Fighting TBML to Sustain a Post-pandemic Recovery in APAC

As we inaugurate the next phase of international trade, the FATF is pushing trade-based money laundering to the top of the international community’s agenda, says Claus Christensen at Know Your Customer.

On 15 November 2020, after almost a decade of negotiations, the Regional Comprehensive Economic Partnership (RCEP) agreement was signed by representatives of the 10 ASEAN countries plus Australia, China, Japan, New Zealand and South Korea. Although the deal is only likely to come into force in early 2022, the pact has built an important new platform where member states can discuss and coordinate future trade and economic issues.

Not all experts agree on the immediate impact of the deal, but the RCEP indisputably represents a turning point in terms of regional cooperation and normalisation within APAC. Excluding the WTO, the new partnership is now the largest regional free trade agreement globally, accounting for about 30% of the global population (2.3 billion) and 30% of global GDP (USD 26.3 trillion).

Analysis by the Peterson Institute for International Economics suggests that RCEP might boost global trade by USD 500 billion in the next ten years. As governments are looking for effective ways to counteract the negative economic impact of more than a year of crisis, such intensified trade is bound to constitute a key pillar of the post-pandemic recovery strategy.

Nevertheless, there is a potential side effect of barrier-free and intensified trade that should not be underestimated or overlooked: a further growth in trade-based money laundering, or TBML. In essence, TBML consists of the criminal practice of exploiting domestic and cross-border trade transactions to move and launder illicit proceeds.

This type of money laundering practice – first explored by the Financial Action Task Force (FATF) in 2006 – came back into the spotlight in December 2020, when the international watchdog released a new report on the topic.

The 66-page document takes stock of current TBML risks, including the exploitation of both new and existing methods of introducing dirty money into the international financial system. In particular, it brings to the fore the main TBML methods used by criminals, namely:

  • the over- and under-invoicing of goods and services, where prices of goods and services are misrepresented to transfer value;
  • the over- and under-shipment of goods and services, where quantities are misrepresented, including “phantom shipments” where nothing moves at all;
  • multiple invoicing for the same goods, where the same documentation is reused numerous times to justify multiple payments; and
  • falsely described goods, which involves the misrepresentation of the quality or type of a good or service.

While listed independently, these techniques are often “mixed and matched” in one scheme, further complicating the transaction chain.

The types of goods and services that can be exploited in TBML schemes can vary wildly, ranging from agricultural produce and precious metals to cars or high-end electronics. But more than relating to a specific sector or product, TBML can occur wherever it’s possible to misrepresent value.

Because of the complexity and elusive nature of TBML, the FATF’s report also highlights the need for public authorities to update and digitalise the tools and techniques they use to analyse financial and trade data.

After years of putting off digital transformation projects for regulatory and monitoring tools, the time might now be right to finally kickstart the process. In 2020 we witnessed a generalised increase in public spending to introduce COVID-19 relief measures.

Now that the end of the crisis finally appears in sight and governments are getting ready for the recovery, we cannot afford to let any form of money laundering practice weaken the financial system even further. For this reason, in the coming months and years, we expect the fight against money laundering and tax evasion to become an even more pressing priority for governments in need of additional tax revenues.

Hence, having acknowledged the importance of digitalisation in achieving the parallel objectives of curtailing money laundering and promoting international trade, it only makes sense to bring RegTech providers into the discussion.

The range and depth of RegTech innovation have grown exponentially in recent times, and for a number of reasons. The traditional space of digital KYC and ID verification, for instance, has been supercharged by the need for remote verification determined by the lockdown measures introduced from the first quarter of 2020.

However, the positive consequences of a decisive move to digital and remote processes, including in the areas of customer experience, compliance costs and regulatory transparency, go far beyond the necessities of the pandemic. Some regulators – starting from the FATF but including local bodies such as the Hong Kong Monetary Authority (HKMA) – have since released specific guidelines to drive greater adoption of digital verification solutions, but that’s just the first step.

While regulators and financial institutions have made great strides in digitising ID verification and KYC practices for individuals, for TBML prevention it is much more important to introduce similar processes for corporate entities. Reliable government-sourced information and documents are still challenging to access in many jurisdictions.

A lot more can be done in this area, starting from large scale digitisation of local company registries, to be accessed and cross-referenced across multiple jurisdictions. If embraced by the majority of local regulators, this seemingly simple strategy would have a massive impact on limiting the use of shell companies for money laundering purposes.

Another area where RegTech providers’ knowledge can be essential in making regulators’ efforts more effective is transaction monitoring. By relying on rule-based systems enhanced by artificial intelligence, next-generation solutions can identify suspicious transactions and patterns at speeds and accuracy unimaginable until not long ago. And if such systems could access a centralised repository of information fed by multiple private institutions across jurisdictions, their effectiveness and scope might improve exponentially.

In conclusion, the APAC region now has a unique opportunity to introduce a new and more collaborative AML strategy, powered by RegTech innovation. The new RCEP agreement, as well as long-established regional forums, can serve to promote coordinated efforts and planning between different industry practitioners – including regulators, regulated companies and RegTech providers.

In particular, more consistent KYC requirements and a centralised body to exchange information on suspicious reports or transactions would enhance authorities’ ability to prevent and punish all forms of money laundering, including trade-based practices bound to accompany the increase in trade determined by RCEP. By bringing RegTech providers and technology experts into the conversation with regulators now, it is possible to drive awareness of available solutions and speed up implementation at the pace demanded by the current global challenges.

Claus Christensen is CEO & Co-Founder of Know Your Customer Limited.

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