Combating Trade Based Money Laundering: Rethinking the Approach
In August BAFT released "Combatting Trade Based Money Laundering – Rethinking the Approach," a paper that proposes alternative, collaborative approaches to solving the problem of trade-based money laundering by increasing the public and private sector partnership.
The paper’s objective is to clarify bank-intermediated trade and banks’ ability to intercept illicit activity, and to explore ways that broader international trade stakeholders from both the private and public sectors can better align to help reduce trade based money laundering and terrorist financing without hindering international commerce and economic growth.
Read the full press release: https://baft.org/events/general/2017/09/08/baft-releases-guidance-on-trade-based-money-laundering
Download the paper: http://baft.org/docs/default-source/marketing-documents/baft17_tmbl_paper.pdf?sfvrsn=2
I must admit that I am a huge fan of the document. It is like “someone” have finally heard with the Trade Finance industry has been saying for a decade!
What the document does (and rightfully so) is to make a make a clear distinction between “documentary TBML” (such as LCs) and non-documentary TBML” (such as trade settled through open account trade).
The document states (as an example) that:
“In documentary transactions, the bank handles or processes documentation such as bills of lading, invoices, packing lists, etc. In non-documentary transactions, the bank may have access to only a portion of documentation based on the structure of the transaction and policy of the institution. For example pre-shipment financing occurs before shipping documents and invoices are produced. For non-bank intermediated transactions, the bank only handles the transfer of funds without seeing any underlying documents that identify the payment as being trade related.”
In other words in “documentary transactions” the bank has a real possibility to check the transaction for Red Flags. That option is very limited in non-documentary transactions.
The new document then makes a reference to Wolfsberg who in 2017 estimated that approximately 80% of global trade was transacted using open account settlement.
This means that only 20% of all trade is documentary, and only 0.1% of the value of all payments is settlement of documentary trade.
The logic consequence of this is that it is “fairly obvious that the highest likelihood of successfully achieving TBML is through open account non-bank intermediated trade”.
For that reason the document states that: “piling more checks and controls to interdict documentary trade transactions is not likely to produce a material impact on TBML” and continues by stating that: “Layering additional controls on the manual operations in a bank’s trade operation will not solve TBML”.
Bum!
As is clear from the headline, BAFT’s purpose is to rethink the approach to TBML. But before going into that, I will delve a bit on the above:
Since “regulatory compliance” went bananas in Trade Finance people from the “outside” (regulators, auditors, compliance officers etc etc) have constantly labelled Trade Finance as a High Risk area – and that without any kind of evidence to that effect. The only arguments I have heard relates to the (perceived fact) that TBML is a huge problem.
The Trade Finance industry has repeatedly been arguing that there is a difference between “Trade Based Money Laundering” and “Trade Finance Based Money Laundering”. However till now without any luck.
This “High Risk label” that has been put on Trade Finance have had severe consequences for the industry already. Transactions are being declined. De-risking is a fact. The manual process around Trade Finance has increased a lot because of rigid controls, and documentation requirements. I.e. increased costs – and thereby increased prices.
So I do hope that this new document from BAFT will (at least) end the adding of new controls on the Trade Finance banks.
As I have stated a number of times, I do not argue that there is no risk in doing Trade Finance – and no controls should be in place. All I am hoping for is the possibility for the banks to take a balanced and risk based approach. This is what we have argued for in the “lcviews white paper on trade finance compliance” *) – and that seems still to be the best possible approach for any Trade Finance bank….
Each bank must do their part – that is for sure! But the next steps are not the banks alone.
And thereby we are back to the recommendations in the BAFT document. Here are the headlines:
Information Sharing
Partnering and information sharing.
Data Analytics
Banks and government entities have invested heavily in technology to improve their ability to identify anomalies in payments, non-documentary and documentary trade.
Emerging Technology
With the introduction of distributed ledger technology (DLT), we have seen banks and the FinTech community feverishly at work trying to apply the benefits of the technology to solve business problems.
The above of course makes it all more difficult and complex, but it is hard to argue that this is not the right way ahead. I am sure that banks are willing to participate and co-operate in that respect.
In the above I have made a reference to the lcviews white paper on trade finance compliance *) – which provides a holistic and balanced approach to working with compliance within Trade Finance.
I hope that will in fact happen – and remind that you take care of each other and the LC.
Kind regards
Kim
*) the lcviews white paper on trade finance compliance can be downloaded free of charge at:
http://lcviews.com/index.php?page_id=472