The Canadian Department of Finance revealed in November 2024 that they would be requesting changes to the Proceeds of Crime (Money Laundering) and Terrorism
Financing Act (PCMLTFA) so that it could “continuously monitor and adapt to new risks and threats”. Similar initiatives are being implemented in a number of countries as regulators realise the impact
financial crime continues to have across the board, not just in the financial services sector.
Action is being taken in other pockets of the world too. Market leaders in
trade finance, particularly banks, have a crucial role to play in combatting the rise of criminal activity in global trade, such as fraud,
money laundering, and terrorist financing. Organisations involved in global trade, especially those with complex supply chains, also face significant risks
of being inadvertently used for trade-based financial crime, and action must be taken to mitigate this trend.
Although this is a trend, trade-based financial crime often does not receive as much media coverage as other types of fraud, like
scams, for several reasons related to the complexity of these crimes, the sectors they affect, and the way they are detected and reported.
Considerations for banks looking to reduce criminal activity
Here’s an overview of how financial institutions can reduce trade based criminal activity in the first instance:
- Enhance due diligence and KYC processes
Banks can deepen their
Know Your Customer (KYC) processes and anti-money laundering (AML) measures with enhanced customer profiling to continuously monitor high-risk clients and transactions. This can be done manually, or better yet, with algorithms that can
analyse trade patterns to spot suspicious activity such as changes in transaction volumes, for example. Further, when dealing with high-risk jurisdictions, it is doubly important to ensure
beneficial ownership identification so that systems can pick up on the ownership of companies. This will reduce the risk of shell companies be created for illegal purposes.
- Collaborate with regulatory bodies and law enforcement
By working with these establishments, financial institutions can keep pace with the rate and type of suspicious activities that are being unearthed by bodies like World Trade Organization (WTO), International Chamber of Commerce (ICC), and the Financial
Action Task Force (FATF). In addition to this, sticking to international sanctions lists closely can make sure that transactions are not funding criminal organisations or activity occurring in sanctioned regions. What can also be beneficial for banks it to
adopt more stringent criteria when working with as freight forwarders, customs brokers, or suppliers, to ensure these parties are also compliant. Combine this with a strong internal culture of compliance and awareness of the associated risk, criminal activity
in trade finance should organically decrease.
- Leverage technology for fraud detection
Beyond using
digital signatures and
smart contracts in trade documentation, that are proven methods of fraud prevention, more can be and needs to be done to ensure that transactions are authentic and are conducted legitimately. Technologies like AI are already being used
to analyse data, find anomalies and in time, predict fraud, but blockchain also has a role to play here. By providing immutable records of transactions, blockchain makes it harder for criminals to alter records to their advantage and bolster transparency in
trade finance.
Complex supply chains? How not to be used for crime
For banks and financial institutions in trade finance, both technology and cooperation must be leveraged together to provide a secure, transparent, and ethical framework for international commerce.
Complex supply chains can lead to financial crime because they create many opportunities for money laundering, fraud, bribery, and corruption. For example, supply chains span a global reach with a multitude of regulations, standards and cultures to consider,
making it easy for misconduct to be hidden. Added to this, numerous third parties can lead to financial strain, with pressure to perform from both internal and external entities, and making it harder to adapt in times of
geopolitical instability.
To ensure crime is kept at bay, a robust KYC process must not be reserved for customers; suppliers, intermediaries, and third parties must also be tested for their due diligence. This could mean audits for individual suppliers or risk assessments, or also
the implementation of interoperable trade finance digitisation platforms that can support the authentication of transactions.
Alongside this, reputation is key: recognised traditional banks will be turned to more frequently for payments that must be channelled through regions with higher risks for money laundering. Therefore, it is imperative for banks to actively vet and require
ethical sourcing practices from suppliers to avoid complicity in human trafficking, child labour, or illicit trade activities. Adopting a strong
Corporate Social Responsibility (CSR) programme can help establish and maintain ethical and transparent practices across their supply chain, reducing the likelihood of involvement in illegal activities.
Why is no one talking about trade based financial crime?
It is evident that trade based financial crime is an issue that will continue to permeate through the financial services sector if no action is taken. Its complexity, the indirect nature of the impact, and the focus on institutional rather than individual
victims means that this form of financial crime gets less media coverage.
Trade-based financial crime involves legitimate business transactions, making it more difficult to detect and report, and requires a high level of expertise to understand the nuances. Trade-based money laundering or customs fraud may only be visible to regulators,
financial professionals, or the companies themselves. Also, many of the mechanisms involved, such as invoice manipulation, over- or under-invoicing, and shell companies, can be legally complex.
International in scope, trade based financial crime stories are harder to follow, but the impact is macroeconomic and has the potential to destabilise financial systems or contribute to the funding of illicit activities like terrorism or organised crime.
More must be done to ensure practices that may facilitate trade-based financial crime, such as mispricing or cross-border financing, are not normalised in international business so alarm bells are rung when suspicions arise.