Why trade based money laundering warrants more attention

Trade Based Money Laundering (TBML) is an insidious but often overlooked area of financial crime, especially for Taiwanese banks that have set up branches overseas.

By Paul Shelton



According to data from Taiwan’s principal financial regulator, the Financial Services Commission (FSC), as of May this year, Taiwanese banks have overseas entities in Asia Pacific, Europe, the United States, and Africa. As of the first quarter of 2022, they had set up 632 overseas branches (including branches, subsidiaries, and representative offices), including 21 subsidiary banks, 153 branches, 29 sub-branches, 55 representative offices, and 343 branches (sub-branches) of subsidiary banks. All those overseas branches, subsidiaries and representative offices from a core of some 38 Taiwanese major banks. Rather than to serve local retail market, I think it is a fair assumption that the major reason for the existence of the offshore branches is to service export/import trade related activities that exist between Taiwan other countries. 

Taiwan is a trade-driven economy (or more accurately an export-driven economy), and the development of Taiwan’s economy may be adversely affected if the banks in Taiwan or their offshore branches render financial services without corresponding systems and controls to manage various risks of money laundering or more broadly financial crime in relation to trade based transactions.

TBML is unfortunately sometimes regarded as the poor cousin of AML and Sanctions compliance, but that poor cousin status is not unique to Taiwan. I’ve been directly involved with TBML and personally approved TBML trades transaction by transaction, as a bank’s Money Laundering Reporting Officer (MLRO) and as Head of Compliance.

Based on my experience I have noted that there is misconception that trade is trade and really only related to shipping raw materials or manufactured goods. So how could it be related to financial crime activities? The answer unfortunately is that trade is a huge avenue for financial crime related activities.

With the monitoring of traditional AML and Sanctions, banks have sophisticated monitoring and tracking systems that help track, trace, and report suspicious or reportable financial crime related transactions. TBML related monitoring and tracking systems have seen material improvement in recent years (and to some extent also benefit from and rely upon the traditional monitoring systems, but it is still, to a large extent still burdened with huge amounts of hard copy-based documents, from simple invoices, shipping contracts and a whole host of other related documentation for just one trade. This is the burden of TBML, and it is this burden that makes it an ideal breeding ground for financial crimes. 

How big is the problem? In July 2021, the Global Trade Review publication, estimated the amount of illicit money laundered through the international trade system is estimated to total hundreds of billions or even trillions of dollars per year. Taiwan’s TBML issues are just a subset of that amount of money and unfortunately whilst I cannot with any prudent accuracy pinpoint an actual NT dollar figure, Taiwan has itself recognized its high-risk AML and Sanctions related crimes as including drug trafficking, fraud, smuggling, tax crimes, organised crime, and corruption/bribery, all of which are ripe for TBML related activities.

So, what is TBML? According to the Financial Action Task Force (FATF), TBML is defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.

Trade-related activities include but are not limited to import and export negotiations, the issuance of letters of credit (L/C), purchase of customers' liabilities under letters of credit, purchase of accounts receivables and accounts payable, acceptance of discounted export bills, material procurement guarantees, export loans, import financing, import and export foreign loans.

So, what should bank do? This where it becomes even more complicated for reasons that I will state below. We know that in Taiwan itself banks must abide by the relevant regulations in the “Regulations Governing Anti-Money Laundering of Financial Institutions” and the “Model Guidelines for Banks' Anti-Money Laundering and Counter Terrorism Financing Policies and Procedures”. The FSC has also provided the industry with “Suggested Best Practices for Banks to Combat Trade Based Money Laundering”.

Accordingly, Taiwanese banks must: adopt a risk-based approach (RBA) to assess the risks of TBML or include risks of TBML into the comprehensive risk assessment of money laundering and terrorism financing, establish appropriate measures to perform reviews on customers and relevant transactions as well as conduct ongoing transaction monitoring.

Upon discovery of any abnormality in business nature or transaction pattern, the relevant enhanced due diligence must be conducted. Taiwanese Banks must also formulate TBML red flags, suspicious transaction reviews and report procedures.

The FSC expects (when I see the word “expects” from a financial regulator I really think it’s more like a mandatory obligation) that the subject of TBML must be specifically included in training for those staff with AML/CFT based job specifications and the content of the training programme must refer to and include frequently-occurred transaction typologies and suspicious transaction cases prone to happen, in order to fit each bank’s level of risk , and to enhance staff’s ability. But all staff should be made aware of TBML.

Staff that should receive TBML training must include trade-related operations staff (I would really stress this, as in my experience, operations staff are often the first to raise TBML related suspicious activity – they are often the front line of protection), AML/CFT staff and internal audit staff.

It is no understatement that trade finance is a complex and specialized field. There are multiple parties with interconnecting relationships and intricate structures involved.

When conducting customer risk rating (CRR) for trade related customers, banks should consider the following common customer risk factors:
 

• Business nature: The type of imported or exported goods is in consistent with the customer’s regular business activities. For example, if the major business of a customer is trading in the import and export of toys, but the goods in the suspect transaction are iron, sand or petroleum instead. This should raise red flags.
• The transaction amount of the goods is not consistent with the scale of the customer’s regular business activities. It is suspicious if a single transaction for half or more than the normal annual turnover.
• The customer suddenly begins conducting businesses in high risk areas, especially if the customer normally conducts businesses in general or low-risk areas. This should raise questions.
• The customer’s original business scope or type of underlying goods is easily utilized for money laundering or terrorism financing, for example embargoed/restricted goods, or high risk goods.
• Transaction pattern that disguises the true nature of transaction with an extremely complex transaction structure: In establishing business relations with a customer, a normal pattern for transactions is generally adopted. But then, after a period, the customer resorts to extremely complex transaction structures to disguise the true nature of transactions. Again, this should raise questions as to why.
• Goods in transactions are against import or export laws and regulations, or they involve dual-use goods (dual-use goods are items that can be used both for civilian and military applications and as such, these types of goods are heavily regulated) and high risk goods.
• The price of goods and services is relatively high or low compared with the fair market price in general. If the price is just too good to be true, it probably isn’t the real price.
• Receiving cash or other payments from the third party without any obvious connection. If the payment for goods after delivery is not paid by the bank’s customer or counterparty, but by the third party without any obvious connection, such as when the ordering customer is a money services business (MSB), there is the possibility of a delivery to a sanctioned country or region with the payment collected through other channels.