The Monetary Authority of Singapore (MAS) recently renewed its emphasis on money laundering risks in Trade Finance in its latest Guidance Paper on Anti-Money Laundering and Countering the Financing of Terrorism Controls (AML/CFT) in Trade Finance and Correspondent Banking in October 2015.
For the purposes of risk assessment relating to trade finance business, MAS emphasised that due to their vulnerability to ML/TF risks, it is important that banks establish a sufficiently robust and trade-specific process with due diligence checks dependent on the role of the bank and who may be the “instructing party”. The bank’s role and its obligations will differ depending on the instructing party at each stage of the trade finance transaction. For example, for import documentary Letters of Credit (L/C), the instructing party would be the L/C Applicant (also Importer/Buyer) whereas the instructing party for the L/C advising/confirming bank would be the L/C Issuing Bank for export L/Cs.
MAS’ concerns on the money laundering risks posed in trade finance is not new – it was mentioned in the 2013 National Risk Assessment Report that “AML/CFT controls in banks are the most developed, but there is scope for improvement in the areas of trade finance and correspondent banking.” This aspect was also part of the financial crime risks highlighted by other supervisory authorities and organisations such as the Financial Action Task Force, the Asia/Pacific Group on Money Laundering and the Wolfsberg Group.
‘Trade-based money laundering’ has been described as a means to hide illegal movement of funds or value, typically by misrepresenting the price, quality or quantity of goods, or faking the existence of goods and is dependent on collusion between buyer and seller. Examples include:
- Over/under invoicing to misrepresent price of goods
- Short/over shipping to misrepresent the quantity or quality of goods
- “Phantom” shipping where documentation is completely falsified and there is no shipment of goods at all
The regulators’ concerns will only be heightened with more trade following the establishment of the ASEAN Economic Community at the end of 2015 and the conclusion of the Trans-Pacific Partnership (free trade agreement involving 12 member countries of the Asia-Pacific Economic Cooperation). Financial services and other institutions exposed to money laundering risks should take note of this rapidly emerging risk.