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TRANSCRIPT
Navigating Shifting Trade Compliance
John Ladany
Head of Market Management, Trade Services
Correspondent Banking Group
Agenda
• The Compliance Environment
• Elements of a Trade AML Program
• Case Studies
• What Comes Next?
Polling Question #1
Does your institution have a specific AML standard for Trade?
A. Yes
B. No
The Compliance Environment
• We are all responsible for:
– “Know Your Customer”
– Documenting our institution’s due diligence efforts
– Reporting suspicious transactions
• Concerns about potentially suspicious transactions must be escalated
…yet the anti-money laundering/anti-terrorist financing procedures at US banks are under intense scrutiny by our regulators, resulting in:
consent decrees, fines of billions of dollars, additional reporting requirements, look back investigations, and other penalties
Employees at Citi — and banks everywhere — have a duty to safeguard their firm’s business
and reputation
The Current Environment
Greater Regulatory Risk (Perceived)
$1.6 trn shortfall in
trade finance globally
“De-Risking”
• Shedding of Correspondent Banking Relationships
• Erosion of trade networks
• Removal of some business lines
Financial institutions are terminating or restricting business relationships with certain sectors/ jurisdictions/entities/individuals due to the perceived risks
1. The global fragmentation of AML, ATF, and sanctions regimes is a driver
2. FIs are also uncertain as to the risk tolerances of their regulators
3. The cost of compliance is a contributing factor
$400 bn
Asia
$225 bn SS Africa
Key Elements of a
Good Trade AML Program
Know Your Customer
• Who the client is will vary by transaction type:
• This can be further complicated by co-applicants and other named parties
– Is each co-applicant obligated to reimburse for drawings under the L/C?
– Is the other named party affiliated or unaffiliated?
Trade Product Client
Export L/C Issuing Bank or Exporter
Import L/C Importer/Applicant
Standby L/Cs & Guarantees Issued Applicant
Export Documentary Collection Exporter
Import Documentary Collection Importer
As a general rule, banks must ensure that clients utilizing their trade products and services have met the applicable customer identification program and KYC requirements
Polling Question #2
For which of the following does your bank require a KYC file in order to advise an export L/C?
A. L/C issuing bank
B. L/C beneficiary
C. Both
Citi’s KYC Decision Making Guidelines for Export L/Cs
Criteria Met Criteria Not Met Not Relevant
Issuing Branch’s • PAC • NESS Check
1. All branches of a bank entity in the home country are covered by the KYC on its head office
2. Issuing bank could be a branch or a subsidiary
3. The one-off exception is by issuing entity, so there can be a one-off for a bank’s branch in Hanoi and separately for its branch in Toronto, for example
4. The subsidiary must be wholly owned by the parent/head office on whom Citi has compiled the KYC file, and the answer to q uestion 9 on the Wolfsberg Questionnaire must be positive
5. For the head office on whom Citi has compiled the KYC file, the answer to question 9 on the Wolfsberg Questionnaire must be positive
KYC on First Advising Bank
KYC on Beneficiary
Confirmation/ Standby
Protective
?
KYC on Originating
Country
KYC on Head Office
Export Advising
?
Scenario
1
Scenario
2
Scenario
3
Scenario
4
Scenario
5
One-of f
Ongoing
Note 2
Note 1 Issuing Bank
Notes :
Note 5
Note 4
Branch
CONDITIONAL Sub
CONDITIONAL Branch
Sub
Note 3
Note 1
Monitoring Trade Transactions
Screening
• A bank’s trade operations must screen its transactions against the applicable SDN and sanctions lists
• This includes not just the content of SWIFT messages received, but all the related documents, too—the individuals, entities, goods, vessels, etc. listed therein
• Based upon Citi’s global presence, our CitiScreening system incorporates more than 500 such lists from governments and multilateral agencies around the world
Red flags
• Banks must also perform a review of all trade transactions to determine if there are any risk indicators (“red flags”) present that are typically associated with money laundering, terrorist financing, economic sanctions, bribery, or other illicit activity
• This may involve manually comparing each item to:
– FFIEC BSA/AML Examination Manual Trade Finance Red Flags List
– Financial Action Task Force Trade-Based Money Laundering Typologies
– Wolfsberg Trade Finance Principles
– Proprietary red flag listings
• High risk businesses
• High risk products
• High risk countries
• A red flag analysis is the minimum amount of due diligence required before a transaction may be executed; trade personnel should always be encouraged to use their expertise and experience to evaluate each transaction on its merits and to escalate any potential concerns
Examples of Trade Red Flags
L/C and Collection Specific
•L/C does not provide a description of the good, services, or technology being furnished •L/C or collection fails to call for presentation of transport documents •Payment to be made to the beneficiary’s account held in a country other than its stated locations •L/C transfer or assignment of proceeds request names a transferee or assignee in an offshore financial
Trade Related Documents
•Future dated bill of lading •Obvious alterations to any third party document(s) without proper authentication •B/L describing containerized cargo, but without container numbers, with sequential numbers, or with non-standard numbers
•Shipping documents show weights and measures inconsistent with the goods shipped or method of shipment
General for Trade
• Trade transaction involves an unusual intermediary, or too many intermediaries •Trade transaction appears unusual in light of the customer’s normal business activities •Unusually favorable payment terms, such as an interest rate far above the market •The quantity of goods exceeds the known capacity of the shipping container or tanker or other vessel
General Inquiries
•Customer requests an unusual degree of confidentiality •Customer reluctant to provide clear answers to routine financial, commercial, technical, or other questions • Inconsistent, insufficient, false, or suspicious information provided by the client •Approach from an unknown party whose identity is not clear, appears evasive, and/or whose references are not convincing
Trade Red Flags – FFIEC BSA/AML Exam Manual
Items shipped that are inconsistent with the nature of the exporter’s business (e.g., a steel company that starts dealing in paper products)
Exporters conducting business in high-risk jurisdictions
Exporters shipping items through high-risk jurisdictions, including transit through non-cooperative countries
Exporters involved in potentially high-risk activities, including activities that may be subject to export/import restrictions (e.g., equipment for military or police organizations of foreign governments, weapons, ammunition)
Obvious over- or under-pricing of goods and services
Obvious misrepresentation of quantity or type of goods imported or exported
Obvious misrepresentation of quantity or type of goods imported or exported
Exporter directs payment of proceeds to an unrelated third party
Shipment locations or description of goods not consistent with letter of credit
Documentation showing a higher or lower value or cost of merchandise than that which was declared to customs or paid by the importer
Significantly amended letters of credit without reasonable justification or changes to the beneficiary or location of payment (any changes in the names of parties also should prompt additional review)
High Risk Businesses and Goods
• These are businesses likely to use trade services/finance products, perhaps for illicit purposes
• They may, of course, be involved in legitimate trade transactions
– But a combination of red flags—from the earlier lists plus the type of business—may be sufficient to raise suspicion and warrant additional investigation and/or reporting
• Banks need to be develop and implement such listings. Here are some examples from Citi’s own guidelines:
– Commodities middlemen (e.g., cement, sugar, fertilizer, urea, coal, iron ore)
– Import/export and trading companies (e.g., brokers, agents)
– Gem/jewel/precious metal dealers
– Scrap metal dealers
– Wholesalers, distributors, and retailers of consumer electronics
– Car/boat/plane/truck/motorcycle dealers and brokers (new, used, parts)
– Liquor distributors
– Telemarketers
– Textile businesses
– Art and antiques dealers
High Risk Countries
• Banks must recognize the inherent geographic money laundering and terrorist financing risk of certain countries and territories
• The inclusion of a high risk country(ies) in a trade transaction represents an additional red flag(s) to be considered
• Citi’s proprietary listing of such countries is based upon a number of factors, including:
– Non-cooperative countries or territories designated by the FATF
– Countries designated as a “primary money laundering concern” pursuant to the USA PATRIOT Act’s Section 311
– Countries with no AML laws and/or implementing regulations, as identified by the US State Department’s International Narcotics Control Strategy Report (“INCSR”)
– Countries posing a terrorist financing risk, based on country descriptions in the INCSR
– Uncooperative tax havens, as identified by the Organization for Economic Co-operation and Development
– Issuers of offshore banking licenses or offshore financial centers, as identified by the International Monetary Fund and INCSR
– A country’s level of perceived corruption, as evidenced by their score on Transparency International’s most recent Corruption Perception Index
Goods/Services Descriptions
• Letters of credit need to have a description of the goods or services covered to ensure they comply with governmental regulations, export controls, anti-money laundering requirements, and other bank-specific policies
• Therefore, L/Cs which merely cite a purchase order number, a contract number, a proforma invoice number, or a cryptic acronym are not sufficient
• Additional due-diligence should be performed when the parties are military and where goods are not clear or have a potential lethal end-use
• Although standby L/Cs may not specifically state the types of goods, banks still need to ensure that they understand the underlying transaction, and that all contracts and references are identified
Red Flag Decision Grid
HIGH
E S C A L A T E
IF MORE THAN ONE
RED FLAG IS PRESENT WITHOUT MITIGATING
QUALITATIVE FACTORS
R I
S K
L E
V E
L
Negative news screening for
ALL L/C
beneficiaries and exporters
with 2 or more Red Flags
DO NOT ESCALATE
for single a Red Flag (e.g., country,
product, value),
unless obviously
suspicious.
LOW
When To Escalate a Transaction Due to Number and/or Type of Red Flags
RISK RANKING RED FLAGS:
ALWAYS Escalate
HIGHEST RISK COUNTRY
INVOLVEMENT
Cuba, Iran, Syria, Burma Northern Sudan, Yemen: These single country Red
Flags will warrant escalation
Sample escalation flow
for red flag and
screening hits:
• Level 0 – Trade
operations
• Level 1 – Trade in
business controls
• Level 2 – Country
compliance
• Level 3 – Subject
matter experts
(including country AML
compliance officer,
regional AMLCO,
global AML, AML
counsel, global
sanctions compliance,
global anti-bribery and
corruption compliance,
sanctions and boycott
counsel, etc.
Case Studies
Polling Question #3
How many red flags are present in the following scenario: A jeweler located in Kuwait buys diamonds from a diamond district jeweler in New York City?
A. 1
B. 2
C. 3
D. 4
Handling Multiple Red Flags
A jeweler (high risk business) located in Kuwait (high risk country) buys diamonds (high risk goods) from a diamond district jeweler (high risk industry) in New York City
• An initial review of this transaction yields at least four red flags, as noted above
• However, upon further review, it is determined through publicly available information that the Kuwaiti jeweler is a well known and reputable retailer who is legitimately purchasing diamonds for wealthy clients, in reasonable amounts, from a licensed wholesale jeweler in the US who banks with [Citi/B of A/JPM]
• This further due diligence sufficiently mitigates the red flags, with the residual risk considered low enough to process the transaction
General guideline: Do not escalate for a single red flag (e.g., country, product, value) unless the transaction is obviously
suspicious. If several or more red flags are present, without mitigating qualitative factors, then escalate
Handling Multiple Red Flags
To: Level 2 Risk
Subject: AML CONCERN REF. 123456789/S-123456-789123, APPLICANT: JOHN DOE TRADING COMPANY, LAGOS, NIGERIA, BENEFICIARY: JOHN JONES-SMITH, LLC, ADDIS ABABA, ETHIOPIA, ISSUING BANKISSUING BANK: FOREIGN CORRESPONDENT BANK ABC, VALUE: USD 6,437,500.00
Dear Level 2,
This is an export L/C in which the goods, “Sugarcane”, are moving to Nigeria. The following are the red flags observed:
a. Goods are inconsistent with Beneficiary’s business line.
b. Port of loading not provided in the L/C.
c. The price per unit of the Sugarcane appears to be high.
d. High risk countries: Nigeria and Ethiopia.
Thank you and best regards.
To: Level 1 Risk
Subject: RE: AML CONCERN REF. 123456789/S-123456-789123, APPLICANT: JOHN DOE TRADING COMPANY, LAGOS, NIGERIA, BENEFICIARY: JOHN JONES-SMITH, LLC, ADDIS ABABA, ETHIOPIA, ISSUING BANKISSUING BANK: FOREIGN CORRESPONDENT BANK ABC, VALUE: USD 6,437,500.00
Dear Level 1,
a. Goods are inconsistent with Beneficiary’s business line. A D&B search on the Beneficiary confirms that it is involved in the export and import of sugarcane and sugar products.
b. Port of loading not provided in the L/C. The amendment received from the IB confirmed that the port of loading is Addis Ababa, Ethiopia.
c. The price per unit of the Sugarcane appears to be high. The unit price provided is consistent with the current market price available online.
d. High risk countries: Nigeria and Ethiopia.
Because all red flags are resolved, we can clear this transaction. Please proceed.
Over-Invoicing
Background
• $5 million transferable L/C issued by our correspondent at the request of Bureau of Health, West African Country
• To be confirmed by Citi
• For the supply of medical goods by Medical Sourcing
LLC, the middleman
Documents are presented to Citi for payment
• Supplier A as the second beneficiary presents invoices for $180,000
• Medical Sourcing substitutes an invoice totaling $500,000
• Citi’s trade operations compares invoices from multiple suppliers to the one from Medical Sourcing, and verifies a 330% average markup for the same goods
Further investigation
• Medical Sourcing is a small company, with no history of multi-million dollar hospital contracts
• The consulting firm that is the Bureau of Health’s agent may be familiar with Medical Sourcing
• This consulting firm may have influenced the selection
of Medical Sourcing as the supplier
What happened
• Citi asked the issuing bank to clarify the price discrepancies with its applicant
• The response from the IB was vague, and Citi follows up with emails
• Without providing any further details, the IB asserts that it is comfortable with the transaction and asks Citi to proceed
Citi declined to proceed, added the various entities to our internal AML hot list, enhanced our due diligence for certain
West African countries, reviewed our AML procedures for transferring L/Cs, and considered a regulatory filing
Fraud Prevention
The most frequently identified red flags for fraud:
– “Funds are good clean, cleared, unencumbered, earned ,and of non-criminal origin“’
– “Top 50 western bank“ or “top 25 prime bank
– Proof of product (“POP”) or “confirm POP” or “bank POP”
– “Proof of product/ownership bank to bank on activation of LC. This is not negotiable as it is standard procedure required by the banking fraternity“
– “Shall be by 100% confirmed, irrevocable, transferable, divisible, revolving LC“
– Any safe world port (“ASWP”)
– Irrevocable corporate/confirmed purchase order (“ICPO”)
– Proof of funds
– Fully funded, revolving, irrevocable, transferable, confirmed, documentary L/C (“FFRDLC”)
– Ready, willing, and able (“RWA”) letter
– High Yield Investment Program (“HYIP”)
– ICC promissory notes
– 3039/3034 format for L/Cs or guarantees (AKA “London short form”)
– Irrevocable bank purchase order (“IBPO”)
Other fraud prevention techniques:
• Track the actual shipping vessel
movement using available data bases (e.g.,
Lloyds)
• Validate the container number (if
applicable) using the shipping company’s
numbering algorithm
• Follow this helpful “rule of thumb”: A 20
foot container has a capacity of 25 metric
tons/33 cubic meters, and a 40 foot
container holds up to 30 MTs/67 CMs
Polling Question #4
Which of the following in a trade transaction could be a red flag?
A. Payment of proceeds to an unrelated third party
B. Kyrgyzstan
C. Scrap metal
D. ICC promissory note
E. All of the above
What Comes Next?
Quality Assurance Testing
• The OCC has mandated that Citi begin testing the resolution of items escalated by our Trade operations to our Trade in business controls (L0 to L1)
• Starting in May 2015, this will involve independently verifying the documentation and rationale used for the L1 dispositions
• On a daily basis, in Trade, Citi experiences approximately:
– 13,000 OFAC/SDN hits
– 145 potential AML/fraud cases
• We will sample 1% of the daily OFAC and 10% of the daily AML/fraud exceptions, with 60% of the selections coming from high risk geographies and businesses/products
Price Verifications
• This is another concern of the OCC
• It is a standard procedure when Citi suspects over- or under-invoicing
• Verification is easy enough when the goods are oil, soybeans, corn, and the like
• But if the goods are a unique item, spare part, not widely traded, etc., then it becomes difficult to impossible
• In such cases we rely on the reasonableness of the transaction with respect to the client’s regular business
Thank you