Trade-Based Money Laundering (TBML) exploits international trade and trade finance systems for laundering illicit proceeds. It involves a series of schemes for TBML, including falsifying invoices, commodity misclassification, forming shell companies, forging trade documents, etc., for illegally moving funds across the continents.

Currently, international financial institutions estimate $2 trillion worth of trade, out of around $20 trillion, to get laundered annually in the form of Trade-Based Money Laundering. Customs fraud is mainly synonymous with Trade-Based Money Laundering. Customs manipulations like price, quantity, and quality alterations in the import/export of the goods are involved in the TBML of illicit bulk cash across nations. This blog sheds light on the TBML methodologies, TBML red-flag indicators, and its regulatory compliance policies.

Widespread TBML Methodologies Exploited by Money Launderers

Over Invoicing, Under Invoicing – When an exporter receives more money than the value of goods sold to an importer, it’s over-invoicing. On the other side, when an importer receives more money while selling the goods in the local market after buying them at an unvalued price from an exporter, it’s under-invoicing. Both the instances trigger an extra value transferred via trade between the parties as money laundering.

Multiple Invoicing or Carousel Transactions – A money launderer misuses the legal system to produce multiple invoices for the same shipment by complicating the payments with more than one financial institution. It’s a typical multiple-invoicing method for legitimizing one payment more than once and integrating illicit money into the financial system.

Over Shipment, Under Shipment – The trade involves misrepresenting the number of goods; the over and understatement of items give the money launderers a scope to process excessive payments of illicit money.

Inferior Shipment – It involves exporting cheaper quality goods with falsified invoices and submitting bills for relatively costly goods to customs.

Front Fake Commodities – The shipment of commodities does not match with the business classification, and the trade is made to transfer the illicit money value rather than the actual goods.

Shell Companies – Offshore companies, acting as front or shell companies for organizations involved in sending excessive funds across the continents. For years, law-breakers have preferred shell companies as camouflage to facilitate TBML activities. At times, it may so happen that established companies make their foray into an entirely distinct market segment to divert their income via shell operations.

Phantom Shipment – There may be no shipment at times, and the invoices are still generated and bills passed in the customs.

Major TBML Red-Flag Checks for Customs and Financial Institutions

A joint effort of Egmont Group and Financial Action Task Force (FATF) to combat the worldwide TBML activities has set-forth imperative red-flag checks on this trade-based financial crime.

Common Anomalies – International trade-related activities involve a lot of paperwork. All the more challenging is that the financial institutions are only exposed to the official documents and not the commodities in trade. So, on the face of it, common TBML red flags involve finding anomalies in product pricing, irregular product description, and price matching with the product quantity and quality standards.

Unnatural Transactions – Financial institutions must keep a regular Transaction Monitoring on the trade activities of the parties involved; the monitoring includes the nature of transactions, business locations, background checks, the characteristics of the traded goods, etc. Unusual transactions also consist of substantial below-threshold cash payments and inexplicable third-party payments.

High-Risk Jurisdictions – Businesses set up in jurisdictions with weak AML-CFT regulations, suspicious addresses, with an indistinct online presence. All the mentioned red flags give a clear indication of out-of-sync business activity. Such entities generally have unstructured business operations with no proper payroll, marketing, advertisement, or accounting reports.

Free-Trade-Zones (FTZs) – The customs-free nature for bringing liberalization in global economic activities has paved the way for acceleration in the TBML activities as criminals are continually exploiting the eased-up trade barriers in around 3500 ports worldwide. Trade activities at the FTZs are more vulnerable to being misused for laundering money.

How Regulated Institutions Must Remain AML-CFT Complaint

Risk-Based Model – Financial Institutions (FI) must follow regulatory Customer Due Diligence (CDD) and keep their Know-Your-Customer (KYC) records updated. It is on the part of the FI to conduct proactive Enhanced Due Diligence (EDD) on the potential high-risk clients with stringent identity checks and transaction monitoring. In addition, the records must be kept updated and presented to the Financial Intelligence Unit (FIU) authorities on suspecting unusual trade activities.

Transaction Monitoring – The financial institutions that handle large trade-related activities must monitor their clients in real-time. All Suspicious Transaction Reports (STRs) and Suspicious Activity Reports (SARs) must put the financial authorities to alarm. A series of SARs and STRs trade datasets also help establish emerging TBML typologies for predictive analysis.

AI-Based Machine Learning Algorithms – All leading financial institutions utilize the best-in-class data analytics technology to monitor transactions. The Artificial Intelligence-based rule engine algorithms instantly trigger unusual events to discover trade-related suspicious activities occurring across the businesses in real-time.

Know-Your-Business (KYB) – The financial and other regulated institutions must regularly check on the businesses they are doing business with. Know-Your-Business (KYB) involves business identity verifications for genuine business onboarding. At the same time, the regulated financial institutions must authenticate the Ultimate Beneficial Ownership (UBO) for both individuals and businesses involved in trade transactions.

Sanctions, PEPs and Adverse Media – The compliance officers must screen businesses and individuals against Sanctions and PEP lists. In addition, adverse news about the owners and entities across the press and online media indicates brewing illicit activities somewhere down the line.

Conclusion 

Given the scope plus volume of today’s trade, masking illicit gains with trade-based activities has become easier for the launderers. Furthermore, there are fewer initiatives taken in the TBML AML-CFT methods than in other money laundering methods. It has been believed that the global trade system is so complex – involving many deterrents and regulatory sluggishness – that it has made laundering money for criminals and terrorists more convenient via global merchandising activities.

The unrestrained threat of Trade-Based Money Laundering has given this financial crime an Advanced Persistent Threats (APTs) risk status, which is otherwise mostly used for cybercrimes. If you are a financial or regulated institution seeking AI-Based client behavior tracking, document verification, and suspicious transaction reporting solutions to fulfil your business compliance, schedule a call with the IDMerit AML solution advisor. We offer best-in-class Fraud Protection and KYC-KYB Compliance solutions to businesses worldwide.

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Anti-money laundering regulations become more stringent every year as do the associated fines. On January 1, 2021, Congress passed the National Defense Authorization Act for Fiscal Year 2021 (the NDAA), which includes the most substantial and sweeping improvements surrounding AML legislation. This omnibus bill includes amendments to the USA Patriot Act which address a wide range of gaps in previous legislation.  The US’ AML Act 2020 (AMLA) was designed to address changes in the technological landscape and the lack of motivation (monetary or otherwise) for whistleblowers to share AML information with authorities.

Key Provisions of the AMLA 2020

The AMLA 2020 brought forth major changes and amendments which strengthened the penalties for non-compliant banks and financial service organizations. Major changes include:

• Stringent AML Enforcement Through Improved Compensation For Whistleblowers
•  AMLA 2020 Expands Existing BSA/AML Violation Penalties
• AMLA 2020 Legislation Allocates More Government Resources Committed to Address Money Laundering 
• AMLA Provides Additional Statutory Authority for DOJ to Seek Documents from Foreign Banks & Financial Institutions
• The AMLA References a Pilot Program To Share SAR (Suspicious Activity Report) Data Across International Borders
• The AMLA Extends the BSA’s Reach To Cryptocurrency (Nontraditional Value Transfers)

7 Anti-money laundering Compliance Fines You May Have Missed

“Financial institutions have been hit with $10.4 billion in global fines and penalties related to Anti-money laundering (AML), Know Your Customer (KYC), data privacy, and MiFID (Markets in Financial Instruments Directive) regulations in 2020, bringing the total to $46.4 billion for those types of breaches since 2008,” ComplianceWeek reports. Failure to comply with Anti-money laundering laws and regulations brought heavy fines in 2020 and continues to increase. Below are seven of the largest fines levied on banking & financial institutions:  

1. 2019 Data Breach leads to Capital One fine of $80 Million 

The US Office of the Comptroller of the Currency (OCC) levied an $80 million civil fine against Capital One in August for its mismanagement and inadequate security systems. According to Fortune Magazine, “the bank’s own internal audit failed to identify “numerous weaknesses” in its management of the cloud environment and ‘engaged in unsafe or unsound practices that were part of a pattern of misconduct.’”  The breach compromised over 140,000 Social Security numbers and 80,000 bank account numbers. Paige Thompson, a former Amazon Software Engineer, stands accused of stealing personal identifiable information (PII). Charges include computer fraud and “abuse for an intrusion on the stored data.”

Large gaps in information security and Anti-money laundering regulations influenced the adoption of the most recent AML legislation which helps support previous computer security and fraud legislation. While Thompson’s motives may still be under investigation, proper employee vetting through background checks and PII security policies are paramount to ensuring these types of breaches do not occur. Banks and corporations are required to follow stringent information security guidelines to avoid large fines and public scrutiny. 

2. OCC Issues $85 Million Penalty To Usaa Federal Savings Bank

The OCC slapped USAA Federal Savings Bank with an $85 million fine for risk management inadequacies in October. This is the second fine this San Antonio bank has been levied with. According to the Office of the Comptroller of the Currency (OCC), “bank’s failure to implement and maintain an effective compliance risk management program and an effective information technology risk governance program.”

Risk management and compliance programs including Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are mandated by the Bank Secrecy Act and recently passed Anti-money laundering (AML) legislation. Large fines and penalties are being levied around the globe as banks and covered financial institutions (and cryptocurrency exchanges) fail to build proper compliance programs.  

3. Swedish Bank SEB Fined $107 Million by Regulator For Baltic AML Failures

Skandinaviska Enskilda Banken (SEB) received a $107 million fine in June for Anti-money laundering (AML) failures. SEB, the second largest bank in Sweden, has been fined for failing to  , Swedish Financial Supervisory Authority (FSA), the regulatory authority, charged the bank in early June of 2020 and levied the fine which highlights the global issues revolving around Anti-money laundering compliance in the financial services industry, “Despite the elevated risk of money laundering in the Baltics, the bank has done too little, too late,” says FSA director general Erik Thedéen.

Basic AML due diligence includes identity verification, validation, and age verification (to name a few). Not only are AML violations on the rise, victims of complex schemes and fraud are rampant within money service provider industries. 

4. Western Union Refunds $153 Million For Scam Victims

“Western Union turned a blind eye to the fraudulent payments made through its money transfer system,” says Andrew Smith, director of the FTC’s Bureau of Consumer Protection. Western Union began refunding defrauded customers in March after they were ordered to by theFederal Trade Commission (FTC). The lack of Know Your Customer (KYC) compliance can severely damage an organization and harm millions of account holders. 

According to the United States Federal Bureau of Investigations, “The FTC’s complaint against Western Union alleged that for many years, Western Union was aware that fraudsters around the world used the company’s money transfer system to bilk consumers, and that some Western Union agents were complicit in the frauds. The FTC’s complaint alleged that Western Union failed to put in place effective anti-fraud policies and procedures and to act promptly against problem agents.” While in this case, Western Union is said by Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, to have “turned a blind eye,” more banks and Money Service Providers (MSP’s) are unaware of the mandatory KYC/AML regulations that can protect them from these types of horrible situations.  

5. Citi To Pay $400 Million Occ Fine For Risk Management Failures

One of the world’s largest financial institutions, Citi Bank, has been ordered to pay $400M in a case that brings to light severe risk management issues. The South Dakota bank was found to have been lacking internal controls and financial safeguards including those relating to AML and data governance. According to the consent order, Citibank needs to complete a “thorough redesign of data architecture, re-engineering of processes, and modernisation of system applications and information technology infrastructure.” This is the second fine in which Citi has been hit with in recent years showing its glaring need to update and comply with regulatory mandates and internal financial controls. 

6. Westpac Agrees To Record Aud 1.3 Billion Fine For Aml Failures

Westpac, one of Australia’s largest banks, agreed to pay a record AUD 1.3 billion ($959m) fine for money laundering breaches in September. According to court filings and Fintech Futures, the financial institution, “failed to keep records related to the origin of the transactions, or carry out “appropriate customer due diligence.” These are major lapses in AML compliance procedures and this underscores the need for both proper, and timely, Know Your Customer compliance as well as ongoing transaction monitoring. 

Westpac admitted to 76,000 additional violations including, “failures to reasonably monitor customers for transactions related to possible child exploitation”, and “further failures to assess money laundering and terrorism financing risks.” Compliance officers should take note of the challenges that exist for large banks and reevaluate their preparedness in order to avoid fines and penalties such as those seen in the above cases. 

7. Compliance Lapses & Fraudulent Accounts Generate Billions In FInes For Wells Fargo

Wells Fargo bank, the fourth-largest in the US, will pay a hefty fine of $3 billion for its failure in security procedures. The Security and Exchange Commission will receive $500 million of the total and plans to use the funds to offer restitution to those customers who were defrauded by Wells Fargo. According to Fintech Futures, the bank “pressured employees to cross-sell products and services, leading them to create millions of fake accounts using forged and fraudulent customer signatures.” Proper Know Your Customer compliance procedures and fraud weren’t incorporated into the account opening process as internal documents showed that, “[e]mployees of the bank were found to be using their own contact details on application forms, so as to ensure that the real customer was never informed about the accounts opened in their name.” 

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About IDMERIT: Headquartered in San Diego, California, IDMERIT provides an ecosystem of identity verification solutions designed to help its customers prevent fraud, meet regulatory compliance and deliver frictionless user experiences. The company is committed to the on-going development and delivery of offerings that are more cost-effective and comprehensive than other solution providers. IDMERIT was funded by experts who have been sourcing data on personal and business identities across the globe for over a decade. This access to official and trusted data throughout the world has become increasingly important as companies find themselves completing transactions across borders as a standard course of business. www.idmerit.com

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In the current regulatory landscape, banks face difficulty implementing Know Your Customer (KYC) or Customer Due Diligence (CDD) for online and mobile banking accounts due to inconsistent state laws on scanning and retaining state-issued identification cards. While most states allow mobile banking applications to copy licenses for verifying a customer’s identification, a small number do not and the HR 1457 bill would preempt the conflicting state laws. The bill would allow financial institutions to use electronic copies of identification for purpose of identity verification to enroll the customer in online banking or other sensitive online services. Specifically, the MOBILE Act would allow banks, with a customer’s content, to record personal information from a scan, copy or image of a driver’s license or other personal identification card. The bill would allow financial institutions to electronically scan and retain an individual’s identity verification documents when he/she initiates an online request to open an account or obtain sensitive online services. Furthermore, the financial institutions would be required to delete any copy or scan of an individual’s personal identification documents after use.

Per the legislative description, “the financial institution may use the information for the purpose of verifying the authenticity of the driver’s license or identification card, verifying the identity of the individual, or complying with legal requirements.”

The MOBILE Act of 2017 could help an estimated 67 million unbanked or underbanked people in the United States access mobile banking services. Keeping convenience aside, this would also ensure that consumers are protected by the financial institution’s identity theft and fraud policies. End-to-end digital banking experience to reduce inefficiency, operations cost and time spent has been at the forefront of every financial institution’s digital plans. Although, most financial institutions lack a legal framework that would allow them materialize such lofty plans.

What is the role of IDMERIT?

The HR 1457 Mobile Act of 2017 could prove to be hugely expensive and time-consuming for financial institutions. Moreover, banks might even face huge fine (or the potential loss of their banking license) for failing to meet KYC standards. While it’s difficult to assess the overall financial and reputational losses a financial institution may face, here is a list of what is certain:

• Banks may possess only partial information. (E.g. US military ID, Social Security Card, Employment Authorization Card, etc., all of which come without proof of address)
• Available identity verification documents may be of poor quality. (E.g. poor quality scans)

Compatible with the Foreign Nationals Employment Act, the Compulsory Identification Act, Counter-Terrorism Act, and the Anti-Money Laundering Act is IDMERIT’s Identity Verification Services.

About IDMERIT

IDMERIT is a global consumer and business verification portal. We help customers across industries and government sectors predict, assess, and manage risks by combining next-generation risk management and anti-fraud services. Our warehouse of unique data and advanced analytics tools to address evolving client needs can help you automate decision making while upholding the highest standards of security and privacy.

We work closely with world-class niche organizations offering data warehousing and validity of contact data solutions to ensure they are compliant with the Foreign Nationals Employment Act, the Compulsory Identification Act, Counter-Terrorism Act, and the Anti-Money Laundering Act. Our company powers the global identity ecosystem for customers.

For more information on IDMERIT’s identity verification services, you can drop us a line through the Contact Us page or call us at (888)-378-9283.

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KYC is the term for the series of due diligence activities performed by regulated financial companies that are designed to check for the relevant information required to safely do business with their clients. At a higher level, KYC also forms part of the banking regulations which govern the financial sector.

AML is a much more recent development, introduced during the 1989 G7 Summit in Paris, as response to concerns about criminal activity across borders. In the US, AML automatically applies to transactions over $10,000, which is still comfortably below where the price of BitCoin and Ethereum, the two premier cryptocurrencies, currently sit. Consequently, having a strong AML system in place to prevent exposure to illegal activity – in particular, the use of cryptocurrency to launder money, is extremely important.

The presence of these two protocols has both positive and negative effects on investors looking to convert their cryptocurrency into fiat. The obvious negatives are that it creates a barrier to easily withdrawing cryptocurrency and using it to buy goods and services in the real world – arguably the single greatest failure for major cryptocurrencies in this day and age.

The positives however, are more considerable. The potential danger of an unregulated global currency should be obvious – one need only look at the corruption of DEA agents in the Ross Ulbricht trial to see that the opportunity to own large amounts of anonymous currency presents a great deal of temptation. Hundreds of millions of dollars of Bitcoin alone have been stolen since 2013, and proper security checks on who is handling what are paramount in today’s global financial climate.

What exactly constitutes sufficient AML and KYC checks, however, is open to some debate. AML, arguably the most important of the two protocols, is not globally binding, so BitCoin wallets located in less salubrious nations can be populated by clients who are deliberately seeking to use their cryptocurrency for nefarious purposes. It is not difficult for a simple Google search to bring up lists of wallets that have poor (or almost non-existent) AML protocols in place. While much of this information is designed to help investors know which companies to avoid (for the security of their own currency), it serves equally as a means to identify which wallets may be beneficial to criminals looking to either store their ill-gotten gains, or to exploit the finances of others.

Should cryptocurrency grow, especially in light of the BitCoin Cash developments, the need for AML and KYC checks to head off the possibility of using cryptocurrency as a form of tax evasion is clearly going to be necessary.

For a wallet (or other cryptocurrency service) looking to prove high quality service to users, it is important to prove to potential investors that the AML and KYC protocols are robust – would you put your money in bank that did not know who was on site at any given time? It is unlikely.

IDMERIT’s solutions for Anti-Money Laundering allows businesses to quickly and easily identity high-risk applicants and manage them in an appropriate manner. Our data identifies and focuses on key markets across the world, while staying current on some of the most stringent identity management models. Our document image validation management allows businesses to approve the credibility of more than 520 global record formats, including national ID cards.

A financial services provider does not have to be deliberately complicit in order to assist in money laundering, it simply needs to be lax on rules – for whatever reason.

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