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Industry experts have completed a proof of concept for a tool that identifies price manipulation or misreporting in trade finance transactions, which could help banks detect trade-based money laundering (TBML). 

The project was carried out by the Digital Trade Finance Lab at the Asia-Pacific Financial Forum (APFF), a public-private initiative launched in 2013, in partnership with trade data and analysis provider S&P Global Market Intelligence. 

Hundreds of billions, or even trillions, of dollars in illicit funds are believed to be laundered through cross-border trade each year, and in recent years the issue has attracted closer attention from financial crime authorities. 

In documentary trade finance, tampering with documentation to obstruct price checking by banks has been identified by the US as a potential area of weakness. Over- or under-invoicing is involved in nearly two-thirds of known TBML cases. 

The proof of concept involved using technology to collect information on individual trades from participating banks, including goods descriptions, units of measurement, quantities and values. 

The tool would automatically use those inputs to generate HS codes – a global standard for classifying goods – and a calculation of unit price, which was then compared to pricing data obtained from official sources such as customs authorities.   

If the unit price of the trade did not match unit values from those official sources, outside a tolerance of 30%, the system would generate an alert. 

The proof of concept did not distinguish between open account and documentary trade finance transactions. Each participant was required to submit data from a minimum of 50 trades. 

A paper on the project was presented to finance ministers from Asia-Pacific Economic Cooperation member states in August and made public this month. APEC members include Australia, China, Indonesia, Japan, Singapore and the US. 

“A proactive approach of screening all transactions against a repository of regulated sources data helps financial institutions identify potential TBML activities, maintain regulatory compliance and protect themselves against reputational and financial risks,” the paper says. 

The proof of concept found that around 80% of HS codes were successfully generated from goods descriptions on trade documents. In some cases, unfamiliar acronyms had to be corrected manually but were then recognisable in future transactions. 

For 81% of trades submitted, the system was able to generate a unit price output, in some cases after converting between units of measurement or currencies. 

It found that around two-thirds of price values from official sources matched those provided by the banks, within the tolerance of 30%. More than half were within 15%. 

“This would imply a good standard of accuracy, of both the automatically generated HS code and the corresponding data returned from the relevant customs authority,” the paper says. 

 

Mismatched pricing and next steps 

In one case outlined by the paper, the system detected a price discrepancy within a shipment of steel between Malaysia and India. 

Bank data and Indian regulatory sources showed unit prices of US$1,470 and US$1,362 respectively, but the corresponding figure from Malaysian data was just US$529. The paper says the case would require “further investigation… to identify a potential cause”. 

If taken further, the tool could address a long-standing challenge for trade finance lenders. 

Alberto Almaraz, a trade financial crime specialist, said during an online event hosted by the International Compliance Association on September 11 that banks currently lack sufficient access to data in order to verify unit prices in trade transactions. 

“When you think of any attempts at verifying prices, it is very limited [what] a bank can do,” said Almaraz, who has held senior compliance roles at Standard Chartered, SMBC and MUFG. 

“Having the ability to, for instance, speak to customs, get up-to-date real-time information on what is now being paid for that type of commodity, is very important.” 

Tat Yeen Yap, head of supply chain solutions at Maybank Singapore and a sherpa at the APFF Digital Trade Finance Lab since 2020, says banks have been “scraping the internet for pricing information, including going to e-commerce sites to check the price of goods”. 

“That’s not very elegant,” he tells GTR. “If you could have pricing that comes from regulatory sources, that’s a much better approach.” 

In terms of next steps, Yap says it is unusual to have immediate direct responses from APEC finance ministers as it takes time for forum recommendations to be examined. 

“The reports serve as an exercise in capacity building, providing actionable insights of what economies can do, with the hope that some of those recommendations will be taken up and implemented,” he says. 

Byron McKinney, business director for trade compliance at S&P Global Market Intelligence, says the tool is still operational. 

“We can still utilise it and run data through it,” he tells GTR.  

“But one of the key things for me personally was to start a debate around this, and generate feedback on the topic as well. Hopefully, we can take that further and work with other agencies, regulators and financial institutions, maybe in a more collaborative way, to extend the project.”