Trade Based Money LaunderingFintelekt Anti-Money Laundering1st Annual Summit (Bangladesh)

February 7, 2017

Kamlesh RanganDirector & Operations LeadAML CoE, IndiaEmail: kamlesh.rangan@in.ey.com

Impact of TBML

Regulatory perspective

Typologies & Red flags

Enforcement & Penalties

Contents

Managing TBML

Analytics & Process automation

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Trade Based Money Laundering (TBML)

The Financial Action Task Force (FATF) defines trade-based money laundering as the “process of disguising theproceeds of crime and moving value through the use oftrade transactions in an attempt to legitimize their illicitorigins.”

[Trade is] the weakest link in the anti-money laundering infrastructure built since the 1980s.— Nikos Passas, professor of criminology and criminal justice, Northeastern University

Annually, we are possibly losing billions of dollars in lost taxes to trade-mispricing alone.— John Cassara, former U.S. intelligence officer and Treasury special agent

A global network of trade transparency units would help us bring the opaque system used byHezbollah and many others into the light of day.— Rep. Stephen Lynch (D-Mass.)

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Global impact

Source: The United Nations Conference on Trade and Development, Global Financial Integrity – IFF Report and Public domain

►80% of illicit financial flows from developing countries arechannelled through TBML methods

►Trade misinvoicing outflows from developing countries in2013 were $878 billion

►Under-invoicing of gold exports from South Africaamounted to $78 billion from 2000-2014

►Between 1996-2014, under-invoicing of oil exports fromNigeria to US was $70 billion

►During 2000-2014, under invoicing of iron ore exports fromSouth Africa to China was $3 billion

►$29 billion in copper exports between 1995-2014 fromZambia to Switzerland did not appear in the books

►$16 billion in copper exports from Chile to Netherlandsbetween 1995-2014 was not recorded

►31% of Côte d’Ivoire’s cocoa exports to Netherlands worth$17 billion between 1995-2014 did not get accounted

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Regional impactBangladesh

Source: Global Financial Integrity – IFF Report and Public domain

►Criminals are using developing countries including Bangladesh as safer routes for TBML

►Terrorist organizations based in Bangladesh are suspected to move funds through TBML channels

►Nearly 80% of money laundering conducted in Bangladesh is under cover of export-import business

►Trade misinvoicing outflows between 2004-2013 were $49 billion

►Maximum export earnings of Bangladesh are from Ready Made Garments (RMG). Back-to-back Letterof Credit (BBLC) worth millions of dollars are issued everyday, which are vulnerable to TBML

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Regulatory perspectiveGlobal initiatives related to TBML

1. Hong Kong Association of Banks2. Monetary Authority of Singapore

2006

FATF BestPractices on TBML

2008

FATF BestPractices on TBML

2011

Wolfsberg bestpractices on TBML

2012

Asia Pacific GroupTypology report on

TBML

2013

FCA’s thematicreview on Bank’s

control of financialcrime risk in TF

2015

FIU-INDguidance onTBML ‘Red

Flags’

MAS2

guidance onAML/CFT in

TF & CB

2016

HKAB1 guidancepaper on

combating TBML

The Wolfsberg Group,ICC and the BAFT

Trade FinancePrinciples

2017

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Common typologies

Under-invoicingExporting the goods withinvoicing lower amount thanmarket standard which helpsimporter to sell the goods inthe market and generate thefunds.

1Over-invoicingExporting the goods withinvoicing higher amountthrough which importertransfer the funds to exportermore than correct value.

2Multiple InvoicingCreating more than oneinvoice for the sameconsignment exported tojustify the reason of multiplepayments. Multiple paymentscan be generated fromvarious financial institutions.

3Over & UnderShipmentDisplaying over/ undershipment exported forreceiving unreal credits in theaccount through tradetransactions.

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Misleadingdescription ofgoodsMethod of Incorrectdescription of goods can beused to launder the money.e.g. exporter displayexpensive goods in theinvoice to receive more thanactual funds.

5Front & ShellCompaniesFront & shell companies helpthe exporter/ importer tocreate trade transaction bycreating false identity tolaunder the money

6Barter TransactionsExchanging one good foranother good in which nofinancial transaction takeplace. There are no moneytrail available for suchtransactions.

7Funnel AccountsFunnel accounts are used inwhich multiple cash deposits/fund transfers are receivedfrom different businesslocations for trade transactionto launder the money.

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Black Market Peso Exchange (BMPE)

1. Drug traffickers smuggle illegal drugs into U.S. and sell them forU.S. dollars (‘narco dollars’)

2. Drug traffickers sell narco dollars at discount to peso broker3. Peso broker consolidates narco dollars in U.S. bank account4. Pays drug traffickers with pesos from Latin American bank

account5. Peso broker uses narco dollars to pay U.S. exporter for

legitimate goods on behalf of Latin American importer6. Latin American importer received legitimate goods7. Sells them in Latin America for pesos8. Repays peso broker with pesos

Price manipulation in Trade Finance

1. Exporter from Bangladesh ships goods worth $2 million toImporter based in UAE

2. Exporter under invoices the goods for $1 million only3. Importer resells the goods in the market for $2 million4. Importer pays Exporter the invoiced amount of $1 million and

keeps the difference of $1 million5. As a result, Exporter launders / moves $1 million out of the

country

Common typologiesSample case studies

Image credit: Combating Terrorism Technical Support Office Source: FATF, TBML, June 23, 2006

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Major red flags

Price manipulationSignificant discrepancies between value ofthe commodity or goods reported oninvoice and the fair market value.

Inconsistent documentationShipment locations, shipping terms, ordescription of goods not consistent withletter of credit.

High risk productsCommodity being shipped is among thosedesignated as “high risk” for moneylaundering activities.

Mode of shipmentShipment does not make economic sense,e.g., the use of an oversized container for asmall volume of goods.

Unrelated businessType of commodity being shipped is not inline with the exporter or importer’s regularbusiness activities.

Mode of paymentMethod of payment appears inconsistentwith the risk characteristics of thetransaction.

High risk jurisdictionsCommodity is shipped to (or from) ajurisdiction designated as “high risk” formoney laundering activities.

Entity typeUse of front (or shell) companies.

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Enforcement & PenaltiesFines on banks that breached US Sanctions

Source: 2015 Thomson Reuters GRC01713/5-15

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Managing TBMLPillars of a robust TBML framework

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Customer Due DiligenceThe level of due diligence is decided by the bankbasis of their risk appetite and customer category.Collecting additional information/ documents for tradetransactions, associated parties, nature of goods etc.helps in mitigating the money laundering risk

Effective Screening ProcessBanks should screen all the relevant elements oftransaction against the OFAC, UN , EU lists alongwith local regulator’s list. Banks may choose anyother relevant list considering their customer baseand geographic location.

Risk AssessmentBanks must adopt risk based approach for theircustomers, business, services and products. Thesophisticated trade finance AML risk assessment toolhelps in managing the sanction risk and moneylaundering risk.

Governance & Control FrameworkReview and updating of policies and procedure is theessential part of AML framework. Trade based moneylaundering policy must be inline with regulatoryrequirement and industry standard.

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System Driven ApproachRobust transaction monitoring tool is required fortriggering potential red flags and detecting the eventsof money laundering/ terrorist financing. Usage ofautomated system for trade transactions having allthe relevant data captured is an important element fortrade finance monitoring. 6

Skilled Resources & EffectiveTrainingsBanks are heavily reliant on the experiencedresources to identify the suspicious activities andescalating the red flags to higher authorities.Trainings to relevant staffs is a vital tool to deal withML/TF risk.

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Analytics & Process automationAdvanced techniques to counter TBML

Text mining

Web crawling Price analysis

Weight analysis

Country analysis

Visual analytics Image analytics

Link analysis

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►Thank you