September 26, 2017

Over the years, banks have become more savvy about detecting and preventing money laundering and terrorism financing. Better education and awareness, policies and technology have successfully closed many of the more traditional and crude avenues, exemplified in the eighties movie “Scarface”. Adapting to the new reality, criminals have developed more sophisticated tools to launder their ill-gotten gains. One of these has been the use of trade and trade finance.

Since the publication of the Financial Action Task Force’s report “Trade Based Money Laundering” in 2006 highlighted the significance of Trade Finance instruments in facilitating money laundering and terrorism financing this topic has benefited from increasing focus by regulators and the financial community at large.

Although there are no accurate statistics of the extent of Trade Based Money Laundering (TBML), estimates range from “hundreds of billions of dollars[1]” per year to an estimate by Global Financial Integrity[2] of illicit inflows and outflows from developing economies between 2005 and 2014, representing a value of more than a trillion dollars.

International trade has several aspects that make it difficult for the authorities to detect abuse and therefore make it an attractive vehicle for money launderers.

  • The cross-border nature of trade complicates the creation of a reliable audit trail;
  • As banks generally represent either the buyer or the seller in a transaction it is not easy for them to assess the complete trade structure. They also face complexities addressing their KYC obligations;
  • In the absence of ‘Trade Police’ it can be difficult to estimate the true value of certain trades, especially if buyer and seller are colluding, as is often the case;
  • The sheer volume of global trade – approximately 16 trillion in goods in 2016 – makes co-mingling billion or two of illegal value a drop in the ocean.

Creating more transparency would be a big step forward to closing this avenue, but this has been difficult to achieve to date.

  • Several Trade Transparency Units (TTUs) have been established between the customs authorities of several countries, notably the United States and some Latin American countries, to compare respective imports and exports. For several reasons, the results have been patchy however.
  • The Wolfsberg Group, representing the 11 largest global banks have introduced sensible Trade Finance guidance[3], but KYC loopholes remain, such as inconsistent standards of customer due diligence investigations and establishing whether buyer and seller might be acting in collusion. Furthermore, the ‘de-risking’ policy of global banks in recent years has led to many correspondent banking relationships being terminated, increasing the need for more intermediary banks in trade finance and extending an already imperfect chain.
  • The ability to detect cross-border collusion is the Achilles heel of TBML detection. Acting in collusion, buyer and seller can set the terms of their agreements as they please. If there is no readily verifiable value reference, the international community is at the mercy of buyer’s and seller’s whim.
  • About 80% of all trade that is settled through banks is conducted through ‘open account’, which means banks have limited ability to even identify if a payment is in settlement of a trade transaction. The use of ‘netting’ between buyer and seller can obscure the nature of the transaction even further. Despite this statistic, and because of the above described opaqueness of ‘open account’ trading, banks focus their efforts to detect TBML mainly on the remaining 20%. Whilst understandable, this does not appear to be the best strategy.

There are however reasons to be optimistic. Several opportunities exist or are emerging to improve the transparency and allow banks to more effectively focus on the 80%.

  • Monitoring non-documentary trade transactions. Banks are expected to know their customers and understand their customers’ business. It is accepted practice that KYC is not a one-time exercise to be conducted when on-boarding a client; customer profile and behaviour are monitored continuously. The good news is that the technology to support this activity intelligently has improved significantly over the years and this trend is likely to  continue . A word of caution however, the ability of monitoring systems to identify anomalies and patterns that may point to TBML relies considerably on the quality of the rules and scenarios in the system. There is a critical human factor here that is often overlooked. Trade Finance is a time honoured banking product and much value is placed on trade specialists’ experience. It can be complex for the un-initiated to grasp relevant nuances, leaving the outsider at a disadvantage. This will almost certainly be the case for IT support, but unfortunately it also applies to many AML Compliance staff. Assigning the task of writing rules & scenarios to Trade Finance specialists is not necessarily the solution to the problem, as seasoned Trade Financiers may be insensitive to TBML red flags simply because these are considered market practice and consistent with their experience. Money laundering prevention experts with solid trade credentials are rare, but vital for the success of this task.
  • Improving data analytics and information sharing. Institutionalising public-private cooperation such as between banks and FIUs will enhance intelligent information sharing. The UK Joint Money Laundering Intelligence Taskforce (JMLIT) is a good example of value creation as information is shared between institutions and across disciplines. This allows early identification of emerging trends and connecting of dots. Whilst TTUs have not lived up to expectation, the benefits of achieving effective customs’ cooperation between nations is potentially so valuable that it deserves to be stubbornly pursued. An integrated combination of data analytics between customs, shipping companies and financial institutions will yield a material impact on stopping TBML.
  • Emerging technology. In addition to the expected further improvement of customer activity monitoring due to cognitive computing technology, blockchain also appears to offer interesting opportunities. It is the distributed ledger technology (DLT) underlying blockchain that promises to provide a significant opportunity to enhance TBML prevention. DLT applied to trade finance will enable the ‘truth’ to be registered in the Cloud, creating an accurate audit trail and vastly increasing overall transparency. The potential of DLT to deliver a knock-out punch to this important money laundering vehicle is an exciting prospect. Venture capitalists and many clever RegTech start-ups are exploring and exploiting the promise of blockchain already. Let’s hope some of these initiatives will further the cause of TBML prevention.


[1] Bureau of International Narcotics and Law Enforcement Affairs, BINLEA, 2009

[2] Illicit Financial Flows to and from Developing Countries: 2005-2014, GFI, April 2017

[3] Wolfsberg Trade Finance Principles, 2011