Bankers and the market price of the goods
In the previous newsletter I addressed the newly released “Wolfsberg Group, ICC and the BAFT Trade Finance Principles” – and focused on transaction monitoring on the Trade Finance transactions
In this blog post – and the coming ones I will look at other specific areas of the report.
For this blog post the topic is “bankers and the market price of the goods.”
But first let’s find out why this is even a topic:
No doubt a number of countries face problems in respect of money laundering.
Money laundering can be defined as “the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.” 1)
It is said (an no doubt true) that a lot of the money laundering today is done via trade; i.e. the so-called “Trade Based Money Laundering” – or in short: TBML.
Trade-based money laundering is defined as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins.” 2)
In that respect it is important to quote “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles”:
“Trade Based Money Laundering (“TBML”) has become a widely used term. It covers a broad spectrum of financial and other services, including those financial services referred to as Trade Finance, but also transactional activities across current and deposit accounts and payments for example, which are not in the purview of Trade Finance operations of FIs.“ 3)
I.e. “Trade Based Money Laundering” is not the same as “Trade Finance Based Money Laundering”! Rather Trade Based Money Laundering covers a wide spectrum – whereby the open account trade is far the biggest:
“Payments made through FIs in support of Open Account trade (which accounts for approximately 80% of all international trade) …” 4)
In any case money laundering – and thereby also Trade Based Money Laundering is a big problem, and since the “laundered” money often flows through the banks, there are requirements from the regulators (as well as for example the EU) towards the banks requesting them to have appropriate controls in place for the purpose of detecting attempts of money laundering.
There are different ways by which Trade Based Money Laundering can be done. Chapter 3 in “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles” describes the key methods that may potentially be used within Trade Finance. 5)
The list is the following:
By misrepresenting the price of the goods in the invoice and other documentation (stating it at above the true value) the seller gains excess value as a result of the payment.
By misrepresenting the price of the goods in the invoice and other documentation (stating it as below the true value) the buyer gains excess value when the payment is made.
By issuing more than one invoice for the same goods a seller can justify the receipt of multiple payments. This will be harder to detect if the colluding parties use more than one FI to facilitate the payments and or transactions.
The seller ships less than the invoiced quantity or quality of goods thereby misrepresenting the true value of goods in the documents. The effect is similar to over invoicing.
The seller ships more than the invoiced quantity or quality of goods thereby misrepresenting the true value of goods in the documents. The effect is similar to under invoicing.
Deliberate obfuscation of the Type of Goods
Parties may structure a transaction in a way to avoid alerting any suspicion to FIs or to other third parties which become involved. This may simply involve omitting information from the relevant documentation or deliberately disguising or falsifying it. This activity may or may not involve a degree of collusion between the parties involved and may be for a variety of reasons or purposes.
No goods are shipped and all documentation is completely falsified.
In particular in respect of the first 2; i.e. over- and under invoicing it has been suggested that in order to identify this, the bank (e.g. the Trade Finance officer) just be able to determine the market (normal) price for the goods shipped, and thereby compare it to the price of the goods actually shipped. If the difference is too big – then it should be further investigated.
For example the FCA report TR/13 includes the following “good practice”:
“Analysis of pricing for those goods where reliable and up-to-date pricing information can be obtained.” 6)
For that reason there has been an expectation from Regulators, Compliance and Internal Audit that the price of the goods shipped under a Trade Finance transaction is within the range of the applicable market price.
In that respect “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles” states:
“Determining whether cases of over-invoicing or under-invoicing exist (or any other circumstances where there is misrepresentation of value) cannot easily be identified based on the trade documents alone. Furthermore, it is not feasible to make such determinations on the basis of external data sources; most products are not traded in public markets and therefore there are no publicly available market prices. Even in transactions involving regularly traded commodities, which are subject to publicly available market prices, FIs generally are not in a position to make meaningful determinations about the legitimacy of unit pricing due to the lack of relevant business information, such as the terms of a business relationship, volume discounting or the specific quality of the goods involved. However, there may be situations where unit pricing appears manifestly unusual, which may prompt appropriate enquiries to be made based on the FI’s RBA.” 7)
Or in other words it is not realistic to assume that a bank (for this blog post represented by the Trade Finance Officer) can make any qualified evaluation of the applicable market price. Of course with the comment that the Trade Finance Officer should (of course) react if the “unit pricing appears manifestly unusual”.
For the sake of good order let me repeat:
It is not realistic to assume that a bank can make any qualified evaluation of the applicable market price!
But then … how can you check a Trade Finance transaction for money laundering?
And for that question, I recommend that you read “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles” and the “lcviews White Paper on Trade Finance Compliance”.
And as always that you take care of each other and the LC.
3) “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles” 1.4 – page 5
4) “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles” 6.1(a) – page 17
5) “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles” 3.1 – page 9
6) Financial Conduct Authority, Banks’ control of Financial crime risks in trade Finance TR13/3 – page 44.
7) “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles” 3.1 – page 9