Trade based money laundering: current issues

Transcription

1 Trade based money laundering: current issues Henry Balani Global Head of Strategic Affairs, Accuity Deutscher Exporttag

2 Topic outline Current trade challenges Trade based money laundering Identifying Red Flags for trade transactions

3 Trade is important to many countries in Europe 450 Trade as % of GDP EU average at 82 % of GDP Source: World Bank & OECD national accounts data Importance of trade to economic growth means that many countries want to ensure open, efficient processes that will encourage trade

4 Current geopolitical trends put greater pressure on protectionist policies

5 Apart from global economic conditions, compliance issues challenge trade finance

6 Rising compliance costs due to: Screening for terrorist financing & money laundering Screening for sanctioned goods and vessels Screening for Dual Use Goods

7 Rising compliance costs due to: Enhanced due diligence requirements Screening for ultimate beneficial owners De-risking by correspondent banks

8 Institutions Which ultimately results in fewer correspondent banks willing to finance trade Total No. Institutions vs. Total Corr Relationships % drop in number of correspondent banking relationships since Total No. Institutions Total Corr Relationships Institutions include Depository Financial Institution, Commercial Bank, Savings Bank, Savings & Loan Association, Credit Union, Industrial Bank, Private Bank, Thrift & Loan, Cooperative Bank, Deposit Taking Institution, Retail Bank, Wholesale Bank, Building Society Source: Accuity Global Payments File data as of Aug

9 Correspondent Banking de-risking is impacting various banking functions including trade finance IMF Staff Discussion note: The Withdrawal of Correspondent Banking Relationships

10 Withdrawal of correspondent banking relationship is a key issue for the Pacific Islands & other high risk regions Reasons given: Presence of offshore sectors Concern over legal frameworks Higher risk customers Lack of profitability Money Laundering/ Terrorist Financing risks

11 De-risking affects economic growth Remittances cannot be sent back to home countries Trade cannot be financed

12 A Closer Look at Trade Based Money Laundering

13 Trade based money laundering continues to be an issue globally

14 Between 2004 to 2013, developing countries lost US $7.8 trillion to illicit financial outflows of which 84% was laundered through trade misinvocing Source: Global Financial Integrity 2015 Illicit Financial Flows from Developing Countries

15 How does trade mis-invoicing occur? Mis-invoicing of trade transaction Mexico USA Exporter Goods: $ 1 Million Importer Goods are over invoiced Payments: $ 10 Million $ 9 Million moved from US to Mexico Goods actual value is $ 1 per unit Goods invoiced at $ 10 per unit Both Exporter and Importer are colluding!

16 Real examples of over/under invoicing from/to the USA Imports of Metal tweezers from Japan to the USA 4.475/unit Source: 1 USD = 0,914

17 Real examples of over/under invoicing from/to the USA Imports of Camshafts from Saudi Arabia to the USA /unit Source: 1 USD = 0,914

18 Real examples of over/under invoicing from/to the USA Imports of Plastic buckets from Czech Republic to the USA 889/unit Source: 1 USD = 0,914

19 Real examples of over/under invoicing from/to the USA Exports of Radial truck tires from the USA to the UK 10/unit Source: 1 USD = 0,914

20 Real examples of over/under invoicing from/to the USA Exports of Toilet Bowls from the USA to Hong Kong 1,60/unit Source: 1 USD = 0,914

21 Real examples of over/under invoicing from/to the USA Exports of Prefabricated Building from the USA to Trinidad 1,09/unit Source: 1 USD = 0,914

22 A Closer Look at Red Flags in Trade Finance

23 Best practices related to identifying TBML continue to mature over the years FATF Tradebased Money Laundering report 2006 FATF Typologies on Proliferation Financing The Wolfsberg Group Trade Finance Principles US FINCEN SAR/TBML Advisory FATF Targeted Financial Sanctions related to terrorism and terrorist financing Jun Jun Feb HKAB Guidance paper on TBML Feb EAG WG International TBML report Dec.2009 EAG WG ML in Foreign Trade Transactions Dec APG TBML Typologies Report Jul UK FCA Thematic Review: control of financial crime risks in trade finance Jul OCC AML Exam Manual TBML Activities Overview Nov JMLSG Guidance, Trade Finance Nov MAS AML CFT Controls in Trade Finance Oct. 2015

24 There are many sources that highlight best practices in regards to identifying TBML

25 The customer engages in transactions that are inconsistent with the customer s business strategy or profile, or make no economic sense* *BAFT Guidance for Identifying Potentially Suspicious Activity in Letters of Credit and Documentary Collections e.g. an agricultural company that starts dealing in paper products Sources: FATF, FCA, FFIEC, Wolfsberg

26 Customer shipping items to, through, or from higher money laundering risk jurisdictions, including countries identified by FATF as noncooperative jurisdictions Sources: FATF, FCA, FFIEC #AccuityTradeFinance

27 The payment terms, tone or structure are inconsistent with the goods or unduly complex. Sources: FATF, FCA, FFIEC, Wolfsberg e.g. perishable items normally converted in 180 days but suggesting >365 days financing

28 The transaction appears to involve the use of front or shell companies for the purpose of hiding the true parties involved Sources: FATF, FCA

29 Transactions that involve obvious dual use goods Sources: FCA 29

30 Dual-use Goods include a wide range of goods that are designed for commercial applications but can also have military applications or potentially be used as precursors or components of Weapons of Mass Destruction

31 Identifying Dual Use Goods can be tricky

32 Dual-use goods are increasingly under the regulator s spotlight While this is a complex area, AIs should nevertheless have measures in place, as part of their risk-based systems and controls that can assist in the identification and escalation (for further review) of dualuse goods in trade transactions, taking into account other relevant red flags in a transaction. Guidance Paper on Combating Trade-based Money Laundering Banks should determine whether the underlying goods financed are embargoed goods and there should be special attention paid to dualuse goods Guidance on anti-money laundering and countering the financing of terrorism controls in trade finance and correspondent banking We found that banks had generally developed effective controls to ensure they were not dealing with sanctioned individuals and entities. However, policies, procedures and controls to counter money laundering risk were generally weak and most banks had inadequate systems and controls over dual-use goods. Banks control of financial crime in trade finance

33 We are being asked by our auditors to explain the combination of chemicals to create explosive devices. We are just bankers, not chemists! TEA Shampoo Triethanolamine Mustard Gas Bicycles Carbon Fiber Rocket Fuselage Instant Coffee Lyophilizer Biological Weapon

34 Key Takeaways

35 Key Takeaways Declining global trade and rising compliance costs puts pressure on Trade Finance Trade Based Money Laundering is a global issue Identifying Red Flags in a trade transaction reduces criminal trade activities

36 Contact Henry Balani Global Head of Strategic Affairs, #AccuityHenry Henry Balani