Panellists at a recent Regulation Asia webinar discussed the need for greater vigilance to TBML risks and how workflow enhancements can improve outcomes.
Trade finance presents high risks for money laundering, terrorism financing and sanctions evasion – a challenge banks have now been dealing with for decades. In recent years, growing complexity and higher trade volumes have presented new opportunities for criminal organisations and bad actors to exploit international trade systems to launder proceeds of crime.
TBML (trade-based money laundering) is the most common method of money laundering, and arguably the most difficult to detect. The presence of legitimate trade from one country to another tends to provide cover for bad actors to transfer illicit proceeds across borders, “cleaning” the funds in the process.
This year, the risk of illicit trade has come into even greater focus following pandemic-related supply chain issues and Russia’s invasion of Ukraine, which prompted wide-ranging sanctions and trade bans at a scale and pace the world has not seen before, as well as economic impacts and commodity price spikes which are exacerbating the problem.
While the level of awareness of TBML risks has increased, and technology is increasingly being used to streamline document checks and workflows, APAC banks still need to be extra vigilant and conduct additional checks, even if they are dealing with regular clients, according to panellists at a recent webinar hosted by Regulation Asia.
Sanctions risk and reference data
“The move to digital and people ordering things online has transformed TBML and the extent to which we have to monitor and understand it,” said Douglas Wolfson, Senior Director at LexisNexis Risk Solutions. “The Ukraine invasion has made it clear that we have to understand supply chains, for example to cut off Russian defence companies buying technology products from companies around the world and using them to make tanks, armoured vehicles, or missiles.”
“You not only have to make sure you’re cutting off the Russian defence contractor; you also need to be aware of all of the parties around them, and grow your understanding of your customer and their business, to make sure that you’re not financing trade that’s going through an intermediary or through an associated party to get back to somebody who is potentially sanctioned.”
According to Wolfson, having access to reliable and accurate reference data is essential, as banks cannot necessarily know every single product and whether it’s a dual use good, for example. Banks would need to access to data to identify the purpose of the goods and who they are going to. “Who the goods are going to often can give you a lot of clues on the purpose,” he said.
“Without reference data, it would be impossible to do a full KYC to know that somebody is potentially acting on behalf of or connected to a sanctioned individual.”
Natural blind spots
“There is an increasing focus and expectations from regulators that banks do more to combat TBML,” said Hermione Tay, Vice President for Financial Crime Compliance and Asia Trade Finance AML Advisory at MUFG Bank. In particular, she pointed to a need for banks to ramp up efforts to identify and assess red flags, conduct due diligence, and make sure they know not only their own customers, but their customers’ counterparties.
When the documents indicate there are more parties involved, Tay says banks should be finding out who they are and identifying whether they could be related companies with common directors, common shareholders or other links. If the goods are potentially dual use goods, banks need to identify the ultimate end user to decide whether they are comfortable with the transaction.
“Due diligence should cover the entire trade flow. Banks need to know what they’re financing, who their customers are, who counterparties are, and where the bank sits in the financing,” Tay said. Still, she acknowledged that banks have “natural blind spots” when it comes to detecting suspicious transactions in trade finance, because of the information asymmetry they face.
Open account trades are among the most challenging for banks, as they often do not involve documentation and the data points available are often too slim for certain red flag checks. “If you really want to address TBML risk mitigation for open account trade finance, it needs to start with getting sufficient data points, which is an entire ecosystem in itself,” Tay said.
She emphasised the need for banks to enforce the right risk ownership culture, so that the first line of defence is increasingly aware of their obligations not only to the customer relationship but also the duty to ensure that the bank is not exposed to any TBML or fraud risk.
A move to digital
TBML often involves fraudulent invoices and bills of lading which may misrepresent the price, quantity, or products in trade transactions. Price validation in particular remains a key challenge, and there still isn’t an efficient and effective way to ensure the goods being declared are actually the goods being shipped without physically conducting a site visit, the panellists said.
“While the level of awareness is starting to increase, there is a need to upskill the staff conducting document checks,” said Azeem Azmi, Managing Director and Regional Head of Trade Finance and Group Transaction Banking at CIMB Bank. He added that there are also a lot of technologies which can automate document checking workflows, which can allow banks to redeploy staff in areas where human expertise is needed, such as investigations.
“It’s important to move away from paper, towards digital – such as OCR and document scanning tools – and towards the ability to do digital analysis,” Wolfson said. What computers can do is highlight where there are anomalies. And then what people are really good at is investigating the anomalies.”
Many banks, however, are still held back by document-heavy procedures and legacy systems, some of which have been in place for over 20 years and make it difficult to implement new digital systems. In its latest True Cost of Financial Crime Compliance report, LexisNexis Risk Solutions found a sharp increase in financial crime compliance costs in 2021 compared to both pre- and early pandemic timeframes – attributed in part to labour costs.
“At some point, you have to overhaul, and this is very difficult to do,” Wolfson said. “It requires funding, it requires budgets, but compliance is only becoming more expensive. And the best way to counteract those cost increases is by increasing digitisation, so you can bring tier one alert efforts to the machines, and then let the people deal with the investigations that result from it.”
The full webinar is available on-demand at this link.