Money Laundering Risks in International Trade

1. Money Laundering Risks in International Trade

2. Trade Based Money Laundering • It is a process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins

3. Trade and Vulnerabilities towards Money Laundering • Enormous volume of trade flows provide abundant opportunity for criminal organizations to transfer value, without getting noticed, by involving in legitimate cross-border trade. • Complexity associated with trade attracts money launderers towards it. • Commingling of illegitimate business with legitimate business makes identification of suspicious operations more difficult. • Limited verification procedures. • Limited inspection of cargo by custom agencies. • Trade is associated with Financial System (significant trade is financed)

4. Trade-Based Money Laundering Techniques • Over and Under-invoicing of goods and services • One of the oldest method of transferring value across border • Misrepresentation of price to benefit the importer / exporter (tax avoidance) • Shipments below ‘Fair Market’ price enables the importer to receive higher value upon sale of goods. • Multi Invoicing of goods and services • Issuing more than one invoice for the same international trade transaction facilitates money launderers or terrorist financier to justify receipt of multiple payments –complexity increases when different banks are involved

5. Trade-Based Money Laundering Techniques • Over / Under Shipments of goods and services (Phantom Shipment) • Banks and other financial institutions may unknowingly be involved in financing for these phantom shipments. • In extreme case, exporter may not ship any goods at all, simply collude with importer to ensure that all shipping and export documents are presented to obtain financing • Misrepresentation of quality or type of the goods & services • Shipments below ‘Fair Market’ enables the importer to receive higher value upon sale of goods vice-versa for the exporter

6. Over & under-invoicing of goods Step no. 1: Chinese company exports 10,000 mobile phone sets (having fair market value of $ 100/each) to Company in Dubai with invoice value of $ 250,000 (1/4th of actual fair value). Step no. 2 : The Dubai Company remit $ 250K against the import of mobile phones, from China. Company in China Company in Dubai Step no. 3 : The Dubai company, exports 10,000 mobile phone sets to company based in UK for $ 1.5 million (i.e., above fair market value) Step no. 5 : The funds are then distributed as per Dubai company’s instructions Step no. 4 : The British company settles the trade transaction and pays L/C proceeds in Dubai company’s bank account. Company in UK Total funds laundered, $ 1.250 million Dubai office’s bank account

7. What can arouse Suspicion ? Following are some -but certainly not all- areas where suspicion should arise or where enhanced due diligence is required: • Applicant and Beneficiary of the LC are same persons or related parties .OR. If the LC is advised by/to Off-shore companies / Shell companies. • Repeated amendments of LC or frequent extensions of LC -without apparent reasons. Frequent cancellation of LC without performance of LC. • Shipment of sensitive goods (nuclear chemicals, arms etc.). • Size of shipment inconsistent with exporter’s/importer’s size or line of business. • Commodity shipped is designated as ‘high risk’ for money laundering activities. • Commodity is shipped to, or from a jurisdictions designated as ‘high risk / NCCT’

8. What can arouse Suspicion • Method of payment inconsistent with risk characteristics of the transaction (advance payment against LC for a supplier in a high risk country; payment against simple receipt without calling for any documents, LC settlement outside the LC). • The shipment does not make economic sense (transshipment from 1 or more jurisdiction for no apparent reason; use of forty foot container to transport small quantity of goods). • Documents presented at the time of negotiation are copies (not originals) .OR. Significant discrepancies among LC documents (discrepancy in description of goods, shipment, value between B/L, Invoice, Certificate of Origin, Customs Documents etc). • Applicant/Beneficiary of the LC and owners of the Shipping Companies are same persons or related parties. • Shipment using unknown vessel or where the voyage of ship is suspicion (matter should be referred to IMB to ascertain genuineness of shipment). • Any trade transaction done to circumvent any Sanctions Program (local or international) should be immediately referred to Compliance – Prior to handling it

9. Risk Mitigation KNOW YOUR CUSTOMERS KYC serves an important function in the conduct of banks business. It helps bank to : - better understanding of customers and their requirements. - enables banks to perform their obligations under international norms. - adequate KYC/due diligence protects banks from adverse reputation . - new concept of “Know Your Customers’ Customers” – (KYCC) KNOW YOUR - CORRESPONDENT BANKS When acting as a correspondent bank, it is essential that sufficient information be gathered on Respondent Bank, so as to fully understand : - the nature of respondent’s business (activities and locations). - respondents bank’s management / shareholders (people behind the bank). - bank’s money-laundering prevention and detection efforts. - bank’s ethics & compliance policies (abidance to sanctions & embargos) - purpose of account opening. - quality of supervision by the local regulatory authorities. etc.

10. Risk Mitigation MONITORING OF TRANSACTIONS Due diligence should be performed on the transaction(s) before establishing LC. Sufficient information should be gathered on Applicant / Beneficiary (names should be screened through backlists). Nature of shipment and source of funding should be evaluated. Enhanced due diligence should be conducted - particularly on transactions involving high risk jurisdictions, transactions involving items of dual use – so as to ensure no breach of sanctions / embargos Stringent documentation review (not only of compliance with LC terms, but also for anomalies / red flags that could indicate unusual or suspicious activity. Transactions that do not appear to be legitimate or do not make any economic sense should be declined (if need be reported to regulatory authority) Existing relationship should be regularly monitored in respect of large/abnormal transactions.