guidelines for suspicious activity · the financial system applying economic sanctions as they...

Guidelines for Suspicious Activity

Stacey FacterSenior Vice President, Trade

BAFT

Global Trade – Documentary vs Open Account

• Global Merchandise Trade: USD 19 trillion (WTO estimate for 2014)

• Split between Open Account & Documentary Trade: 80:20 (Wolfsberg Group estimate)

• Documentary Trade: USD 3.8 trillion

• Real Time Gross Settlement (RTGS) globally: USD 2.9 quadrillion (World Bank Report)

• Documentary Trade as % of global payment: 0.13% (USD 3.8 tr vs USD 2.9 qn)

Regulatory ExpectationsThe role of banks in managing financial crime risk

originally centered on identifying the proceeds of a limited number of criminal activities, especially drugs trafficking

Identifying customers and reporting suspicious transactions or activity to the relevant national Financial Intelligence Unit

Traditional Expectation / Requirement(Identifying and Reporting suspiciousactivity)

Financial crime responses expected from banks now include:

Reducing money laundering across a wide spectrum of criminal activity including terrorist financing risks

Identifying and reporting the proceeds arising from criminal behavior

Preventing criminal and corrupt proceeds entering the financial system

Applying economic sanctions as they apply to prohibited countries or persons, including those engaged in nuclear proliferation.

Identifying tax / customs duty evasions (via under/over invoicing) and activities / goods which are subject to export / import restrictions(including dual use goods)

New Regulatory Expectation / Landscape(Protecting the financial system from thethreat of financial crime by seeking to prevent it, thereby strengthening financial sector integrity and contributingto safety and security)

Regulatory View on Banks AML Compliance

• Trade based money laundering (TBML) is becoming an increasing area of focus by regulators.

• FCA Concluded that:

".... the majority of banks in our sample, including a number of major UK banks, are not taking adequate measures to mitigate the risk of money laundering and terrorist financing in their trade finance business.“

“Most banks need to conduct significant work to ensure that all financial crime risks are routinely considered when processing transactions. In particular, staff responsible for managing financial crime risks required better training to identify potentially suspicious transactions”

“…we have highlighted the areas where they need to improve. We are also considering where further regulatory action may be required for certain banks in our review.”

• For e.g. FCA came out with a report in 2013 titled “Banks’ control of financial crime risk in trade finance”, based on review of various banks’ Trade Finance processes, which provides in details the gaps along with their recommendations

• Some of the key concerns raised (by FCA) were the inconsistent approach to risk assessment, absence of clear policy or procedure dealing with TBML risks and failure of processing staff to use client due diligence information effectively in identifying potential money laundering attempts.

Overview

• 2007/2008 BAFT produced guidelines for compliance with the Bank Secrecy Act in consideration of the examination procedures articulated in the Bank Secrecy Act/ Anti-Money Laundering Examination Manual issued by the Federal Financial Institution Examination Council (FFIEC) in June 2005 and last revised in 2014.

• Regulators have focused intense scrutiny on trade finance as a potential conduit for financial crimes, including money laundering and terrorist financing

• Bank examiners have heightened their expectations concerning customer due diligence, sanctions and suspicious activity identification related to trade finance.

• The Financial Action Task Force (FATF) issued its Best Practices on Trade Based Money Laundering in June 2006.

• The Wolfsberg Group issued its Trade Finance Principles in January 2009 (amended in 2011).

• The Financial Conduct Authority (FCA) published its Thematic Review document in July 2013

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Overview

• As a consequence of these changes and additions, and to reflect current market conditions in 2015, BAFT developed guidelines concerning the identification of unusual potentially suspicious activity derived from various industry sources

• BAFT reviewed the red flags, risk indicators and practices provided by the FFIEC, FATF, Wolfsberg and the FCA to assist banks across the globe in developing their approach to combating financial crime risk in letters of credit and documentary collections

• As the lists are not mutually exclusive, BAFT combined them into sixteen red flags of potentially suspicious activity to provide clarity and advice for banks to consider following globally

• This document is intended as guidance to raise awareness of potentially suspicious activity in certain trade transactions

• Each bank should make its own decision on whether to adopt it in whole or in part in accordance with its own risk based approach and local regulations.

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Risk-Based Approach to a Risk Management Program

• Banks need to consider their risk appetite, including their business and risk profiles when applying these suggested guidelines. It is difficult to create simple guidelines that fit the specific needs of multiple organizations and become an integral part of every bank’s procedures due to the diversity of size, scope and product mix of financial institutions engaged in trade finance.

• These guidelines are a starting point for consideration to assist banks in further developing policies and procedures related to identifying unusual trade finance activity.

• Banks should view their own compliance requirements for trade finance using a risk-based approach.

• This means that the steps taken for individual transactions or customers are based on that bank’s analysis of the risks in relation to the parties involved, the type of transaction, monetary value of the transaction and other factors that may either increase or reduce the risk of financial crime in any given transaction.

• Banks should review these guidelines and incorporate, as appropriate, all or part of them into their internal documented processes.

• Banks should have a sound risk management program.

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Customer Applicability• As a general rule, at least one party to the transaction should be identified as a

customer of the bank and subject to proper due diligence procedures. • More specific guidance with respect to customer due diligence, including who the

bank considers to be the customer, may be found in the Wolfsberg Trade Finance Principles and the IFSA Model for a USA PATRIOT Act Customer Identification Program for Trade Products , published in September 2004.

• Banks may apply a different level of due diligence depending on the nature of their role in the transaction according to their risk-based approach.

• Potentially suspicious activity can occur at multiple levels and at various points in a trade transaction

• Banks start by identifying activity as “unusual” and individuals should escalate this activity to the appropriate area within their institution.

• Transaction review may take place before, during and/or after processing to look for trends that might indicate unusual or suspicious activity.

• Staff should be trained to be aware of the potential for financial crimes using these red flags.

• Banks should have policies and procedures covering customer due diligence and sanctions screening.

• Work should be documented against robust and recognized procedures.

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Documentary Trade Red Flag Guidelines

• BAFT has published the Guidance for Identifying Potentially Suspicious Activity in Letters of Credit and Documentary Collections for the industry that is based on the trade red flags published by the Federal Financial Institutions Examination Council (FFIEC), FATF, Wolfsberg and the UK’s Financial Conduct Authority (FCA).

• The ability to use the trade red flags productively depends on the role that a bank plays in the flow of funds arising from a trade transaction and, crucially, the information that is available to banks about the transaction in the normal course of business.

Documentary Trade Red Flag Guidelines

1. The customer engages in transactions that are inconsistent with the customer’s business strategy or profile (e.g. a steel company that starts dealing in paper products), or make no economic sense

2. A customer deviates significantly from its historical pattern of trade activity (i.e. in terms of markets, monetary value, frequency, volume, or merchandise type)

3. Transacting parties appear to be affiliated, conduct business out of a residential address, or provide only a registered agent’s address

4. Customer conducts business in jurisdictions that are at higher risk for money laundering, terrorist financing or other financial crimes

5. Customer shipping items to, through or from higher money-laundering risk jurisdictions including countries identified by the Financial Action Task Force as "non-cooperative jurisdictions" as regards anti-money laundering regulations

6. Customers transacting in activities/goods that potentially involve a higher risk of money launderingand other financial crimes including activities/goods that may be subject to export/import restrictions

7. Obvious over or under pricing of goods

8. Obvious misrepresentation of quantity of goodsshipped

9. The payment terms or tenor are inconsistent with the type of goods

10. Transaction structure and/or shipment terms appear unnecessarily complex or unusual and designed to obscure the true nature of the transaction

11. The LC contains non-standard clauses or phrases or has unusual characteristics

12. The LC is frequently significantly amended for extensions, changes to the beneficiary, and/or changes to payment location

13. The transaction appears to involve the use of front or shell companies for the purpose of hiding the true parties involved

14. The bank is approached by a previously unknown party whose identity is not clear, who seems evasive about its identity or connections, or whose references are not convincing, or payment instructions are changed at the last minute

15. Trade-related documentation under an LC or documentary collection appears illogical, altered, fraudulent, or certain documentation is absent that would be expected given the nature of the transaction

16. Transaction involves potential dual use goods

Potentially Suspicious Activity

Red Flag 1.

The customer engages in transactions that are inconsistent with the customer’s business strategy or profile (e.g., a steel company that starts dealing in paper products) or make no economic sense

Sources: FATF, FCA FFIEC, Wolfsberg

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Red Flag 2.

A customer deviates significantly from its historical pattern of trade activity (in terms of markets, monetary value, frequency of transactions, volume or merchandise type)

Sources: FATF, FCA, Wolfberg

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Red Flag 3.

Transacting parties appear to be affiliated, conduct business out of a residential address, or provide only a registered agent’s address

Sources: FCA, Wolfsberg

13


Red Flag 4.

Customer that conducts business in jurisdictions that are at higher risk for money laundering, terrorist financing, or other financial crimes

Sources: FATF, FCA, FFIEC

14


Red Flag 5.

Customer shipping items to, through, or from higher money laundering risk jurisdictions including countries identified by the Financial Action Task Force as “non-cooperative jurisdictions” as regards anti-money laundering regulations

Sources: FATF, FCA, FFIEC

15


Red Flag 6.

Customers transacting in activities/goods that potentially involve a higher risk of money laundering and other financial crimes including activities/goods that may be subject to export/ import restrictions

Sources: FATF, FFIEC, Wolfsberg

16


Red Flag 7.

Obvious over or underpricing of goods

Sources: FATF, FFIEC

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Red Flag 8.

Obvious misrepresentation of quantity of goods shipped

Sources: FATF, FCA, FFIEC, Wolfsberg

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Red Flag 9.

The payment terms or tenor are inconsistent with the type of goods

Sources: FATF, FCA

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Red Flag 10.

Transaction structure and/or shipment terms appear unnecessarily complex or unusual and designed to obscure the true nature of the transaction


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Red Flag 11.

The L/C contains non-standard clauses or phrases or has unusual characteristics

Sources: FCA, FFIEC, Wolfsberg

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Red Flag 12.

The L/C is frequently significantly amended for extensions, changes to the beneficiary and/or changes to payment location


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Red Flag 13.

The transaction appears to involve the use of front or shell companies for the purpose of hiding the true parties involved

Sources: FATF, FCA

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Red Flag 14.

The bank is approached by a previously unknown party whose identity is not clear, who seems evasive about its identity or connections, or whose references are not convincing, or payment instructions are changed at the last minute

Sources: FATF, FAC, FFIEC, Wolfsberg

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Red Flag 15.

Trade-related documentation under an L/C or documentary collection appears illogical, altered, fraudulent, or certain documentation is absent that would be expected given the nature of the transaction

Sources: FATF, FCA, Wolfsberg

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Red Flag 16.

Transaction involves obvious dual use goods

Sources: FCA

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Summary• Elements of a successful trade finance risk mitigation program

include: – customer due diligence, – product specific policies, – sanctions screening, – targeted training, – Identification and escalation of unusual activity, and,

reporting of suspicious activity,– sound proven and updated policies and procedures, and,– documented action

• These guidelines focus on identification and escalation of unusual / potential suspicious activity.

• Banks should apply the suggested guidance using a risk-based approach.

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