handout-trade - Rohan Bedi`s Compliance Home Page

Client Custom-Training
Trade Finance
Dr. Rohan Bedi
Managing Director
Asia Compliance
rohanbedi.com
asiacompliance.org
19 & 20 July 2012
Copyright © 2012, Rohan Bedi. All rights reserved.
HANDOUT
AGENDA
Understanding TBML
Spotting Red Flags/ Suspicious Activity
1st Controls Exercise
AML for Trade Finance Products
Trade ML Investigations
2nd Controls Exercise
Interactive Case Studies (33)
Collusion (15)
Trade Fraud (18)
Source: UNODC
Understanding TBML
THREE WAYS
1. Cheques and wire
transfers
2. Cash smuggling
3. Trade Finance
Trade Finance - Big Picture
1.
Trade finance covers both domestic and international commerce
2.
Trade Finance activities comprise a mix of money transmission conduits, default
undertakings, performance undertakings and the provision of credit facilities
3.
Regulators view Trade Finance as higher risk for ML, TF and potential breaches of
international and national sanctions, including the proliferation of WMD
4.
80% of world trade now on “Open Account” i.e. ‘buy now, pay later’ and is more
like regular payments for a continuing flow of goods rather than specific tran’s
5.
The SWIFT TSU (trade services utility), enables alternative forms of financing (preshipment, post-shipment & reverse factoring) to support open account trade
6.
Only where credit is involved (even for open account transactions**) do banks
have more readily accessible information to support EDD on the trade transaction
7.
LC’s remain essential to emerging market trade & in countries with FEX controls
** Credit for open a/c trans = OD, Revolving LOC. Not enough info on the specifics of the transaction.
Trade Finance - Big Picture (Contd.)
8.
Bank due diligence defined by ICC rules that “Banks deal with documents, and not
with goods, services or performance to which the documents may relate”
9.
Reviews cover both the transaction and the customer. Bank is limited in time by its
obligation to process without “undue delay” with established practices
10.
LC’s can include an issuing bank, an advising bank, negotiating confirming bank or
reimbursing bank. For BCs there may be a remitting, collecting or presenting bank
11.
The assessment of risk and application of appropriate AML controls will also
depend on the role of the FI in any trade transaction (and apportionment)
12.
Role of FI dictates nature & level of info. available and limits effectiveness of a
single FI to devise a rules or scenario or pattern based Tran’s Monitoring system
13.
Volume/value of trade limits ability of any one FI to understand who the ultimate
buyer (or seller) is, or the ultimate end use (especially in complex structures)
OPEN ACCOUNT TRANSACTION FLOW
Risk borne by seller since payment only after possession of the goods
Risk mitigants are an established track record with buyer, mutual dependence,
or alternative structures such as avalisation, export factoring, etc.
Source: hsbc.co.in
LETTER OF CREDIT TRANSACTIONAL FLOW
Source: bocusa.com
Trade Based Money Laundering
TBML is an alternative remittance system that allows illegal organizations the
opportunity to earn, move and store proceeds disguised as legitimate trade.
What is Trade Fraud?
1.
Collusion between importer and exporter is central to TBML
2.
Works through simple trade documentation fraud and manipulation
3.
Misrepresent price, quantity, quality and description to transfer value
4.
Payment for shipment of goods & documentation is a cover for money transfer
5.
Includes a number of complex layers including cash, front companies, currency
exchange, and purchase/shipment of goods with illicit proceeds
6.
Helps to perpetrate tax evasion, capital flight, money laundering (incl. fraud),
corruption, sanctions violations, underground banking and terrorist financing
Factors Assisting TBML
Massive volume/value of global trade taking place daily/
annually ($15.7 trillion in global merchandise exports in 2008)
Financial Diversity
Diversity of financial controls across countries
Diverse financial arrangements made between governments, and
Innumerable different types of financial deals found in international
commerce (e.g. in FEX and trade finance)
Co-mingling of legal and illicit funds and trade items
Focus on other methods of moving money has led to more trade laundering
Low risk of detection - ‘Factory processing’ approach to trade finance in banks
Limited government understanding/resources to detect suspect transactions
At a macro level, besides pricing, abnormal trade weights are a key indicator.
Ultimately international cooperation including sharing of trade data and
analysis (by TTU’s), is critical to identify glaring anomalies.
Black Market Peso Exchange (BMPE)
Basic schemes - misrepresenting price, quantity, quality, & description
Complex schemes include the Colombian BMPE:
– Developed as a result of currency exchange control in Colombia
– Based on the hawala-type barter system. Goods move and money
stays
– Colombian cartels sell drug-related, US-based currency to peso
exchangers in Colombia
– Currency placed into US bank a/c’s
– Exchangers sell monetary instruments drawn on bank a/c’s to
Colombian importers
– Colombian importers purchase foreign goods
– Goods are smuggled into Colombia; OR
– Variations of this scheme include Trade transactions through banks
– Collusion not needed
Black Market Peso Exchange (BMPE)
(Contd.)
BMPE additionally uses:
– Bulk cash smuggling (incl. NI) cross-border
– Placed via individual or cash-intensive businesses
– Wired back to the US and others (incl. FTZ’s in Asia - HK, CN, KR, TW)
– As payments for int’l trade goods/services
Similar narcotics-driven systems are purchasing goods in Dubai, China, and Europe
TBML Methods
Over & Under-invoicing
Over-invoicing – seller gains excess value
Under-invoicing – buyer gains excess value
Move money out: Import at overvalued prices or export at undervalued prices
Move money in: Import at undervalued prices or export at overvalued prices
Multiple or Double invoicing
Issues more than one invoice for same goods
Uses it to justify receipt of multiple payments
Harder to detect if colluding parties use more than one FI for payments/ trans
TBML Methods (Contd.)
Short and Over-shipping
Short Shipping – seller ships less than invoiced quantity/ quality – effect is
similar to over invoicing
Over shipping – seller ships more than invoiced quantity/quality – effect is
similar to under invoicing
False Invoicing - Omitting information on type of goods from the relevant
documentation or deliberately disguising or falsifying it
Phantom Shipping –no goods are shipped & all documentation is completely
falsified
OVER-INVOICED IMPORTS
Move $1,000,000 from US to Foreign Firm
Through US Import at High Price
1.
2.
3.
US Firm has $1 million to move to Foreign Firm
Foreign Firm buys 10,000 pencils at 10 cents each ($1,000) locally
Foreign Firm sells 10,000 pencils to US Firm at $100 each
Import 1,000 pencils
US
Firm
4.
$1,000,000
Foreign
Firm
US Firm pays $1,000,000 to Foreign Firm
[Source: ECI Oct 2008 presentation]
UNDER-INVOICED EXPORTS
Move $1,000,000 from US to Foreign Firm
Through US Export at Low Price
1.
2.
3.
US Firm has $1 million to move to Foreign Firm
US Firm buys 200 gold watches at $5,000 each (pay $1,000,000)
Sell/Export 200 watches to Foreign Firm at $5 each
Export 200 gold watches
US
Firm
4.
$1,000
Foreign
Firm
The Foreign Firm: Sells 200 gold watches at $5,000 each = $1,000,000
[Source: ECI Oct 2008 presentation]
Over-Invoiced Exports & Credit Fraud
Other companies
owned by Importer
7) Wire transfer
after splitting
proceeds e.g.
US$1.6M
1) Shipment of low
value, e.g. US$ 100,000
Exporter Co. UK
2) Falsified
documents
for higher
value e.g.
US$ 2M
Importer Co. UAE
4) Falsified
documents
6) Payment of
US$2M
Exporter’s Bank UK
(advising bank)
5) Payment of higher value
$2M (against LC) upon
receipt of falsified
documents
Importer’s Bank UAE
(issuing bank)
3) Falsified documents
Multiple or Double Invoicing
Duplicate invoices are created for a single trade transaction
By invoicing the same goods more than once, multiple payments for the same
shipment of goods can be justified
The payments are further disguised by using different financial institutions
[Source: Homeland Security Presentation, 2011]
[Source: Homeland Security Presentation, 2011]
[Source: Homeland Security Presentation, 2011]
Please Refer To These Resources
“The Wolfsberg Trade Finance Principles (2011)”
FFIEC BSA/AML Examination Manual – “Trade Finance Activities—Overview”
FINCEN Advisory – “Advisory to Financial Institutions on Filing Suspicious Activity
Reports regarding Trade-Based Money Laundering”, Feb 2010
FATF – “Best Practices on Trade Based Money Laundering”, June 2008
FATF – “Trade Based Money Laundering”, June 2006
Epublications.uef.fi - “Approaches to Resolving the International Documentary
Letters of Credit Fraud Issue”, Feb 2011 - Chapter 5 “L/C Fraud Risk
Management”, Pg 217 onwards
ICC “Guidance Paper on the Use of Sanction Clauses for Trade Related Products
(e.g. LC’s, Documentary Collections and Guarantees) subject to ICC Rules”, Mar
2010
Spotting Red Flags/
Suspicious Activity
1st CONTROLS EXERCISE
As I discuss best practices please make a list of
things that Client can enhance
At the end of the module we will split you into
4 groups to come out with new controls
We will document what these controls are
The compliance head will take charge to
implement the controls considered necessary
Fake Trade Documentation
Easy to make BL, invoices, etc., with a good PC, software and printer
Trade documents have few in-built security measures, but are
complex in nature
Trading Companies
Used as Hawala’s to transfer proceeds of crime/ TF e.g. a F&B outlet
Facilitate trans-shipment of military weapons, nuclear proliferation
/WMD commodities
PEP accounts including
companies owned by
PEP’s are higher-risk and
trade transactions
should be subject to
enhanced scrutiny…
Free Trade Zones
1.
Typically, administrative/oversight
procedures are reduced or eliminated
2.
Potential vulnerabilities could include:
–
Weaker customs controls – trade
fraud, TBML, tax evasion (VAT C.)
–
Weaker AML controls around
company formation
–
Goods purchased in cash and no
CDD on such clients
–
Exposure to bulk cash smuggling
–
Opacity of transhipment increases
origin ambiguity
[Source: FATF Report]
Transshipment, FTZ’s
and origin identification
Source: Journal of ML Control, Vol. 14, 2011, Iss:1
RED FLAGS
Business
1.
The type of items being shipped is not in line with the exporter or importer’s
regular business activities, e.g., a manufacturer of toys exporting IT equipment
2.
The size of shipment appears inconsistent with the scale of the exporter or
importer’s regular business activities. E.g. a third of the turnover
3.
Customers conducting business in high-risk jurisdictions
4.
Customers in high-risk activities, including those subject to export/import
restrictions (e.g., weapons/nuclear, chemicals, metals, gems, ore and crude oil)
5.
Goods do not comply with applicable import or export regulations
6.
Negative news on parties
Transaction Structure
1.
Appears unnecessarily complex to obscure the transaction's true nature e.g. use
of intermediaries – multiple parties and transfers of ownership
2.
Involves the receipt of cash (or other payments) from third party entities that
have no apparent connection with the transaction
3.
Involve third parties highlighted during screening as unacceptable high-risk
4.
A transaction that involves front (or shell) companies
Transaction Structure (Contd.)
5.
LC’s are amended significantly without reasonable justification; or that include
changes to the beneficiary or location of payment; or frequently extended LC’s
6.
LC’s are routinely cancelled or untilised
7.
“High risk" for ML goods e.g. valuation problems or high value (e.g. electronics,
gems), high turnover consumer goods, especially if shipped to FTZ’s
8.
Carousel transactions: repeated import & export of the same high-value goods
9.
A customer’s inability to produce appropriate doc’s (e.g., invoices)
10. Method of payment inconsistent with risks e.g. advance payment for a new
supplier in a high-risk country. Or applicant documentation controls payment
11. Connected Applicant/beneficiary (e.g. beneficial ownership, signers, shell co’s)
Shipping
1.
Shipping that uses a small NVOC with the potential for collusion
2.
Shipped via high-risk or transshipment jurisdictions or unconnected subsidiaries
3.
Shipment by firms/individuals from foreign countries other than ct’y of exporter
4.
A shipment that does not make economic sense (e.g., the use of a 40-foot
container to transport a small amount of relatively low-value goods)
Documentation
1.
Obvious over- or under-pricing of goods and services relative to fair market value.
E.g., gold jewelry at US$500 an ounce when market is US$950 per ounce
2.
Multiple or Double-invoicing
3.
Obvious misrepresentation of quantity or type of goods imported or exported
4.
Packaging inconsistent with commodity or shipping method
5.
Difficultly determining the ultimate consignee (recipient) i.e. via agent
6.
Shipment locations or description of goods that are not consistent with LC
7.
Shows a higher/lower value or cost than declared to customs or paid by importer
8.
Significant discrepancies between the descriptions of the goods on BL, invoice, or
other documents (i.e., certificate of origin, packing list, etc.)
9.
Significant discrepancies between the actual goods shipped and the descriptions of
the goods on the BL and/or invoice (can only know through inspections)**
10. Common red flags for LC fraud including incorrect use of banking terms, spelling
mistakes, and errors in grammar and composition
11. Unusual trigger point for LC payments e.g. before goods are shipped without doc’s
** FATF 2006 Report
Waivers
1.
Discrepancies waived – advance waivers, absence of transport docs, overdrawn LC
Transactions on Accounts
1.
Foreign negotiable instrument placements/ payments for goods/services, or funds
transfers from BMPE jurisdictions or payments to FTZ’s
2.
Amount of fund transfers not consistent with the business
3.
Transactions from unrelated parties in high-risk jurisdictions
Trading Companies
1.
Payment details inconsistent with trading companies purported business
2.
Originators and recipients of wires have ties to high-risk countries
3.
Wires sent to manufactures of export controlled commodities
4.
Owner of the trading company is person from sanctioned country
5.
Incoming wires deposited into personal checking accounts are in even amounts
6.
Determine if any previous investigations on recipients/transmitters of wires
Source: Last 4 slides – US Regulatory Guidance, FATF
LC - Red Flag Terms
ASWP (Any Safe World Port)
‘Top’, ‘Prime Bank’ or ‘Prime World Bank’
‘A’ grade (e.g. sugar)
‘Good clean unencumbered cleared funds of noncriminal origin’,
ICC provision of ‘non-circumventure & nondisclosure’),
‘Irrevocable, divisible, assignable, transferable,
fractionable, revolving, confirmed L/C. Payable
100% at sight.’ etc….)
Zero coupon L/C
Discounting L/Cs
Due in 1,5 or 10 years and 1 day
Foreign bank advice
HYIP
Source: Citi Presentation Oct 2010
ICD – International Certificate of Deposit
IBPO – Irrevocable Bank Purchase Order
ICPO – Irrevocable Corporate/Confirmed Purchase
Order
KTT – key tested telex
Market to buy or sell (i.e. discount) L/Cs
Proof of Funds
Proof of Product
‘R,W & A’ (Ready, Willing & Able)
2% Performance Bond
Soft Probe
ICC Promissory Notes
ICC, or London Short Form, 3039/3034 format for
L/Cs or guarantees
CUSIP (not relevant to L/Cs)
The Insider Connection
"A 2009 survey conducted by the Association
of Certified Fraud Examiners, found that U.S.
organizations lose 7 percent of their annual
revenue to fraud. Based on the 2008 GDP, this
is approximately $994 billion in fraud losses.
And employees accounted for 48 percent of
those cases." - CNBC
Red Flags of Insider Fraud
Some warning signs:
Wheeler and Dealer
Domineering/Controlling
Don’t like people reviewing their work
Strong Desire for Personal Gain
Have a “Beat the System Attitude”
Live Beyond Their Means
Close relationship with customers or vendors
Unable to Relax
Often have a “too good to be true” work performance
Don’t take vacation or sick time or only take leave in small amounts.
Often work excessive overtime
Outwardly, appear to be very trustworthy
Often display some sort of drastic change in personality or behavior
Source: The Certified Accountant, 1st Quarter 2009 - Issue #37
Sanctions Controls
Sanctions controls need to cover both the financial sanctions (lists) and the trade based
sanctions (e.g. embargoes) – UN, national and regional
Usage of sanctions clauses frowned upon by ICC – see guidance in References. ICC would
rather that banks deal with this issue as part of their risk controls
Hence, AML controls considered relevant for complying with sanctions and NPWMD
Sanctions and terrorist lists may affect:
–
–
–
–
–
Directly, any party as a named target
Countries in which the importers and exporters are located/ where their banks are located
The goods involved
Country where goods shipped from, any disclosed transhipment and destination points
Names appearing in the LC
Open account transactions (80%)- normally only name screening can done
Dual use technology difficult to identify by LC, Gtee/SBLC checkers, or the wording used
Countries which are technology producers or are “diversion risk” countries used for
transit/re-export may not appear on any warning lists
Extra-territorial effect of US sanctions
1st CONTROLS EXERCISE
Now I will split you into 4 groups to come out
with new controls
Please discuss amongst your groups. You have
7 minutes for this.
Choose one person to speak on your behalf
Compliance head - please take charge to
implement the controls considered necessary
Client NEW TBML CONTROLS
1.
..
AML for Trade Finance
Products
Source: The Wolfsberg Trade Finance Principles (2011)
2nd CONTROLS EXERCISE
As I discuss best practices please make a list of
things that Client can enhance
After the Trade ML Investigations module we
will split you into 4 groups to come out with
new controls
We will document what these controls are
The compliance head will take charge to
implement the controls considered necessary
PRODUCTS
Documentary Letters of Credit (LC’s)
Documentary Bills for Collection (BCs)
Guarantees (Gtees) and Standby Letter of Credit (SBLC)
Open Account Transactions
Forfaiting
Documentary Letters of Credit
Controls fall into 4 categories:
1.
Due Diligence – on customer & risk-based on others
Pre-Transaction
2.
Reviewing (not automated) relevant info. on relevant parties, doc’s
presented and instructions received
3.
Screening – usually automated process to check against terrorist lists
Completed/In-Progress Transaction
4.
Monitoring – for unusual/suspicious features
–
–
Impossible to introduce standard patterning techniques for account/
transaction monitoring.
Range of variations present even in normal trading patterns
DUE DILIGENCE OVERVIEW
Wolfsberg AML Principles for
Correspondent Banking &
Bankers Almanac Repository
DUE DILIGENCE – BANK A
Bank A – DD on X
EDD – based on risk-categories or where DD raises issues e.g. third party middlemen or
traders
DUE DILIGENCE – BANK B
REVIEWING ACTIVITY
REVIEW, MONITORING, LIMITATIONS – BANK A
Bank A Review Activities
Stage 1 – Reviewing LC application – On Seller “Y” - sanctions and terrorist checks,
country exposure, goods, the seller (suitable counterparty)
Stage 2 – Reviewing documents presented under the LC – local legal requirements,
screening against lists (Bank B & Y), compliance with information on LC, lapse of
time (e.g. further sanctions/ regulations checks)
Stage 3 – Making the payment – screen names including all banks
Bank A Monitoring Opportunities
Normal monitoring of Party X’s account and transactions
Party X’s activity from BAU trade processing
Limitations of Bank A
Rely on initial due diligence rather than additional assurances for new transactions
REVIEW, MONITORING, LIMITATIONS – BANK B
Bank B Review Activities
3 Stages similar to Bank A but focused on Party X and Bank A
Plus to watch for any unusual payment instructions by Party Y
Bank B Monitoring Opportunities
Same as Bank A but focused on Party Y
Plus monitoring correspondent Bank A activity
Limitations of Bank B
Limited time to act upon instructions
May not have a preexisting relationship with Bank A, or Party Y – need to apply a
risk based approach which may be limited to sanctions or terrorist checks
MONITORING OF RISK INDICATORS
MONITORING OF RISK INDICATORS
(Contd.)
Documentary Bills for Collection
Unlike LC’s, for BC’s banks do not incur independent undertakings
The terms of the BC simply set out the basis on which the seller’s documents will
be passed to buyer
These terms do not set out the information which is required to appear in the
seller’s documents nor the underlying transportation terms involved
A banks position with regards to checking documents is therefore fundamentally
different to the position with LC’s (and with Gtees/SBLC’s)
A detailed examination of documents attached to a BC is consequently unlikely to
be productive due to the absence of any specified T&C against which to check
Transactions are fragmented involving a number of parties. Hence it is rate for any
one bank to have the opportunity to review an overall trade financing process
With regards to over or under invoicing (and other misrepresentation of value),
banks are not required to check the underlying documents presented with BC’s
DUE DILIGENCE OVERVIEW
REVIEWING ACTIVITY
MONITORING OF RISK INDICATORS
SUMMARY CONTROLS
**
** Appropriate Due Diligence =
Identification, verification
screening & KYC i.e., normal DD
while opening an account
NOTE: Because of differences
with regards to checking
documents and the financial
responsibility, DD in the LC
process is = EDD in the BC
process. See Wolfsberg Principles
2011
Guarantees and SBLCs
SBLC and Gtees are different from LC’s – LC’s are a performance-related payment
instrument whereas the former makes payment for non-performance
E.g. buyer for sellers failure to deliver goods/ services or to seller when buyer fails
to make regular payment
Not designed to facilitate payment but only to provide a security for a
compensation payment if failure to perform per specified criteria
SBLC – simple demand for payment along with a statement of default is sufficient;
Gtees – simple demand with a statement of the nature of the default or claim
Gtees and SBLC’s for trade – performance bonds, advance payment guarantees,
tender bonds, bid bonds
Many SBLC/Gtees are not related to Trade Finance (e.g. support bond issue)
Risk control framework for Gtees and SBLC is similar to LC’s
DUE DILIGENCE OVERVIEW
REVIEWING ACTIVITY
MONITORING OF RISK INDICATORS
CONTROLS
Bank A
Controls similar to LC’s
Bank B
Controls similar to LC’s
Open Account Trade Transactions
Based on mutual trust – bank payment financing or performance risk mitigation not
needed - finance from their cash-flow
Least expensive way for trade-related payments
Banks only facilitate payments or indirectly through OD facilities or revolving lines of
credit but don’t have enough information on the specifics of the transaction
Bank will not be able to automatically differentiate open account payment from other
clean payments
Banks don’t review trade documentation unless their normal monitoring requires
them to ask for this e.g. payments from high-risk countries
Banks offering proprietory open account facilitation mechanisms may have greater
insight up to complete visibility of trade documents and transaction flows
– Purchase order management capabilities, invoice discounting services, payment preparation
and deliver suites
– Adopt a risk-based approach to determine appropriate screening and monitoring systems
If the seller or buyer is the customer of the banks correspondent then again the bank
does not necessarily have any general knowledge about their expected behaviour
Forfaiting
Method of export trade financing, especially when dealing in capital goods (which
have long payment periods) or with high risk countries
180 days to 10 years financing
Forfaiter advances cash to exporter against invoices or promissory notes guaranteed
by the importer's bank (by sight/deferred-payment LC or guarantee/ SBLC)
The amount advanced is always 'without recourse' to the exporter, and is less than
the invoice or note amount as it is discounted by the bank
The discount rates depends on the terms of the invoice/note and the level of the
associated risk
Forfaiter has recourse to exporter only when there is a fraud or court injunction
Main risk is of the counterparty bank who should not default if importer defaults
Wolfsberg AML Principles for Correspondent Banking
Correspondent Banking Clients presenting greater risk should be subjected to a
higher level of due diligence
The Principles outline risk indicators and provide guidance on the due diligence
process
Consider the risk indicators below:
Banks Domicile
Banks Ownership and Management Structures
Banks Business and Customer Base
Trade ML
Investigations
General Points
1.
2.
3.
4.
5.
6.
7.
8.
Investigative role involves much more than just documentary review
Knowledge of the nature of the company’s business & scale is required
Knowledge of the customers expected transactions activity is required
Documentation review - cover compliance with terms of LC & red flags
for unusual activity
Banker may have limited information in open account transactions
Some red flags need visual check on goods by inspections prior to
payment
Fake documentation “shadows” actual shippers, shipping, containers,
and goods
Making the “right enquiries” from the “right people” is key – see case
studies
General Points (Contd.)
9.
10.
11.
12.
13.
14.
15.
16.
Pricing checks are key, and if not obvious then these are also difficult to
do
Frequent counter-parties are almost as good as client for KYC purposes
Don’t rule out identity theft for new business/that existing clients can
be controlled
Don’t rule out the possibility of an insider hand – good to trust, better
to verify!
Review high value or unusual transactions over a threshold by 2
experienced TF managers (FATF)
Reviews may involve using help from external sources such as ICC IMB
& FIB
Where STR filed, don’t need to stop trade/ discontinue processing
(required in some cty’s)
Stopping the trade needed to avoid a potential violation of sanctions/TF
laws
Learnings from Trade Fraud Cases
1.
Trade fraud controls and investigations must consider the possibility of
fake identities
2.
Most aspects of the BL can be correct albeit one key aspect may be false
e.g. shipper, container, shipping dates and even cargo on board; albeit
cargo’s ownership may be fake
3.
Significantly low prices can be an indication of fraud intended by the
exporter
4.
Usage of smaller NVOCC can highlight risk. Even medium ones
sometimes have poor controls
5.
Reviews should cover letterheads, stamps and or seals of approval, as
well as the endorsement signatures of senior management personnel
6.
Incorrect use of banking terms, spelling mistakes, and errors in grammar
and composition
7.
Special care in trade in pharmaceutical products and/or their
constituents. Check for alterations to certificate of authenticity and
standing of exporter
8.
Special care for high-demand, high-risk commodities and in times of
economic uncertainty – market crisis/ credit crunch e.g. revolving LC’s,
guarantees
Learnings from Trade Fraud Cases (Contd.)
9.
10.
11.
12.
13.
14.
15.
16.
17.
Country risk is important especially where goods are originated from
e.g. Indonesia
Intermediaries/other means to hide ultimate end use or ultimate
application/use or product
Care - middlemen or traders using back to back or transferable LC’s to
conclude offshore deals
Watch out for LC’s on a Deferred Payment Basis
Watch out for trade transactions involving advance fee’s
Shell companies may be used to facilitate transactions
Intermediary may be far away from country of origin of goods i.e.,
difficult to verify goods, OR may be victims
Both timber and diamond trade should have relevant certifications for
exports
If the bank is from an unreliable center, it may be issuing worthless LC’s
and Guarantees
Beating Trade documentation falsification for AML
For higher-risk transactions/clients or as a “packaged solution” e.g. for Jewelers:
1.
Insist on using bank approved independent inspectors for the trade process (?)
2.
With above buyer should choose to use time drafts (usance drafts) instead of
sight drafts (payable when presented) to buy time for inspection
3.
Requesting documentation based on the information contained in import and
export documents submitted to Customs and take copies of these. Anomalies:
–
Shipping documentation
–
Obvious under- or over-invoicing
–
Government licenses (when required), or
–
Discrepancies in the description of goods on various documents
4.
Checking legitimacy/ standing of shipping carrier issuing BL – large international
carriers/ freight forwarder or a small NVOCC who the seller can collude with
5.
Requiring carrier to send BL to paying bank rather than to the seller
6.
Contacting other bank/ investigate credibility of buyer/seller especially if a
trading company
Using services such as ICC’s Financial Investigation Bureau (FIB) for
comprehensive background checks, for example
NVOCC = Non-Vessel Owning Common Carriers
Beating Trade documentation falsification for AML (Contd.)
7. Checking credibility of LC issuing bank (bank may issue LC based on fraudulent
financial history or some form of collusion)/ counterfeit LC
8. Imposing obligation on paying bank to undertake investigation into the validity,
genuineness, or accuracy of the documents before paying out under a L/C (?)
9. Independent investigations to verify whether some key documents such as BL are
authentic by calling the issuer to check the authenticity:
I. Legally tape telecon with carrier. Get carriers phone number independently
II. Can also check other custom documents with customs
10. Alternatively, using the services of creditability investigation companies/services:
I. E.g. ICC International Maritime Bureau (IMB) for trade finance documentation
(Bills of Lading, Seaway Bills, Airway Bills, CMR and FCR) authentication
II. E.g. Thomson Reuters Accelus to screen a vessel’s IMO number, other
information against global sanction and enforcement data
III. E.g. Thompson Reuters Iran Economic Interest (IEI) solution for screening
11. Using Bolero services to automate the LC/ Guarantee lifecycle for both Importers
and Exporters and their banks.
Needs all parties (incl carrier and cargo insurer) to participate
Trade Pricing
Most products not traded on public markets and price is difficult to get
Specific terms make it difficult to assess e.g. volume discounting, quality
International Price Profiling System (IPPS) helps albeit it has US Centric
data
Otherwise Google and industry enquiries
Trade pricing checks on unusual transactions or where obviously off
market prices
Other Verifications
For diamonds (Kimberly) and timber (FSC) trade
2nd CONTROLS EXERCISE
Now I will split you into 4 groups to come out
with new controls on trade products and
investigations
Please discuss amongst your groups. You have
7 minutes for this.
Choose one person to speak on your behalf
Compliance head - please take charge to
implement the controls considered necessary
Client NEW PRODUCT/
INVESTIGATION CONTROLS
1.
..
Interactive Case Studies
- Collusion (15)
Wachovia Corporation
2010 - Banking giant Wachovia Corp. will pay $160 million to settle a federal investigation
into laundering of illegal drug profits through Mexican exchange houses
Numerous red flags were missed over a three-year period. Billions of dollars in wire transfers,
bulk cash shipments and other transactions from the Mexican exchanges
Suspicious transactions included multiple round-number wire transfers on the same day for a
single account; deposits of traveler's checks with sequential numbers that contain unusual
markings; and bulk cash transfers up to 50% larger than customers expected transactions
Sunrider Corporation Case, 1994
A US herbal product company guilty to tax fraud and customs fraud
Tei-Fu Chen, 49 – 2 yrs jail; his wife, Oi-Lin Chen, 46 - 2 years probation
Paid $93 million in back taxes, interest and penalties to the IRS
Investigation triggered in 1992 based on their "Prior Disclosure" to US Customs
STEPPING OVER A DIME TO PICK UP A DOLLAR
"Prior Disclosure" claimed imports from 1986-90 undervalued. Paid $2.3M in duties
Disclosure was fraudulent and monies paid to avoid paying far greater amounts in IT
“Double invoicing“. Fake invoices from 2 HK shell co’s inflated imports by 50-900%
Fraudulent tax deductions for costs, understating profits and evading IT
Avoided paying tax on more than $126M of taxable income evading $39M in IT
Laundered nearly $90M dollars in profits through several Hong Kong bank accounts
Returned assets to the US in the form of real estate, Chinese antiques and artifacts,
and used for construction of Sunrider facilities
What controls could the HK banks have had?
SHAKLEE AHMED CASE
Over Invoicing
Income tax fraud in the US
20% higher VAT rebate on overvalued exports in Pakistan
Source: US ICE Presentation
Operation Golden Door- BMPE
US Company – duty-free toys imported from China into Colombia
Payments - Narcotics proceeds dropped off or deposited directly into company bank a/c’s
Angel Toy’s employees instructed not to accept deposits of more than $10,000- structuring
Criminal forfeiture indictment of $8.6 million, which is amount laundered from 2005-09
Soybean Exports – Never Shipped
Source: FATF, 2006
Scrap Metal Exports – False Weights
Source: FATF, 2006
Laundering to Get Genuine Documentation
Source: FATF, 2006
Drugs and Gold Exports
• The re-exported gold is accurately reported to US Customs as “gold bullion”, but
falsely described to Colombian Customs as “manufactured gold products” in order to
claim export credits.
Source: FATF, 2006
Drugs and Grain Exports with LC’s
• In this case, the Colombian importer also made use of the two types of payments to
try to defraud the Colombian Government of import duties by only declaring the 70
Source: FATF, 2006
percent of the cost of the shipment covered by the letter of credit.
Comingling Of Illicit Funds With Legitimate Business Funds
• The diamond company was subsequently the subject of an investigation
into the trade in illegal “blood diamonds”
Source: FATF, 2006
Re-Invoicing
Source: FATF, 2006
Counterfeit Goods Imports using LC’s
Source: FATF, 2006
Avoiding Smurfing Risk through Smuggling Cash & Trade
Suspicions raised because forged documents used to export goods
and the organisation never applied for a VAT rebate.
Source: FATF, 2006
Cash Smuggling and Over-Invoiced Cough Syrup
Source: FATF, 2006
•The weight and other physical characteristics of the shipment was unchanged, however,
the process of dilution was used to reduce its value from US$40 a litre to US$1 a litre.
Using Performance Bond’s
Co A signs contract to purchase aluminum metal from Indian exporter Co H
Son controls Company A, father controls Company H
Company A extends a US$5 million advance to Company H to be repaid by the
receipt of aluminium ingots from the exporter at a future date
Company H's obligations backed by a performance bond from Bank H
Company A borrows US$5M from Bank Y and assigns the bond to them
Company H reneged on its obligations
Company A repays the US$5M to Bank Y and took back the performance bond
Company A then claimed a similar amount from Bank H
Customs and tax inspectors in India notice discrepancies between goods described
in BL and the underlying goods in certain shipments
Suspect that Company H has evaded payment of customs duties
Under duress, father confesses and implicates Company A/ his son
Bank H successful in proving the intent of fraud and never pays claim
What controls could Bank H have had?
Interactive Case Studies
- Trade Fraud (18)
TRIANGLE OF FRAUD
The reasons behind every fraud include:
1.
Pressure – certain circumstances that make the fraudster do what they do
2.
Opportunity – this could be in weak controls in banks and regulatory firms
3.
Rationalization – These include, “I’ll pay the money back”, “They will
never miss the funds”, “They don’t pay me enough”, “They deserve this”
USING STOLEN IDENTIES OF IMPORTERS
Stolen Identities of Legitimate Importers
US uncovered scheme to smuggle counterfeit goods from China into the US
Utilized containers falsely associated with legitimate importers
Used an unwitting customs broker, they stole identities of legitimate corporations
to import counterfeit goods to evade detection at the Port
In total they imported, or attempted to import, more than 135 containers of
counterfeit goods into the US
Many of the containers of goods held millions of dollars in merchandise; together
they had an estimated retail value of more than $300 million
They also engaged in laundering of proceeds of narcotics and illegal gambling
activity through banks in China, US, & elsewhere
As of April 2012, 26 individuals associated with this investigation have been
arrested and more than $3 million in proceeds have been recovered
What’s the learning for banks from this case?
Source: ICC IMB
FAKE HIGH-QUALITY BILL OF LADING
Bogus Scrap Shipments, June 2011
Shipments of Heavy Melting Scrap (HMS) which did not take place at all
Documents represented containerised cargoes shipped, by an Austrian
beneficiary, from a northern Italian port to various ports in Asia
Nominated vessels were at the port at the stated time of loading and the
containers as per B/L are in existence, the said cargoes were not loaded
Source: ICC IMB
All the transactions included BL’s issued by same NVOCC
NVOCC website that offered an ‘Automated Tracking System’, which allows users to
enter shipment details for email confirmation on shipment
The verified information directly contradicted that provided by the NVOCC
Documents included inspection certificate issued by a UK-firm registered a month ago
with a similar name and logo to that of an established firm
Scheme designed to deceive those without specific shipping or trade knowledge
IMB: Stringent due diligence checks on all parties involved in any major
transaction needed, even on parties with established trading records
IMB: All details of the shipment on documents need independent verification
ADVANCED FEE FRAUD
Nigerian oil scams, Jan 2012
Fraudulent sale of Nigerian oil – discount/advance fee
Victim not well-versed in commodity trading. Tempted by low price & documents
Innocent shipping vessels get caught up. Fraudsters are small co’s in Nigeria/ Ghana
Fake documents – poor quality/good quality. Doc’s show the ownership of cargo
carried on board vessels
A German buyer case involved good documentation confirming that the Nigerian
National Petroleum Company (NNPC) had indeed supplied the seller with the goods
Details of the cargo match a genuine shipment
However, nothing more than an advance-fee fraud
NNPC has select clientele who normally sell to other established companies
Fraudsters tell victims to contact vessels and verify that the cargo is on board
Verification of cargo a vessel is carrying is relatively easy although confirming
ownership of cargo is more problematic as documentation is fake
What are the lessons for bankers?
Source: ICC IMB
NVOCC RISKS
Misuse of NVOCC Bills of Lading, Aug 2010
Number of fraudulent shipments originating in India for containerised cargoes of
garments & footware from Indian ports
Convincing shipping documents issued by a well known Non-Vessel Owning
Common Carrier (NVOCC)
Verification from the physical carriers and port authorities
Nominated vessels called regularly at the ports of loading, but they were not
at the ports on the specified dates
Furthermore, the container numbers on the BL were containers at different
ports around the world on the dates on the B/L with different consignments
Documents are very convincing, as they feature genuine vessels that call at the
named ports and use containers that are in circulation
NVOCC respected, albeit it regularly gave blank BL to its customers for them to
complete in at their will. Caused misuse to defraud unwitting customers and banks
What bank controls would you recommend?
Source: ICC IMB
TERMS USED IN GUARANTEES
Fake Bank Guarantees, Aug 2004
Cases highlight importance of review for specific terms
In one case, terms 'blocked for one year and one day' and 'agreement in
accordance with ICC rules on non-circumvention and non-disclosure'
– No such rules
– Utilize phrases that begin with 'one year' and are then followed by another
period of time such as an 'extra day, week or month(s)'
A second case involved Letter of Intent and a 'divisible, assignable and
transferable' Bank Guarantee
– In most cases, guarantees are not negotiable, assignable or transferable,
unless expressly stated in the covering contract.
Fraudsters typically have been involved in other cases
Controls for bankers?
Source: ICC FIB
TERMS, LANGUAGE AND GRAMMER USED IN SBLC
Fake One Billion Euro SBLC, Feb 2008
1B Euro fraud Standby Letter of Credit based on enquires with bank & review of LC
A SBLC for 1B normally issued only in specific circumstances - NA for this case
Reviews include of letterheads, stamps and or seals of approval, as well as the
endorsement signatures of senior management personnel
Common red flags including incorrect use of banking terms, spelling mistakes, and
errors in grammar and composition
The wording of the document may highlight a veiled attempt to extort funds
Specific ‘red flags’ of this case:
– The document instructed the applicant to provide an access and pin code in
order to block and change the beneficiary name.
– Use of language and grammatical structure was highly unusual:
“since the US treasury who also uses this instrument, do not want others to use it, because
they need to use credit line for US government at this period, so, they monitored all the swift at
the swift center in Basel, and try to block and utilise for themselves.”
A growing trend is aggressiveness in terms of the amounts of money
Identity theft of bank personnel is on the rise, allowing fraudsters to execute
frauds within a bank’s specific transactional procedures
Lessons for bankers?
Source: ICC FIB
TERMS USED IN HIGH-DEMAND/ HIGH-RISK COMMODITY DOCUMENTS
Commodity Frauds, Nov 2007
A number of highly suspect commodity frauds originating from the Russia, Ukraine, and other
CIS countries, offering high demand commodities including cement and urea
Offering of goods well below market value and fake documentation associated with the sale
Some of these suspicious sellers were also in other cases
In one case, the seller was not in good standing - struck off its own national register
Inquiries quickly verified that bagged cement is not exported from Russia or the Ukraine
Many contracts reviewed contained "red flag" terms typically associated with financial frauds
– Specific terms used in the documents included: "Advance Payment Bank Guarantees",
"Bank Comfort", "Proof of Funds", and "Non-circumvention / Non Disclosure" letters
– Other similar offerings referencing CIS countries included high risk commodities such as
iron ore, scrap metal, sugar, urea and cement.
– Offers for hundreds of thousands of tonnes per year, in shipments of 12,500 tons
Buyers targeted via the Internet or through intermediaries
Lessons for bankers?
Source: ICC CCS
GENUINE TRADE, FAKE GOODS AND ALTERED DOCUMENTS
Chinese Counterfeits Prove Deadly for Panama, June 2007
100 people die after consuming counterfeit medicine – govt. produced cough syrup
Harmless and commonly used Glycerine was substituted for a cheaper, poisonous alternative:
Diethylene Glycol
Government of Panama unknowingly used Diethylene Glycol relabeled as Glycerine
46 barrels of Diethylene Glycol were purchased all falsely labeled as 99.5 % pure Glycerine
Origin traced through trading companies in Spain to the Yangtze Delta in China
Chinese companies responsible for the re-labeling - one owned by Government of China
Investigation found one factory that was not certified to produce pharmaceutical products
Although the fake Glycerine passed through a number of countries, it was never tested
Shipment’s certificate of authenticity was repeatedly altered, eliminating names of
manufacturer and the previous owner
Had this irregularity been noticed, it would have been apparent that the manufacturer was
not approved to produce Glycerine and the stock could have been safely disposed of
Lessons for bankers?
Source: ICC IMB
LC ON DEFERRED PAYMENT BASIS
Indonesian Trade Fraud Leaves Paper Trail, Feb 2006
Five cases of trade fraud in the shipping of paper and board products
Cases involved the same exporter and NVOCC from East Java
– Luring potential victims with attractive prices
– Open a LC, often on a deferred payment basis
– Claim that shipments arranged via a NVOCC
– “Exporter” defers responsibility to the NVOCC and denies any accountability
The containers are purported to hold products from legitimate Indonesian paper
and board companies, but BL fraudulent and goods never shipped
Fraudsters had developed a convincing website
BL do not list any street address or phone no. for the NVOCC − only the website
Initial contact via business intermediary, trade fairs or via the Internet
Attempting to recover assets or order banks to stop payment through the
Indonesian court system − can prove both difficult and costly
Lessons for bankers?
Source: ICC IMB
FINANCIAL CRISIS - TEMPTING VICTIMS WITH CREDIT
Fake Bank Guarantees, Sep 2009
Spate of fraudulent bank guarantees identified from $10M-100’s of millions
Guarantees offered as collateral for various deals and for benefit of individuals
Documents contained numerous inconsistencies and ‘red flag’ terms
Some parties referred were being investigated by ICC in other cases
For others, enquiries indicated that the co’s/FI’s did not exist or were unregulated
In some cases, the names bore similarity to those of genuine organisations
In one case, a financial intermediary, in the purchase of shares in a company,
offered collateral of 2 fake bank guarantees issued by well-known FI’s
Also used as collateral for large real estate deals, to tempt victims affected by the
current economic climate by offers of hard to come by credit from the fraudsters
ICC: Routinely have all documents above a certain value checked by third-party
specialists. Agree?
Source: ICC FIB
FINANCIAL CRISIS - REVOLVING LC – HIGH-RISK FINANCIAL INSTRUMENT
Suspected Oil Fraud, Aug 2008
Suspicious oil transaction of USD 30M involving Russian and UAE companies
Suspicions owing to the Revolving LC, a high-risk financial instrument
During the market collapse, best to treat such LC’s with due care and diligence
Profit margin significantly higher than seen in recent, similar transactions
The parties were not established traders and flaws in the financial mechanism
A number of ‘red flag' terms in the documentation
Documentation purportedly from one of the bank's well-known clients, a
Russian oil giant, had typing errors and the contact details did not match
Involved a Swiss intermediary private bank not known for trade finance with
no correspondent banking relation in the UAE
DD checks are particularly important in trades concerning those commodities
whose prices are at a high and have a controlled supply
Bankers lessons learnt?
Source: ICC FIB
FINANCIAL CRISIS - TOO GOOD TO BE TRUE DEALS
Suspicious Cement Transactions, July 2008
During financial crisis, parties offered cement trades at prices well below market
Given construction boom & rise in fuel prices, the price of cement had increased
By undercutting prices, fraudsters persuade buyers to open LC’s favouring them
Strategy is to seize opportunities to obtain cash upfront and quickly
– Cases reviewed include offers of goods originating from countries that do not currently
export the specified commodity in the packing described
– The proposed prices averaged approximately 25% lower than current market prices
– The offers did not come from established or well known traders of these goods
IMB used its network of trading contacts to verify the price of commodities and
conducts background checks to review an individual or company's trading record
Lessons for bankers?
Source: ICC IMB
SHELL COMPANIES
Spurious Steel Transactions, April 2010
Purported shipments covered consignments of steel billets from North African and
Middle Eastern ports to Port Sudan
In all cases the nominated vessels did not exist, though their names resembled
those of genuine vessels trading in the region
Checks with the operators of the vessels with similar-sounding names confirmed
that they had no knowledge of the alleged shipments
Furthermore, the documents featured numerous typographical errors that are
unlikely to occur on genuine trade documents
The same parties appeared in all transactions, suggesting that shell companies had
been set up to facilitate the fraudulent transactions
Fraudsters were specifically targeting banks rather than legitimate buyers
What controls can banks have?
Source: ICC IMB
USING INTERMEDIARIES FAR AWAY
Fraudulent Steel Trades in North Africa, Dec 2006
Shipments from North Africa of scrap metal to Indian sub-continent
BL contained numerous discrepancies, including incorrect container no’s
An additional risk factor - presence of an intermediary in the deal:
– Middle-man had allegedly purchased cargo that was being sold
– Frequently, the intermediary is located far away from the country of origin of
the goods, making it difficulty for intermediary to verify goods
– Sometimes, the intermediaries are victims themselves
False BL related to vessels that actually docked at the listed load ports. A simple
check of the ports visited by the vessel will not reveal the scam
Fraudsters are also using fake websites to persuade buyers that goods have been
shipped
Lessons for bankers?
Source: ICC IMB
INSIDER LIFTS SHIPMENT DETAILS FOR FAKE BL
Suspect Bills of Lading for West African imports, Nov 2011
Suspect Bills of Lading for containerised shipments into Lagos, Nigeria
Small quantities of consumer products
BL’s were for cargoes transported by major carriers with their logos
Shipments had taken place on the stated vessels, between the stated ports
However, shipments were 3 months prior and with different carriers to the BL
Scheme designed to wrongly draw funds under the doc. credit system
Insider had lifted the original BL details and transposed on false documents
While shipping co’s share slots on certain routes, BL issued by booking carrier
The purported carriers had no knowledge of the shipments
Reference no. format or container no’s helped identify the actual physical carrier,
who helped trace the genuine shipments and whereabouts of containers
IMB: The need for banks to carry out thorough checks, even on those transactions
which appear to be genuine. Agree?
Source: ICC IMB
ADVANCE FEE FRAUDS
Ships for Charter, March 2011
Several ‘rogue’ Nigerian companies offer ships for charter (for crude oil)
Majority of the vessels had been scrapped/no longer operating under the names
Names and details of the vessel taken from correspondence with shippers
Fraudsters’ modus operandi often includes obtaining an advance fee, channeled
through legitimate banks
Banks can be open to charges of conducting improper due diligence, assisting
fraudsters in processing the proceeds of a crime
Banks asked to process such transactions should conduct background checks on all
parties
Source: ICC IMB
TIMBER RISKS
Fraudulent Timber Shipments, July 2008
Series of spurious timber shipments, which allegedly originated in Southeast Asia
BL for containerised shipments from Malaysia to MENA featured the same supplier
and carrier
Stated vessels had not called at the port of loading at time of loading
The port of loading had no record of the stated cargo, nor could the respective
cargoes be traced at the nominated discharge ports
Names of vessels used by the big liner companies were used with container
numbers owned or operated by some of the larger firms
Container numbers do not conform to the industry standard
Vigilance over timber shipments originating in Southeast Asia
Other controls (e.g. FSC Certification)?
Source: ICC IMB
KNOW YOUR COUNTERPARTY BANK
Anjouan Banks Suspect, Sept 2005
Banks registered in Anjouan, Comoros Islands, off the east coast of Africa
Offers of trade financing, commercial lending or asset-backed lending were made
against false financial instruments such as LC’s, SBLC’s, and Bank Guarantees
Anjouan financial authorities caught up in internal conflicts
Issuing inappropriate licences to offshore banks that were financially unstable
– One discredited bank succeeded in registered details in a leading business directory
after producing financial statements and testaments of good practice
– This institution issued fraudulent, worthless Letters of Credit and Bank Guarantees,
often for several millions of dollars
– The bank in question does not appear to have a physical location
– The address stated to be in Ireland is not registered
A second Anjouan bank whose licence was revoked in 2003 is still issuing illegal
documents and is typing up with two North Korean banks to set up an offshore FI
Lessons for bankers?
Source: ICC IMB
KPMG AML Survey 2011
THANK YOU!