Financial crime authorities are upping efforts to tackle trade-based money laundering (TBML), urging lenders to watch for complex corporate structures or trade flows, circular payment arrangements and inconsistencies in documentation.
The warnings feature in new guidance from the Financial Action Task Force (FATF), an influential global standards-setting body. The document was produced in collaboration with the Egmont Group, an international organisation of various countries’ financial intelligence units.
The guidance sets out several risk factors for TBML, which involves criminals moving illicit funds through the international trade system in order to disguise their origin.
It says financial institutions should consider whether an importer or exporter’s corporate structure “appears unusually complex and illogical, such as the involvement of shell companies or companies registered in high-risk jurisdictions”. They should also assess its ownership model, staff arrangements and registered addresses.
The guidance emphasises that banks should continue to monitor the underlying trade activity itself. Risk factors include trading activity that is outside a company’s typical profile, such as the sale of atypical goods or the use of shipping routes that are inconsistent with the wider industry.
In terms of trade finance, it warns of traders making “unconventional or overly complex use of financial products, eg use of letters of credit for unusually long or frequently extended periods without any apparent reason, intermingling of different types of trade finance products for different segments of trade transactions”.
It is the second time in recent months that the TBML risks associated with documentary trade finance instruments have been highlighted by the task force.
Late changes to payment arrangements, use of transit or “pay-through” accounts, and payments “routed in a circle” back to the country of origin are also cited as potential red flags.
The FATF’s intervention follows increasing attention to money laundering through the international trade system, both from public authorities and the private sector.
Financial regulatory expert Johannes Wirtz, counsel at Bird & Bird’s Frankfurt practice, points out that similar warnings have been issued by German regulator BaFin, as well as the EU-wide European Banking Authority (EBA), in recent months.
BaFin similarly noted the role of complex company structures and unusual documentation in a January consultation paper on anti-money laundering, while the EBA set out sector-specific guidance for trade finance lenders in revised guidelines published on March 1.
Though Wirtz acknowledges TBML issues “seem to be in focus”, he suggests a lot of the guidance from different authorities is complementary or overlapping – and much of it “should go without saying” for most of the financial sector.
The lawyer adds that the FATF and EBA risk factors are “not identical but several are similar”.
Peter Ferrigno, senior tax counsel in Reed Smith’s international trade and customs team, says the uptick in authorities’ attention to TBML could be seen as a sign that international approaches are becoming more harmonised – rather than as an additional compliance burden.
“These guidelines are helpful in targeting where they should focus, while hopefully not putting too onerous requirements on legitimate businesses,” he tells GTR.
“National governments will already have their own internal guidelines. As so many of these suspect payments cross borders, consistent international guidelines will help ensure that both ends of a transaction are investigated in a similar manner.”
The FATF guidance does not suggest specific tools that banks could use to detect potential money laundering, but tech firm R3 – which developed the Corda blockchain platform – says in a paper published in March that existing transaction screening and monitoring tools are “inconsistent and limited”.
As a result, manual and paper-based processes are still necessary, while an estimated 95-99% of transactions flagged up by such systems end up being false positives.
“Banks urgently need to find solutions and take additional measures to establish whether unexpected flows are legitimate – or they risk paying for it later,” R3 says.