Financial Crime in Trade Finance - Targeting Issues and Suggesting Solutions

14th November 2014

Presented by Heather Lee

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Cross border flows of illegal money are damaging to emerging economies

The developing world lost US$946.7 billion in illicit outflows in 2011 The capital outflows stem from crime, corruption, tax evasion, and other illicit activity. Trade based money laundering (TBML) provides criminals with an easy way to move illegal money TBML can be closely linked to financial fraud

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Data from Global Financial Integrity Report: http://iff.gfintegrity.org/iff2013/2013report.html

The Financial Conduct Authority (FCA) published a report in July 2013 regarding banks’ control of financial crime risks in trade finance

Their conclusion: “Majority of banks….are not taking adequate measure to mitigate the risk of money laundering and terrorist financing in their trade finance business”

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Trade based money laundering is a serious issue around the world

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“Singapore’s openness as an international transport hub and financial centre exposes it to inherent cross-border ML/TF risks” Monetary Authority of Singapore

“Trade finance is a key component in maintaining a competitive and productive economy” UK Financial Conduct Authority

“TBML focused training is an absolute necessity for the anti-TBML strategy to succeed” Asia Pacific Group on Money Laundering

“A number of Australia’s major trading partners present a high TBML risk” Australian Government Institute of Criminology

Key challenges for banks Increasing regulatory pressure

Relying on staff’s experience and intuition (rather than a consistent, automated approach)

Documenting how and why decisions are made

Inefficient process of checking multiple sources

Inability to screen dual use goods

Poor/no escalation process

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Accuity’s research on Trade Finance has covered a mixture of Tier 1, 2 and 3 banks and industry groups

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Key drivers for Trade Ops departments are time and cost – regulatory compliance tends to be at odds with these key drivers

“Regulation is only going to increase in the financial world and the cost of doing business is going up. The cost of compliance is going up.” Recognised legal counsel

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There is an increased need to conduct due diligence on your customer’s customer

“The challenge is that regulators are telling us that we need to know our customer’s customer. We have no insight into these customers. Our correspondent banks may have other correspondent banks. The due diligence they conduct on correspondent banks is not necessarily specific to trade services only. It is around their onboarding procedures and due diligence processes, looking at corporate structures, public filings etc” Tier 1 international bank

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International Chamber of Commerce Global Survey 2014: Rethinking Trade and Finance

31% of respondents said they were going to “close down correspondent account relationships due to tougher KYC regulations”

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Dual Use Goods continue to cause headaches for banks. “Ball bearings, navigators and switches can be dual use or not. These are challenges. We don’t get enough information about what use they are being put to, so we can’t make a decision…” Tier 1 international bank

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The FCA insists that “Failing to attempt to identify dual use goods in transactions” is bad practice

Example from FCA’s ‘Banks’ Control of Financial Crime Risks in Trade Finance’ report “One bank included within its customer due diligence procedures a section that set out more commonplace goods descriptions that might indicate terrorist financing, for example: ‘centrifuges’, ‘pumps’; and ‘homing devices’.”

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Source: http://trade.ec.europa.eu/doclib/docs/2008/september/tradoc_140595.pdf

Many banks use multiple tools to do the checks they need on a trade

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Shipper Use your compliance department’s watch list screening/lookup tool

Sending Bank

Beneficiary Bank

Buyer/ Consignee

Ship Used for Transport

Port of Loading

Port of Discharge

Use a free worldwide search engine

Manually search against restricted

goods lists

Goods and type of goods

Using many tools equates to a lack of oversight and proof • What if a particular field wasn’t checked? • What proof is there that all fields were checked properly

What if…these checks could all be done from one tool?

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One tool will save you time in manual entry and provide a centralized audit trail

Operational efficiency

48.2% reduction in time taken to conduct checks

(Major European bank)

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We are able to combine payments and compliance data which significantly increases the ability to track sanctioned entities

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OFAC SDN List: • 27 addresses • 0 BICs

Bank Saderat

Accuity’s Enhanced OFAC List:

• 117 more addresses added

• 87 additional BICs added

• 23 unsanctioned locations in Egypt, France, Germany, Greece, Lebanon, Oman, Qatar, Turkmenistan, United Arab Emirates, and United Kingdom

OFAC SDN List: • 259 related entities

Implementation of pervasive sanctions on the Syrian government

Accuity’s Enhanced OFAC List:

• 166 Banks • 84 BICs • 26 Companies

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The only Dual Use and Controlled Goods screening system in the market

E.g. Fluoride to UK no alert. Fluoride to Syria alert) FCA Poor Practice: "Third party data sources are not used where possible to undertake checks on dual-use goods"

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Source: FCA Financial Crime Guide (Amendment No 2) Instrument 2014

Key Messages Our banking customers tell us our solution can reduce risk and operational costs in checking trades against sanctions, PEPs, Vessels, Negative News, Dual Use Goods etc all in one place Using our Trade Finance solution allows you to take a more consistent and accurate approach to all transactions, not just those that are ‘high-risk’

Accuity provides a full audit trail, reporting and workflow for internal audit and regulators to prove checks have taken place Our Professional Services Group will configure the solution to your requirements

If you would like to discuss how our solution applies to your organisation, please contact:

will.davies@accuity.com greg.leech@accuity.com

http://www.accuity.com/compliance/trade-finance-solutions/

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