Strategic Approaches to Mitigating Money Laundering Risks in Global Trade

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3D earth graphic symbolizing global trade, vector illustration.

by Shahzaib Muhammad Feroz, Trade Finance Expert, AKS iQ


Money laundering casts a long shadow over the world, and international trade is a prime target for criminals. This article explores how businesses and financial institutions work together to combat Trade-Based Money Laundering (TBML), a method criminals use to disguise illegal earnings as legitimate business transactions.

The Evolving Role of the AML Compliance Officer

The Anti-Money Laundering (AML) Compliance Officer, often referred to as the MLRO (Money Laundering Reporting Officer), plays a pivotal role in safeguarding trade finance from TBML exploitation.  Their responsibilities extend far beyond simply staying informed; they are strategic partners in developing and implementing a robust TBML defense.

  • Policy Development: The MLRO goes beyond generic AML/CFT policies. They actively participate in crafting bespoke policies tailored to address the specific vulnerabilities of trade finance to TBML. This includes leveraging their expertise to identify emerging typologies and tailoring risk mitigation strategies accordingly.
  • Targeted Staff Training: Equipping staff with the necessary know-how is critical. The MLRO is responsible for delivering regular training programs to ensure staff can effectively identify and report red flags indicative of TBML activity.
  • Suspicious Activity Analysis (SAA) Expertise: Suspicious Activity Reports (STRs) are a vital tool for detecting potential TBML attempts. The MLRO plays a crucial role in assessing and analyzing these reports to uncover suspicious patterns.
  • Customer Risk Management: Maintaining up-to-date customer risk profiles is essential. The MLRO incorporates TBML vulnerabilities alongside other financial crime risks to create a holistic understanding of each customer’s risk profile.

Regular reporting on TBML risks and incidents to senior management and the Board fosters transparency and facilitates proactive mitigation strategies.

Enhanced Due Diligence: Going Beyond the Basics

Thorough Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures act as the foundation for understanding customer business models and identifying potential TBML vulnerabilities. Here’s how enhanced due diligence strengthens the AML framework:

  • Beyond the Basics: Standard KYC/CDD procedures are essential, but for trade finance, an extra layer of scrutiny is needed. Implementing supplementary questions specifically designed to uncover potential trade compliance red flags, particularly for transactions that wouldn’t normally trigger escalation for review, helps identify suspicious activity.
  • Suspicious Activity Investigation: Transactions suspected of money laundering or terrorist financing (ML/TF) require immediate attention. The due diligence process should include robust investigation protocols for such cases, with clear escalation procedures to the Compliance team and senior management for further investigation and potential STR filing.
  • Suspicious Activity Reporting (SAR/STR): Timely filing of Suspicious Activity Reports (SARs or STRs) with the appropriate authorities is crucial. Effective due diligence ensures relevant information is captured and reported when suspicious activity that may be linked to TBML is detected.

Challenges: Balancing thoroughness with efficiency can be a hurdle. Implementing a risk-based approach can help optimize resource allocation while maintaining effectiveness.

A Clear Roadmap: Robust Policies and Procedures

Clearly defined policies and procedures serve as a roadmap for staff navigating the complexities of trade finance while effectively mitigating TBML risks. These policies should:

  • Identify Red Flags: Outlining specific red flags and indicators associated with TBML equips staff with clear guidance for identifying suspicious activity.
  • Assign Clear Roles: Clearly delineated responsibilities for different departments involved in trade finance processing foster accountability and ensure a holistic understanding of AML/CFT considerations throughout the process.
  • Living Documents: The ever-evolving landscape of financial crime necessitates regular reviews of AML/CFT policies and procedures to ensure their continued effectiveness.
  • Staff Training Programs: Incorporating ongoing staff training programs into these policies is key. By keeping staff aware of the latest financial crime risks and mitigation measures specific to trade finance, institutions can maintain a vigilant posture against TBML.

Challenges: Keeping pace with evolving regulations and industry best practices can necessitate frequent updates to policies and procedures. Streamlining the review and update process can ensure agility.

Enhancing Oversight: Correspondent Banking Controls

Effective correspondent banking relationships require robust due diligence and ongoing monitoring to mitigate the risk of being used as a conduit for TBML activity. Here are some key considerations for fortifying AML/CFT controls in correspondent banking:

  • Knowing Your Partner: Gathering comprehensive information on correspondent financial institutions (FIs) is essential. This includes understanding their ownership structure, business models, and risk profiles.
  • Regulatory Landscape: Assessing the quality of AML/CFT supervision within the correspondent FI’s jurisdiction is crucial. Weaker regulatory environments might necessitate a more cautious approach, with stricter due diligence requirements and closer monitoring.
  • Control Measures: A thorough review of the correspondent FI’s AML/CFT controls and policies is essential. This ensures they are aligned with international standards and effectively mitigate TBML risks.
  • Open Communication: Maintaining open lines of communication with the correspondent FI’s management and compliance teams fosters information exchange and collaboration. Regular discussions can help identify emerging threats and areas for improvement in AML/CFT controls.
  • Monitoring for Anomalies: Proactive monitoring goes beyond reviewing policies. Scrutinizing correspondent FIs for adverse news and monitoring their account activity for suspicious patterns potentially indicative of TBML is essential. Leveraging technology for transaction monitoring and sanctions screening can further enhance effectiveness.

Challenges: Gathering comprehensive information from correspondent FIs, particularly those located in jurisdictions with weaker AML/CFT regimes, can be challenging. Establishing strong relationships and leveraging technology for enhanced data collection can help overcome this hurdle. Utilizing third-party due diligence providers can also be an option.

Conclusion: A Collaborative Effort for a Secure Future

By implementing this multi-layered approach and continuously adapting to evolving threats, financial institutions can significantly strengthen their AML/CFT framework in trade finance. However, combating TBML effectively requires a collaborative effort. Financial institutions, industry peers, regulators, and law enforcement agencies must work together to create a more secure financial ecosystem, where information sharing and coordinated action can effectively dismantle the schemes of criminals seeking to exploit trade finance.  Public-private partnerships that foster intelligence sharing and collaboration between these stakeholders are essential in the fight against TBML.  Emerging technologies like blockchain have the potential to revolutionize trade finance.  Continued exploration and development of these technologies can play a significant role in the future of secure trade finance.