Trade Finance can be described in its broadest terms as providing finance and related banking services to facilitate the movement of goods between the Exporter (seller) and Importer (buyer) in either the same country, or as a cross border transaction.
The trade finance industry has recently come under the scrutiny of regulatory bodies worldwide and is regarded as a high risk banking and logistics process that requires the immediate attention of Compliance Teams within financial institutions that have a Trade Finance/Documentary Credits operation.
As Trade Finance operations are inherently paper based they require a manually intensive review process in order to check that relevant documentation such as Letters of Credit, Bills of Lading, Airway Bills, etc are correct and tally with other corresponding documentation relating to the same trade.
Due to the range of variances that are present in even normal trading patterns it is virtually impossible to utilise standard transaction or account monitoring systems so any trade monitoring must be done manually which is not only time intensive, but is also subject to human error.
Being paper based also brings a multitude of problems in terms of manually searching for entities contained in the trade documentation that might also be present on Global Watch Lists, or looking for inconstancies in trading such as anomalies in market pricing or unusual and complex payment structures involving third parties unrelated to the trade.
Apart from performing traditional sanction screening on elements of the Trade Finance function within the banking industry, Financial Institutions in the UK could, in the near future, face the potential regulatory requirements of identifying the “End User” for certain exported “Dual Use Goods.”
HMRC Export Control already have stringent polices in place for exporters sending goods to destinations deemed “Countries of Interest” and require the exporter to have certain licences in place to move certain goods to these destinations, along with declaration of the final “End User.”
While technological developments have been made to accommodate the effective screening of Dual Use Goods (as designated by the EU) that are being exported to, or from, sanctioned countries, or destinations defined “Countries of Interest,” it is the proof and verification of a valid export license which is now being discussed and how this check should be performed. Having the information of the “end user” will at least allow an additional level of sanction screening to be performed and another risk element of the trade addressed.
So, what can be done do to help address the challenges and pressures that the global enforcement agencies and regulatory authorities are putting on the Trade Finance industry to perform effective anti-money laundering measures, and what are the industry restraints that make Trade Based Money Laundering a difficult activity to efficiently counter, or at least, seriously disrupt?
Disrupting the Trade Process Flow
The Trade Finance workflow can often be at the mercy of deadlines which can put pressure on the responsible areas within a financial institution to process the documentation as quickly as possible in order to ensure the timely execution of the transaction.
When Trade Finance related documentation such as Letters of Credit, Bills of Lading, etc are being checked, there can be discrepancies which, although minor, still have to be corrected for the related documentation to match up and validated. These corrections can take time as they are normally in a paper based format and are transferred via the standard postal system between the relevant Financial Institutions that are processing the transaction.
When corrective procedures are in operation the delay caused by the postal distribution of the documents can shorten the processing margins thus making meeting deadlines a priority. The knock-on effect of this will inevitably shorten the time available to effectively perform any sanction screening or transactional monitoring activities.
A Fragmented Paper Based Industry
As mentioned before, Trade Finance is, “by nature of the beast,” a predominately paper based operation, and even with the advent and use of related standardised message formats such as the SWIFT 7 series of Trade Finance Message Types for Documentary Credits and Guarantees, it is still virtually impossible to fully automate screening the data sets and fields within the other associated documents.
In recent years a number of Trade Finance related software applications to create and store trade data have been developed and marketed however, while these applications help streamline processing and support a more automated screening process, the adoption of these systems have been slow within the industry therefore, additional manual input processes have had to be introduced in order to convert paper based data into an “electronic” format via a pre-configured interface from which the trade information can be efficiently screened by an appropriate application.
Data Privacy Issues
There are also concerns around Data Privacy issues where clients expect their trading and financial details to be kept secure and private from non-related parties.
While data privacy is important to the freedom and rights of the customer and his counterparts, and should be observed when dealing with honest trading parties with no apparent connection to known money launderers, it is still vitally important that global law enforcement agencies are able to share intelligence on known, or suspected entities to all Financial Intelligence Units (FIUs) and Trade Transparency Units (TTUs) in order for them to conduct efficient investigation and monitoring of transaction activities.
At present it seems that this cross border/international co-operation model is currently unavailable to the global compliance community, with some government agencies willing to accept other countries data but not offering reciprocation. This status quo has effectively created a “one-way street” scenario that benefits only a select few. This of course lessens the global concerted effort to combat Trade Finance Related Money Laundering and is a subject that the Compliance industry as a whole should be urgently addressing.
Lack of a Centralised Trade Data Repository
The very nature of Trade Finance processing is fragmented and often done in isolation however, a centralised trade database accessible by Regulatory Authorities, Law Enforcement Agencies and Financial Intelligence Units working in Financial Institutions around the world could be the answer to sharing information on a wide range of trade activities and any nefarious entities involved.
As previously mentioned, intelligence on known or suspected entities that use Trade Finance as a vehicle to launder money should be shared multilaterally throughout the Compliance/AML community in order to support the consistent and effective monitoring of trades.
The data could be stored on a Single Information Platform where Investigation Units and regulatory authorities could enter new and updated information on known, or suspected entities onto the system for general distribution and access by Compliance and Investigation teams in Financial Institutions, Insurance Companies and maybe even Logistic Companies, much along the lines of how the UK Insurance Fraud Bureau operates in order to identify and disrupt claim fraud by known entities across the insurance industry.
As mentioned earlier, the Export Control function of HMRC strictly monitor (UK) exporters of certain designated goods that are to be consigned to “Countries of Interest,” and on the relevant “End User” of those goods.
In order to ensure all licence regulations are being adhered to during the life cycle of a trade, access to the UK Government SPIRE Export License system that holds the details of export licences of selected goods should be made available to view by Banks, Cargo Insurers, and even carriers engaged in transporting the relevant goods.
While “read only” access to SPIRE may form the basis of the solution, the details around the actual procedure for this additional verification remains to be defined therefore, a practical approach to supporting this process will need to be formulated in greater detail by all parties concerned.
So, in order to tackle the restrictions and difficulties Compliance teams are facing to perform effective anti-money laundering in Trade Finance we also need to look at providing education to Operational staff on various AML techniques in order to use such knowledge, in tandem with their normal processing experience, to perform at least some basic transaction monitoring throughout the Trade Finance industry.
The Need to Identify Entities Connected to Money Laundering Activities
An important area in which to concentrate efforts is to identify entities that are connected to money laundering activities and are known to law enforcement agencies. These entities are available on government, law enforcement and regulatory sanction lists and should be used to perform sanction screening against of all of the counterparties, banks, and logistic details (shipping agents, carriers, ports, vessels etc) involved in the trade.
While this procedure will support enhanced due diligence in indentifying any sanctioned entities present in the transaction the process can be manually intensive and extremely difficult to perform effectively and in a timely manner without converting the paper based data into an electronic format and using a screening application.
Where transactional data can be formatted into a uniformed structure and stored electronically in mediums, such as the aforementioned SWIFT Trade Finance 7 category message types, or the comparatively new Bank Payment Obligation message initiated by SWIFT and the ICC Banking Commission, the data can be extracted and screened against watch lists automatically.
This screening process can also apply to any associated standard payment message types used as part of the overall transaction that will contains the names all the parties involved in the trade such as the ordering customer of the payment, the beneficiary customer, and the beneficiary’s bank, extremely important information when monitoring for third parties that have no real need to be involved in the trade other than the buyer and seller.
Identifying Money Laundering Trends in Trade Finance Effectively
Indicators of over or under invoicing can be utilised such as a Unit Price Analysis mechanism where domestic import data can be analysed using automated price comparison techniques during the document review, focussing on the average unit price for a specific commodity and identifying disparities in the average unit price versus invoicing. The same process can also be applied on known international commodity market price indicators.
This process could be expanded to cover the identification of traders who have been known to import or export commodities at significantly higher or lower prices outside of the world market averages. Again, this information could be stored in a central intelligence database for authorised access by appropriate FIU’s, TTU’s, and Operational teams monitoring transactions.
Other indicators could be within the trade structure such as:
- Unusual complexities in the payment transfer side of the trade
- Last minute changes to payment instructions
- Goods being imported from improbable origins
- A third party funding or providing partial funding the Letter of Credit value
- Goods not in keeping with the customers known business model
These are just a few examples of the indicators that Trade Finance industry experts can use to indentify suspicious activities and of course there are probably many more, but this is just an illustration of what could be achieved by allying AML training and related techniques used in Transaction Monitoring and Sanction Screening to the Trade Finance industry expertise.
The overall aim should be to provide the framework for supporting effective measures in countering Trade Based Money Laundering, achieved through the unilateral sharing of intelligence, and digitising as much related trade data as possible to facilitate automated sanction screening.
Delivering comprehensive education in AML techniques to experienced Trade Finance Operations Team members is another tool to be used and will allow them to utilise these new skills in tandem with their knowledge of Trade Finance processes to identify and report suspicious trade activity that could be connected to a potential money laundering operation.
By Colin Wood, Associate Director – Professional Services Group, Accuity