Trade-based money laundering – a macro view of the changing dynamics

TBML_2In our earlier blogpost, we discussed how trade-based money laundering (TBML) is emerging as the new hurdle on the anti-money laundering front, although financial institutions have striven to improve their overall anti-money laundering (AML) governance framework. Today, this issue is more than a local concern – it is a key global financial issue, which Governments, regulatory bodies and most organizations are struggling with.


A route to terror and crime

The Financial Action Task Force (FATF) defines TBML as the process of disguising the proceeds of crime and moving value through the use of trade transactions, in an attempt to legitimize their illicit origins; or moving legitimate funds through the use of trade to divert them towards terrorist financing or criminal organisations. The international trade system is subject to a wide range of vulnerabilities, which provide criminal organisations with an opportunity to launder the proceeds of crime and provide funding to terrorist organisations, with a relatively low risk of detection.

The Indian regulatory push

The Indian Government, as well as the Indian financial regulator (Reserve Bank of India [RBI]), have been working toward formulating enhanced measures to tackle the issues around TBML.

Some notable regulatory changes and guidelines issued in recent times impacting TBML include:

  1. The passing of the Undisclosed Foreign Income and Assets (Black Money) and Imposition of Tax Act, 2015 and Benami Transactions (Prohibition) Amendment. Act, 2015 to prevent and curb money laundering
  2. Clause 177 of the 2015 Finance Bill proposed to club all offences under Section 132 of Customs Act such as false declarations, false documentation, etc. as offences under Prevention of Money-laundering Act (PMLA), 2002
  3. Formulation of an elite panel comprising the Enforcement Directorate, Director General (DG) Directorate of Revenue Intelligence (DRI), DG Central Economic Intelligence Bureau (CEIB), Director of Financial Intelligence Unit (FIU) and the Central Board of Direct Taxes (CBDT) investigation wing to devise and solidify indicators (on classification of certain types of transactions) evaluate and identify red flags, in the case of any misdemeanour
  4. The Indian Financial Intelligence Unit (FIU) rolled out a new process mandating all banking and financial institutions to file formatted Cross Border Wire Transfer Reports (CBWTRs) for amounts exceeding INR 5 lakh, under the legal anti-money laundering provisions
  5. RBI has issued an advisory to banks to intimate them to exercise caution, with regard to an emerging trend of parties using fake or forged Bills of Entry for foreign remittances, especially to certain tax havens. The regulator has also initiated database synchronisation with the department of customs for fraud detection.

The above steps may seem insignificant in the larger scheme of things, but are positioned in the right direction. On the other hand, there is yet a lot to be accomplished, in terms of implementation of good practices within the banking system.

Learning from the lapses

The Financial Conduct Authority (FCA) Financial Services Authority (FSA) in their thematic review of “Banks’ control of financial crime risks in trade finance” in 2013 had highlighted some of the common lapses within UK banks pertaining to TBML. These include:

  • Having no clear policy or procedure documents for dealing with TBML risks, thus failing to identify potentially suspicious transactions
  • Producing little or no management information on financial crime risks in the trade finance business and;
  • Not developing specific training on the risks of crime relating to finance relevant staff

Today, banks in India face a similar set of concerns with regard to TBML. One of the root causes is the lack of sufficient know your customer (KYC) data or due diligence, carried out by the operations staff at bank branches at the time of opening of accounts, execution of import export transactions and monitoring.

Key pervasive issues which need to be addressed by the banking sectorTBML Part 2_revised

In addition to the above, bankers need to effectively watch out for warning signals by observing any fraud angles for such transactions. They need to evaluate potential fraud perspectives such as;

  • A conflict of interest arising from promoters or directors opening current accounts
  • Falsification of documents submitted for opening of accounts
  • Incomplete and incorrect details submitted while executing remittance and forex transactions
  • Nexus with bank employees

Our next post will present a comprehensive view of a prominent modus operandi thereby clarifying how timely detection plays a significant role in curbing these issues at the onset.

(The article is second of a three part series on trade based money laundering.)

Follow @EY_India and track #EYForensic for regular updates

3 thoughts on “Trade-based money laundering – a macro view of the changing dynamics

  1. A very well artulated article so first of all congrates on it. Secondly to mitigate TBML is heavily trliant on the synchronization of data as well as the core stake holders like Cuatoms, Banks, Careers and Corporate Law Authority is critical to establish the bonafide of a trade transaction.

    Similarly the regulators i.e., Central Banks in countries instruct Carriers to give access to their data base to the banks to verifying the transport documents the data of the Customs to verify the bill of entry or goods declaration and that to me it would be more effective if the innitiative ahould be roll out in countries like Basel by BIS so all should be bound to follow the standard rules of the game to defeat this evil.


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