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Trade-based money laundering: not just a bank’s burden

Americas / 15-05-17 / by
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US regulators are clamping down on trade-based money laundering, but they should look further than banks to combat the practice. Melodie Michel explains why.

Financial crime was at the forefront of the agenda at the 2017 annual conference of the Bankers Association for Finance and Trade (BAFT): on top of a number of banks’ compliance officers and compliance technology providers, speakers included representatives of the Federal Bureau of Investigation (FBI) and US Drug Enforcement Administration (DEA). These specialists helped the audience understand what trade-based money laundering (TBML) and terrorist financing look like on the ground, and how authorities tackle these cases.

“It’s far more complex than any other type of financial investigation and it requires a lot more co-operation across agencies and across national jurisdictions,” Mark Giuffre, assistant special agent in charge at the DEA, told GTR about TBML on the sidelines of the conference.

The illegal activity, which has received an increasing amount of attention from the media and lawmakers in the past couple of years, uses international trade to disguise and transfer the fruits of illegal activity. Trade misinvoicing (purposely over or undervaluing goods being sent on trade documentation), for example, helps fund up to US$2.2tn a year, according to a March 2017 study by Global Financial Integrity (GBI).

Banks are a crucial link in the physical and financial supply chain that handles illicit trade – but they are only one component. Exporters, importers, freight forwarders, shippers, ports and customs authorities are all interlinked parts of this ecosystem, all contributing to trade in one way or another. Why, then, does it seem like regulators are placing the burden of combatting TBML solely on banks?

According to Ross Delston, independent attorney and expert witness, it has to do with the know your customer (KYC) and your customer’s customer “dilemma” within banks. “No question: regulators, at least in the US, are increasingly focused, and I would say paranoid about this issue,” he explains. “There are many reasons for that, particularly when you look at the banks. One is that in the best of circumstances, the bank typically only knows one party to the transaction, for example if it issues an LC, they know their customer but they don’t know their customer’s customer. And there are a lot of transactions, for example discounting bills or drafts issued under other LCs where the bank doesn’t know either party. That’s a big dilemma for banks and therefore, for regulators.”

For his part, Stephen Alsace, senior director of sanctions, global AML group at Canadian bank CIBC, believes banks are “potentially unfairly burdened” with the responsibility of detecting and preventing TBML alone. “I guess it’s convenient for the banks to be burdened with it because we’re doing it with sanctions screening and other areas. But why isn’t it the importer/exporter or the shipping company that has to file suspicious transaction reports?” he asks.

Lack of information

The argument that banks and associations like BAFT are trying to make with regulators is that they only have the ability to detect illicit activity on a very small proportion of trade, as just 20% of all trade is documentary-based. “There’s a difference between trade finance and TBML. They often get confused and we think that’s a very important issue because trade bankers can only do so much to combat financial crime and money laundering issues,” explains Stacey Facter, senior vice-president of trade products at BAFT.

“They’re a good place to start but they only see a limited subset of activity, and the activity they see is what comes through from a documentary trade basis. With the 80% of open account trade, it’s almost impossible for a trade finance banker to see what’s going on, because they don’t have all the documents to show what the issues are and look at the red flags” she adds.

Even when they do have access to documents, bankers don’t necessarily have all the information they need to know that illegally-acquired money is being transferred. A roundtable discussion held by compliance service provider Pelican during the conference revealed that bankers feel like they don’t know enough about the products traded to determine how they should be priced. A suit, for example, can cost anywhere between US$300 and US$10,000, and trade documentation doesn’t include which kind of suit is being exported, making it difficult for banks to contest pricing.

“One of the issues is that not all of the information needed to make an assessment is submitted by the parties. For example, it isn’t enough to know that shrimp is being exported: you have 12 grades of shrimp. You have to know the specific grade and the amount. Often, all of that information is not available, not just to the bank but in the electronic system itself,” says Delston.

This has led some banks to practically exit certain sectors, such as used car trade, where accurate pricing is impossible to determine. “When we onboard clients, we’ll ask the name of their company and the type of business they’re engaged in, and they may provide vague answers like import/exports or they may even say things like furniture to begin with. In one of the cases we had, the client said that [they were in the furniture business] back in 2016, and then we started seeing in the bills or payment settlements, which were then indicative, that they were dealing with used cars or attending auto auctions. When we do find that we shut them down because it’s very high-risk and usually associated with money laundering,” Alsace says.

Another issue is that banks don’t have full access to the Customs and Border Protection (CBP) data used in TBML investigations. Giuffre tells GTR that the speed at which information is shared between federal agencies has increased tremendously over recent years, but that the most important piece of the puzzle is CBP information.

“I cannot imagine, for example, being on the bank trade finance side without having access to the detailed records that, for example, CBP customers and border patrol has on the commerce going across borders. We’re in the department of justice, so with trade-based money laundering investigations we find ways to work closely with CBP to have access to that information instantaneously, which is critical,” he says.

This problem seems easy enough to fix: regulators could simply require the disclosure of more specific information on trade documentation, and give banks expanded access to CBP data. But according to Delston, this would involve customs departments ramping up their requirements, “which they don’t like to do”. It would also involve increased inspections of the quantity and quality of goods being shipped, not only to help detect misinvoicing, but also for safety reasons. A case in point, the misreporting of container weight is suspected to have participated in the sinking of the container ship MOL Comfort after the vessel broke in half in bad weather in 2013 off the coast of Yemen, and shipping experts believe the practice to be a widespread industry issue.

Cross-sector collaboration

Some countries are more advanced than the US in involving all trade counterparties in the fight against TBML: the UK’s Joint Money Laundering Intelligence Taskforce (JMLIT), for example, includes the government, the British Bankers Association (BBA), the National Crime Agency (NCA) and more than 20 UK and international banks, with the aim of improving intelligence sharing in the fight against money laundering.

Between May and July 2016, the JMLIT contributed to the following operational outcomes: 37 arrests of individuals suspected of money laundering, the instigation of 186 bank-led investigations into customers suspected of money laundering, the identification of 137 suspicious accounts, the heightened monitoring by banks of 165 accounts, the closure of 114 bank accounts suspected of being used for the purposes of laundering criminal funds, and the restraint of £145,000 of suspected criminal funds. The taskforce is also developing two alerts on money laundering methodologies that are currently being used by criminals to launder their criminal proceeds through UK banks.

The NCA is now working with counterparts around the world to help the development of similar initiatives. But in the US progress is likely to be slow, not least because of stringent privacy laws blocking information sharing.

Facter points out: “One of the major stumbling blocks for identifying money laundering issues is the inability for us to share information across borders, even within our own financial institutions because of confidentiality and privacy issues. This keeps us from talking about the typologies, the criminal activities that have been identified from one jurisdiction to another. The industry is working very hard to let the regulators, whether it’s the Financial Action Task Force (FATF) or the Basel Committee, know about these issues so that there could potentially be something done about it.”

One way this could be improved is through industry associations, which are trying to come up with ideas on how to share information without having to breach privacy or as Facter calls it, “watering down the information to a point that it can be shared”.

Some hope the awaited application of blockchain technology in trade finance could also provide more transparency and collaboration in the sector. But in the meantime, there are things banks can do now to improve the detection of TBML, on their side at least.

“My suggestion is to incorporate the red flags into their daily work, in a way that’s not just waiting for an escalation but looking for suspicious transactions, and also to ramp up training, because often it’s the operations team, the back office and trade finance people who are viewing documents and Swift messages, and not the compliance people who see the transactions. Often the compliance people won’t understand the underlying trade transaction, so it’s really up to the operations people to take on the major responsibility,” advises Delston.

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