Trade Finance
Trade Finance – Key Highlights
- Trade finance money laundering refers to the misuse of trade instruments to move illicit funds across borders.
- Criminals often take advantage of complex cross-border trade and create fake invoices to enter dirty money into the legitimate financial system.
- Regulators and FATF expect entities to implement customer due diligence and monitor transactions to detect suspicious money movement across borders.
- Citadel365 automates KYC, screening, risk assessment, and transaction monitoring with effective audit trails to facilitate AML trade finance controls and comply with regulations.
What Is Trade Finance in AML?
Trade Finance refers to the financial instruments that support domestic and international trade by ensuring the smooth flow of goods and payments and mitigating risks. Common trade finance instruments involve Bank Guarantees (BGs), Letters of Credit (LCs), and Documentary Collections, which facilitate trade between buyers and sellers in different geographies.
Trade finance instruments are highly appealing to money launderers for Trade-Based Money Laundering, as they can be misused to convert dirty money into clean payments for goods and transfer illicit money across borders. The heavy reliance on complex, paper-based transactions and involvement of multiple parties makes trade finance a high-risk activity.
Trade-Based Money Laundering (TBML) Risks
Criminals exploit trade finance for Trade-Based Money Laundering (TBML) through over-invoicing (setting a higher price on the invoice), under-invoicing (declaring a lower value for goods than their actual value), false description (falsifying shipping documents), and multiple invoicing (goods shipping with invoices issued at multiple times to multiple parties).
Trade finance helps criminals to pay for imports/exports, allowing illicit money to enter the financial system (placement). They further use under/over invoicing techniques to transfer funds through several banks and jurisdictions, creating complex chains to hide the source of funds (layering), which enables money laundering and terrorist financing.
The misrepresentation of the goods’ price, quality and quantity on invoices leads to TBML risks that arise from:
- Use of complex supply chains: agents, shippers, diverse manufacturers, and multiple ports.
- Involvement of multiple parties: brokers, shell companies, and third-party agents to move goods or transfer payments.
- Use of high-risk jurisdictions to send/receive goods or payments.
Red Flags and Suspicious Indicators in Trade Finance
Regulated Entities must detect the following red flags or signs in trade finance, indicating TBML:
- Goods are priced much higher, much lower or do not match the market price.
- Unusual complex trade routes, an attempt to hide the origin or destination of goods/funds.
- Inconsistent documents due to constant changes, mismatched papers, forged documents, and vague descriptions.
- Large cash payments, unusual terms & conditions, unnecessary third-party involvement, and a sudden spike in volume of transactions or shipments.
- Use of shell companies, front businesses, or hidden beneficial ownership to corrupt the legitimate international trade for illicit fund transfers.
Trade Finance Compliance Requirements: KYC and Sanctions Screening
Trade finance compliance starts with knowing every party to the deal, not just your own customer. Firms should:
- Apply KYC to all parties: verify the customer, its beneficial owners and, where possible, the buyer, seller and other counterparties.
- Understand the trade: check that the goods, volumes, prices and routes make sense for the customer’s business.
- Screen everything against sanctions lists: parties, banks, ports, vessels and countries, plus goods that may be dual-use (usable for military purposes).
- Check documents for consistency: invoices, bills of lading, letters of credit and certificates of origin should match each other.
- Monitor transactions: look for patterns such as repeated amendments, unusual payment routes or sudden volume spikes.
Regulatory and FATF Expectations for Trade Finance Controls
FATF standards, adopted into national law by regulators, require Regulated Entities to implement Customer Due Diligence (CDD) procedures to verify the identities of involved parties, the purpose of business, true beneficial owners, and red flags in trade transactions. Regulated Entities must conduct in-depth scrutiny to detect document inconsistencies and the use of shell companies, high-risk individuals or countries.
Further, regulators expect Regulated Entities to maintain accurate and organised records of every transaction involving trade finance in structured audit trails. Moreover, entities must escalate suspicious transactions or customer activities to senior management or compliance teams for further investigation and mandatory regulatory reporting.
How to Conduct a Trade Finance AML Risk Assessment
Assess trade finance risk across six factors, then set the level of due diligence to match:
- Customer: business type, ownership structure, trading history
- Product: documentary trade (letters of credit, collections) versus open-account trade, where the bank sees less of the underlying deal
- Goods: high-value goods, goods easy to misprice, and dual-use goods
- Geography: high-risk jurisdictions, FATF grey-listed countries and free trade zones
- Counterparties and intermediaries: unknown agents, shell companies, unrelated third-party payers
- Transport and routing: unusual routes, transhipment points and vessel ownership
Managing Trade Finance AML Risk with Citadel365
Citadel365 replaces manual compliance processes with automated solutions that help identify TBML risks and strengthen trade finance compliance controls. Citadel365’s customer onboarding software helps verify the identities of individuals and entities with automated due diligence procedures to create entity profiles and assess risk.
Further, Citadel365, with advanced name screening software, helps screen customers, beneficial owners, counterparties, and related parties in real time against sanctions, PEPs and adverse media lists. Its customer risk assessment software provides risk scores based on analysing trade activity, geographical risk, and counterparty risk.
Moreover, Citadel365 supports transaction monitoring, and its case management software maintains comprehensive audit trails, keeping records of every action taken on a trade-finance case. Hence, the platform helps detect suspicious trade finance patterns, linked to TBML, for further investigation and reporting to regulators.
Integrating Trade Finance into the AML Framework
Trade Finance integration into the AML framework helps manage ML/TF risks effectively.
- Customer Due Diligence (CDD): Have a proper understanding of business and shipping routes and perform Enhanced Due Diligence (EDD) to identify complex structures and beneficial owners.
- Risk Assessment: As routes, products, and customers may be at high risk, Citadel365’s customer risk assessment services help assess exposure across goods, counterparties, and trade corridors.
- Ongoing Monitoring: Review trade transactions, detect unusual patterns and ensure documentation consistency.
- Governance & Reporting: Maintain centralised records through effective audit trails that facilitate inspections, law enforcement, and internal audits.
Trade Finance FAQs for AML Professionals
Trade Finance is considered high-risk for AML/CFT because it involves complex cross-border transactions, and criminals often use fake invoices to move illicit funds.
TBML red flags in Trade Finance include document inconsistency, over/under-invoicing, multiple invoicing, unusual routing, use of shell companies, unnecessary third parties, and involvement of high-risk jurisdictions.
Regulators evaluate customer due diligence processes, transaction monitoring, and proper documentation through audit trails to determine AML controls in Trade Finance operations.
Documentation such as trade documents, proof of CDD procedures, customer and involved parties’ information, beneficial ownership identification, EDD for high-risk customers, risk assessment, and audit trail records.
Yes, technology such as Citadel365 automates onboarding, screening, risk assessment, transaction monitoring and maintains audit trails, which improve detection of TBML in Trade Finance.