Trade Based Money Laundering (TBML) and Sanctions Compliance

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This Trade Based Money Laundering course can also be presented in-house via live webinar.

Trade Based Money Laundering Course Objectives:

Participants will:

  • Be introduced to the key characteristics of Anti-Money Laundering, Countering the Financing of Terrorism and Sanctions adherence.
  • Extend their understanding of the principles of compliance risk, with particular reference to Trade Finance and cross border transactions.
  • Gain an insight into current trends and issues in financial crime, using practical examples, and the risks of non-compliance.
  • Be more informed and therefore better equiped to understand their role and responsibilities, to make considered risk decisions more quickly, based on a sound knowledge of financial crime risk management
  • Be better placed to protect their Bank’s clients from financial crime risks in their own supply chains, thereby helping them to achieve sustainable growth
  • Have key skills to protect the Bank from individuals and organisations seeking to commit trade based financial crime through the recognition / identification of red flags and understanding how to respond appropriately
  • Have a higher level of understanding of trade and commodity finance including core products, compliance risk characteristics and potential mitigants.
  • Be able to view transactions holistically with reference to AML, CFT, Sanctions and Compliance Risk
  • Have an overview of the role of correspondent banks and other financial institutions, payment methods including SWIFT messaging

Trade Based Money Laundering Course Content:

Day 1

Introductions

  • Trainer & participants
  • Aims and objectives.
  • Course context.

Financial Crime Compliance

  • Principally (money laundering, terrorist financing, sanctions breaches)
  • Current examples
  • Other areas of FCC (fraud, tax evasion, bribery & corruption,  human trafficking and counterfeiting
  • An introduction to the nature of compliance risk in cross border transactions
  • Why are international trade transactions increasingly a target for abuse?
  • The consequences of non-compliance (for banks, corporates and individuals)

Anti-Money Laundering (“AML”)

  • What is money laundering?
  • Why and how is money laundered?
  • The key stages of money laundering
  • Customer Due Diligence (CDD)
  • The risk-based approach to anti-money laundering
  • Money laundering and terrorist financing

During this session various case studies and videos are used to show  the involvement of businesses and an international bank involved in money laundering and the consequences for those entities

Countering the Financing of Terrorism (CFT)

  • Key differences between CFT and AML
  • The importance of due diligence and focused screening

Case study concerning the involvement of, and consequences for, an international bank which was identified as having transferred money arising from drug smuggling across three continents and processed funds used to finance terrorism.

Sanctions

  • What are sanctions?
  • Why are they imposed and what is their intended impact?
  • Who imposes them and on whom are they imposed?
  • What is the difference between a trade embargo and financial sanctions?

Case study – Balthar Group was fined by the US authorities for sanctions breaches.  What were the breaches and ultimate consequences for the business?

  • Dual use goods and proliferation
  • Examples of sanctions imposed in recent years
  • The relevance of due diligence and screening

Case study – MC, a UK based engineering company unwittingly used to provide dual use goods.

Facilitation of money laundering

  • Complexity
  • Three stages of money laundering
  • Financial products vs open account
  • Co-mingling
  • Cash
  • Fraud
  • Smuggling
  • Transfer pricing, etc.
  • Capital Flight
  • Foreign Exchange

Examples of legitimising the movement of illicit monies.

a) the use of over-inflated invoicing representing “management charges

b) misrepresentation of invoice value, multiple invoicing and false description of goods

Correspondent banking

  • What is the role of a correspondent bank?
  • Why is correspondent banking fundamental to cross border money flows?
  • The counterparty compliance risk of using Correspondent Banks
  • The use and operation of Nostro, Vostro and Loro accounts
  • Correspondent banking infrastructure;
    • Message authentication;
    • Provision of payment, trade and treasury services;
    • Cash management
  • Risk profile of remitting, receiving and reimbursement parties in cross border transactions
  • Know your customer; the impact of ”KYCC”
  • Key compliance risk zones:
    • Ownership and control
    • Jurisdiction
    • Quality of jurisdictional regulatory and supervisory framework
    • Adequacy of AML and sanctions compliance procedures
    • Nature of respondent’s business
    • Client base
    • Shell banks
    • Direct access accounts
    • Downstream correspondents
    • Correspondent network rationalisation

Financial Institutions – as customers:

  • Compliance risk assessment framework; key components
  • Due diligence and risk assessment
  • Unacceptable customers
  • Monitoring activity – warning signals, red flags, Financial Action Taskforce (FATF) recommendations.

International Payments / SWIFT Messaging

  • The mechanics of cross border funds transfers and nature of the payment instruction
  • Parties; remitter, originator bank, receiving bank, beneficiary, cover/reimbursing bank
  • What is SWIFT?
  • What is the function and operation;
  • Understanding the use and role of SWIFT “MT” message types in payments and trade transactions
  • Compliance risk;
    • Correspondent bank
    • Message abuse
    • Inappropriate use of message types
  • Message stripping
  • Methods of international bank transfer:
    • Direct and serial processing method (the use of SWIFT MT 103)
    • Cover method (the use of SWIFT MT103 plus SWIFT MT202 COV)
    • The compliance risk implications of SWIFT MT202
  • Value dating
  • Key compliance risk zones:
    • Message information
    • Originator; ownership, jurisdiction
    • Beneficiary; ownership, jurisdiction
    • Nature and value of payment – ordinary course of business?
    • Screening – designated persons – sanctioned countries?
    • The compliance risk exposure of US dollar transfers
    • High risk customers requiring payment services
    • Red flag suspicious activity indicators

Global Cash Management

  • Examples of global cash management (concentration/pooling, zero and target balancing)
  • Parties; corporate structures, pool participants and banks
  • Key compliance risk:
    • Pool participants; ownership, jurisdiction
    • Nature of business
    • Correspondent/partner banks
    • Origin and nature of funds
    • Co-mingling of legitimate and illicit monies
  • Monitoring activity – warning signals
  • Compliance risk profile

Case study – Tornado Clothing, an offshore registered business, complex ownership structure and the challenges in establisshing and monitoring a corporate group cross border cash concentration arrangement

Managing Risk

  • Risk Assessment and due diligence
  • Know your customer (KYC)
  • Red Flags and responsibilities
  • Identifying suspicious activity
  • Regulatory environment
  • Counterfeiting

Video / discussion on CDD, KYC, etc.

  • Summary of day’s learning
  • Opportunity to refresh clarify key points, clarify
  • Review main learning points.

Day 2

  • Review of principal considerations re Financial Crime Compliance
  • Key learning points form Day1
  • Any questions / thoughts which have arisen
  • Introduction to Day 2

Trade Finance

Trade Transactions

  • Principal parties and associated risks
  • Objectives of principal parties
  • Understanding the trade cycle
  • Additional risks of trading internationally

Description, function and operation:

  • The nature and purpose trade finance
  • What trade finance is and why it is required
  • Why trade finance carries high compliance risk
  • High risk components (e.g.)
  • Trade finance compliance risk characteristics;
    • Counterparties – “know your customer’s customer”
    • Parties; different roles of banks; fragmented bank involvement
    • Transactions; complexity & banks deal in documents – validation?
    • Negotiable instruments
    • Involvement of third parties (agents, carriers, etc)
    • Jurisdictions / role of finance in cross border abuse

Comparison between international payments and documentary trade finance in the compliance risk environment:

  • Automated screening
  • Message stripping
  • Manual based due diligence

Trade based money laundering (TBML)

  • Definition
  • FCA Thematic Review
  • Increasing focus of criminal activity
  • Compliance considerations
  • Risk mitigation (KYC; KYCC; information screening; document checking; red flags; etc.)
  • Common methods of trade based money laundering

Case study; Metal Components Ltd, involving the assessment of a business transaction, requiring identification of potential risk issues

Core Trade Finance Products

Open Account Trading

  • Trade cycle
  • Incoterms
  • Risk considerations (counterparty, credit, FCC)
  • Products overview
  • Compliance risk assessment (bank controlled payment/reimbursement)

Case study; Aldwych Textiles Ltd, involving the review of a business in particular a series of transactions, which require further investigation to assess potential TBML risks.

Documentary collections

  • What is a documentary collection?
  • What is the purpose of a documentary collection?
  • Principal parties and roles
  • Document requirements and purpose
  • Types; sight (DP), usance (DA)
  • URC522
  • Compliance risk assessment;
    • Remitting bank due diligence
    • Collecting bank due diligence

Case study; Abco Limited the assessment of a potential AML / CFT / sanctions breach through the use of documentary collection transaction, requiring the delegates to identify key compliance risk issues and the need for further information to make a risk-based assessment

Documentary Letters of credit

  • What is a letter of credit?
  • What is the purpose of a letter of credit?
  • Principal parties and roles
  • Other considerations:-
    • The independence principle
    • Application process
    • Workability
  • Different types of letter of credit (overview)
    • Irrevocable / revocable
    • Unconfirmed / confirmed
    • Transferable (parties and operation, compliance risk)
    • Standby
    • Revolving
    • Back to back
    • Synthetic
  • Trade documentation; vulnerability to abuse and compliance risk
  • UCP 600
  • Compliance risk assessment; issuance, presentation of documents, payment; Issuing / advising / negotiating bank; the importance of LC availability
  • Red clause / sanctions clausing
  • Payment terms
  • LC confirmation; financial engagement and responsibility; discounting

Case study; Advanced Plant Limited. The Delegates need to identify unusual features of a letter of credit request and identify the red flag suspicious activity characteristics

Bank Guarantees

  • What are bank guarantees?
  • Principal parties
  • The characteristics of “on demand” unconditional guarantees
  • Autonomy and the independence principle
  • Types and use of guarantees in trade (bid, APG, performance)
  • Direct, indirect and counter guarantees
  • Transferable guarantees; key compliance risks aspects
  • Foreign laws and usage
  • General compliance risk and vulnerability to criminal abuse
  • Structuring guarantees to reduce compliance risk exposure
  • URDG 758

Case studies;

1)   Global Laundromat looks at the use of guarantees and SBLC to facilitate cross border money laundering.

2)  Rymills Bakeries Ltd to consider the compliance risk aspects of a request for guarantee

Both cases consider the further information required to undertake due diligence; use of additional information to identify unusual features and consider an appropriate course of action

Non-core Trade Products and processes

Forfaiting

  • What is forfaiting?
  • Principal parties
  • Primary and secondary forfaiting transactions
  • How to establish debt instrument authenticity
  • The importance of due diligence; is there an underlying trade transaction?

Receivables finance

  • What is receivables finance?
  • Compliance risk vulnerabilities of financing open account transactions
  • Forms of receivables finance:
    • Full factoring
    • Confidential invoice discounting
    • Specific insured receivables finance
    • Reverse factoring
  • The use of receivables finance in the context of trade finance

Payables finance / Supply Chain Finance

  • What is payables finance and when is it used?
  • Principal parties
  • Types of payables finance; description, operation and parties:
    • Pre-shipment payables finance (supplier-led)
    • Approved payables finance (buyer-led)

Commodity Finance

  • Characteristics of commodity finance
  • Key compliance risk zones :
    • Emerging markets/high risk jurisdictions
    • Commodity traders (nature and vulnerability to compliance risk)
    • Value and existence of goods
  • Syndicated facilities (due diligence on other lenders/participants)
  • Pre-export & pre-payment finance (high risk environment)
    • Key compliance risk aspects/deployment of risk mitigation
  • Warehouse financing
    • Parties
    • Key compliance risk aspects/deployment of risk mitigation techniques
    • The use and vulnerability of warehouse receipts & role of collateral managers
  • Tolling
  • Key compliance risk considerations

Case study; Alfa Metals Ltd the identification of key, relevant information to determine the appropriate products to finance a commodity based transaction and protect the bank / customer against financial crime.

Compliance Considerations

  • Trade based money laundering characteristics
  • Vulnerability of cross border transactions to fraud
  • Information screening
  • Document checking
  • Red flags

Mitigating Risk

  • Know your customer and your customer’s customer
  • Understand the trade cycle and what is ‘ordinary business’
  • Compare and contrast
  • Is the complexity of the transaction necessary?
  • Follow the money
  • Apply common sense
  • Ask the right questions
  • The importance of first line of defence
  • Red flags
  • Fraud
  • Summary of day’s learning
  • Opportunity to refresh clarify key points, clarify
  • Review main learning points.

Conclusion & next steps for action

Background of the Trainer:

The trainer is a leading trade finance practitioner and trainer with almost 40 years banking experience.  Prior to taking early retirement, he was responsible for the risk management of the UK trade book for a top international bank, with whom he had spent his whole banking career as a Relationship Manager, Credit Risk Approver, Trade Finance Manager and latterly their Trade Portfolio Risk Manager.

He provides training to banks globally on trade and receivables finance, risk mitigation, AML and sanctions compliance, is ACIB qualified and has completed the ICA Certificate in Trade Based Financial Crime Compliance issued by the University of Manchester Business School.

Trade Based Money Laundering Course Summary:

Whilst trade and commodity finance is low in credit risk it exposes banks to high compliance risks.

Banks who have failed to implement adequate Financial Crime Compliance programmes and training have incurred fines, reputational damage and faced the potential loss or suspension of their ability to operate in certain currency markets or jurisdictions.

This 2-day Trade Based Money Laundering course for personnel who are involved in Trade Finance, including bank auditors, compliance officers, operations managers and relationship directors, provides an explanation of the operation of the methods of payment and financing used in international trade and commodity transactions and the nature of associated compliance risks.

The Trade Based Money Laundering course covers all aspects of Financial Crime Compliance (including the regulatory framework) with particular regard to Trade & Commodity Finance (principles and products), Correspondent Banking, International Payments, Global Cash Management, their associated compliance risks and the suspicious money laundering / sanctions violation activity red flag indicators of each.

Through attending this course participants will be able to identify compliance risk features in core product areas and key aspects from an audit and compliance risk perspective.

The Trade Based Money Laundering course uses a range of typologies, exercises and case studies to enable the participants to consider transactions and identify the key risk compliance features, areas of due diligence and further information required to make a risk-based assessment.

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