Criminals are increasingly using cross-border trade to transform the financial proceeds of their illegal activities into seemingly legitimate revenues, in a process known as trade-based money laundering (TBML)
How it operates?
TBML takes place in domestic as well as international trade. But it is the international trade system, with its greater complexities and vulnerabilities that provides the best opportunities for money launderers.
Red flags for ML through TBML:
- Significant discrepancies between the description of goods on the bill of lading and on the invoice, which could indicate over- or under-invoicing, over- or under-shipping or a false description of the goods
- A letter of credit that fails to call for the presentation of transport documents
- A letter of credit that fails to call for the presentation of transport documents
- Unusually favourable payment terms (such as an interest rate far above the market rate)
- A letter of credit transferee or assignee in an offshore financial centre
- A quantity of goods that exceeds the known capacity of the shipping container or tanker or other vessel
- Odd client behaviour. Examples include requesting an unusual degree of confidentiality, not providing clear answers to routine commercial, financial or technical questions and approaches from an unknown third party whose identity is not clear or convincing.
Real life scenario – Fabrication of documents
A letter of credit was issued by Bank A in Nigeria to a beneficiary in China for the importation of seamless steel pipes valued at about $100,000. The credit was routed through Bank B. Anomalies in the documents caused them to be referred to Bank B’s Investigations Team. The Investigations Team determined that the bill of lading issuer (B/L) was not recognized by the port loading agent, and that there was no record of the B/L number. The International Maritime Bureau was unable to obtain contact details for the B/L issuer. Bank B returned the drawing documents to the presenter and discharged itself of the transaction.
Conclusion: – Looking at the wider risk
A company exposed to fraud will turn to its bank before anything else. So banks need to be educating and training employees on Know Your Customer (KYC) measures. Furthermore, staff must be aware that they now have an obligation to “know your customer’s customer”—mere KYC is increasingly insufficient.
A recurrent concern expressed by those who work in trade-based finance (corporates) is that they work in a very process-driven environment, one that follows a set formula for completing tasks. Useful as it is to have expertise concentrated in this way, it can leave trade finance isolated, distant from some of the other vital departments such as sanctions and money laundering. All of these have to be holistically viewed to detect the fraudsters and the fraud prevailing in the system.
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