By Christopher M. Ferguson and Hannah Ambinder
On March 3, 2021, the Financial Action Task Force (FATF) and Egmont Group of Financial Intelligence Units (Egmont Group) released Trade-Based Money Laundering: Risk Indicators, a publication outlining anti-money laundering risk factors. The FATF Report’s purpose is to improve the identification of suspicious activities associated with trade-based money laundering (“TBML”) by professionals in both public and private entities, including financial institutions and law enforcement agencies. It does so by describing common signs that indicate a trade entity or transaction is suspicious, and possibly being used by criminals to move money.
The FATF is an intergovernmental watchdog organization dedicated to combating money laundering, terrorist financing, and the proliferation of weapons of mass destruction. The FATF sets international standards to prevent financial crimes and encourages worldwide legislative and regulatory reforms in accordance with these standards. The Egmont Group is a united body of 166 national financial intelligence units. Its goal is to facilitate information sharing and cooperation in the fight against money laundering and terrorist financial crimes. This report on risk indicators supplements the FATF and Egmont Group’s previous joint report, Trade-Based Money Laundering: Trends and Developments, published in December 2020.
Risk indicators identified in the FATF Report are derived from real-world data and divided into four different categories: structural risk indicators, trade activity risk indicators, trade document and commodity risk indicators, and account and transaction activity risk indicators. The existence of one or more risk factors does not guarantee that TBML or other illicit activities have occurred, but it may warrant further examination of a customer or transaction, which is why widespread knowledge of these indicators is crucial. Private sector entities should always consider the totality of a customer profile during investigations and may need to work with law enforcement authorities or financial intelligence units to obtain additional contextual information.
Many of the structural risk indicators are intuitive and could be detected through an internet search or minimal due diligence. Below is a non-exhaustive list drawn from the FATF Report:
- The corporate structure of a trade entity appears unusually complex and illogical, such as the involvement of shell companies or companies registered in high-risk jurisdictions.
- A trade entity is registered or has offices in a jurisdiction with weak Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) compliance.
- A trade entity is registered at an address that is likely to be a mass registration address, e.g. high-density residential buildings, post-box addresses, commercial buildings, or industrial complexes, especially when there is no reference to a specific unit.
- The business activity of a trade entity does not appear to be appropriate for the stated address, e.g. a trade entity appears to use residential properties, without having a commercial or industrial space, with no reasonable explanation.
- A trade entity lacks an online presence or the online presence suggests business activity inconsistent with the stated line of business.
- A trade entity, or its owners or senior managers, appear in negative news, e.g. past money laundering schemes, fraud, tax evasion, other criminal activities, or ongoing or past investigations or convictions.
- The name of a trade entity appears to be a copy of the name of a well-known corporation or is very similar to it, potentially in an effort to appear to be part of the well-known corporation, even though the trade entity is not actually connected to the corporation.
Many of the trade activity risk indicators involve activity that is overly complex or inconsistent with expectations. These indicators would be intuitive to anyone with industry expertise. Below is a non-exhaustive list:
- Trade activity is inconsistent with the stated line of business of the entities involved, e.g. a car dealer is exporting clothing or a precious metals dealer is importing seafood.
- A trade entity engages in complex trade deals involving numerous third-party intermediaries in incongruent lines of business.
- A trade entity engages in transactions and uses shipping routes or methods that are inconsistent with standard business practices.
- A trade entity makes unconventional or overly complex use of financial products, e.g. use of letters of credit for unusually long or frequently extended periods without any apparent reason, or intermingling of different types of trade finance products for different segments of trade transactions.
- A trade entity consistently displays unreasonably low profit margins in its trade transactions, e.g. importing wholesale commodities at or above retail value, or reselling commodities at the same or below purchase price.
- A newly formed or recently re-activated trade entity engages in high-volume and high-value trade activity, e.g. an unknown entity suddenly appears and engages in trade activities in sectors with high barriers to market entry.
The trade document and commodity risk indicators involve suspicious information on contracts and documents. They require basic due diligence such as fact checking in order for the suspicious information to be noticed. Below is a non-exhaustive list:
- Inconsistencies across contracts, invoices, or other trade documents, e.g. contradictions between the name of the exporting entity and the name of the recipient of the payment; differing prices on invoices and underlying contracts; or discrepancies between the quantity, quality, volume, or value of the actual commodities and their descriptions.
- Contracts, invoices, or other trade documents display fees or prices that do not seem to be in line with commercial considerations, are inconsistent with market value, or significantly fluctuate from previous comparable transactions.
- Contracts, invoices, or other trade documents have vague descriptions of the traded commodities, e.g. the subject of the contract is only described generically or nonspecifically.
- Contracts supporting complex or regular trade transactions appear to be unusually simple, e.g. they follow a “sample contract” structure available on the internet.
- The value of registered imports of an entity displays significant mismatches to the entity’s volume of foreign bank transfers for imports. Conversely, the value of registered exports shows a significant mismatch with incoming foreign bank transfers.
- Shipments of commodities are routed through a number of jurisdictions without economic or commercial justification.
Lastly, the account and transaction activity risk indicators involve unusual monetary behaviors. Below is a non-exhaustive list:
- A trade entity makes very late changes to payment arrangements for the transaction, e.g. the entity redirects payment to a previously unknown entity at the very last moment, or the entity requests changes to the scheduled payment date or payment amount.
- An account displays an unexpectedly high number or value of transactions that are inconsistent with the stated business activity of the client.
- Payment for imported commodities is made by an entity other than the consignee of the commodities with no clear economic reasons, e.g. by a shell or front company not involved in the trade transaction.
- Cash deposits or other transactions of a trade entity are consistently just below relevant reporting thresholds.
- Transaction activity associated with a trade entity increases in volume quickly and significantly, and then goes dormant after a short period of time.
- Payments are sent or received in large round amounts for trade in sectors where this is deemed unusual.
- Payments are routed in a circle – funds are sent out from one country and received back in the same country, after passing through another country or countries.
The FATF Report is a helpful tool for those working in financial institutions and law enforcement agencies, and comes at a time when anti-money laundering enforcement is already on the rise. For instance, on January 1, the U.S. Congress passed into law, as part of the National Defense Authorization Act (NDAA), the Anti-Money Laundering Act of 2020 (AMLA). AMLA ushers in the most sweeping anti-money laundering reforms in the United States since the passage of the USA PATRIOT ACT and will have a significant impact on anti-money laundering enforcement worldwide for years to come.
If risk indicators described in the FATF Report are identified in relation to a transaction, then due diligence requires that the transaction be investigated further for other signs of TBML. This is one of many ways in which organizations such as the FATF and the Egmont Group attempt to facilitate collaboration between the private sector, governments and law enforcement agencies in detecting and deterring money laundering and terrorist financing.