Trade finance compliance is essential to ensure that international trade transactions adhere to regulatory standards, mitigate risks, and prevent money laundering or fraud within financial institutions.
A Trade-Based Money Laundering Officer or TBMLRO is a senior-level financial institution position responsible for ensuring the development and implementation of appropriate processes and controls to manage the risks associated with trade customers and their transactions.
TBMLRO and the trade account opening team ensure that appropriate customer due diligence measures are adopted and applied for all trade customers, including the high-risk category customers. No account of a high-risk category customer is opened without performing the relevant enhanced due diligence or EDD measures and taking approval from senior management for opening the account.
When entering a business relationship, the MLRO checks whether the customer or the customer’s UBO is a 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 proves impossible to establish 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 politically exposed persons or 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.
Trade Finance Compliance
ML/TF Risk Indicators
Some of the ML/TF risk indicators, which necessitate the investigations of trade transactions, are as follows:
Complex structured trades or unclear trading goods involved in the trade transaction;
PEPs or customers from countries or regions that are politically or economically unstable conducting trade transactions;
Trade services that, by their nature or the techniques used, are susceptible to inappropriate use by the trade or export customers;
Export transactions to or from countries that are subject to sanctions, including trade sanctions, free trade zones, offshore centers, tax havens, and countries that appear on the FATF watch list;
Customers with frequent, non-routine, complex trade transactions;
Non-routine, cross-border payments by third parties;
The trading business relationship is conducted in unusual circumstances;
Trade customers, including importers or exporters who are residents in geographical areas of higher risk;
Involvement of legal persons or arrangements that justify the trade transaction despite having clear trade-related regulatory requirements;
Trading companies having doubtful management structures and people;
Cash-intensive trading businesses;
The ownership structure of the company appears unusual or excessively complex given the nature of the company’s business;
The trading customer is a third-country national who applies for residence rights or citizenship in the member state in exchange for capital transfers or the purchase of property;
Trade 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;
Cash / Non-face-to-face trading business relationships or transactions;
New products and new business practices, including new delivery mechanisms and the use of new or developing technologies for both new and pre-existing trading products;
Transactions that lack an economic rationale, such as the trade of goods between countries with no prior trade relationship or the trade of goods that are not in demand in the destination country.
Imports or exports with countries that are subject to sanctions, embargoes, or similar measures issued by, for example, the United Nations;
A significant difference between the price of goods on the invoice and the market price for similar goods or the volume of goods on the invoice and the actual volume of goods being shipped or the quality of goods being shipped and the quality described on the invoice or other documentation.
Trading with people in countries that are known for providing funding or support for terrorist activities or that have designated terrorist organizations operating within their country.
Imports or exports with companies or people in countries identified by credible sources as having significant levels of corruption or other criminal activity.
Final Thoughts
The role of a Trade-Based Money Laundering Officer (TBMLRO) is pivotal in financial institutions to safeguard against illicit financial activities. This senior-level position oversees the establishment and execution of thorough protocols to manage risks tied to trade clients and their transactions. To bolster this, Enhanced Due Diligence (EDD) is stringently applied, especially for high-risk clients, ensuring thorough vetting processes and the ascertainment of sources of wealth, particularly for Politically Exposed Persons (PEPs).
The intricate web of ML/TF risk indicators ranging from convoluted trade structures to the involvement of sanctioned regions or high-risk commodities underscores the complexity of trade-based money laundering. Moreover, anomalies in trading patterns, dubious management structures, or dealing with countries known for corruption or terror activities further elevate the risks. In essence, a TBMLRO’s function is paramount in decoding these sophisticated patterns and ensuring financial transparency, shielding institutions from potential legal and reputational fallouts.
