Circular CN-FIU/2016/23: TBML Red Flags

MALDIVES MONETARY AUTHORITY
MALDIVES

Circular No: CN-FIU/2016/23

September 28, 2016

To: ALL BANKS

TBML RED FLAGS

Trade Based Money Laundering (TBML) was recognized by the Financial Action Task Force (FATF) in its 2006 study as one of the three main methods by which criminal organizations and terrorist financiers move money for the purpose of disguising its origins and integrating it back into the formal economy. This study highlighted the increasing attractiveness of TBML as a method for laundering funds, as controls on laundering of funds through misuse of the financial system (both formal and alternate) and through physical movement of cash (cash smuggling) become tighter.

TBML also often involves foreign exchange transactions. Given the nature of the cash-based economy of this country, the increasing demand for foreign currency and the reliance on imports, the Maldivian economy and the financial sector are likely to be abused for illicit purposes, including trade based money laundering as well as terrorism and terrorism financing activities.

Therefore, it is important that banks should enhance the implementation of their Know Your Customer and Customer Due Diligence (KYC/CDD) measures to prevent, detect and report activities that may be related to TBML.

To assist the banks to implement appropriate KYC/CDD measures to and to detect and report suspicious transaction that may be related to TBML, this Unit has prepared a list of suspicious indicators (red flags) related to TBML. Banks are recommended to refer to the attached non-exhaustive list of examples of red flags to enhance their monitoring activities to detect and report suspicious transactions. Banks are also advised to maintain their own suspicious indicators specific to their customer activities. These red flags do not replace the laws, regulations and international standards and shall be treated as a guidance issued by this Unit to assist in their compliance to the applicable laws and regulations.

Yours sincerely,

Abdulla Ashraf
Head of FIU
Financial Intelligence Unit

Attachment: Examples of TBML Red Flags

EXAMPLES OF RED FLAGS

EXAMPLES OF TBML RED FLAGS AND PREDICATE OFFENCES OF TBML

NOTE
The following are examples of potentially suspicious indicators, or "red flags" for trade-based money laundering and financing of terrorism (TBML).
FATF defined "TBML" 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."
In practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports. Moreover, trade-based money laundering techniques vary in complexity and are frequently used in combination with other money laundering techniques to further obscure the money trail.
Red flags and patterns of suspicious indicators are often seen from: <br> • 'over/under invoicing' of goods <br> • multiple invoicing of goods <br> • 'over/under shipments' of goods <br> • falsely described goods <br> • phantom shipping
Although the red flags provided in this document are not all-inclusive, they may help the banks to recognize possible TBML activities.
Banks are advised to consider common red flag indicators for all types of transactions and customers and to have red flags specific to the respective bank incorporated to monitor suspicious transactions and for risk mitigation.
The presence of a red flag may not necessarily be a suspicious transaction. However, it may warrant the bank to collect more information before submitting a suspicious transaction report to the Financial Intelligence Unit.

RED FLAGS RELATING TO FINANCIAL & BANKING PRODUCTS

1. Use of letters of credit to move money between those countries, where such trade would not normally occur and / or is not consistent with the customer's usual business activity. A Letter of credit is generally resorted to so as to accord more legitimacy to the transaction in order to conceal the real facts.

2. The method of payment requested by the client appears inconsistent with the risk characteristics of the transaction. For example receipt of an advance payment, for a shipment, from a new seller in a high-risk jurisdiction.

3. The transaction involves the receipt of cash (or by other payment methods) from third party entities that have no apparent connection with the transaction or which involve front or shell companies or wire instructions / payment from parties which were not identified in the original letter of credit or other documentation. The transactions that

EXAMPLES OF RED FLAGS

involve payments for goods through cheques, bank drafts, or money orders not drawn on the account of the entity that purchased the items also need further verification.

4. The transaction involves the use of repeatedly amended or frequently extended letters of credit without reasonable justification or that includes changes in regard to the beneficiary or location of payment without any apparent reason.

5. Unusual deposits i.e. use of cash or negotiable instruments (such as traveller's cheques, cashier's cheques and money orders) in round denominations (to keep below reporting threshold limit) to fund bank accounts and to pay for goods and services. The negotiable instruments may be sequentially numbered or purchased at multiple locations and may frequently lack payee information. Further, cash payments for high-value orders are also indication of TBML activity.

6. Inward remittances in multiple accounts and payments made from multiple accounts for trade transaction of same business entity are indicators for TBML. In this regard the study of foreign exchange remittances may help detect the offence.

7. In the case of merchanting trade, the trade finance mechanism should be in place for both export leg as well as import leg of transaction. If the Trade Finance mechanism, for example, Letters of Credit, have been provided for only the import leg of the transaction and not for export leg, it also indicates the possibility of TBML.

RED FLAGS WITH REGARD TO JURISDICTIONS

1. The commodity is shipped to or from a jurisdiction designated as 'high risk' for ML activities or sensitive / non co-operative jurisdictions. These countries also include countries that are known to be engaged in nuclear proliferation and arms dealing activities.

2. The commodity is transshipped through one or more such high risk / sensitive jurisdictions for no apparent economic reason. Consideration must be given to transshipment ports of countries known to be engaged in nuclear proliferation and arms dealing activities.

3. Jurisdictions with Free Trade Zones (FTZs) or Special Economic Zones (SEZs) also affects the sensitiveness of a jurisdiction as far as TBML is concerned. FTZs are also emerging as being especially vulnerable to TBML. Some suspicious indicators identified by FinCEN in 2010 include:

   a. third-party payments for goods or services made by an intermediary (either an individual or an entity) apparently unrelated to the seller or purchaser of goods. This may be done to obscure the true origin of the funds.

   b. amended letters of credit without reasonable justification.

   c. a customer's inability to produce appropriate documentation (ie invoices) to support a requested transaction.

EXAMPLES OF RED FLAGS

d. significant discrepancies between the descriptions of the goods on the transport document (ie bill of lading), the invoice, or other documents (ie certificate of origin, packing list etc)

4. Circuitous route of shipment and/or circuitous route of financial transaction or order for the goods is placed by firms or individuals from foreign countries other than the jurisdiction of the stated end-user.

5. Transaction involves shipment of goods inconsistent with normal geographic trade patterns of the jurisdiction i.e. trade in goods other than goods which are normally exported/ imported by a jurisdiction or which does not make any economic sense. Example: Semi-conductor manufacturing equipment being shipped to a jurisdiction that has no electronics industry.

RED FLAGS WITH REGARD TO GOODS

1. Where significant discrepancies appear between the description, quality and quantity of the goods on the documents such as bills of lading, invoices etc and the actual goods shipped. The misrepresentation may also be in relation to or type / grade of goods. For example, a relatively inexpensive good is supplied but it is invoiced as being more expensive, of different quality or even as an entirely different item so the documentation does not accurately record what is actually supplied. This technique is particularly useful in TBML. Cheap cloth items / waste thereof are declared as premium quality garments to launder the criminal money.

2. Significant discrepancies appear between the value of the commodity reported on the invoice and the commodity's fair market value. This is done either in conjunction with mis-declaration of the description / quality / grade of goods or without it. This is also often associated with mis-declaration of the jurisdiction of origin.

3. Consignment size or type of commodity being shipped appears inconsistent with the scale or capacity of the exporter or importer having regard to their regular business activities or the shipment does not make economic sense.

   Example: There is no reasonable explanation for the client's financial investment into the shipment.

RED FLAGS WITH REGARD TO CORPORATE STRUCTURES

1. The transaction involves the use of front or shell companies. Both shell and front companies can be used to facilitate TBML but in different ways. A shell company has no real operating activity and is used to hide ML activity and the identities of individuals involved so as to obscure the money trail. Shell companies are also often referred to as offshore companies. The characteristics of offshore companies, for example, convenient formation, free operation, tax exemption and financial secrecy, all provide rather good veneer to disguise ML.

2. Numerous sole proprietorship businesses/private limited companies set up by seemingly unrelated people (proxies) are found to be controlled by the same group of people. For the setting up of such businesses false addresses are registered.

EXAMPLES OF RED FLAGS

3. Trade transaction reveals links between representatives of companies exchanging goods, for example, same owners or management. TBML requires collusion between traders at both ends of the import/export chain. Related party transactions (ie transactions between entities that are part of the same corporate or business group) can possibly make TBML easier and more difficult to detect. Related party transactions being used for fraud and for TBML, dealings between related parties are not necessarily illegal.

4. Transfer pricing is a related party transaction that is commonly used by transnational corporation as part of their financial and tax planning strategy. Multinational organisations use transfer pricing to shift taxable income from jurisdictions with relatively high tax rates to jurisdictions with relatively low tax rates to minimise income tax. Similar strategies are also employed in relation to import duties and value added tax.

PREDICATE OFFENCES OF TBML

1. Tax evasion and offences related to customs laws and regulations, import and export laws are the predominant predicate offence in TBML cases.

2. Other predicate offences include:

   • drug offences
   • human trafficking
   • terrorism
   • financing of terrorism
   • embezzlement
   • corruption
   • organized crime (including racketeering)
   • dealing in banned goods
   • conducting illegal business

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