Detecting TBML Risks with Stronger AML Compliance in Trade Finance

“According to a combined study by Global Financial Integrity (GFI), Fedesarrollo, Transparency International Kenya, and ACODE, between 2011 and 2021, approximately $60 billion in trade-based money laundering affected 77 countries.”

At the global level, trade-based money laundering poses considerable challenges for the authorities as it facilitates the spread of different forms of crimes. A report by the FATF-Egmont, published in 2021, reveals that criminals are combining traditional and advanced strategies in trade-based money laundering to legitimize their funds. Considering the role of trade in global economic development, trade finance is an essential component that enables cross-border transactions. However, this specialty makes this sector more vulnerable to exploitation.

What is Trade Finance and How Does it Link to TBML Risks?

Trade finance refers to financial instruments and products used by companies to facilitate international trade and commerce. It is quite complex as it uses diverse arrangements such as letters of credit and direct billing, which can be exploited for Trade-based Money Laundering (TBML). These complexities then provide the criminals with different ways to conceal their illicit gains under the name of payments for authentic goods.

High-value goods like gold and luxury vehicles are commonly used to disguise illicit funds due to their portability, ease of undervaluation or overvaluation, and global demand. These Illicit gains can then be transferred into the financial system as legitimate money.

Role of Modern Instruments in Evolving Trade Finance

Trade finance has evolved over time to include new products such as receivable financing, which are then used as collateral to borrow money from lenders. With such practices, businesses can improve their cash flow without waiting for the customers to pay. These instruments include:

• Letters of Credit (LCs)
• Receivables financing
• Supply Chain Finance (reverse factoring)

Letters of credit guarantee payments in trade finance if conditions are met, but they often include limited due diligence. Banks mostly focus on verifying the document compliance and may neglect the proper identification of the actual goods being traded. Apart from these modern instruments, open accounts are also highly vulnerable to being exploited for TBML.

TBML as a Growing Global and National Threat

The United Arab Emirates’ 2024 National Risk Assessment (NRA) also identifies Trade-Based Money Laundering as a significant and growing threat. It highlights vulnerabilities in sectors such as gold trading, as well as risks arising from false documentation, dual-use goods, and complex ownership structures. The report underscores that TBML is not only a global concern but also an acute national priority, particularly in jurisdictions with large re-export economies like the UAE.

The increasing threat of illicit finance creates urgency for the FIs to improve their AML compliance in trade finance, especially by detecting the right risk indicators such as layered ownership structures, anomalous transaction behaviors, and sanctioned or watchlist entities.

Several countries have ranked TBML among their top national money laundering threats. For instance, Germany highlights its use in organized crime and narcotics, while the United States considers TBML one of the most complex and pervasive laundering methods.

Likewise, Australia, Mexico, and Hong Kong (China) have all flagged TBML as a serious and growing threat. These findings emphasize the global scale and severity of TBML risks.

According to a survey quoted in a FATF report on TBML, in situations where TBML was suspected, 11 jurisdictions reported that transactions involved trade finance products, such as letters of credit or documentary collections.

However, it’s worth noting that eight jurisdictions stated that such products were not part of TBML cases. These findings highlight that TBML extends beyond traditional trade finance products to areas like receivables financing and open accounts, requiring broad vigilance across all trade methods.

Key Risk Indicators in Trade Finance

Here is a list of some indicators that can spotlight suspicious patterns related to business operations, transaction behaviors, and documentation that are used to hide illegal funds in international trading. Such risk indicators reveal the suspicious trends in core trading activities:

• Mismatched Goods and Business Profiles
• Complex External Relationships
• Non-standard logistics and mismatch with Freight data
• Unusual Use of Financial Instruments
• Excessive and high-value transactions through newly formed entities
• Over-Financing Relative to Means
• Irregular Transaction Patterns Across Jurisdictions
• Entities Related to International Leaks and Negative Media
• Trading with Watchlisted and Sanctioned Entities
• Use of Crypto Wallets in Commodity Trading
• Use of Banks in High-Risk Jurisdictions
• Excessive Trading with No Digital Presence

The Dezheng Resources Case reveals how the company executed a 12.3 billion yuan scam by duplicating collateral pledges and using identical metal shipments between 2012 and 2014. This also helped them secure numerous bank loans backed by fake documentation.

Cases like Dezheng Resources highlight the vulnerability of different trade finance arrangements to money laundering.

Guidelines and Regulations For TBML Mitigation

Globally, businesses can fight against the TBML, and they can strengthen their AML compliance in trade finance through regulations and guidelines. The Financial Action Task Force (FATF) offers numerous recommendations and red flags to detect suspicious transactions. This report also assists in providing measures to mitigate TBML red flags.

The International Chamber of Commerce (ICC) is a governing body that offers a secure trading environment. It promotes AML trade finance compliance by recommending risk assessment registries, along with other data sources, for stronger AML intelligence. In one of its reports, ICC has stated that “Digitization in trade finance AML will transform the global battle against TBFC (Trade-based Financial Crime)”. ICC promotes the usage of efficient operations by applying a risk-based approach and integrating digital innovation portfolios.

Chris Southworth from ICC United Kingdom emphasizes that we’re not doing enough to prevent scamming in trading, and it’s costing us a lot. Government and industry experts must work together to “shut the fraudsters out of trading”.

Furthermore, AML regulations such as the Bank Secrecy Act (BSA), as mandated by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), require the banking sector to identify and report suspicious activities. These agencies collaborate with regulatory enforcement, such as the Internal Revenue Service (IRS) and Customs and Border Protection, to establish a comprehensive strategy against Trade-based money laundering risks.

It’s a primary challenge for the FIs to comply with these regulations in different jurisdictions; therefore, they are advised to integrate solutions that will provide them with updated news from official government websites. It will help them in navigating the multi-jurisdictional regulations more effectively. Additionally, by doing so, digital trading businesses can file suspicious activity reports (SARs) and perform a comprehensive risk assessment of their customers.

The guidelines mentioned above must be implemented within everyday best practices for compliance teams to stay ahead of emerging trade-based money laundering risks.

Best Practices to Reinforce Regulatory Compliance in Trade Finance

To strengthen AML Compliance in trade finance, digital trade-based money laundering officers are mandated to comply with the following practices:

• Understanding Typologies

Trading businesses should follow TBML FATF recommendations to improve their defensive strategies against trade-based financial crime (TBFC). It is necessary to comprehend how criminals use trading to hide their illicit gains for an effective goods exchange.

• Understanding the Customer

It is necessary for the trading sector to perform a complete verification of the identities of involved entities, such as the seller, third parties, and buyers. This process of customer risk assessment is essential in understanding whether the individual is a sanctioned entity or not. Therefore, businesses must have solutions that can provide them with real-time updates to the sanctions list.

• Adhering to Reporting Requirements

Trading businesses must know the monitoring and reporting requirements to save themselves from hefty penalties. It helps in increasing transparency in the financial market. Trade reporting assists regulators in understanding the traders and clients.

• Understanding the Need for Regtech

To combat TBML and cross-border payments, it is necessary for the banks that work as mediators to implement RegTech solutions. With powerful technology, AML compliance in trade finance can be strengthened, and financial institutions facilitating transactions for trade can seamlessly perform goods exchange activities.

Strengthen Compliance in Trade Finance With AML Watcher

Are you ready to protect your trade finance operations from TBML threats? AML Watcher’s comprehensive AI-powered solutions are here to assist you in detecting suspicious activities, screening high-risk entities, and complying with evolving regulations.

Here’s what it offers!

• Extensive sanctions, Watchlist, and PEP screening: It offers screening against 3500+ official watchlists and 2.6 million+ PEP profiles to reduce TBML risks.
• Real-time Transaction Monitoring: Identifies anomalies and suspicious patterns in real-time, preventing hidden trade-based money laundering activities.
• Warnings and Regulatory Enforcement: Flags entities with recent penalties using data from over 100,000+ reliable data sources, so FIs know the risks involved in trading with high-risk businesses.
• Adverse Media Screening: Finds hidden links to high-profile leaks and obscure financial networks from 50k+ news sources in 80+ languages.
• Customized risk scoring: Focuses your compliance teams’ efforts on high-risk trading instead of wasting time on low-risk transactions.