The complexities that arise from the involvement of multiple jurisdictions and various stakeholders throughout several stages of a global trade transaction can be exploited by organised criminal networks to launder money, evade taxes, commit fraud through document alteration or breach sanctions. Common typologies for such schemes include over-pricing, under-pricing, variable volumes, phantom shipments, false description of goods, misrepresenting the actual beneficiaries and making payments to unrelated parties.
While identifying such schemes can be difficult enough in more ordinary times, the Covid-19 pandemic has further complicated compliance efforts for financial institutions in a very real way.
Among the biggest challenges created by Covid-19 is the limited access to trade documents for physical inspection. In response to social distancing guidelines, paper documents have been replaced by their electronic counterparts. Yet most of the important documents linked to a trade finance transaction require physical inspections, including checking watermarks and wet-ink signatures on bills of lading, certificates of origin and inspection certificates. While many bank staff based in the developed world are able to work from home, the physical documents are delivered to corporate office locations, limiting the ability of trade operations staff to vet them.
The pandemic has also raised issues related to limited staff availability. With some working from home and, to a lesser degree, others out of the office because they are either self-isolating or sick, financial institutions are learning to make due with less. This challenge has substantially increased the risk for financial institutions as there is a continual build-up and backlog of alerts pending review. Some financial institutions have introduced tactical solutions through tweaking their sanctions screening software in the form of screening only selective parties instead of screening all parties to a trade transaction. Although firms may decide on a risk-based approach to modify their screening approach, this tactic of reducing the scope of screening may expose them to a significant residual risk of failing to identify bad actors.
Staffing issues also apply to the offshore centres typically based in developing countries. A number of large financial institutions have thousands of staff members in offshore operations centres that do not have comparable technological resources, including work-laptops and access to high-speed Internet connectivity. The additional hurdle of limited staff ability can hinder crucial documentary checks. Due to the large volume of trade transactions, staff in developed countries (who represent a small fraction of total staff that are located in offshore jurisdictions) may not be able to perform all applicable checks on the legitimacy of trade transactions. Consequently, several financial institutions have modified their procedures to reduce the checks performed on trade transactions.
The pandemic has also contributed to significant price volatility and large-scale fluctuations in terms of supply and demand perspective. Even before the pandemic, it could be difficult for financial institutions to effectively mitigate their over/under pricing risks. As volatility has grown, so have the risks that criminals may be exploiting trade deals for illicit purposes.
A number of scandals have been exposed over the last few months involving organised criminal groups attempting to launder substantial sums of illicit funds through over/under pricing of underlying products and attributing the price disparity to a significant shift in supply and demand.
Bolivia’s health minister, Marcelo Navajas, was arrested in May for authorising the purchase of medical equipment (ventilators) at the price of €27.6k per unit through an intermediary, who had bought the ventilators for €9.5k per unit from the manufacturer. The payment totaled nearly €5 million–three times higher than the actual value of goods–and was allegedly intended to benefit the intermediary, which is based in a foreign country. .
It is of paramount importance for financial institutions to raise awareness among their staff members around emerging typologies of financial crime through global trade. Whether firms choose to engage in bespoke training or take other precautions, mitigating the risks of criminal exploitation is a goal we all should share.
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