Trade Finance: The new frontline in the battle in the prevention of money laundering & terrorist financing


By: Sean Norris, Sales Director, Asia-Pacific, Accuity

Combatting Trade Based Money Laundering (TBML) gains momentum in Asia-Pacific (APAC) with a detailed guidance paper by the Hong Kong Association of Banks (HKAB)(1). What makes this paper important is the input, acknowledgment and encouragement of the Hong Kong Monetary Authority for the authorized institutions it governs to adopt these practices to improve anti-money laundering and counter terrorist financing (AML/CFT) processes and systems.

Since 2013 when the UK Financial Conduct AuthoriSean best headshotty (FCA) published “Banks, Control of Financial Crime Risks in Trade Finance” (2) Accuity has seen a significant change in focus by regulators across APAC with regulators in India, Singapore, Australia and Hong Kong being particularity proactive in raising awareness and defining best practices related to the combatting of TBML and Dual-use Goods (DUG) Screening. The UK FCA report was the spark that set a fire of focus on TBML across the world.  Indeed, even in the USA, there was a recent congressional hearing around this topic with members of Congress recognizing the increasing threat of TBML as related to financing terrorism. (2)

Banks and other regulated institutions have strong AML/CFT controls for traditional banking process related to client onboarding, payment screening and transaction behavior. As momentum and focus moves from these traditional banking areas to Trade Finance, the cost of compliance will go up as banks will need to prepare additional budget to combat TBML. Larger institutions with international and regional operations will need to determine if a centralized or decentralized model works when combating TBML as the information gathered closer to the port or source may come at higher operational cost.  This approach however may actually may be the best way to limit the risk as knowledge is built up by the trade operations people in country.

Due to the paper based nature of trade transactions and the limitations of automated transaction monitoring in a trade context, the majority of risk assessments are reliant on the judgement of staff. The importance of trade operations experience when developing a policy, escalation procedures and defining roles/ responsibilities related to combating TBML cannot be underestimated; the absolute key to a successful program is the collaboration of compliance and trade finance operations

The HKAB guidance paper acknowledges that dual-use goods screening is complex and can require specialist knowledge, however it sets an expectation that firms utilise both manual and automated methods of screening for dual-use goods. We have seen a large increase in the adoption of Accuity’s Dual-use Goods screening services in jurisdictions with stronger regulatory oversight, and in the case of the foreign banks in these jurisdictions this has in turn raised the standard of the Dual-Use Goods Screening programme in the home country, with several banks rolling out the service globally.

The focus to combat TBML is gaining momentum with more and more regulators starting to review banking standards in this area. Compliance officers need to sit down with trade finance operations to develop policy and procedures related to combating AML/CFT and DUG Screening. This is the new front line in the battle against money laundering and terrorist financing and only more scrutiny by regulators is expected. The HKAB Guidance is a clear guide as to what is expected of regulated institutions in Hong Kong.

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Note:

(1) http://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/aml-cft/Guidance_Paper_on_Combating_Trade-based_Money_Laundering.pdf
(2) https://www.fca.org.uk/your-fca/documents/thematic-reviews/tr13-03
(3) http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=400192