The Monetary Authority of Singapore launched a dedicated anti money laundering (AML) department on 1 August, and this triggered my interest in reading more about AML-related developments in Asia Pacific. I came across an article from May this year which talked about how regulators in Hong Kong, for example, the Hong Kong Monetary Authority (HKMA), are cracking down on trade based money laundering (TBML).
State Bank of India
Last year, the HKMA took disciplinary action against the State Bank of India’s Hong Kong (SBIHK) branch for breaching four obligations of Hong Kong’s Anti Money Laundering and Counter Terrorist Financing Ordinance (AMLO). In this action, the authority fined SBI HKD7.5 million (almost US$1 million). In addition, it ordered the bank to submit a report on whether the remedial plan put in place by the bank, after an onsite examination by HKMA in 2012 had found weaknesses in its AML controls, was effective and adequate to address the breaches found.
The four breaches, which occurred between April 2012 and November 2013, were:
- failing to carry out customer due diligence (CDD) on 28 new corporate customers
- neglecting to continuously monitor business relationships with customers
- having ineffective procedures for identifying politically exposed persons (PEPs)
- having ineffective procedures to ensure compliance.
This successful action appears to have spurred on the efforts of the HKMA to fight TBML. It has tripled its staff levels in AML and has been cracking down on customs and shipping at the ports, trying to recover some of the funds lost due to procurement fraud or misinvoicing. These funds can equate to billions of dollars every year.
This case appears to be the boost that the HKMA needed to make sure that Hong Kong’s banking system is able to deal with the risk of TBML. Therefore, in February this year the Hong Kong Association of Banks (HKAB) issued its Guidance Paper on Combating Trade-based Money Laundering, which the HKMA contributed to. As the name suggests, this paper is for guidance, however, the HKMA does suggest that abiding by these guidelines will help ‘authorised institutions’ (licensed banks, restricted licence banks and deposit-taking companies in Hong Kong) to meet their responsibilities under the AMLO.
The paper outlines what TBML is and the importance of having written procedures and policies to evaluate and mitigate TBML risk. It also suggests that authorised institutions should adopt a risk-based approach, meaning they have to be able to produce paperwork and documentation to prove they have attempted to know the customer, product or market.
Another point it makes is in relation to CDD requirements. It states that in addition to general CDD obligations set out in the AMLO, there are trade-specific CDD tips, for example, documenting everything, collecting all the information relating to trade-based activities and, due to the ever-changing nature of the trade cycle, keeping up with changing customers. It also has some key screening recommendations, including detecting red flags and keeping up to date with sanctions/high-risk jurisdiction lists.
As with all money laundering (ML) guidance, it talks about transaction monitoring and reporting suspicious transactions and not relying on automated transaction monitoring.
Unfortunately, due to the HKMA clamping down, this has led to some banks de-risking, leaving billions in unbanked trade finance in Asia and other regions, which could lead to money being transferred via informal or even illegal channels.
De-risking is discouraged by experts, for example, the Financial Action Task Force (FATF) advises banks to adopt the risk-based approach to avoid the consequences of inappropriate de-risking behaviour. At a briefing in Hong Kong in May this year, banks were urged to approach the challenge of TBML practically and to use the guidance paper in helping them with this challenge.
Importance of knowledge
TBML is defined by FATF as ‘the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins.’ It also is recognised by FATF as an ‘important channel of criminal activity’ that can be easily exploited by criminals.
The Asia Pacific Group on Money Laundering (APG), of which Hong Kong is a member, issued a report in 2012, designed to ‘update and extend [an earlier] FATF study to identify current methods and techniques’. Not only did the APG find that there is a deficiency in training and awareness when it comes to TBML but also that ‘most jurisdictions do not distinguish TBML from other forms of ML.’
According to the US Financial Crime Enforcement Network (FinCEN), referenced in a report made to the US Congress in June this year, TBML is growing ‘in both volume and global reach’. Elsewhere, FinCEN earlier this year described TBML as ‘a primary method for drug trafficking organizations to move and launder their illicit funds’. Meanwhile, the report to Congress also identified Hong Kong as identified as a country where ‘TBML concerns have surfaced’.
The global nature of trade today means that it is essential to focus attention on TBML, especially for Hong Kong, as trade is such an important part of its economy. The ICA has a Specialist Certificate in TBML for just this reason. This course looks at the AML and counter financing of terrorism models used to address the risks that exist within the international trade environment and investigates some of the practical issues faced, where breaching money laundering requirements can cost hundreds of millions of dollars.
You can attend a one-day workshop in Hong Kong and study the ICA Specialist Certificate in Trade Based Money Laundering.
Find out more here
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