What are the latest FATF typologies and risk indicators in Trade-base Financial Crime, and how do financial institutions implement this intelligence?
Global money laundering is a serious issue for the world, with estimates of the value of Trade-Based Money Laundering (TBML) in the trillions, not billions, of dollars: capturing this value, Global Financial Integrity has identified a “global value gap” based on the difference between developing and advanced economies’ export and import declarations. This gap has estimated the losses due to TBML at $8.7 trillion for 2008-2017.
To help the anti-money laundering/anti-financial crime community, the FATF and Egmont published a report, “Trade-based money laundering: risk indicators.” This report provides the intelligence the anti-financial crime community needs to take on this complex fraud.
What are the TBML risk indicators?
The FATF sets out current know-how in its report on Trade-based money laundering: risk indicators, stating that if one or more risk indicators are present, this suggests a probability that an activity is suspicious. However, the FATF stresses that the appearance of a single risk indicator does not indicate that a TBML is occurring, simply that the situation must be monitored; other factors must be considered in this complex form of fraud. TBML is a highly complex fraud type. As such, the risk indicators presented by the FATF are relevant to both public and private bodies, including banks, small to midsize companies, and non-financial organizations. The areas within these organizations that the risk indicators will be of most interest to are:
- Transaction monitoring
- Investigative analysis
- Client onboarding and relationship management
These risk factors provide the evidence to detect fraudulent events that may indicate a TBML chain is operating. The FATF details the risk indicators that should form the basis of monitoring decisions, to detect and prevent TBML.
The FATF’s four pillars of TBML risk indicators
The FATF/Egmont report breaks the TBML risk indicators down into four core pillars:
- The structure of the business
- Trade activity
- Trade documents and commodities
- Account and transaction activity
An overview of the risk indicators identified in the report are shown below:
Structural Risk Indicators
- Is the structure of an organization complicated, for example, including many shell companies?
- The entity is registered in a location with known weak AML/KYC compliance.
- The entity is registered at a mass registration address.
- Trade activities seem to contradict the organization's core business.
- Online presence is either absent, or the website does not represent the business interest of the entity.
- Lack of typical business activity, such as regular payrolls.
- Owners and senior managers are nominees and lack business experience.
- Negative news associated with the business or owners.
- Staff numbers do not reflect the level of trade.
- Unexplained periods of dormancy,
- Evidence of non-compliance with business obligations.
Trade Activity Risk Indicators
- The trade does not fit with the business, e.g., this is a car business, but it trades in precious metals.
- Evidence of complex trade deals involving multiple intermediaries.
- Unusual transactions or shipping routes.
- Shows evidence of using complex finance products such as letters of credit for extended lengths of time.
- Low profit margins with evidence of selling goods at the same or below purchase price.
- A new or recently re-activated entity engages in high-volume and high-value trade activity.
Trade document and commodity risk indicators
- Inconsistencies in trade documents, such as name or price discrepancies.
- Price or fees that do not reflect the market value.
- Vague descriptions on contracts and invoices.
- Documents associated with the trade are missing or have false information or show evidence of modification.
- Complex trade transactions are simplified and follow a template found online.
- A registered import value is significantly different to its volume of foreign bank transfers for imports and vice versa.
- Goods entering a country on temporary importation and inward processing regime are then exported using falsified documents.
- Complex routing of commodities through multiple jurisdictions without reason.
Account and transaction activity risk indicators
- Last minute changes to payment arrangements.
- Large volumes or value of transactions that are outside the core business of an entity.
- Evidence of “pay-through” or “transit” accounts and associated low end-of-day balance with no good reason.
- Evidence of a shell or front company taking payment for imports on behalf of the business entity.
- Regular cash deposits that are consistently below the reporting threshold.
- Evidence of large volume trade followed by periods of dormancy.
- Large payments sent or received in sectors where this is unusual.
- Passing Of payments through multiple countries but starting and ending in the same country.
Full details of each risk indicator can be found by downloading the FATF/Egmont report Trade-based money laundering: risk indicators.
How can financial institutions use the FATF risk indicators to stop TBML?
It is essential to recognize that the risk indicators identified in the FATF/Egmont report are often complex, multi-faceted, and can be interrelated. Some also present more apparent indicators of fraud than others, but it can also be seen that a combination of several seemingly lower-risk indicators, when used together, provides a compelling picture of ongoing TBML.
The FATF, in its 2023 updated document on combating money laundering, recommends a raft of measures to combat TBML, including the following:
- Verifying identities, including extending this verification to beneficial owners.
- Ongoing due diligence and transaction monitoring.
- Extensive PEP (Politically exposed persons) checks.
- In the case of crypto-assets, virtual asset service providers must be regulated for AML/CFT.
In general, the FATF recommends using a risk-based approach (RBA) to anti-financial crime and TBML. In terms of implementing this RBA approach, the FATF says this:
“...financial institutions and DNFBPs (Designated Non-Financial Businesses and Professions) should have in place processes to identify, assess, monitor, manage and mitigate money laundering and terrorist financing risks.”
To handle the complex nature of Trade-Based Financial Crimes, and prevent the funding of terrorism and other crimes, as well as to avoid huge fines, financial institutions are turning to intelligent technologies to utilize the FATF TBML risk indicators.
To capture TBML complexity and provide powerful AI-driven analysis of risk indicators, Eastnets has developed a platform called SafeTrade. The platform provides deep insight into the risks associated with trade-based financial crime. Included in this are the following features:
- Dynamic compliance screening that ensures watchlists are kept up-to-date.
- Monitoring of complex trading trails and suspicious trade finance transactions.
- Vessel Tracking involving the related vessels in trade-based financial crime monitoring and screening.
- Trade finance deal components screening, including Letters of credit (SWIFT MT700 series messages), trade finance documents such as bill of lading/ waybills/ airway bills, etc.
In terms of the impact of financial institutions, fines continue to rattle the sector. In H1 of 2021, 80 banks were fined over $2.7 billion for AML and KYC-related violations; the average penalty was around $34 million. By using solutions that are designed for the task of weeding through the complex nature of risk indicators in TBML, an organization can avoid these fines as well as help to stop money laundering.