The ground realities of trade-based money laundering

3_130x130Money laundering is a global menace, with most countries being equally susceptible to it. Our earlier blogposts focused on understanding trade-based money laundering (TBML), its evolution as a major roadblock on the anti-money laundering front (AML), the need to improve overall AML governance frameworks and varying dynamics witnessed from a macro standpoint. 

The last piece of our three-part series is aimed at a transactional understanding of issues that could arise and the probable modus operandi. It will also throw light on how timely detection and assessment, effective due diligence, training and the tone at the top can play a significant role in curbing issues around money laundering at the onset.

New risks and techniques at play

While money laundering schemes continue to grow and develop in financial institutions; an increased number of banks have parallelly been involved in cases which are potentially arising out of AML non-compliance and risk management. Some key challenges and risks which are typically encountered while implementing combative TMBL processes and systems include.

1) Goods or shipment risk –

  • Nature of goods transacted and port of loading or discharge either not captured in the system or subject to sanction reviews
  • Operations staff unaware of the concepts and process transactions, face challenges in conducting ‘enhanced due diligence’ on vulnerable transactions

In specific context to aspects such as ‘Dual Use Goods’, very few financial institutions have set up structured processes to enable review of transactions from this view point. The Directorate General of Foreign Trade (DGFT) has provided an indicative list of goods which could potentially be considered as dual use items / technologies and hence could be incorporated as one of the checks in the overall TBML control framework.

2) Pricing risk –

  • No specific guidelines are defined by financial institutions to verify trade transactions from potential under or over invoicing vulnerabilities
  • Comparative market prices of goods traded is not available
  • Validation checks on invoice value of commodities is often overlooked for regular customers

3) Counterparty risk –

  • No defined guidelines for ‘Know your customer’s customer (KYCC)’
  • Credit reports on counter party not called for all large value transactions

4) Country risk –

  • In-effective sanction screening process in terms of:
    1. Free text data fields for capturing critical information
    2. Sanctions databases not updated
    3. Methodology of screening focused on a particular field
    4. Fuzzy matching algorithm capturing only limited formats

While under-invoicing, over-invoicing and multiple invoicing were common techniques used by money launderers, increasing complexities in businesses have given rise to other techniques. These include over and under shipment, description of goods which are misleading, building front and shell companies and barter transactions. Funnel accounts, a scenario where multiple cash deposits or fund transfers are received from different business locations for trade transactions, is yet another modus operandi.

The curious case of disappearing millions

Recent instances which led to movement of millions through TBML modus operandi have been a rude awakening for the sector. It highlighted existing lacunae within the processes to manage financial crime related risks.

It is possible that several red-flags in the transaction cycle which, if identified and reviewed, may have helped prevent the issue in the first place. Having said that, these cases were unique – some even showing a probable nexus between customers and bank employees. This highlights one among the many vulnerabilities that the sector is facing today.

Media reports suggest that consequent to various fact finding reviews by banks, the India Regulator had declared penalties of over INR 130 million, the highest ever in India, highlighting the criticality of the issue.

Additionally, action points in terms of monitoring TBML related scenarios have also been shared with the banks, which can help them take preventive steps to control TBML in India.

Defining the way forward for financial institutions – implementing a robust TBML preventive mechanism

With increasing risk from trade finance activities and rise in the number of entities participating in international trade, it is getting tougher for financial institutions operating in India to safeguard themselves from the challenges highlighted above. Bankers need to consider the key pillars of TBML preventive mechanisms, which typically have defined robust frameworks –

  1. Governance and tone at the top – Comprehensive TBML risk framework, policies and procedure guidelines benchmarked against regulatory requirements and global industry practices
  2. Customer Due Diligence (CDD) – Well defined CDD guidelines implemented at the branch level to ensure consistent approach to performing due diligence on customers and third parties
  3. Risk assessment – Adopting a risk-based approach for customers and optimum utilization of technology to pre-empt TBML risks
  4. Effective screening process – Comprehensive screening of all relevant elements of transactions (such as beneficiaries, goods, vessels, ports, etc.)
  5. System driven approach – Setting up transaction monitoring systems to detect and review red flags and maintain sufficient audit trails
  6. Training and continuous monitoring – Empowering skilled resources for effective review of transactions
  7. Analytics capabilities – Implementing robust analytics capabilities to enable greater efficiencies within monitoring / tracking TBML vulnerabilities.

Given the onerous road ahead when tackling TBML related issues, financial institutions would need to prioritise, focusing on the vulnerable areas first. It would also depend on the maturity level of the people, process and technology framework when implementing TBML mechanisms.

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

Ashwin Kumar, Director, Fraud Investigation & Dispute Services contributed to the above post.

Follow @EY_India and track #EYForensic for regular updates


One thought on “The ground realities of trade-based money laundering

  1. TBML is amongst the top 3 ML practices. Frankly, banks in India are not equipped to handle TBML. Poor training, insufficient TBML busting processes, I deal in documents and not in goods concept… we can go on. The general impression among bank employees in India is stopping TBML is the responsibility of law enforcement agencies like ED and Customs.. It is also necessary that ED/Customs/Banks share with each other details of live cases (without providing names/critical information)… which today does not happen.

    It would also help if the regulatory authorities issue specific guidelines/instructions with regard to TBML..

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