Economic Sanction Screening in Trade Finance* -...

Economic Sanction Screening in Trade Finance*

Henry Balani, CAMS Head of Innovation

ACAMS Northern California Chapter Meeting

Nov 19th 2015

* Also includes quick update on Iran

Accuity focuses on the needs of banks, financial services and

corporations to ensure efficient payment transactions while

minimizing regulatory compliance risks

Key Takeaways

#AccuityTradeFinance

Here at Accuity, we recognize the increasing challenges Compliance Officers and Trade Finance departments face in screening transactions

Regulators around the world are focusing efforts to enhance guidance around Trade Based Money Laundering (TBML).

Best practices are available to ensure compliance while managing effectiveness of trade finance operations.

Current Regulatory Landscape

Trade-based money laundering (TBML) provides criminals an easy

way to move illegal proceeds typically impacting developing

countries

Source: Global Financial Integrity

From 2003 to 2012, developing countries

lost $6.6 trillion to illicit outflows

#AccuityTradeFinance

Trade-based money laundering is a serious issue around the world

#AccuityTradeFinance

“Anything that can be priced can be mispriced,

and false pricing is done every day, in every

jurisdiction, on a large percentage of import and

export transactions. TBML ‘is the most

commonly used technique for generating and

transferring dirty money—money that breaks

laws in its origin, movement and use’.

Asia Pacific Group on Money Laundering

“Trade finance is a key

component in maintaining a

competitive and productive

economy”

UK Financial Conduct

Authority

Trade-based money laundering is a serious issue around the world

#AccuityTradeFinance

“Singapore’s openness as an international

transport hub and financial center exposes it

to inherent cross-border ML/TF risks”

Monetary Authority of Singapore

“A few years ago American customs

investigators uncovered a scheme in which a

Colombian cartel used proceeds from drug

sales to buy stuffed animals in Los Angeles”

The Economist

#AccuityTradeFinance

Regulators are now looking at TBML as traditional methods of detecting money laundering have been identified

The UK HMT recently published a National Risk Assessment that highlighted TBML as an issue

#AccuityTradeFinance

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#AccuityTradeFinance

Regulators are now looking at TBML as

traditional methods of detecting money

laundering have been identified

The Monetary Authority of Singapore recently issued guidance related to screening trade finance transactions

“As a trading and transportation hub, Singapore is vulnerable to money laundering (“ML”) risks posed by trade finance. Due to its significant volume and value, trade finance transactions are an attractive medium for money launderers to transfer large values across borders. Trade finance can also be exploited for terrorism and proliferation financing (“TF/PF”).”

#AccuityTradeFinance

Regulators are now looking at TBML as

traditional methods of detecting money

laundering have been identified

#AccuityTradeFinance

The recent OFAC enforcement action against a

major European bank highlights trade finance

as a key money laundering concern

“_____and _____ negotiated a

variety of trade finance

instruments on behalf of or that

involved parties subject to U.S.

sanctions on Sudan, Iran, Cuba

and Burma…”

How does TMBL occur?Moving money from the US to Mexico through trade

Exporter Importer

Mexico USAGoods: $ 1 Million

Payments: $ 10 Million

$ 9 Million moved from US to Mexico

Goods are over invoiced

Goods actual value is $ 1 per unitGoods invoiced at $ 10 per unitBoth Exporter and Importer are colluding!

Being fined is bad enough. However, there can be additional repercussions as well.

Identifying Red Flags Best Practices to reduce TBML

There are many sources that highlight best practices in regards to TBML

#AccuityTradeFinance

The customer engages in transactions that are inconsistent with the customer’s business strategy or profile, or make no economic sense*

*BAFT Guidance for Identifying Potentially

Suspicious Activity in Letters of Credit and

Documentary Collections

#AccuityTradeFinanceSources: FATF, FCA, FFIEC, Wolfsberg

e.g. an agricultural

company that starts

dealing in paper products

Customer conducts business in jurisdictions that are at higher risk for money laundering, terrorist financing or other financial crimes

#AccuityTradeFinanceSources: FATF, FCA, FFIEC

Sources: FATF, FCA

The transaction appears to involve the use of front or shell companies for the purpose of hiding the true parties involved

#AccuityTradeFinance

Customer shipping items to, through, or from higher money laundering risk jurisdictions, including countries identified by FATF as ‘non-cooperative jurisdictions’

Sources: FATF, FCA, FFIEC #AccuityTradeFinance

Obvious over or under pricing goodsSources: FATF, FFIEC

#AccuityTradeFinanceSources: FATF, FFIEC

Source: http://www.acfcs.org/trade-based-money-laundering-the-next-frontier/

Real examples of over/under invoicing from/to the USA

Metal Tweezers from Japan

Camshafts from Saudi Arabia

Plastic Buckets from Czech

Radial Truck Tires to UK

Toilet Bowls to Hong Kong

Prefabricated Buildings to Trinidad

#AccuityTradeFinance

$4,896/unit

$15,200/unit

$972/unit

$11.74/unit

$1.75/unit

$1.20/unit

24

Sources: FCA #AccuityTradeFinance

Transactions that involve obvious dual use goods

Dual use goods include a

wide range of goods that are

designed for commercial

applications but can have

military applications or

potentially be used as

precursors or components

of Weapons of Mass

Destruction (WMDs)

Strategic Goods Control, Singapore Customs #AccuityTradeFinance

Case Study

Shipment of graphite from Hong Kong to Dubai

27#AccuityTradeFinance

How many Red Flags are there in this shipment?

28#AccuityTradeFinance

Did you spot 7 or 8?

29#AccuityTradeFinance

Screening the transaction through a single source database highlights all the risky elements in one step

30#AccuityTradeFinance

Let’s also dig down into the possible connections

Al Mataf Shipping

Mataf Star

CKLBCNBJ

Graphite

31#AccuityTradeFinance

32

Mataf Star is a sanctioned entity because of it’s links to Iran

33#AccuityTradeFinance

SCT (aka Sorinet Commercial Trust) is also a sanctioned entity due to links with Iran

34#AccuityTradeFinance

35

Both SCT and Hong Kong Intertrade Company

are linked to the National Iranian Oil Company

#AccuityTradeFinance

36

It looks like both shipper and consignee have the same ultimate beneficial owner

Also, we cannot forget what they are shipping

37

Picture of Pripyat – near

Chernobyl, a graphite moderated

nuclear power plant

#AccuityTradeFinance

Iran nuclear deal implications

Joint Comprehensive Plan of Action

40

Stage Action Date

Finalization Day Conclusion of agreement July 14th 2015

US Congress review Congress votes on agreement

Sep 17th 2015

Adoption Day 90 days after endorsement of JCPOA by UN Security Council

Oct 18th 2015

Implementation Day EU and US lift sanctions following IAEA verification

TBD (Key date when sanctions are lifted)

Transition Day IAEA states all nuclear material in Iran used for peaceful purposes

Oct 19th 2023 (8 years after Adoption Day)

Termination Day JCPOA terminates. All conditions removed.

July 19th 2025 (10 years after Adoption Day)

Lifting of sanctions will be in stages

Total Iranian banks sanctioned 64 29

Sanctioned Banks liftedImplementation Day 13 24

Sanctioned Banks Lifted Transition Day

0 5

Total Iranian Banks that remained sanctioned 51 0

41

Related to sanctioned banks specifically, there is a difference between the OFAC and EU lists

There will be differences between OFAC and EU list of lifted sanction entities causing conflict when dispositioning

OFAC EU

Lists from Annex II Attachment 2 & 3 of the JCPOA