Trade based money laundering: A threat to development

With the advancement of technology a launderer’s technique of laundering has also been changed

Trade-based money laundering has been recognized by the Financial Action Task Force (FATF) in its 2006 study as one of the main methods by which criminal organizations and terrorist financiers move money for the purpose of disguising its origins and integrating it back into the formal economy. It is the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.  However, the FATF Paper on Best Practices (2008) broadened the definition to include terrorist financing. The definition recognizes that terrorist organizations also engage in a variety of criminal activities, ranging in scale and sophistication from low-level crime to serious organized crime. According to the International Narcotics Control Strategy Report (INCSR) hundreds of billions of dollars are laundered annually by way of TBML.

Banks play an important role in the economy of a country which extend finance to the importer and exporter and undertake on behalf of its customers in various forms which include opening of Letter of Credit, Post import finance in the form of Payment Against Documents (PAD), Loan against Imported Merchandise (LIM), Loan against Trust Receipt(LTR), UPAS(Usance but payment at sight), seller/buyer’s credit, issue of shipping guarantee etc.  Banks also make fund available for exporter in the form of pre-export financing by opening documentary credit, Pre-shipment Credit(PSC) for RMG sectors, Packing Credit (PC), post-shipment financing by negotiation of export bills, collection of export bills, document against acceptance or document against payment, bill purchasing/discounting against local and foreign export bills, open account transactions and warehouse financing etc. However, problems arise when these funds are abused by some unscrupulous business man or if they adopt unfair means for tax evasion or involve in trade-based money laundering. Their unfair means not only affect the smooth business of the real business community but also act as barrier in the path of sustainable development of a country.

Normally it is assumed that international trade transaction involves only an issuing bank and advising bank on behalf of the importer and exporter. But the fact is not limited to that extent only. There are other parties involved in the trade transactions. They are:  negotiating bank, collecting bank, reimbursing bank, remitting bank, confirming bank, transferring bank, intermediary bank, principal, indentor, shipping agents, insurance agents, pre-carriage vessels, vessels, forwarding agents, consignee, notifying parties etc. Thus in addition to core parties issuing bank, advising bank, importer and exporter, multiple financial institutions, multiple agents, multiple documents, rules and regulations and multiple ways to move the goods to and from all these makes the monitoring for money laundering complex.

How manipulation occurs: As we know shipping documents include a set of papers namely-invoice, packing list, transport documents namely bill of lading/airway bill/truck receipt etc., certificate of origin, inspection certificate, insurance policy/certificate, consular advice and other documents depending on the nature of import etc. If buyer and seller had ill intention, they adopt unfair means to manipulate the price of goods and services through false pricing i.e. either by over invoicing in case of import or under invoicing in case of export or multiple invoicing through misrepresenting the goods and falsely description of commodities. Shipping documents are also manipulated in a way either by shipping of short quantity of commodities than actual invoice value or shipment of more goods than the actual value of invoice whereas phantom shipment arises out of fraudulent documents or bill of lading and certificate of origin etc. presented to bank’s counter although actually no goods have been shipped out. By adopting such unfair means scope creates for tax evasion and thus criminal groups involve in trade-based money laundering.

There is no scope to deny that who evades tax and involve in the occurrence of trade-based money laundering are the enemies of the mankind. Their heinous activities not only adversely affect the economy but also health, education and other development plan of a country. They use the money in the terrorist activities like militancy and arson attack, drug abuse and human-trafficking and many other misdeeds. They stand against the achievement of Sustainable Development Goals. Real business communities are adversely affected for their activities. If all stakeholders in the international trade remain alert and ensure proper checking of documents from their respective places manipulation by the culprits can be stopped to a great extent and ultimately this will help prevention of trade –based money laundering

With the advancement of technology a launderer’s technique of laundering have also been changed. Cyber-crime is not unknown to us. There is no alternative but to remain alert to prevent threats and keep updated relating to various topics of the foreign trade. Several policies, rules and regulations and laws are there.  We must keep ourselves updated with regards to current Import policy and export policy of the government and also Foreign Exchange Regulations Act-1947, Bangladesh Bank Guidelines for Foreign Exchange Transaction, Customs Act and ICC publications etc. In order to combat trade-based laundering Bangladesh Bank circular and head office circular should be followed meticulously.

Recently a seminar on the topic ‘Prospects and Challenges of short-term foreign currency financing of banks was organized by the Bangladesh Institute of Bank Management (BIBM). A research team of BIBM disclosed that private sector’s short-term foreign currency loans stood $6.16 billion at the end of 2016 whereas it was $1.58 billion four years ago. New more customers are availing loans in foreign currency in the form of UPAS/buyers credit and export bill discounting. This is very much encouraging. Although central bank’s objectives had been to boost up economy allowing local industries to obtain short term foreign currency loan from overseas banks and financial institutions towards financing import of capital machinery and raw materials for setting up new industries but  some borrowers paid of their high cost local loan with the low cost foreign loans. If such low-cost loan is not abused and proper utilization is ensured than the real borrowers will be benefitted and such borrowings can contribute significantly for upliftment of the economy.

Now what are the ways out to tackle the threats of the foreign trade? According to the observations of US Immigration and Customs Enforcement (ICE) and the Financial Action Task Force (FATF) some Red Flags indicators of the trade-based money laundering  are note-worthy. These are:  significant differences between the description of the goods on the invoice and the bill of lading, type of commodity imported or exported do not match the line of business of the importer and exporter. Say importer’s business line is importation of toys and doll but consignment arrived at port is computer and computer accessories. Import value and market value of goods will significantly differ. Say exporter ships potatoes for USD 5 per 40 kg. Whereas the current market price for potato is USD 15 per 40 kg., size of shipment will be  inconsistence with importer or exporter’s regular business volume, use of multiple routes without valid reason and settlement by receipt of cash or other payment method from the party that have no apparent connection with the transaction. In order to prevent trade-based laundering, these indicators may work as check list for the practicing bankers and other parties in this trade.

Nevertheless developments in the international trade finance are encouraging: Over the years with the introduction of internationally standard monitoring system of Bangladesh Bank significant development in the international trade sector have brought a congenial atmosphere. At present no LC is accepted without Swift transmission. LC monitoring system has been introduced.  As a result all the AD branches are obliged to report to LC information to BB website. LC number, date, value, particulars of goods, port of shipment and port of loading all the details are incorporated in the reporting system of LC. Once the import bills are accepted the same have to be reported to BB through online monitory system. As a result the due date of payment is reflected in the dash-board which helps to ensure payment at maturity date. There was a time when suppliers of accessories could not get payment in time although maturity date of import bill was confirmed by acceptance.

 If acceptance is given now payment cannot be stopped except there is a court injunction.  After payment the details are reported to Bangladesh Bank online monitory system.  If any bill of entry remains outstanding the same is reflected in the online monitory system of Bangladesh Bank. On other hand online export monitoring system helps monitoring of export from Bangladesh. Such online monitoring systems have helped to detect discrepancies and can contribute significantly towards preventing trade-based money laundering in one side, and on the other such developments have created opportunities for the genuine business community to run the trade smoothly.

Import and Export policy should be followed meticulously. Instructions exist in the Import policy 2015-2018 (Rules 3(5) & 8(16) (Kha) to mention proper description of goods and H.S. Code number and value of goods in the LCA and LC. Invoice should contain generic name, brand name, model number and other details depending on the nature of import. If these particulars are available than tax evasion could be checked and help in combating trade-based money laundering.

Bangladesh has the Vision 2021 and 2041 and the country is thriving to achieve the SDG targets by 2030 as a member country of UN.  The country has always expressed solidarity with the policies and strategies of the UN and other international financial institutions/bodies to combat money laundering/trade-based laundering. With this end in view, Money Laundering Prevention Act was promulgated in Bangladesh in 2002. This has been amended last in 2012.

We have to fight and win over the greatest enemy-Trade Based Money Laundering. Failing which the enemy will grab the world which must not be allowed. In the country we have a set of rules and regulations and policy guidelines of Bangladesh Bank in line with international financial institutions and bodies in this regard which need to be followed meticulously. Banks have own and separate risk management unit for comprehensive and intensive risk management. Along with government efforts, all stakeholders and parties must take robust effort and work together to combat trade-based laundering for sustainable development.

The writer is the Assistant General Manager,

Sonali Bank Limited.

 

Trade based money laundering: A threat to development

With the advancement of technology a launderers technique of laundering has also been changed

Trade-based money laundering has been recognized by the Financial Action Task Force (FATF) in its 2006 study as one of the main methods by which criminal organizations and terrorist financiers move money for the purpose of disguising its origins and integrating it back into the formal economy. It is the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins. However, the FATF Paper on Best Practices (2008) broadened the definition to include terrorist financing. The definition recognizes that terrorist organizations also engage in a variety of criminal activities, ranging in scale and sophistication from low-level crime to serious organized crime. According to the International Narcotics Control Strategy Report (INCSR) hundreds of billions of dollars are laundered annually by way of TBML. Banks play an important role in the economy of a country which extend finance to the importer and exporter and undertake on behalf of its customers in various forms which include opening of Letter of Credit, Post import finance in the form of Payment Against Documents (PAD), Loan against Imported Merchandise (LIM), Loan against Trust Receipt(LTR), UPAS(Usance but payment at sight), seller/buyers credit, issue of shipping guarantee etc. Banks also make fund available for exporter in the form of pre-export financing by opening documentary credit, Pre-shipment Credit(PSC) for RMG sectors, Packing Credit (PC), post-shipment financing by negotiation of export bills, collection of export bills, document against acceptance or document against payment, bill purchasing/discounting against local and foreign export bills, open account transactions and warehouse financing etc. However, problems arise when these funds are abused by some unscrupulous business man or if they adopt unfair means for tax evasion or involve in trade-based money laundering. Their unfair means not only affect the smooth business of the real business community but also act as barrier in the path of sustainable development of a country. Normally it is assumed that international trade transaction involves only an issuing bank and advising bank on behalf of the importer and exporter. But the fact is not limited to that extent only. There are other parties involved in the trade transactions. They are: negotiating bank, collecting bank, reimbursing bank, remitting bank, confirming bank, transferring bank, intermediary bank, principal, indentor, shipping agents, insurance agents, pre-carriage vessels, vessels, forwarding agents, consignee, notifying parties etc. Thus in addition to core parties issuing bank, advising bank, importer and exporter, multiple financial institutions, multiple agents, multiple documents, rules and regulations and multiple ways to move the goods to and from all these makes the monitoring for money laundering complex. How manipulation occurs: As we know shipping documents include a set of papers namely-invoice, packing list, transport documents namely bill of lading/airway bill/truck receipt etc., certificate of origin, inspection certificate, insurance policy/certificate, consular advice and other documents depending on the nature of import etc. If buyer and seller had ill intention, they adopt unfair means to manipulate the price of goods and services through false pricing i.e. either by over invoicing in case of import or under invoicing in case of export or multiple invoicing through misrepresenting the goods and falsely description of commodities. Shipping documents are also manipulated in a way either by shipping of short quantity of commodities than actual invoice value or shipment of more goods than the actual value of invoice whereas phantom shipment arises out of fraudulent documents or bill of lading and certificate of origin etc. presented to banks counter although actually no goods have been shipped out. By adopting such unfair means scope creates for tax evasion and thus criminal groups involve in trade-based money laundering. There is no scope to deny that who evades tax and involve in the occurrence of trade-based money laundering are the enemies of the mankind. Their heinous activities not only adversely affect the economy but also health, education and other development plan of a country. They use the money in the terrorist activities like militancy and arson attack, drug abuse and human-trafficking and many other misdeeds. They stand against the achievement of Sustainable Development Goals. Real business communities are adversely affected for their activities. If all stakeholders in the international trade remain alert and ensure proper checking of documents from their respective places manipulation by the culprits can be stopped to a great extent and ultimately this will help prevention of trade based money laundering With the advancement of technology a launderers technique of laundering have also been changed. Cyber-crime is not unknown to us. There is no alternative but to remain alert to prevent threats and keep updated relating to various topics of the foreign trade. Several policies, rules and regulations and laws are there. We must keep ourselves updated with regards to current Import policy and export policy of the government and also Foreign Exchange Regulations Act-1947, Bangladesh Bank Guidelines for Foreign Exchange Transaction, Customs Act and ICC publications etc. In order to combat trade-based laundering Bangladesh Bank circular and head office circular should be followed meticulously. Recently a seminar on the topic Prospects and Challenges of short-term foreign currency financing of banks was organized by the Bangladesh Institute of Bank Management (BIBM). A research team of BIBM disclosed that private sectors short-term foreign currency loans stood $6.16 billion at the end of 2016 whereas it was $1.58 billion four years ago. New more customers are availing loans in foreign currency in the form of UPAS/buyers credit and export bill discounting. This is very much encouraging. Although central banks objectives had been to boost up economy allowing local industries to obtain short term foreign currency loan from overseas banks and financial institutions towards financing import of capital machinery and raw materials for setting up new industries but some borrowers paid of their high cost local loan with the low cost foreign loans. If such low-cost loan is not abused and proper utilization is ensured than the real borrowers will be benefitted and such borrowings can contribute significantly for upliftment of the economy. Now what are the ways out to tackle the threats of the foreign trade? According to the observations of US Immigration and Customs Enforcement (ICE) and the Financial Action Task Force (FATF) some Red Flags indicators of the trade-based money laundering are note-worthy. These are: significant differences between the description of the goods on the invoice and the bill of lading, type of commodity imported or exported do not match the line of business of the importer and exporter. Say importers business line is importation of toys and doll but consignment arrived at port is computer and computer accessories. Import value and market value of goods will significantly differ. Say exporter ships potatoes for USD 5 per 40 kg. Whereas the current market price for potato is USD 15 per 40 kg., size of shipment will be inconsistence with importer or exporters regular business volume, use of multiple routes without valid reason and settlement by receipt of cash or other payment method from the party that have no apparent connection with the transaction. In order to prevent trade-based laundering, these indicators may work as check list for the practicing bankers and other parties in this trade. Nevertheless developments in the international trade finance are encouraging: Over the years with the introduction of internationally standard monitoring system of Bangladesh Bank significant development in the international trade sector have brought a congenial atmosphere. At present no LC is accepted without Swift transmission. LC monitoring system has been introduced. As a result all the AD branches are obliged to report to LC information to BB website. LC number, date, value, particulars of goods, port of shipment and port of loading all the details are incorporated in the reporting system of LC. Once the import bills are accepted the same have to be reported to BB through online monitory system. As a result the due date of payment is reflected in the dash-board which helps to ensure payment at maturity date. There was a time when suppliers of accessories could not get payment in time although maturity date of import bill was confirmed by acceptance. If acceptance is given now payment cannot be stopped except there is a court injunction. After payment the details are reported to Bangladesh Bank online monitory system. If any bill of entry remains outstanding the same is reflected in the online monitory system of Bangladesh Bank. On other hand online export monitoring system helps monitoring of export from Bangladesh. Such online monitoring systems have helped to detect discrepancies and can contribute significantly towards preventing trade-based money laundering in one side, and on the other such developments have created opportunities for the genuine business community to run the trade smoothly. Import and Export policy should be followed meticulously. Instructions exist in the Import policy 2015-2018 (Rules 3(5) 8(16) (Kha) to mention proper description of goods and H.S. Code number and value of goods in the LCA and LC. Invoice should contain generic name, brand name, model number and other details depending on the nature of import. If these particulars are available than tax evasion could be checked and help in combating trade-based money laundering. Bangladesh has the Vision 2021 and 2041 and the country is thriving to achieve the SDG targets by 2030 as a member country of UN. The country has always expressed solidarity with the policies and strategies of the UN and other international financial institutions/bodies to combat money laundering/trade-based laundering. With this end in view, Money Laundering Prevention Act was promulgated in Bangladesh in 2002. This has been amended last in 2012. We have to fight and win over the greatest enemy-Trade Based Money Laundering. Failing which the enemy will grab the world which must not be allowed. In the country we have a set of rules and regulations and policy guidelines of Bangladesh Bank in line with international financial institutions and bodies in this regard which need to be followed meticulously. Banks have own and separate risk management unit for comprehensive and intensive risk management. Along with government efforts, all stakeholders and parties must take robust effort and work together to combat trade-based laundering for sustainable development. The writer is the Assistant General Manager, Sonali Bank Limited.