Financial fraud and violations continue to shatter the world; the current global crises, such as the Pandemic, Russian aggression over Ukraine, soaring inflation and systemic supply shortages., have amplified the impact of such violations on the Global Financial System.
This reinforce the need to establish a more digitised and comprehensive compliance system to curtail the crimes such as money laundering, human and drug trafficking that is on an upward trend owing to reasons cited above. As we know, money laundering is the process by which a large amount of money is illegally obtained from various criminal activities and showcased as originating from a legitimate source. It has a global reach that undermines countries' economic and political stability and systematically erodes wealth by making the parties vulnerable to severe threats. As per a recent study by the United nations1, 2 to 5% of Global GDP equivalent money is laundered annually, and an 8.7 trillion-dollar value mismatch in the last decade. Penalties imposed on FIs and other parties increased to $ 4.65Bn in 2020, which was previously $3.75 Bn.
Trade-based money laundering (TBML), a top three ML method
There are three broad categories where illicit money has been transformed into the formal economy. The first is via financial institutions, the second through bulk cash smuggling between countries and the third is the transfer of goods via Trade. The FATF defines the term TBML as the "process of disguising the proceeds of crime and moving value through trade transactions in an attempt to legitimise their illicit origins. Many recent financial crimes reported have strong links to AML control failings where lack of TBML checks had an important role. There are various techniques, such as price and invoice manipulations, false invoices/documents etc., are being employed by fraudsters and identifying these irregularities is very challenging when trade volumes are significant with complex paper trails and multiple data sources to check.
Effective Compliance measures, a necessity
Trade Compliance mainly revolve around two operating practices.
- Customer due diligence: this is complying with the KYC (Know your customer) norms to understand the customer, its business, whether it appears under an internationally recognised Sanction/OFAC list, everything to identify the customer and their business comes under the due diligence practice. As per analysts' reports, banks are dedicating between 31% and 40% of their compliance budget to fulfill their know-your-client (KYC) obligations which is a high cost.
- Trade-based Compliance: Managing commodity-based import and export controls in a compliant manner across the global supply chain, addressing the challenges such as dual usage of goods, fraudulent invoices, and many more. This is commonly defined as a Trade-Based Money laundering compliance check (TBML check).
To ensure an effective compliance system, financial institutions need to overcome the challenges like Trade transaction complexities, multiple data sources, multiple parties, and locations and, most importantly, handle the multi-dimensional supply chains (Physical, Financial and information supply chains)
Measures to improve Trade Compliance
- End to end digitization will help different supply chains (physical, financial and information supply chains) to co-exist. The digital connectivity of all supply chains is an important measure to improve the overall effectiveness of compliance. The financial institution has a critical responsibility to identify the wrong transactions or parties and ensure they do not do business with sanctioned entities or countries, especially while dealing with a global network. In Trade, risk elements and uncertainties are higher. The banks need to extract some of this data to tick compliance boxes such as anti-money laundering (AML), know-your-client (KYC), and international sanctions regulations. Digital solutions can streamline compliance processes by automation using AI and machine learning which ultimately improve operational efficiency and reduce costs.
- The Trade Ecosystem: As the regulatory focus on international Trade exponentially increases, there is significant growth in demands from banks, cargo carriers, freight forwarders, and other members of the broader trade ecosystem. To meet the regulatory expectations, all parties involved in a trade transaction must be equipped to screen for sanctioned entities throughout the life cycle of the Trade; this includes screening the sender, recipient, the goods and also monitoring the journey of the shipment to ensure there are no sanctioned entities or suspicious circumstances that could pose a risk.
- Legal Entity identifier: The challenges with inconsistent data across organisations may be addressed via a standard, globally accepted entity identifier. The banks must understand the level of due diligence they must perform on their customers and non-customers at the onboarding and transaction levels. The Legal Entity Identifier (LEI) initiative will help all parties to be identified for this purpose
Role of Technology: A key enabler
Technology plays a pivotal role in establishing a robust, end-to-end digitised compliance system for the parties and financial institutions involved in Trade transactions. Leveraging modern technologies such as OCR tools for digitisation, AI capabilities for contextual enrichments and the internet of things (IoT) to know your goods (KYG) will significantly improve the overall efficiency and effectiveness of compliance systems.
Money laundering is a global problem requiring stringent measures supported by comprehensive digital solutions. Trade Finance is an easy target mainly due to complex documentary processes involved and Global exposure.
With technology uncovering that trade-based financial crime is far deeper than most people had imagined, banks and institutions must deploy real-time intelligent compliance solutions for their trade processing. The effective combination of new technologies such as OCR, Artificial intelligence, Natural Language Processing and machine learning will play a significant role in providing a digitally advanced compliance system that collaborates with financial institutions, Corporates and intermediaries. The fourth industrial revolution, amidst the global crises, has offered a unique opportunity to fast forward a digitally sound solution and optimise the cost, ultimately reducing the current 1.7 trillion trade gap.