Managing emerging trade-based money laundering risks

Recognizing and preventing these problems is now the No. 1 priority for those working to stop trade-based money laundering (TBML). The first of these priorities, in the new reality we inhabit, can be the harder of the two: TBML professionals need to articulate the threat and communicate it to others before preventative measures can be put in place.

This begins by establishing that TBML is no longer solely a concern for banks and that its scale and scope is massively underestimated. The typical country-to-country movement of products is no longer the norm, and it’s far from unusual for trade within borders to be abused for money laundering purposes. Measures taken to combat the coronavirus are likely to boost the movement of goods and products within borders.

Next is understanding TBML is not just about business. Before the pandemic, we had already seen a growing number of consumers buying locally sourced products from producers about whom consumers had some grasp of provenance. The virus means this purchasing behavior has shot up exponentially—and is likely to continue to.

Third, we must be aware that the huge increase in the number of people now working from home will, for a small minority, be an opportunity to commit false accounting. Criminals are also likely to exploit the search for wider supply chains that firms looking for a competitive advantage will seek out in the post-lockdown landscape.

Now that we know the risks, we need to understand how to spot and combat them. We can start with the following list of key considerations:

Look at the wider risk

A recurrent concern expressed by those who work in trade-based finance is that they work in a very process-driven environment, one that follows a set formula for completing tasks. Useful as it is to have expertise concentrated in this way, it can leave trade finance isolated, distant from some of the other vital departments such as sanctions and money laundering.

This isolation can have the negative consequence of preventing effective communication with other important departments looking to detect criminal activity. Stepping outside of the trade finance bubble will allow those who work within it to have a better understanding of the wider risk, allowing trade finance to see how its work functions within the wider anti-financial crime context.

Communication is central to making sure risks are covered. The ringfencing of the trade finance sector is understandable and necessary. Yet its strength is also its weakness: When the control framework is too robust, it doesn’t allow much room for nuance and enquiry. Softening the trade finance ringfence lets in other departments and gives TBML staff room to maneuver and spot risks.

Education and training

A company exposed to fraud will turn to its bank before anything else. So banks need to be educating and training employees on Know Your Customer (KYC) measures. Furthermore, staff must be aware that they now have an obligation to “know your customer’s customer”—mere KYC is increasingly insufficient.

Education doesn’t end there. Banks must also disseminate to staff members ways of spotting fraud taking place. When behavior changes, what is causing it? Does it look suspicious? Is it in line with normal business, or is it extraordinary?

Emphasizing the cost of getting it wrong for banks is an effective training technique, and there are numerous examples. But perhaps the most overlooked way of driving home the message is the moral dimension. Social responsibility has steadily grown to become a crucial factor for customers deciding with whom they do business. Employee awareness of this helps reinforce trade-based finance staffs’ responsibilities and its importance to the business.

Recognizing responsibility

We mentioned earlier it is no longer just banks who must be wary of TBML: Suppliers and buyers also need to be alert to the risk. This means that responsibility for TBML is now diffuse.

Every supplier you now work with is important. The risks are too great to be overlooked, and as such, responsibility lies with every trade finance team member to perform their function in a way that takes in risk holistically. A vital feature of this is reviewing the control framework around TBML risk on a regular basis. COVID-19 has inherently altered the trade finance area—for instance, an increase in trade within borders—and failing to recognize this will see TBML escape attention.

Talking to clients is another important feature of taking responsibility. By doing so, we avoid what would happen when trade finance staff are performing their tasks in a tick-box fashion; actually communicating with clients will allow trade finance employees to gather information and insight into the trade being conducted and the level of risk.

Final thoughts

TBML was of course already happening prior to the coronavirus pandemic. The threat remains, but its nature will have shifted. Trade-based finance staff need to respond quickly and efficiently to make sure they can respond effectively to the evolving threat. By looking at the wider risk, being aware of the latest developments in TBML, and taking responsibility for the different areas in which TBML can occur, those who work in trade finance will give themselves the best opportunity of staying ahead of the threat and protecting themselves and their organizations.

The International Compliance Association is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.