Financial institutions protect the financial system and play a critical role in preventing money laundering, including the tough challenge of trade-based money laundering (TBML). In TBML, criminals exploit legitimate trade channels to conceal illegal money, thereby jeopardizing financial stability. Detecting and preventing TBML is crucial for maintaining a strong global financial system.

Understanding TBML:

TBML means manipulating trade transactions to clean money. People do this by changing prices on invoices, including over/under-invoicing goods, creating fake invoices, or invoicing the same shipment many times. Well-known cases that involve significant amount of money highlight the gravity of TBML. This makes it clear that we need to take quick action and deal with it in a thorough way.

Unique Challenges in Detecting TBML:

Traditional systems have a hard time spotting TBML. The huge volume and complexity of international trade transactions make it difficult to distinguish legitimate transactions from the illegal ones. Plus, there are networks of middlemen, shell companies (fake companies), and different ways for paying for trades, which makes it even harder to track laundered funds.

Regulatory Landscape and Compliance Requirements

International organizations such as the Financial Action Task Force (FATF) set rules and standards to stop Anti-Money Laundering (AML) and Financing of Terrorism (CFT). These rules include specific measures to fight TBML. These rules require extra check on transactions in risky places. Banks must implement robust compliance programs that incorporate these regulations to effectively identify and mitigate TBML risks.

Technology and Tools for TBML Detection

Technological solutions such as artificial intelligence (AI) and machine learning (ML) offer trade compliance management to help in finding huge sets of trade transactions to identify red flags of TBML. However, they work well with high-quality data and need human expertise to understand alerts properly.

Case Study: Company based in High Risk Jurisdiction Paying a Low Amount for Electronics:

Scenario:

You work in the trade finance department of a major bank. You receive a request from a company based in a risky place to pay for electronics. But the price seems too low, which is suspicious.

Challenge:

Identify the potential red flags in this scenario and outline the necessary due diligence steps your team should take.

Red Flags Detection:

• The company is from a High-risk jurisdiction.
• The price for the shipment for electronics is unusually low.

Due Diligence Steps to Detect TBML:

• Enhance Customer Due Diligence (CDD) procedures: Identify who owns the company, verify they are real and assess their risk profile.
• Assess the prices of similar electronics: Compare the typical market value for the electronics involved with the declared value.
• Examine all the paperwork: Look for any discrepancies in invoices, bills of lading, and other trade documents.
• Investigate the trade route: Investigate why they’re using that particular route and identify any potential red flags with the destination country.
• Implement transaction monitoring: Keep an eye on the transaction monitoring rules to flag suspicious activity related to specific transactions.

Methods to Improve TBML Detection:

To detect TBML effectively, you need to use different approaches:

• Leveraging Enhanced Customer Due Diligence (CDD): Do more thorough checks on trade customers, especially those in high-risk jurisdictions. Find out who owns the company and identify potential risk factors.
• Setting up Rules for Transaction Monitoring: Set up rules for monitoring transaction to identify red flags of TBML such as over/under invoicing and unusual trade routes.
• Leveraging AI and Machine Learning: Utilize AI and machine learning tools to analyze trade transactions and detect suspicious activities.
• Information Sharing and Collaboration: Maintain open communication channels with law enforcement agencies and regulatory bodies to share suspicious activity reports.

Conclusion

Detecting TBML is a complex challenge because international trade is complex and criminals keep changing their tactics. However, by implementing strong compliance programs and technology effectively, bank compliance professionals can significantly enhance their ability to identify and stop TBML activities. It’s crucial to keep watching closely and coming up with new ideas to protect the financial system from this big threat.