Enhanced due diligence in trade is essential for organizations to navigate the complexities of international regulations, ensuring full compliance and mitigating potential risks associated with global transactions.
Trade-based transactions, including exports, carry the risk of money laundering and terrorist financing. The risk of money laundering has increased because criminals use trade transactions as a tool to hide or generate illegal funds or to transfer them from one place to another, presenting themselves as reliable importers or exporters of goods or services.
To deal with trade-related ML/TF risks, an organization’s management needs to adopt and implement appropriate trade-based AML measures and controls. One of the controls to mitigate the trade-related ML/TF risks is the performance of enhanced due diligence or EDD measures or detailed scrutiny of the customers and their trade businesses and related activities. Such EDD measures are to be performed before onboarding customers and facilitating them in the trade transactions. Whenever any trade-related red alert is identified, EDD measures need to be performed later.
The Trade-Based Money Laundering Reporting Officer or TBMLRO and the trade account opening team are required to ensure that Enhanced Due Diligence or EDD measures are applied for high-risk category customers since no business relationship of high-risk category shall be entered into without performing an appropriate EDD and obtaining senior management’s approval.
When entering into a business relationship, the trade compliance team, under the supervision of TBMLRO, checks whether the trade customer or the Ultimate Beneficial ownership or UBO of the customer is a Politically Exposed Person or PEP. Suppose the customer or UBO becomes or is found to be a PEP during the business relationship. In that case, the TBMLRO and relevant employees must take additional measures as quickly as possible such as establishing the source of wealth of a UBO who is a PEP.
In cases where it is impossible to prove the source of the wealth, the TBMLRO and relevant employees must be able to demonstrate that it has made sufficient efforts to discover the source.
EDD measures mean obtaining more detailed information for the identification and verification of customers. For all high-risk category customers, including the PEPs, in addition to basic KYC information, the EDD measures are applied where detailed information is asked from the customers, including the source of financing for proper identification and verification of the category of customers.
Enhanced Due Diligence in Trade
The organizations shall do more than simply check whether the customer or other stakeholders appear on the sanctions lists, whether they are creditworthy through the appropriate Credit Registration Agency, whether their identity documents are genuine, and whether the customer appears in institutions’ internal or external warning systems.
Such additional information may relate to the reputation of the customer or the UBO but also of persons with whom they are associated. This includes acquiring and assessing information on business activities, including negative information. As part of enhanced customer due diligence, the institution must also conduct a deeper investigation into the source of the funds.
Risk score-based criteria include the expected number of transactions, the amount involved, the customer profile information, the person’s age, country, etc., to assess the customer category as high. All identified high-risk category customers are to be marked as high-risk customers or clients, and approval is to be obtained from senior management to open their accounts.
The EDD must occur if there is a heightened risk of money laundering and terrorist financing. EDD must always be applied in the following cases:
If the business relationship or transaction by its nature entails a higher risk of money laundering or terrorist financing
If the customer is a resident, established, or has its registered office in a state designated by the European Commission under the Anti-Money Laundering Directive as carrying a higher risk of money laundering or terrorist financing
Trade documents or business activities seem fake or false or suspicious in general
Money laundering/terrorist financing risks being faced or possible money laundering/terrorist financing activity:
Complex structured financing transactions or collateral arrangements with private customers
PEPs or customers conducting transactions involving PEPs
Bank products and services that, by their nature, are susceptible to inappropriate use
Customers with transactions to or from countries that are subject to sanctions and countries that appear on the FATF watch list
Customers with frequent, non-routine, complex treasury and private banking products and services
Non-routine, cross-border payments by non-customers
Correspondent bank accounts with banks in jurisdictions with weak laws to combat money laundering and terrorist financing
The business relationship is conducted in unusual circumstances
Customers that are residents in geographical areas of higher risk
Legal persons or arrangements that are personal asset-holding vehicles
Companies that have nominee shareholders or shares in bearer form
Businesses that are cash-intensive
The ownership structure of the company appears unusual or excessively complex, given the nature of the company’s business
The customer is a third-country national who applies for residence rights or citizenship in the member state in exchange for capital transfers, purchase of property or government bonds, or investment in corporate entities in that member state
Transactions related to oil, arms, precious metals, tobacco products, cultural artifacts, and other items of archaeological, historical, cultural, and religious importance or of rare scientific value, as well as ivory and protected species
Non-face-to-face business relationships or transactions
New products and new business practices, including new delivery mechanisms
Countries subject to sanctions, embargoes, or similar measures issued
Countries providing funding or support for terrorist activities or that have designated terrorist organizations operating within their country
Countries identified by credible sources as having significant levels of corruption or other criminal activity
Final Thoughts
Trade-based transactions are increasingly vulnerable to money laundering and terrorist financing, with malign actors exploiting trade avenues to obscure illicit funds or relocate them. To combat these threats, it’s imperative for organizations to implement rigorous trade-based anti-money laundering (AML) protocols. Central to this approach is the concept of Enhanced Due Diligence (EDD), which mandates a deeper, more meticulous scrutiny of customers and their trade operations, especially before initiating any trade relations.
Crucially, this involves not just checking for sanctions or creditworthiness but delving into the client’s reputation, associations, and the nature of their business, including any negative associations. High-risk entities, such as Politically Exposed Persons (PEPs) or those linked to countries with known financing risks, must undergo even more rigorous checks. In essence, to guard against trade-based financial crimes, organizations need a holistic approach that blends regular monitoring with specialized due diligence for high-risk clients.
