TBML-FATF

The continued shortfall in combatting trade based money laundering

Some 15 years after the Financial Action Task Force (FATF) published its first landmark report on trade-based money laundering (TBML), new research from the independent inter-governmental body makes sobering reading. Organised crime groups continue to exploit the complexities of the international trade system to launder dirty money, the FATF’s latest report warns, and despite some successes, attempts to combat these efforts continue to come up short.

A year ago in this blog, we identified TBML as a likely focus for financial regulators, given that the banking sector is a crucial link in the enabling chain, both as a provider of trade finance and in its transaction processing role. That focus now looks set to intensify. While the sector will not solve the problem on its own – the case for a partnership approach has never been stronger – banks and other financial institutions will come under increasing pressure to improve the data and intelligence they collect in the battle against TBML.

Those banks that do not play their part can expect to face the wrath of regulators worldwide. In the UK, for example, the Financial Conduct Authority has already fined leading banks for failures connected to TBML. Regulators in jurisdictions around the world have followed suit, with cases in countries as far apart as the US and India.

Above all, the pressure is on banks to ensure they have processes in place to capture and report suspicious transactions involving clients and third parties. As the FATF’s latest report points out, “Financial institutions are in a unique position to provide valuable leads to financial intelligence units for detecting possible TBML schemes.”

Diving into the data

In practice, of course, banks will have more information about some transactions than others. In cases where they are providing trade finance, it is likely they will have access to the documentation detailing the underlying transaction. Indeed, banks that have not carried out enhanced due diligence checks when offering funding of this type are likely to face some difficult questions if and when issues come to light. In cases where a bank is simply facilitating a trade transaction, less data may be available, but there will still be opportunities to identify anomalies and customer behaviour that might point to suspicious activity.

Certain red flags should be particular triggers for investigation and reporting in a TBML context. Is a particular transaction unusual in the context of what the bank knows about the profile and commercial activities of its customer? Do details of the transaction, such as shipping terms or the description of the goods, tally with the associated letter of credit? Does the transaction involve an unusual movement of goods, or a third party for no obvious reason? Is there a discrepancy between the value of the goods invoiced for and their true market value?

Clearly, capturing accurate data will be vital if banks and other financial institutions are to spot such triggers. That may be challenging, given that trade finance in many markets still involves a high degree of manual processing, but banks will be expected to improve in this regard, adding much more trading data to their standard data capture and checking processes.

There is also a need to explore alternative data sets that offer additional – and often more valuable – intelligence to augment what is required simply for due diligence compliance. Financial institutions that are able to develop such data sets – often specific to sector or organisation or transaction type – will be in a stronger position to identify suspicious activity.

Inevitably, these imperatives will mean compliance departments have to manage and interrogate ever-increasing volumes of data. New technologies, including machine learning and artificial intelligence tools, may be the key to seeing the wood for the trees, where human eyes alone are unable to look through the data. Automation will be crucial.

Equally, it is clear some customers and types of trade pose a higher risk than others. The FATF singles out a number of sectors and product areas that it believes are particularly vulnerable to TBML. One leading example is the metals and mining industry. “The exploitation of gold and other precious metals and minerals is often a factor in TBML schemes,” its report warns.

It is not only that the international trade in such resources provides significant volumes of transactions to be exploited, but also that gold and other precious metals are often used as a proxy for cash in money laundering cases. The FATF also worries about illegal mining, which may give rise to other issues, from worker exploitation to environmental breaches, as well as TBML.

The need for partnership

Finally, it is important to say that financial institutions should not be expected to fight this battle alone. Across the whole of the money laundering space, there is an increasing focus on public-private partnerships that enable information sharing, intelligence gathering and other types of collaboration. These may be especially important in the battle against TBML, where public authorities have particularly expertise in trade and cross-border transactions.

The FATF report points out that some jurisdictions are now setting up such partnerships specifically to target TBML – Australia’s Fintel Alliance, for example, launched such an initiative earlier this year. In other cases, TBML is just one focus of partnerships that aim to collaborate on a broad range of money laundering issues.

Either approach may work well, but the key will be to ensure that both public and private sector participants are able to pool relevant expertise in areas such as trade, customs and finance – and to communicate effectively via technologies that provide connectivity and inter-operability.

The reality is that there is no one-size-fits-all approach to tackling TBML. The threat continues to evolve and grow; indeed, the scale of the problem has increased markedly since the FATF’s first TBML report in 2006. Still, working together – and with improved data management and use of technology – public and private organisations do have an opportunity to make significant inroads into this crime.

David Prosser

Freelance journalist and consultant, and a former business editor of The Independent.