and eagle-eyed readers may see a theme emerging:

  • failure to adequately control transactions that are highly vulnerable to criminal exploitation; and
  • inadequate due diligence on high-risk customers.

The interesting thing here however, is that this is not an emerging type of money laundering. Trade-based money laundering is something that has been around for some time, although it’s fair to say that momentum appears to be gathering.

Studies have been produced on this subject by the Financial Action Task Force (2006 & 2008), the Eurasian Group (2010), the Wolfsberg Group (2011) and the Asia-Pacific Group (2012). And now we have the FCA Report.

In June 2013, Lebanese Canadian Bank Sal agreed to pay $102 million to settle the US Government lawsuit. The announcement of this settlement was accompanied by this statement from the office of Manhattan U.S. Attorney Preet Bharara: "today's settlement shows that banks laundering money for terrorists and narco-traffickers will face consequences for their actions, wherever they may be located".

So what comes next is the $64,000 question. All indicators suggest that scrutiny of money laundering in trade finance is set to rise. So financial institutions need to ensure their houses are in order and that the systems and controls in place are robust.

Ghost shipments, mis-labelled goods, variable volumes, variable pricing, under or over invoicing, letters of credit – these are all areas which require solid understanding. Training is a key part of this defence, and understanding your risk exposure is the first step in mitigating it. This was recognised by the FCA who stated that "good quality training is one of the most important tools that banks can use to prevent and detect financial crime risks occurring in trade finance business."

Now is the time to check your defences against this particular type of money laundering – before your organisation ends up putting the 'fine' into trade finance.

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