Trade finance Six AML Red Flags

By Bachir El Nakib (CAMS), Senior Consultant, Compliance Alert (LLC).
Trade finance has emerged as priority concern for anti-money-laundering enforcers and compliance officials are taking a fresh look at the channel for risk factors as regulatory risk increases. Government officials told AML compliance officers at a conference this week that they need to study trade finance processes to sharpen their ability to spot abuses. 

The new emphasis on AML trade finance reflects concern among the regulators that money traffickers have shifted activity from closely watched bank deposits to more sophisticated money channels where controls are looser.

"We obsess over a few thousand dollars in a Western Union office and in trade based money laundering we permit vast amounts of money to go through loopholes large enough to drive a container ship through," said Kim Manchester, managing director of ManchesterCF, a financial crime risk management consulting and training firm.

Department of Homeland Security official Anthony Tortora, section chief for the trade transparency unit, told compliance officers at the Association of Certified Financial Crime Specialists this week they should train staff to look for “things that just don’t add up.” 

Six red flags – six degrees of separation

He offered six red flags to watch for in ferreting out illicit money flows in trade finance that he called the “six degrees of separation," referring to the kind of inconsistencies to watch for in falsified trade credit documentation.

Since trade finance manipulations almost always involve undervaluing and overvaluing goods and services, and then pocketing the difference, along with other unusual pricing patterns, compliance should train its hands-on trade credit teams to watch for anomalies. They include:
  • Does the transaction make sense based on business purpose and logic? Money launderers rely on their creative powers to disguise their true intent and often it leads to inventive obfuscation. 

  • How do the trade partners know each other? When legitimate businesses do transactions worth millions of dollars they should be expected to know each other. Money launderers try to hide their true counter-parties, or deal with shadowy “trade” partners. Investigators must track relationships end-to-end and look for signs they are legitimate counter-parties who know each other's indentities

  • “Excuses are the grease of lies.” When questioned about gaps in the information required on trade documentation, manipulators will offer elaborate explanations for their failure. Bankers should not allow short-cuts.

  • Watch for shell companies in businesses with a lot of cash. “Not all shell companies are involved in illegal activity,” Tortora said. A trading entity that might legally use a shell company to incorporate a fledgling business is not likely to have the cash reserves of Apple or Google. Conversely, a shell company that shows high cash balances and activities is a warning sign.

  • What is the relationship between the client and its customers? The company that can’t document its own customers could have something to hide. 

  • “You can’t make this stuff up.” The extent that money launderers will go to in creating a falsified business or paper trail should not be underestimated. The internet has proven to be a great platform to create phony businesses, or an explanation for how the money launderer and trading partner met. Trade finance manipulations may be one-of-a-kind schemes that are outliers. The extravagant deal that seams too a bold cover for moving money may be just that.

The compliance team needs written procedures explaining how to escalate the concerns that arise from the documentation and letter of credit trade finance operations. The process should be founded on a risk assessment that gauges firms' exposures. 

Recent AML cases enforcement cases -- including last month's $17.5 million Financial Industry Regulatory Authority penalty against Raymond James -- have highlighted the need for all of the activities to be coordinated at a high level because of the multiple points of potential vulnerabilities beyond the commercial banks, AML experts said. Trade-based finance is just one sector, though its importance may be rising, regulatory s said at the conference. 

The compliance programs need to cross all of a financial firm's business lines and geographical footprint. The trade based finance operation is just one facet for major banks and trading firms such as commodities and potentially even securities firms. Given the size of the transaction amounts – typically $20 million-plus – they offer out-sized risk in a little noticed but large business now in regulators' sights.
By definition, TBML is the process by which criminals use a legitimate trade to disguise their criminal proceeds from their unscrupulous sources. The crime involves a number of schemes in order to complicate the documentation of legitimate trade transactions; such actions may include moving illicit goods, falsifying documents, misrepresenting financial transactions, and under- or over-invoicing the value of goods.
The burden falls on compliance officers to stay current on emerging schemes and updated AML technology to detect and prevent criminal activity.
Trade-Based Money Laundering Examples and Red Flags
There are several red flags indicating potential TBML, according to the U.S. Immigration and Customs Enforcement (ICE):
  • Payments to a vendor by unrelated third parties
  • False reporting, such as commodity misclassification, commodity over- or under-valuation
  • Repeated importation and exportation of the same high-value commodity, known as carousel transactions
  • Commodities being traded that do not match the business involved
  • Unusual shipping routes or transshipment points
  • Packaging inconsistent with the commodity or shipping method
  • Double-invoicing



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