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Trade-based money laundering can create a barrier to entrepreneurship, crowding out legitimate economic activity. Hazem Mulhim, EastNets CEO writes about the suspicious activities banks must watch for, and how automation can help fight this exploitation.
Trade-based laundering is known to be growing in both volume and global reach. Although it’s widely recognized as one of the most common manifestations of international money laundering, trade-based laundering appears to be less understood among academics and policymakers than traditional forms of money laundering through the international banking system and bulk cash smuggling.
The potential is vast for criminal organizations and terrorist groups to exploit the international trade system with relatively low risk of detection. Key traits of international trade have made it both attractive and vulnerable to illicit exploitation.
For instance, the enormous volume of trade flows can obscure individual transactions and provides abundant opportunity for criminal organizations to transfer value across borders. There can also be a complexity associated with foreign exchange transactions—which can involve multiple transactions—and recourse to diverse financing arrangements.
This leaves much of the detection to the private sector, using software and related approaches. As money, launderers exploit legitimate trade finance activities to launder ill-gotten funds; anti-money-laundering/counter terrorist finance transaction monitoring systems can help keep an open eye to all suspicious activities related to this economic sector. Let’s review examples of some suspicious activities banks must watch for:
Money laundering through over- and under-invoicing of goods and services is one of the most commonly used methods for laundering funds across borders.
By invoicing a product or service below market value, an exporter can shift funds to the importer because the payment to the exporter is less than the value that the importer receives when the goods are sold at market value.
Similarly, by invoicing a product or service at a price higher than market value, the exporter transfers value from the importer. That’s because the payment to the exporter is greater than the value the importer receives when the product or service is sold at market value.
Also, complex products and products that travel through supply chains are more apt to be used in these types of over- and under-invoicing activities because they complicate the ability of customs officials to determine the true market value of such goods and services.
Another gambit used is multiple invoicing of particular goods or services. By providing multiple invoices for the same transaction, a money launderer or terrorist financier can justify multiple payments for the same goods or services. In addition, by using a number of financial institutions to make these multiple payments, a money launderer or terrorist financier can increase the level of complexity of the transaction and complicate efforts at detection.
How automation can help
Critical differentiators to look for when evaluating risk-based approaches entail the use of automatic integration of customer risk scores with actual transactional behavior. This approach needs to incorporate a flexible and advanced customer/account risk scoring functionality; a customer/accounts grouping and peer grouping capability; a suspected connections application; and an advanced rules and scenarios library that covers all suspicious financial business and activities.
Banks must also be able to adhere to the changing regulations and laws in international transactions through easy-to-configure rules. An automated and customizable detection and case workflow needs to have escalation and delegation options. A system that can perform background checks through leveraging partnership with the recognized data providers can help.
Having a comprehensive inventory of information is key. Institutions’ investigators need easy access to all data that is already in the core banking system, along with other extra information registered in the bank’s Know Your Customer application—data which may not be available in the core banking system. Users must be able to easily extract any search results in the form of a report and be able to generate a wide variety of reports based on any filtering criteria needed.
How private sector can help stop proliferation
Engagement and partnerships with the private sector to prevent proliferation of the practices described is the most critical element to success—and should be the first line of defense against trade-based laundering.
There are some national and international initiatives to come up with new methodologies and techniques to help and engage the private sector to stop proliferation through their supply chains and financial activities.
Many initiatives including laws, regulations, and best practices from national and international governments and non-governmental bodies have been raised recently. Naturally, with these initiatives, the awareness of all economic sectors and related entities has been fortified and developed. The reason behind this is mainly escalated terrorist financing, proliferation, and money laundering trends globally.
All economic sectors and business activities should be covered with these laws, best practices, awareness campaigns, and guidance, as they may be implicated unintentionally—whether directly or indirectly—in facilitating those proliferation attempts. Also, governments should facilitate and enable implementation of non-proliferation programs and compliance implementation.
The main objective of this global trend is to protect international trade from being exploited by money launderers and other criminals. Financial institutions and firms involved in logistics and the supply chain can help governments stop proliferation by installing effective compliance frameworks and monitoring programs.
Compliance with laws, rules, and regulations are not enough. Governments must develop means of effectivity working with the private sector. This may include facilitating the sharing of information and inquiries with other related entities such as competitors and governments through solid partnerships.
Using advanced intelligence tools and trustworthy and reliable sources of information can be very useful as well, especially for background checks on customers and related parties. Public/private partnerships will contribute to more efficient anti-proliferation efforts, including attempts to stop financing of weapons of mass destruction.
Beyond the motive of laundering, these criminal activities can impact legitimate trade.
Trade-based money laundering can have a more destructive impact on legitimate commerce than other money laundering schemes. While trade-based laundering appears to be less understood than traditional forms of money laundering through the international banking system, the volume of global trade and the value of such transactions can result in substantial consequences for international commerce and government revenue.