developing an effective bsa/aml compliance function … · •negotiable instruments in round...
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BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON,
D . C .
DEVELOPING AN EFFECTIVE BSA/AML
COMPLIANCE FUNCTION FOR TRADE FINANCE
Institute of International Bankers
BSA/AML Compliance Seminar
May 20, 2010
Connie M. Friesen
Partner
Sidley Austin LLP
787 7th Avenue
New York, NY 10019
(212) 839-5507
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Background
• As higher standards and higher scrutiny have been applied to many other money laundering techniques, trade-based money laundering has become more prevalent.
• Criminal organizations use the international trade system to transfer value across international borders and disguise the origins of criminal proceeds – it is estimated that the annual dollar amount laundered through international trade is hundreds of billions of dollars.
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Key Definitions
• ―Trade-based money laundering and terrorist financing‖ refers to the process of disguising the proceeds of crime and transferring value through the use of trade transactions in an attempt to legitimize their illegal origins or finance their activities. (FATF definition)
• ―Trade finance‖ refers to the financial component of an international trade transaction. Trade finance activities may involve, among other things, managing payments for open account trading, or issuing letters of credit, standby letters of credit or guarantees. (FATF definition)
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Methods of Trade-Related Money Laundering
• Colombian Black Market Peso Exchange (―BMPE‖) as an example of a complex method of trade-based money laundering.
• Money launderers employ diversified methods such as utilizing individuals or businesses that have control over numerous bank accounts, often spread over multiple financial institutions, and bulk cash smuggling from the U.S. The smuggled U.S. dollars are deposited into foreign institutions and then wired back to the U.S. as payments for international goods and services.
• Money launderers may also use letters of credit, guarantees and bills of collection.
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Recent New Guidance
• Regulators have taken note of the increase in trade-based money laundering and have issued guidance outlining higher expectations for BSA/AML trade finance risk assessment, KYC due diligence, suspicious activity monitoring and reporting, and OFAC compliance.
• FinCEN Advisory (February 18, 2010)
• The Wolfsberg Trade Finance Principles (January 15, 2009)
• FATF Best Practices on Trade-Based Money Laundering (June 20, 2008)
• FFIEC BSA/AML Bank Examination Manual (April 2010)
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Primary Objectives of Effective BSA/AML Compliance Function for Trade Finance
• Management of BSA/AML risks associated with trade finance activities.
• Implementation of effective BSA/AML due diligence, monitoring and reporting systems in context of trade finance.
• Identification and monitoring of suspicious activity that might occur in trade finance activities.
• Management and monitoring of OFAC risk.
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Requirements for BSA/AML Trade Finance Compliance Function
• Make certain that BSA/AML compliance program covers all of the specific trade finance activities conducted by the U.S. branch or banking entity.
• Identify the documentation requirements, transaction flow and participants (direct and indirect) for each trade finance activity.
• Make certain that electronic monitoring systems have been updated to reflect recent regulatory guidance.
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Risk Factors in Trade Finance
• Involvement of multiple parties on both sides of an international trade transaction can make the process of due diligence more difficult.
• Trade finance is document intensive and therefore susceptible to documentary fraud.
• Goods may be over-valued or under-valued in an effort to evade AML or customs regulations and trade documents, such as invoices, can be fraudulently altered to hide the scheme.
• The true identity or ownership of the applicant for a letter of credit or any other party to a trade finance transaction may be disguised by the use of certain corporate forms, such as shell companies or opaque offshore entities.
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Review of Documentation as Part of the Due Diligence Process
• Banks should review documentation, not only for compliance with the terms of the letter of credit or other trade finance document, but also for anomalies or red flags that could indicate unusual or suspicious activity.
• When analyzing trade transactions for unusual or suspicious activity, banks should consider obtaining copies of official U.S. or foreign government import and export forms to assess the reliability of documentation provided.
– There might be discrepancies in shipping documentation, obvious invoicing errors, forged or fraudulent government licenses or discrepancies in the description of goods in various documents.
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Role of Correspondent Banks in Trade Finance Process
• Trade finance activities often require the active involvement of multiple parties who may be involved in a transaction through use of a correspondent bank.
• In addition to the basic importer-exporter relationship, relationships may exist between the exporter and its suppliers and between the importer and its customers.
• Various intermediary financial institutions may provide conduits and services to expedite the underlying documents and payment flows associated with trade finance.
– This creates a need for BSA/AML trade finance function to assess adequacy of BSA/AML program of any correspondent bank that might provide access to a trade finance transaction.
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Due Diligence for Letters of Credit
• Banks involved in the letter of credit process need to undertake varying degrees of due diligence depending on their role in the transaction.
• Due diligence by an issuing bank should include gathering sufficient information on applicants and beneficiaries, including their identities, nature of business and sources of funding.
• Banks taking other roles in the letter of credit process should complete due diligence that is consistent with their role in the transaction.
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Wolfsberg Guidance on Letters of Credit
• Banks operate in accordance with ICC Publication No. 600-Uniform Customs and Practice for Documentary Credits (the ―UCP-600‖).
• Responsibility of bank to review a letter of credit is determined by bank’s duties as set forth in UCP-600.
• Wolfsberg Guidance identifies responsibilities for due diligence, review and monitoring in some detail; it also describes a variety of specific risk factors.
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Wolfsberg Guidance on Bills of Collection
• Banks operate in accordance with ICC Publication No. 522—Uniform Rules for Collections
• Responsibility of bank to review a bill of collection is determined by bank’s duties as set forth in UCP-522.
• Wolfsberg Guidance identifies responsibilities for due diligence, review and monitoring in some detail; it also describes a variety of specific risk factors.
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Monitoring for Suspicious Activity as Key Part of BSA/AML Trade Finance Function
Greater scrutiny should be given to:
– Customers conducting business in higher-risk jurisdictions.
– Customers shipping items through higher-risk jurisdictions.
– Obvious over-or under-pricing of goods and services.
– Obvious misrepresentation of type or quantity of goods.
– Documents that appear to be amended without reasonable justification.
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Monitoring for Suspicious Activity
• In circumstances where a SAR is warranted, the bank is not necessarily expected to stop the trade or discontinue processing the transaction; however, stopping the trade may be required to avoid a potential violation of an OFAC sanction.
• Banks with a higher volume of SWIFT messages should determine whether their monitoring efforts are adequate to detect suspicious activity, particularly if the monitoring mechanism is not automated.
• Sophistication of the documentation review process should be consistent with the size and complexity of the bank’s trade finance portfolio.
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FinCEN Advisory of February 18, 2010
• Red flags identified in the FinCEN advisory cite only possible signs of illegal activity and must be considered in conjunction with the normal transaction activity expected for an individual customer.
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Red Flags for Trade-Based Money Laundering
• Third-party payments for goods and services made by an intermediary apparently unrelated to the seller or purchaser of goods.
• Amended letters of credit without reasonable justification.
• Customer’s inability to produce appropriate documentation (i.e., invoices) to support a requested transaction.
• Significant discrepancies between goods and documents.
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Additional Red Flags
• Negotiable instruments in round denominations under $3000 used to fund domestic accounts, or alternatively, smuggled from the United States for placement into accounts with foreign financial institutions.
• International wire transfers received as payment for goods into U.S. bank accounts or processed through U.S. correspondent or intermediary accounts where the ordering party (importer of goods) does not conduct its business in the country where the wire originated.
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Additional Red Flags (Continued)
• Funds transferred into a U.S. domestic account and then subsequently transferred out of the account in the same or nearly the same amount, with destination being a high risk jurisdiction.
• Sudden onset and sudden cessation of payments.
• Other unusual deposit patterns.
• ―Micro-structuring‖ – checking accounts receive small cash deposits followed by ATM withdrawals in foreign countries.
• Foreign visitors opening multiple U.S. bank accounts at one or more financial institutions.
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Filing SARs
• FinCEN Advisory provides updated guidance to financial institutions by providing recommended key terms and phrases to be used in the SAR narrative.
• FinCEN Advisory notes that consistent use of these terms is important for law enforcement officials.
• FinCEN requests that financial institutions check the appropriate box in the suspicious activity information section and include the abbreviation ―TBML‖ or ―BMPE‖ in the narrative portion of all relevant SARs filed. Of course, the narrative should also include an explanation of why the institution suspects, or has reason to suspect, that the customer is participating in this type of activity.
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Key Components of Effective BSA/AML Trade Finance Program
• Risk-based analysis of types of trade finance activities, customers and geographies.
• Development of appropriate KYC due diligence:
– customers
– related parties
– correspondent relationships
– others
• Development of effective procedures for reviewing trade-related documentation.
• Development of appropriate techniques for identifying and monitoring suspicious activity.
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Key Components of Effective BSA/AML Trade Finance Program (Continued)
• Development of effective OFAC component.
• Provisions for updating to keep pace with new trade finance activities as well as new money laundering techniques.
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