Trade-Based-Money-Laundering New guidance from Wolfsberg Group

Bachir El Nakib, Senior Consultant Compliance Alert (LLC)

3 February 2017

While Current money laundering cerncerns Private Banking, Offshore Banking, Correspondent Accounts, Terrorist Financing, Trade Based Black Market Peso Exchange, Stored Value Cards, Loan/Investment Fraud, and Discreet Financial Services very profitable for Banks persons of Political and Economic Influence-Gross Failure of Due Diligence vulnerable to corruption by Domestic and Foreing Officials, the UBS Swiss Bank Secrecy Laws V. US Income Tax Laws 18 billuion USD 52000 "Secret Accounts"780 million USD Fine 200 to 300 Disclosures to IRS, Correspiondent Accounts-Foreign Accounts in another country "Pay Through"Accounts-Nested Accounts", the U.S. A. Patriot Act Due Diligence requirements performed by U.S. Banks, Tax Evasion is one significant driver of trade finance-based money laundering (TBML) operations, there are many others, and, indeed, many and various modus operandi for engaging in such activities. The growing concern with regard to TBML has prompted the recent publication of updated Trade Finance Principles by the joint ICC-Wolfsberg Group. The members of the group include participants drawn from the Wolfsberg Group Banks, the ICC Banking Commission and the Bankers'Association for Finance and Trade (BAFT)

TBML is defined by FATF as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins. While a lot of attention was on use of the financial system and cash movement, TBML received little attention until in 2006 FATF announced results of their Trade Based Money Laundering study.

They found that global trade in goods and services exceeded US $11 trillion a year. This offers fertile ground for tax evasion. By over or under-invoicing imports and exports, companies and their affiliates in low-tax and high-tax jurisdictions use tailored transfer prices to shift company profits and thus reduce worldwide tax payments. Some of this also represents capital flight, where currency restrictions are circumvented by pricing of imports and exports.

However while these two practices may involve legitimate funds, TBML is even more concerning, as it involves proceeds of crime.

It took 6 years more for the Asia/Pacific Group on Money Laundering (APG) to bring out their report, that investigated why so few cases of TBML were being detected in spite of expectedly serious incidence in the region.

Most customs agencies inspect less than 5% of cargo shipments entering or leaving their jurisdictions. Further, they tend to monitor exports less than imports. Consequently under-invoicing exports is a classic TBML ploy. What DRI would have detected would include cases of Indian exporters shipping a higher value of goods and services, with part payment received in India, and the balance deposited into a bank account, in this case in Hong Kong.

Money-laundering (ML) is typically carried out in three stages. Firstly, in the Placement stage, ‘dirty’ cash is placed into the financial system. Multiple smurfs (individuals or businesses) are used to repay loans, manage gambling scenarios, smuggle currency and blend funds into legitimate business.

Secondly, in the Layering stage, an attempt is made to move funds electronically, often between countries, in an attempt to obscure the source and links to the original misdeeds that are associated with the funds.

Thirdly, in the Integration stage the criminal receives possession of the funds from apparently legitimate sources. This could be done by buying property, cars, paintings and other high-valued items.

The cases that were highlighted in the FATF and APG surveys illustrate how placement, layering and integration take place through TBML. Case 7, a particularly complex one provided by India involved multiple ways in which trade was misused, with Dubai-based Indian national “A” laundering funds for drug cartels in Asia and South America

The guidance document has updated the Wolfsberg Group's paper on Trade Finance Principles which was last revised in 2011. It has been designed to address the due diligence required by international and regional financial institutions of all sizes in the financing of international trade. 

It has added to earlier initiatives in this field, including:

  • The Financial Action Task Force (FATF) TBML Typology and Best Practices papers on TBML. 
  • The Financial Conduct Authority (FCA) "Thematic Review", "Banks' Control of Financial Crime Risks in Trade Finance" . 
  • The Joint Money Laundering Steering Group guidance on Trade Finance and correspondent banking. 
  • The Guidance published in Hong Kong and Singapore.


The Revised Core Principles

The Core Principles paper has been expanded to:

  • provide more detail about risk mitigation activities; 
  • describe the challenges and limitations faced; 
  • recommend actions that law enforcement, customs and other government agencies and policy makers still need to address to help the financial services industry meet its obligations under financial crimes compliance frameworks.

The paper is designed to be read alongside other relevant Wolfsberg Group papers on Correspindent Banking, the use of SWIFT RMAs and the Risk-Based Approach,which reflect the requirements of regulators, and the FATF 40 Recommendations. 

The scope of the core principles

In the paper, the term "financial crime" encompasses:

  • money laundering; 
  • fraud; 
  • tax evasion; 
  • human trafficking; 
  • bribery and corruption; 
  • terrorist financing; 
  • the financing and proliferation of weapons of mass destruction; 
  • other related threats to the integrity of the international financial system.


The Nature of Trade Finance and Trade-Based-Money-Laundering (TBML)

Trade finance includes money transaction conduits, default undertakings, performance undertakings and the provision of specific trade-related credit facilities. TBML is the process by which criminals use a legitimate trade to disguise their criminal proceeds from unscrupulous sources. The crime involves a number of schemes which complicate the documentation of legitimate trade transactions including:

  • under- or over-invoicing the value of goods; 
  • moving illicit goods; 
  • falsifying documents; 
  • misrepresenting financial transactions.

In terms of banking it covers trade finance and transactional activities across current and deposit accounts and payments which are not in the purview of the trade finance operations of financial institutions (FIs). The guidance is described as being based upon the requirements of the FATF 40 Recommendations and the best practices outlined in the Finanacial Conduct Authority thematic review. 

"Open account" terms

The majority of world trade is carried out under "open account" terms, whereby the buyer and seller agree to the terms of the contract and the goods are delivered to the buyer followed by a "clean or netting" payment through the banking system. 

In a clean payment method, all shipping documents, including title documents, are handled directly between the trading partners. The role of banks is limited to clearing amounts as required. This offers a relatively cheap and uncomplicated method of payment for both importers and exporters.

The exporter carries the risk

Under this system the importer is trusted to pay the exporter after receipt of the goods and so the main drawback is that the exporter assumes all the risks while the importer get the advantage of a delay in the use of its cash resources, nor is it responsible for the risk associated with goods. Under this system the FI will not generally be aware of the underlying reason for the payment. 

Due diligence in open account payment trading

Under such terms, unless the FI is providing credit facilities, the FI's involvement will be limited to the clean payment and it will not generally be aware of the underlying reason for the payment. As the FI has no visibility of the transaction, it is not able to carry out anything other than the standard anti-money laundering (AML) and sanctions screening on the clean or netting payment. 

Documentary letters of credit 

Documentary letters of credit (DCs) ensure that the seller will be paid, but no payment will be made until the buyer receives the goods. Such arrangements may be costly. 

In a D/C arrangement payment may be made subject to the production by the seller of documents evidencing, for example, contracts of sale, carriage of goods and marine insurance to conform with the requirements in this regard stipulated by the buyer.

The payment process under a D/C

According to the provisions in Appendix 1 of the principles the payment process operates as follows:

  • an importer (X) is purchasing goods from an exporter (Y); 
  • X is a customer of Bank A (A); 
  • Y requires a D/C in his favour with payments to be made against documents; 
  • X instructs A to issue a DC in favour of Y; 
  • A selects advising Bank B (B) (its correspondent bank or Y's nominated bank) to deal with Y; 
  • Y presents the required documents to Bank B; 
  • B sends them to A; 
  • A pays B; 
  • B pays Y; 
  • X pays A.

The next section deals with the detailed compliance guidance applicable to the buyer's bank in a DC-based transaction. The principles contain further granular guidance for other parties engaged in a DC transaction and in other forms of trade finance arrangement, such as bills for collection, guarantees and standby letters of credit.

Initial due diligence overview

  • A conducts customer due diligence (CDD) on X (when onboarding and during the account CDD review cycle);
  • A conducts appropriate risk-based due diligence on Bank B and at CDD review; 
  • B conducts appropriate risk-based due diligence on Bank A and at CDD review; 
  • B conducts risk-based due diligence on Y where Y is B's customer; 
  • B conducts appropriate risk-based control checks on Y where Y is not B's customer.

Continuing review overview

  • A reviews the DC application from X before agreeing to issue it; 
  • B reviews the DC as issued when received from A (before agreeing to advise it); 
  • B reviews the documents presented by Y (when receiving them under the DC from Y) applying a risk-based analysis (RBA); 
  • A reviews the documents and payment instructions presented by B before paying B, who will in turn pay Y); 
  • A and B screen the payment which they make or receive as per their financial crime policy, procedures and controls.

The specific controls for Bank A

A should engage in identification, verification screening, CDD and credit approval checks as appropriate on X who is a customer of A prior to the issuance of the CD and this should include questions concerning:

  • the countries in relation to which X buys and sells; 
  • the goods traded; 
  • the type and nature of parties with whom X does business.  

Subject to the nature of the answers, it may be necessary to conduct enhanced due diligence (EDD) procedures. It may also be the case that A can be expected to have a risk-based approach to obtaining information on a transactional basis about the role and location of agents and other third parties used by X in relation to the business (where this information is provided by X).

Enhanced due diligence

If EDD is required it should be applied in accordance with FATF interpretive Note H to Recommendation 10. This should ensure clear understanding of the trade cycle, to gain assurances regarding a customer's compliance systems (which could include but are not limited to cross-border controls and licensing regulations) and to ensure understanding of payment flows. 

Trigger events

There may be trigger events during the onboarding stage or during the ongoing review of a relationship or during the transaction process if any additional risk factors become apparent, and this may warrant additional or enhanced due diligence which may include third parties (i.e., parties not associated with Bank A, intermediaries or traders using back-to-back or transferable DCs to unconnected other parties).

Bank B due diligence

  • A should undertake appropriate due diligence on B, depending on the nature of the relationship between A and B. 
  • The due diligence will support a continuing relationship with B, which will be subject to a relevant risk-based review cycle.


Reviewing transactional information

Reviewing and screening will take place at:

  • receipt of the initial D/C application (and any amendments) from X; 
  • receipt and checking of documents presented by Y through B; 
  • payment; 
  • other times where material changes to the transaction occur.

In practice, once a D/C has been issued, A has an obligation to complete the transaction. Only if subsequent reviewing activity shows a positive screening match would Bank A be in a position to stop the transaction. 

Fraud and D/Cs

Depending on local law there may be circumstances where fraud would also allow the transaction to be stopped. The documentation presented to Bank A will be examined to ensure compliance with the DC and in accordance with the ICC UCP 600 and international banking standards. 

Reviewing the application

This includes sanctions and terrorist lists for:

  • Y as a named target; 
  • Y's country; 
  • the goods; 
  • the shipment country; 
  • transshipment points and destination points; 
  • all other names in the D/C; 
  • the countries which are rated as high-risk for other reasons in which B or Y are located or the transportation of goods occurs.


Other matters for review 

Other matters which should be reviewed include:

  • countries where A or X are located or transportation of goods occurs and are high-risk for other reasons; 
  • the goods, to check that the type and quantity of the goods and the value of the transactions is consistent with what is known of X; 
  • the seller Y to check whether they are the kind of counterparty which is consistent with what is known of X and his business. 

Risk indicators and unusual activity

Depending on the information arising from this process Bank A may need to:

  • make further internal enquiries as to the appropriate course of action; 
  • request more information from X before agreeing to proceed with the transaction; 
  • allow the transaction to proceed to issuance of the DC, but make a record of the circumstances that allowed the DC to be issued for review purposes; 
  • depending on circumstances, local regulatory and legal requirements, A must file a suspicious activity report to the appropriate authority and take any additional action as required by local laws and regulations. 

Reviewing the documents presented

This should include:

  • dealing with any lapse of time between application and presentation since this can raise the need for a further check of any relevant sanctions or binding local regulations or local legal requirements; 
  • the screening of all names and parties related to the transaction against current applicable lists; 
  • the extent to which documents presented match the information already checked in the DC at the time of presentation; 
  • if the information matches, it means that the reviewing would have already taken place when checking the DC, so that relevant AML reviewing activities do not need to be repeated; 
  • checking the documents against any risk indicators or scenarios that Bank A has determined to apply. 

Suspicious activity reports

A must decline the transaction if enquiries do not provide reasonable explanations and, subject to circumstances and local legal requirements, it must submit an internal suspicious activity report to the appropriate department and take any additional action as required by local laws and regulations.

Making the payment

When making the payment, A will screen the names in the payment instructions, including the names of any banks involved. In the event that Y requests the transfer of funds to an account with a bank not involved in the DC, therefore, that bank's name should be subjected to screening by A.


For A the monitoring opportunities arise from:

  • the normal procedures for monitoring X's account and transactional activity; 
  • X's activity observed from business-as-usual trade processing. 


Ongoing due diligence by Bank A

A will rely heavily on the initial and ongoing due diligence conducted on X. It will not be practical or commercially viable for A continually to seek additional assurances from X as every new transaction is received for processing. This would hamper the efficiency of processing and undermine the trust which is normal in the relationship between A and X.


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