Anti-Money Laundering – A Worst Case Scenario


International trade between the likes of Latin America and China in the South is rising while the big banks in the North are still reluctant to lend. What are the implications for anti-money laundering efforts? Henry Balani offers an intriguing scenario…

Arms dealers and drug traffickers once cleaned their dirty money at the casino. Now they increasingly get their cash into the banking system by inflating the invoice value of anything from stuffed toys to used cars and shipping them between shell companies. International regulators are becoming wise to the fact that money laundering is increasingly being hidden within the ebb and flow of international trade. And all banks are now expected to report on any suspicious transactions.

Given all this, there are at least four trends that might make things worse before they get better. Let’s examine them.

Increased South-South Trade

Trade between Asia, the Middle East, Africa and South America is increasing at a higher rate than trade between OECD countries in the North. In fact, the United Nations (UN) reckons that South-South trade has increased by 13.7% between 1995 and 2010, while the world average remained only at 8.7%. Furthermore, Africa and Latin America are increasingly supplying China with commodities while China, in return, is selling them consumer goods.1

As trade increases, so do the opportunities for trade-based money laundering.

Lack of Mature Infrastructure

Countries in the South tend to lack the payment and risk infrastructure standards of the North. The SWIFT messaging standards, for example, have been used in OECD countries since 1977, while in the South their use, while increasing, still lags behind. See the history of SWIFT use.

Another thing is that OECD countries have a long history of complying with anti-money laundering (AML) legislation, dating back to the US Bank Secrecy Act of 1970. An OECD country also tends to have an independent judiciary, non-corrupt police force and free press. See a US list of recent penalty enforcements.

By contrast, countries in the South are relatively unfamiliar with AML regulations and often lack the willingness or the capacity to enforce them. The Financial Action Task Force (FATF) identifies Iran and North Korea as the most non-cooperative jurisdictions. See the FATF high-risk list.

All of this makes the bad guys think they’re more likely to get away with trade-based money laundering in the South than in the North.

Credit Squeeze on Banks

The Basel III regulations laid out by the Bank for International Settlements make it harder for the commercial banks to finance big trade deals than before the financial crisis. According to the International Chamber of Commerce (ICC), Basel III specifies that banks should have more capital and less balance sheet capacity combined with stricter liquidity requirements.2

With the commercial banks less able to finance big trade deals, the shadow banking system is more likely to step in and pick up the slack. And shadow banks have low standards when it comes to assessing the risks of corruption.

Undervaluing Compliance

Experience says that banks and companies in the South are more likely than OECD countries to view compliance with regulations as a burden. They prefer to ‘tick the box’ by simply checking trade documents rather than putting in any focused due diligence efforts. Very often they just get junior staff to do manual checks.

This makes it less likely for trade-based money laundering to be identified in the first place.

Each one of these trends on its own can reduce the effectiveness of anti-money laundering sanctions. Their combined impact could actually begin to damage the economic growth usually associated with increased trade. And that could be bad news for the South.

References

  1. UN (2012), ‘World Economic Situation and Prospects 2012 – International Trade’, World Economic Situation and Prospects 2012, pp 41–66
  2. ICC (2013),  Global Risks Trade Finance Report

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