According to the International Money Laundering Information Bureau (IMLIB), money laundering is the third largest industry worldwide after oil and currency. Trade Based Money Laundering (TBML) is one of the oldest forms of money laundering. It is also one of the most sophisticated methods of cleaning dirty money, and TBML red flags are among the hardest to detect. Money laundering and crime are complement to each other. One cannot survive without the other. Crime generates dirty money and money laundering washes that dirt to make it look clean.
People always want a safer place to keep their legal or illegal earnings at a secured and lower tax jurisdiction. In that course of action they utilise various complex channels and networks to bring their black or white money at a place where it is difficult to trace it out, personal security is guaranteed, no political instability, lower or no tax and more benefits.
Recently a huge leak of documents from a Panamanian law firm, Mossack Fonseca, has thrown new light on how the rich and powerful hide their wealth. They show how the company has helped clients launder money, dodge sanctions and evade tax. Most of that illegal money comes through various mechanism of TBML. Although there are legitimate ways of using tax heavens, most of what has been going on is about hiding the true owners of money and avoiding paying tax on the money.
According to recent statistics the illegal flow of money from Bangladeshi nationals are growing rapidly where the trend is decreasing in other South Asian countries. Maximum portion of export earnings of Bangladesh come form RMG export. Here in order to execute RMG export order Back-to-back Letter of Credit (BBLC) worth millions of dollars are being issued everyday against huge number of export LC and contracts. Here TBML is easier than any other foreign trade operations. So in Bangladesh the scope of TBML is wider than most other countries in the world.
We know that within the scope of “trade finance” a Financial Institution (FI) provides services, such as • Bank guarantees • Documentary collections • Financing under open account transactions • Forfeiting and risk participation • Import/export loans • Packing loans • Pre-shipment loans • Structured trade financing • Trust receipts • Warehouse financing Import/export invoice discounting • Letters of credit (“L/C”) • Financing for transactions under L/Cs and so on.
The TBML paper published by the Financial Action Task Force (FATF) has a list of red flag indicators that can be used proactively by bank trade finance departments to combat TBML. These red flags include the following:
• Significant discrepancies between the description of the commodity on a bill of lading and the invoice.
• Significant discrepancies between the value of the commodity or goods reported on the invoice and the fair market value. For example, gold jewelry being exported at US$500 an ounce when the market rate is approximately US$950 per ounce.
• The type of commodity being shipped is not in line with the exporter or importer’s regular business activities, e.g., a manufacturer of toys exporting IT equipment. Cross linking “know your client” data and regular business alerts is an absolute requirement for an effective AML compliance program.
• The size of shipment appears inconsistent with the scale of the exporter or importer’s regular business activities. For example, a small textile exporter shipping a consignment worth US$50 million when its normal turnover is $1.5million.
• The goods are shipped through one or more jurisdictions or unconnected subsidiaries for no apparent economic reason.
• The transaction involves the receipt of cash (or other payments) from third party entities that have no apparent connection with the transaction. The transaction involves the use of front or shell companies.
As an essential element of trade related activities an FI should establish and maintain adequate and appropriate risk-based controls to address TBML in respect of each kind of customer, business relationship, product and transaction. Accordingly, they should also develop written policies and procedures to assess and mitigate Money Laundering/Terrorist Financing (ML/TF) risks arising from their trade-related customers and activities.
Therefore, KYC (Know-your-customer) related to trade-based activities is the most important requirement for the FIs that may include: (a) business nature, such as major products, jurisdictions and markets; (b) delivery / transportation mode for goods or services; (c) major suppliers and buyers; (d) products and services to be utilised from the FI; (e) anticipated account activities; (f) anticipated major methods and terms of payment and settlement; (g) internal customer risk assessment ratings by the FI; (h) any previous suspicious transaction reports filed with relevant authorities, to the extent possible bearing in mind legal and regulatory constraints, including the need to avoid the risk of tipping-off; and (i) other information from the relationship manager or other relevant staff.
Recently the Hong Kong Association of Banks (HKAB) has issued its much anticipated Guidance Paper on Combating Trade-based Money Laundering (Guidance Paper). They suggested some key principles in detail to the FIs relating to Trade Controls that are as follows:
• Adopting a risk-based approach to their assessment of risks in relation to trade-related activities, as well as the formulation and implementation of Trade Controls.
• Performing customer level or (for non-customers) transaction-level risk assessment by making reference to the risk-based approach and, based on the assessment results, conduct appropriate Customer Due Diligence (CDD) and ongoing monitoring.
• Setting out the methodology for assessing, monitoring and mitigating trade-related activities, including specific types of transactions regarding risk levels.
• Taking into account relevant red flag indicators which are appropriate having regard to their own business coverage, scale of operations and particular scenarios.
• Setting out clear red flag review and escalation procedures engaging higher levels of authority for higher risk factors and specifying the suspicious transaction reporting mechanisms involving the money laundering reporting officer (MLRO).
• Making use of rule-based exception reports or detection scenarios to the extent reasonably practicable.
• Ensuring clear division of roles and responsibilities and ownership of risks relating to critical functions.
• Requiring decisions relating to trade transactions, workflow procedures and red flags to be documented appropriately for audit trail purposes regarding record-keeping standards.
KYE (Know-your-employee) is also an essential precaution along with KYC (Know-your-customer). The Cobrapost, an Indian news website through some sting operations found some instances that highlight the involvement of employees in fraudulent transactions and in most cases in league with customers. Though there was no evidence to show they did it for direct financial gains, it did prove that to attract customers and mobilise businesses to meet their targets they won't hesitate to resort to any tactics. It seems the pressure to achieve the target was the motive behind their action. This therefore brings in sharp focus the need for thorough checks on employees' credentials and proper screening of candidates to prevent the hiring of undesirables.
An organisation implementing and maintaining a rigorous internal control system and with a moral and ethical value system would, in most cases, prevent any distortion of rules and regulations. If banking organisations do not go down that road, it is inevitable that they will be more prone to violations and resultant reputational risk. A good internal control system with a strong and robust ethical culture will minimise any damage.
Lack of spirituality, morality and greediness seem to be the root causes for all of these problems. Greed has taken over contentment and replaced ethical values. Everyone wants to get rich, driving people and organisations to indulge in activities inconsistent with organisational values. Organisations should try to develop a culture with an ethical and spiritual tone that echoes constantly. The more it is developed, less will be the incidence of fraud and violations.
The writer works at a private commercial bank. Email: [email protected]