Trade-based transactions have gained considerable flak over the years due to the complexities involved. Traditionally, trade finance has always been viewed as a high risk area, particularly related to fraud. This perception has transformed recently, and regulators and international bodies have increasingly started viewing trade finance as a ‘high risk’ area of business for money laundering, terrorist financing and, more recently, for transactions related to the potential breach of international and national sanctions. In fact, trade-based money laundering (‘TBML’) has been a regular feature in recent news.
The Indian Government introduced the Black Money Bill in 2015 that retrieved INR 4,147 crores; however a single incident wherein a series of transactions alone drained over INR 6,000 crores, had a negating effect in terms of the mentioned bill. It is yet to be determined whether this is only the tip of the iceberg, or if it simply reinforces the dire need for effective proactive monitoring and controls in the area of TBML, from both a regulatory and banking channel perspective.
“The front door of money laundering is the banking system…the Government has done a pretty good job of closing the front door, but the back door – international trade – is wide open” – John Zdanovicz in a story by the Miami Herald.
Benchmark institutions and regulatory bodies have come up with various guidance and practices for managing TBML. However, given the complexity involved, the need for right information and skill sets, technological investments and an overall enhanced collaborative effort to tackle the issue remain key barriers.
Line of credit transactions undertaken with intent of TBML could masquerade to include multiple layers of banks or entities including – remitting, reimbursing and advising banks, shipping agents, insurance agents, forwarding agents, vessels and lastly, internal employees of financial institutions itself. Hence, although the base of trade transaction remains, these layers add complexity to the issue.
Additionally, there are over 400+ lists of sanctions and law enforcement lists across the globe which have seen significant additions in last few years. Given this situation, there could be billions of fuzzy logic combinations to identify vulnerable entities. Dealing with such enormous data sets is an extremely onerous task.
Furthermore, TBML is unique because:
- It involves transferring of goods as a substitute for money and occurs outside the bank
- Banks need to leverage all the information available to them to determine whether their customers’ transactions are consistent with their businesses. From a business as usual perspective, this often becomes a key concern of business vis-à-vis cost of compliance issue.
- It involves systemic enhancements to ensure that trade related data sets are updated in the system so as to generate alerts and also requires manual review of documents
- It is challenging to detect aberrations in complex relationships between trading operations, operators, and money movements
- There is significant complexity involved in multiple foreign exchange transactions
- There are limited skilled resources available
Given the complexity, the need to effectively blend technology, data and manual reviews becomes imperative.
The need for rationalised caution and action
It must be noted that today, almost all banks have well-oiled Anti Money Laundering (AML) monitoring and review systems which help in detecting red flag transactions basis industry benchmark scenarios and triggers. Additionally, given the volume of trades, bankers also have dedicated personnel to review trade transactions. The gap, however, is present due to the need for macro data to decipher each micro transaction that needs to be processed. Banks therefore, need to prioritise the most vulnerable areas – customer due diligence and Know Your Customer (‘KYC’) processes, effective on-ground branch level monitoring, systemic controls, staff accountability and promote increased awareness through training and development.
(The article is first of a three part series on trade based money laundering.)
Ashwin Kumar, Senior Manager, Fraud Investigation & Dispute Services contributed to the above post.