In our previous blog we made reference to the ICC 2015 Trade Survey wherein it was stated that 18.5% of respondents had indicated an increase in fraud allegations. As we pointed out, banks and traders will need to pay close attention to this trend, with further risk-alleviating actions perhaps required.
This is a subject area that needs to be more fully understood than at any time in the past. Increased regulatory requirements, technological advancements, digitisation, internal operational cost demands and a growing need for risk mitigation all contribute to a complex pressure chain that could threaten business operations.
There is no single definition that is used globally to describe the act of fraud but the following may come close: "Wrongful or criminal deception intended to result in financial or personal gain". Fraudulent trade transactions have existed since trading began many thousands of years ago and all parties to a trade transaction need to be aware of the potential for fraud.
Banks need to introduce processes, procedures and/or guidelines for the identification and internal escalation of fraudulent transactions in order to minimise any potential financial loss. Identifying fraudulent documents often comes down to the experience of a document examiner by questioning the look and feel of the paper, or the content and layout of a document.
However, fraud is just one element of the financial crime issues that can surface in a trade transaction. The International Chamber of Commerce (ICC) Financial Crime Risk and Policy Group describes financial crime as money laundering, the financing of terrorism and weapons proliferation, breaking of sanctions, financial fraud, financial crimes such as tax evasion and other predicative offences related to trade products and services.
Financial crime can have significant negative impact not only on the economy of one or more countries, but also on companies and individuals.
A number of international bodies have been established to combat such crime, with part of its focus to provide tools to help prevent and/or identify suspect transactions.
Interpol define money laundering as any act, or attempted act, to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources. For trade based money laundering, it can be described simply as the misrepresentation of the price, quantity or quality of an import or export.
It is unlikely that trade finance products will be used by money launderers in the placement stage of money laundering, except where funds are used to collateralise the issuance of a bank undertaking. However, they could be used in the layering and integration stages as the enormous volume of trade flows obscure individual transactions and the complexities associated with diverse trade financing arrangements that facilitate the commingling of legitimate and illicit funds.
A bank needs to understand the business of its client and its client's client. There are two reasons for this (1) to prevent money laundering and comply with applicable laws and regulations, and also to preserve the bank's own business principles and integrity; and (2) to serve the client and maximise the bank's business opportunities.
It is essential that banks have anti-money laundering guidelines or programmes in place. Such programmes must be regularly updated to keep abreast of topical issues, be continuously re-tested, and include a clear and transparent referral structure for reporting suspicious transactions. If not, a bank may not only face severe reputational risks, but can also be subject to substantial financial fines.
Understanding clients, the nature of their business, the type of products they require or supply, historical trading patterns, volumes and values of transactions, future initiatives, sources of funding, trading geographies and how all these aspects fit together, helps to create an incisive KYC / CDD strategy.
A more in-depth study of Financial Crime and essential risk mitigation techniques can be found in our training modules for Financial Crime, Fraud and Sanctions at www.tradefinance.training