Banking is one of the most regulated industries in the world. Anyone working in the sector knows all too well the challenge of navigating the sea of regulations. It is fair to say that trade finance and international trade transactions have met rocky waters over the last few recent decades. In 2023, this turbulence continued with banks like Silicon Valley Bank collapsing. Recovery from turbulent times demands steerage by regulations and laws. The result has been the enforcement of a swath of regulations and laws to govern financial transactions and mitigate risk, including Trade-BasedFinancial Crime (TBFC)
Eastnets explores the complex regulatory landscape governing trade finance and international trade transactions. We also offer some best practices for banks to help in compliance with this complex jigsaw of regulations.
The complexity surrounding TBFC
Our connected world has made TBFC a global challenge, with banks sitting at the center. A 2023 crime threat assessment report from Europol has identified TBML as a core methodology in the illicit movement of money. The Illegal movement of money or “Illicit financial flows (IFFs) result in staggering financial losses. As Europol notes on the complex nature of TBFC:
“Criminal networks are increasingly involved in TBFC, a method that exploits foreign trade and transit procedures to move criminal funds using false invoicing and documentation.” “Criminals set up trading structures operating with goods and services across many sectors and jurisdictions.”
The report also explains the nature of TBFC; the multi-stage, non-linear transactions that the financial crime depends on provide the means for obfuscation making detection increasingly tricky.
Banks ealing in trade finance must abide by laws that include anti-money laundering (AML) measures and combatting the financing of terrorism (CFT). However, adhering to these laws within an increasingly sophisticated and complex Finance Crime environment is challenging, to say the least. Regulations are evolving to handle the convoluted nature of international trade transactions that are now digitized and often use instant payment rails to cross borders. All of these factors combine to make TBFC a complicated financial crime to detect and prevent.
Guidelines and regulations for TBFC mitigation
Regulations and guidelines are helping to shape the approach to the criminalization of cross-border transactions. Some examples show the depth of the guidance:
The Financial Action Task Force (FATF): FATF publishes comprehensive guidelines and best practices based on a series of risk typologies and risk indicators. The FATF risk indicators can be used to identify a potential fraudulent transaction. The risk indicators cover the entire ecosystem used by fraudsters to launder money. The report also suggests measures to prevent Trade Based-Money Laundering TBML.
International Chamber of Commerce (ICC) guidelines: The ICC acts as a governing body for inclusive and sustainable trade. ICC advocates for a rules-based trading system. A report from UK ICC has said that “the digitalisation of trade and finance systems is set to revolutionize the fight against trade fraud across the globe.” The ICC report promotes “efficient operations through de-risking trade and implementing digital innovation portfolios.” In terms of anti-TBML, ICC suggests that fraud prevention registry data sources, FCI reporting, and goAML, are used as feeds for anti-money laundering intelligence.
Anti-money laundering (AML) regulations: Various AML rules exist worldwide. Typically, these AML requirements are held within broader laws or regulations. For example, the Bank Secrecy Act (BSA) has AML rules that are used to detect and report suspicious activity. BSA is enforced by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). In turn, these agencies work with various law enforcement agencies, including the Trade Transparency Unit – Customs and Border Protection and the Internal Revenue Service (IRS). These units focus on TBML. The result is a holistic and interwoven approach to TBML, which can be complicated to navigate for banks required to adhere to the regulations.
Regulations and guidelines focus on the mechanisms of TBFC. As noted, these mechanisms are complex and multi-stage. Banks are expected to perform verification checks and transaction monitoring across convoluted transaction chains. Often, the bank will have to file a suspicious activity report (SAR). Maintaining an environment of compliance within the increasingly digitized and fast world of cross-border transactions requires a keen understanding of the best practices available.
Added to the complexities of navigating regulations, banks are also in an unenviable position when it comes to liability and TBFC. As a central pivot of trade transactions, a bank sits at the juncture of a chain of involved parties. Add further to this milieu regulations across jurisdictions and the limited visibility of potentially fraudulent trade documentation, and you have an alignment of planets. Banks must respond with technology to handle this complicated web of interconnected threats.
Best practices to ensure compliance
TBFC threat actors have taken advantage of the digitization of payments and the expansion of international trade. Banks must respond by using fraud intelligence from the regulatory community and AI-powered technologies. Without due diligence, fines for regulatory non-compliance will be issued. An example of this was the £64 million fine issued to HSBC by the FCA for failings in its anti-money laundering processes, including failure to perform robust monitoring and to check the accuracy of data fed into the system.
Best practices to counteract the specter of TBFC must include:
Know your typologies: Use the FATF guidance to develop policies and strategies to combat TBFC. Understanding how fraudsters use trade transactions to obfuscate illicit money movements is essential in determining the next way to counteract money laundering.
Know your customer: It is vital to verify the identity and validity of any entities involved in a transaction, including the buyer, seller, and intermediaries. KYC/CDD checks involve verification and checks against corporate information, financial statements, and other required checks, including sanction screening. The unique aspects of TBFC are best served using real-time capabilities that perform sanction screening on the fly. Real-time reporting from sophisticated solutions like SafeTrade resolves the complex nature of cross-jurisdiction regulations.
Know your reporting requirements: Many banks have been dealt hefty fines for non-compliance in reporting. Reporting must be continuous and easily accessible. Monitoring and reporting are expected requirements of banking compliance programs worldwide. Auditing and reporting are also core parts of threat intelligence, offering knowledge about gaps and where to focus protective measures.
Know when to use powerful tech: Banks involved in trade finance and cross-border payments should use powerful tech to mitigate TBFC by strengthening AML and KYC measures. Technologies that can utilize AI and related tech, such as behavioral analytics, are essential to arming your bank against TBFC threats. Monitoring is a great example. The guidelines and regulations recognize continuous real-time monitoring as being a powerful tech in TBFC prevention and detection. Solutions like SafeTrade can integrate data sources like watchlists, vessel tracking and document digitization to detect and prevent TBFC.
Navigating the evolving and complex world of TBML and the regulations that set out to prevent it is not for the faint-hearted. But not acting is also not an option. TBFC threatens our way of life, the rule of law, and a robust and coherent society. Drug trafficking, migrant smuggling, human and protected species trafficking, and so on, generate billions, even trillions of illicit funds. Banks are where the buck stops in shutting down this heinous crime. Regulations give the banks the framework to act and technology the means to prevent TBFC.
