2025-11-07
Added · Updated
Licensed Financial Institutions must integrate trade-based money laundering risk assessments into their AML/CFT programs, conduct customer due diligence including screening against sanctions lists, and apply enhanced due diligence for high-risk transactions. They are required to monitor for red flags such as fictitious documents, back-to-back letters of credit, and third-party intermediaries, reporting suspicious activity to the Financial Intelligence Unit. Registered Hawala Providers must verify customer registration in the UAE and understand transaction purposes to detect illicit transshipment.
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CBUAE Classification: Public
ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF TERRORISM AND ILLEGAL ORGANISATIONS GUIDANCE FOR LICENSED FINANCIAL INSTITUTIONS ON RISKS RELATED TO TRADE-BASED MONEY LAUNDERING (“TBML”) AND TRANSSHIPMENT October, 2025.
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Contents
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4.3. Targeted Financial Sanctions Obligations ...................................................................40
4.3.1. Confirmed Matches ................................................................................................43
4.3.2. Partial Name Matches............................................................................................43
4.4. Transaction Monitoring and Suspicious Transaction/Activity Reporting......................44
4.4.1. Transaction Monitoring...........................................................................................44
4.4.2. Suspicious Transaction/Activity Reporting .............................................................45
4.5. Governance and Independent Audit............................................................................47
4.6. Training ........................................................................................................................47
4.7. Record-keeping............................................................................................................48
Annex 1. TBML and Illicit Transshipment Red Flags..............................................49
Annex 2. Visual Synopsis.........................................................................................54
Annex 3. Synopsis of the Guidance ........................................................................55
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1 Available at: https://www.centralbank.ae/en/cbuae-amlcft.
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CBUAE Classification: Public be able to demonstrate compliance with these requirements. In the event of a discrepancy between this Guidance and the legal or regulatory frameworks currently in force, the latter will prevail. This Guidance may be supplemented with additional separate guidance materials, circulars, and notices, and outreach sessions and thematic reviews conducted by the CBUAE. Furthermore, this Guidance takes into account standards and guidance issued by the Financial Action Task Force (“FATF”), 2 and red flag indicators identified by the FATF and other relevant international bodies. 3 These are not exhaustive and do not set limitations on the measures to be taken by LFIs in order to meet their statutory obligations under the legal and regulatory framework currently in force. As such, LFIs should perform their own assessments of the manner in which they should meet their statutory obligations. This Guidance comes into effect immediately upon its issuance by the CBUAE with LFIs expected to demonstrate compliance with its requirements within one month from its coming into effect.
1.2. Applicability
Unless otherwise noted, this Guidance applies to all natural and legal persons, which are Financial Institutions or Licensees, or any other defined term which brings all entities within the scope of licensed and/or supervised entities by the CBUAE, in the following categories:
2 For example, please see: https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Trade-Based-Money-Laundering-Risk-Indicators.pdf. 3 For example, please see: https://library.iccwbo.org/content/tfb/pdf/trade-finance-principles-2019-amendments-wolfsberg-icc-baft-final.pdf.
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1.4. Acronyms and Definitions
Terms Description
AML Anti-money laundering
BAFT Bankers Association for Finance and Trade CBUAE Central Bank of the United Arab Emirates CDD Customer due diligence CFT Counter the financing of terrorism EDD Enhanced due diligence FATF Financial Action Task Force FIU Financial Intelligence Unit ICC International Chamber of Commerce LFI Licensed financial institution ML Money laundering RHP Registered hawala provider SAR Suspicious activity report SBML Service Based Money Laundering STR Suspicious transaction report SWIFT Society for Worldwide Interbank Financial Telecommunications TBML Trade-based money laundering TFS Targeted Financial Sanctions UNSC United Nations Security Council
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CBUAE Classification: Public
Bank guarantee: A formal assurance from a lender or an LFI that a borrower will be able to pay its counterparty, irrespective if the borrower fails to perform against their obligations and pay the counterparty. Buyer: A party to a trade transaction that purchases goods either for their direct use, to manufacture into another good, or for further resale. Documentary trade finance products: Trade finance products that require a party to present certain documents to an LFI in order to trigger a payment obligation for the trade transaction. Dual-use items: Items, including goods, technologies and software, that have both commercial and military applications, and/or contribute to the proliferation of weapons of mass destruction. Forfaiting: A method in trade finance where exporters obtain cash by selling their receivables at a discount on a “without recourse” basis. Import and export factoring: The process of purchasing account receivables from an exporter in one country and collecting the invoice value later from the importer in the second country. Landlocked country: A sovereign state that lacks direct access to the seas. Letter of credit: A letter issued by an LFI guaranteeing that the LFI will make a full payment for goods under specified conditions, namely, that the LFI will provide payment to a seller or supplier once the seller or supplier presents the documents that enable the buyer to take possession of the goods. Non-documentary trade finance products: An arrangement that does not tie payment from an LFI to the presentation of all the documentation related to the trade. Open account trade: A trade transaction in which the goods are shipped and delivered before payment is due, and invoices and shipping documents are sent directly from the supplier to the buyer, rather than through the banking system. The only role of an LFI is processing the payment, which may or may not indicate that it relates to a trade transaction. Phantom shipping: A fraudulent technique used in TBML in which documents indicate that goods are shipped from a supplier/exporter to a buyer/importer when, in fact, no product has moved at all. Seller or Supplier: A party to a trade transaction that sells goods to a buyer. Structured trade finance: A type of debt finance that aims to reduce the gap between the time a manufacturer procures materials until the final product is sold to a consumer by structuring trade finance products across the supply chain. Trade finance: The provision of finance products, typically by LFIs, to facilitate movement of goods and services between two parties, either within a country or cross-border. In trade finance LFIs take on certain payment or supply risk. Trade-based money laundering: The process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illegal origins or finance illicit activities. Transshipment: The shipment of goods from the country of origin to one or more
intermediate destinations prior to shipment to the country of ultimate destination.
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2. Understanding and Assessing TBML
According to the FATF, illicit actors move funds for the purpose of hiding their illicit origin and integrating them into the formal economy through three main methods:4
4 FATF, Guidance on Trade-Based Money Laundering, 2006, available at: https://www.fatf-gafi.org/content/dam/fatfgafi/reports/Trade%20Based%20Money%20Laundering.pdf 5 Ibid. 6 FATF, United Arab Emirates Mutual Evaluation Report, April 2020, available at: https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MutualEvaluation-Report-United-Arab-Emirates-2020.pdf.coredownload.pdf 7 Global Trade Update (March 2023), UNCTAD, March 2023, available at: https://unctad.org/publication/global-trade-update-march-2023. 8 UAE Ministry of Economy, UAE ranks 11th globally in commodity exports in 2022 with a 41 per cent growth, April 6, 2023, available at:
https://www.moec.gov.ae/en/-/uae-ranks-11th-globally-in-commodity-exports-in-2022-with-a-41-per-cent-growth 9 World Bank, United Arab Emirates, 2023, available at: https://thedocs.worldbank.org/en/doc/5bae5632e2d8425830fbf0bac721cce3- 0280012021/original/17-mpo-sm21-united-arab-emirates-kcm3.pdf
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CBUAE Classification: Public transferring value from the buyer to the supplier when processing payments related to trade, whether as
part of a trade finance settlement or on an open account.
In the following sections, this Guidance differentiates between documentary trade finance and nondocumentary trade finance, and the role of LFIs across trade finance products. Each type of trade products carries specific risks, hence LFIs are required to implement controls based on the type of trade transaction, the level of information available and their role in the transaction.
2.1.1. Documentary Trade Finance
Traditional documentary trade finance products include performance-based products, such as letters of credit (“LCs”), in which payment is due once the supplier has performed according to contract terms and presents the required documents. Traditional documentary trade finance products also extend to nonperformance-based products, such as guarantees and standby LCs, that provide compensation to one of the transacting parties in the event that a party fails to perform according to contract terms. In documentary trade finance transactions, a party to the trade transaction approaches an LFI to open a documentary product, such as a LC, a documentary collection, or a guarantee. At the initiation stage, the parties agree on the conditions of the settlement and establish the documents a party should present to the LFI against the payment or acceptance. Once goods are shipped (or a supplier has failed to act), the beneficiary presents certain documents to the LFI in order to trigger a payment obligation. The LFI reviews the presented documents related to the underlying transfer of goods and pays the invoice (or a claim in the case of a guarantee), if it finds the documents conform with the terms of the agreement and applicable rules. Such documentation can include title and transport documents, bills of lading, invoices, packing lists, and certificates of origin or inspection. Based on these documents, the LFI may have access to information relevant to identifying potentially suspicious activity. Even though transaction information may be difficult to verify based on the documents alone, the LFI may have information regarding the type and quantity of the underlying goods involved in shipment; the identity and location of the supplier and buyer; the vessel name and shipping company; and applicable shipping routes and destinations. As a best practice, LFIs should review the presented documents to detect potential red flags or involvement of sanctioned parties once they are made available to an LFI and before processing a payment related to a trade finance product or instrument. If an irregularity is detected, LFIs should review the irregularity for indicators of potentially suspicious activity and report suspicious activity to the FIU. LFIs should also take appropriate follow-up measures to address the risk associated with the transaction in question and the parties involved, including if an LFI identifies a confirmed match of an individual, entity, or group to the key identifiers published in the UAE Local Terrorist List or the United Nations Security Council (“UNSC”) Consolidated List, as further discussed in Section 4.3 on Targeted Financial Sanctions Obligations.
2.1.1.1. Description of Documentary Trade Finance Products and Instruments
There are several types of documentary trade finance products that differ in payment terms, presented documents, LFI’s involvement, and other characteristics. LCs and bank guarantees, two of the most prevalent types, are discussed in further detail below. However, all trade finance products, even if not explicitly referenced in this guidance, can be exploited in TBML. Therefore, it is important for an LFI to assess the types of products it offers, their characteristics, and mitigating measures the LFI can apply to such products based on principles discussed in Section 4.
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2.1.1.1.1. Letters of Credit
An LC is a letter from an LFI guaranteeing that the LFI will make a full payment to the supplier once the supplier presents the documents that confirm their performance and that would allow the buyer to receive the ownership of goods and services. If the supplier presented the full and correct documents and the buyer is unable to make a payment on the agreed-upon date, the LFI will be required to cover the full or remaining amount of the purchase. There are different types of LCs, commercial LCs, standby LCs, and bank guarantees, discussed in further detail below:
(1) Commercial LC (also known as a documentary LC or simply an “LC”): Commercial LCs are extensively used as a means of payment in cross-border or domestic trade. The buyer’s LFI (i.e., the issuing bank) pays a pre-determined amount to the supplier’s LFI (i.e., the advising bank) upon presentation of certain pre-agreed documents that prove that the goods were shipped by the supplier. Since the terms of each LC could be different, different documents might be presented as part of the trade transaction. These documents contain information about the underlying trade that should be used by LFIs to determine the legitimacy of the transaction. These documents are discussed in Section 2.1.1.2 Types of Documents Available in Documentary Trade Finance Instruments. Commercial LCs can have many other variations, as follows:
Revocable versus Irrevocable
LC
Irrevocable LC means that the LC cannot be cancelled or amended unless all parties to the LC agree to do so (i.e., the buyer and the supplier). Revocable LC allows the buyer or the buyer’s LFI (i.e., issuing bank) to amend or cancel the LC at any time and without notice to the supplier, and as a result of these conditions, revocable LCs are less common than an irrevocable LC. Confirmed versus Unconfirmed LC Unconfirmed LC is a type of the LC where only the buyer’s LFI (i.e., issuing bank) guarantees performance. Confirmed LC is used when a supplier would like additional assurances of performance under the LC. In this case, the supplier can ask a reputable LFI or its own LFI to add a confirmation to the LC. With a confirmed LC, even if the buyer’s LFI (i.e., issuing bank) fails to pay, the LFI that has confirmed the LC has to make the payment against complying presentation of the documents presented by the supplier. Transferable versus Nontransferable LC Transferable LC is a type of LC where the beneficiary can transfer all or part of the payment due under the LC to another party (i.e., a second beneficiary). Non-transferable LC, by definition, means that the LC cannot be transferred.
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(2) Standby LC: In contrast to a commercial LC, standby LCs serve as a secondary payment method (i.e., it will only be called upon when one of the parties to a standby LC fails to perform against their contractual obligations in a trade). For example, if a supplier plans to dispatch 10 shipments of goods in a year to a buyer, it may ask the buyer to open a standby LC valid for that period of time. The supplier and the buyer then continue their relationship (e.g., exchange documents and payment) without involving the issuing bank or calling upon the standby LC. However, if a buyer fails to pay under one of those 10 shipments and the standby LC’s term is still valid, the issuing LFI will have to pay the supplier. Similar to commercial LCs, presentation of certain documents may be required in order for the issuing LFI to make the payment. Such documents contain information about the underlying trade that should be used by LFIs to determine the legitimacy of a transaction. These documents are discussed in Section 2.1.1.2 Types of Documents Available in Documentary Trade Finance Instruments.
2.1.1.1.2. Bank Guarantee
A bank guarantee is largely similar to a standby LC, as it represents an undertaking from an issuing LFI to pay to a beneficiary if one of the parties to a contract has failed to perform against their contractual obligations in a trade. The major difference between the two instruments is that bank guarantees have a wider application and are not limited to securing a performance under a trade-related transaction. Thus, for example, a bank may issue a guarantee that a certain construction project will be completed in time and under a certain specification. If a builder fails to perform against the agreed-upon terms, the beneficiary can demand a payment from the bank. In connection with a trade transaction, a bank may issue a guarantee, for example, that a supplier will manufacture and dispatch certain goods within an agreedupon period of time and will have to pay the buyer if the supplier fails to do so. Letter of Credit:
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Figure 1 – The above figure illustrates a typical payment flow for an LC. The Buyer (Importer/Applicant) applies
for an LC with the Buyer’s Bank (Issuing Bank), and the Buyer’s Bank (Issuing Bank) guarantees that it will make a full payment to the Supplier’s Bank (Advising Bank) (Step 3: LC Issuance) once the Supplier (Exporter/Beneficiary) presents certain documents (in this case, shipping documents) that confirm goods have been shipped to the Buyer (Importer/Applicant).
2.1.1.2. Types of Documents Available in Documentary Trade Finance Instruments
The following documents are the most common types of documents available in documentary trade finance products. The terms of each LC and bank guarantee will differ, and the parties involved in a trade transaction may decide to request more or fewer documents, depending on the nature of their relationship. Please refer to Section 4.3 Targeted Financial Sanctions Obligations for further information on sanctions screening best practices involving documentary trade finance products.
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CBUAE Classification: Public o Ports and places of receipt and delivery; o Number of originals issued; and o Issuer details.
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CBUAE Classification: Public o The name and address of the buyer and the supplier; and o The terms of delivery.
10 Wolfsberg Group, ICC and BAFT Trade Finance Principles, The Wolfsberg Group, ICC and BAFT Trade Finance Principles, 2019, available at:
https://library.iccwbo.org/content/tfb/pdf/trade-finance-principles-2019-amendments-wolfsberg-icc-baft-final.pdf
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CBUAE Classification: Public finance facilities of the LFI, all details can be derived, and all controls checks and measures can be exercised prior to completing the transaction. As a result, non-documentary trade finance and open account trade are among the highest-risk activities in which LFIs routinely engage, as illicit actors seek out methods where LFIs have a reduced role, namely less oversight, than in traditional documentary trade finance. LFIs should therefore be aware of the particular transparency challenges associated with non-documentary trade finance and open account trade transactions, which typically provide LFIs with less risk-relevant information regarding the parties and goods involved in the underlying trade activity than traditional, document-based instruments.
2.1.2.1. Description of Open Account Trade and Non-Documentary Trade Finance
Products and Instruments
The following section discusses open account trade as well as the most common types of non-documentary facilities used in trade-related transactions. As noted above, precisely because these products do not involve an LFI collecting, inspecting, and accepting the underlying trade documents, the TBML patterns are very hard to detect. Instead, an LFI should focus on Customer Due Diligence (“CDD”)/Know Your Customer (“KYC”) and Enhanced Due Diligence (“EDD”)-related processes, as well as transaction monitoring that may alert an LFI to indicators of suspicious activity associated with TBML. (1) Open Account Trade: this is a type of a sale that is very advantageous to the buyer (importer). The exporter (seller) ships the goods to the buyer and specifies when the payment is due (typically within 30, 60, or 90 days after the shipment). This is a type of financing extended directly by the seller to the buyer, without involvement of a third-party LFI or trade finance provider. In theory, the buyer should then pay the invoice (e.g., via wire transfer or a cheque) when it becomes due; however, if the buyer fails to pay the seller has little recourse against the buyer other than bringing a legal action for non-payment. Typically, an exporter is willing to trade on open account in situations when it knows the importer well and the two have a longestablished relationship. In the alternative, if the exporter overproduced certain goods that it cannot easily sell in the open market, it might be willing to sell the goods on an open account to a willing buyer, taking on the risk of non-payment. Some importers in developing markets may also pressure exporters on the basis that LCs or other traditional types of finance have prohibitive costs for the buyer. The opposite but similar type of a settlement in a trade transaction that is advantageous to the seller is cash in advance, i.e., a scenario where the buyer pre-pays the seller via wire transfer/cheque/credit card the entire value or a percentage of the goods to be shipped before the shipment.
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(2) Import and Export Factoring: Import and export factoring (also known as “international factoring”) is the process of purchasing account receivables from a supplier/exporter in one country and collecting the invoice value later from the buyer/importer in the second country. The company purchasing the accounts receivables is called a “Factor” and can be a bank or a non-bank “Factoring Company.” A factoring transaction will typically involve two Factoring Companies, an Export Factor and an Import Factor, each of which are local companies for, respectively, an exporter and an importer. As international trade continues to shift away from LCs and documentary trade finance, and towards open account terms, factoring gains more traction. Factoring is particularly relevant as it helps parties to a transaction manage their cash flow, helping suppliers that would otherwise have to wait a certain period of time before a buyer makes a payment. While factoring can take several forms, Figure 2 below illustrates this typical Import and Export Factoring arrangement:
Open Account and Cash In Advance Vulnerabilities:
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Import/Export Factoring:
Figure 2 – The above figure illustrates a typical Import and Export Factoring arrangement. The Buyer
(Importer) orders goods from the Supplier (Exporter). The Supplier (Exporter) ships the goods and issues an invoice to the Buyer (Importer). The Supplier (Exporter) then assigns the invoice to the Export Factor B who pays up to 80% of the invoice value to the Supplier (Exporter). The Buyer (Importer) meanwhile pays the invoice to Import Factor A, and when the funds are remitted to Export Factor B, the Export Factor B pays the remainder of the invoice, minus interest and fees, to the Supplier (Exporter). (3) Forfaiting: Forfaiting is similar to the factoring example above. A forfaiting company is either a bank or a specialized finance firm that purchases an exporter’s receivables at a discount. The key difference is the fact that forfaiting is non-recourse, meaning a forfaiting company Forfaiting Vulnerabilities: Similar to factoring, a forfaiting company will have limited visibility into the underlying trade transaction and would collect fewer documents than in a documentary trade finance. Thus, a forfaiting company is unlikely to detect illicit activity. Import and Export Factoring Vulnerabilities: The following are particular vulnerabilities of Import and Export Factoring:
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CBUAE Classification: Public assumes the risks of a buyer’s non-performance and cannot ask the supplier to pay if the buyer fails. At the same time, in forfaiting, unlike factoring, the receivables are typically guaranteed by the importer’s bank. The receivables in forfaiting also take on a form of a debt instrument that can later be traded in a secondary market. Forfaiting is typically used in capital goods transactions (e.g., equipment) and commodities trading. (4) Structured Trade Finance: Structured trade finance helps manufacturers, suppliers, and buyers reduce the gap between the time a manufacturer procures materials until the final product is sold to a consumer. A financial company, typically a bank, will loan funds to a company to cover the multiple stages of a trade. For example, the bank can loan funds to the supplier/exporter to finance the pre-export activities, such as manufacturing and storage. The bank can also loan funds to the buyer/importer that has received a shipment of goods but has yet to sell these goods. The borrowed funds are then repaid through the lifecycle of production, storage, transfer, or sale of the goods. Common trade finance structures are warehouse financing and pre-export finance, discussed below:
o Warehouse Financing: A type of inventory financing where a company or a manufacturer secures a loan from an LFI by using their goods as collateral. The commodities are kept in a warehouse approved by the lending institution or managed by a third party. For example, a buyer of wheat or another commodity secures a warehouse financing. If the buyer fails to repay the loan or delays the payments, the lender can seize and sell the goods to recover the losses.
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Warehouse Financing:
Figure 3 – The above figure illustrates a typical warehouse financing arrangement. The Lender and Seller
(Borrower) enter a credit agreement, after which, the Seller (Borrower) places goods in a warehouse. The warehouse issues a receipt to the Seller (Borrower), and the Seller (Borrower) provides this receipt to the Lender as a collateral. The Lender then proceeds to issue a loan to the Seller (Borrower). The Seller (Borrower) sells stored goods to the Buyer, and the Buyer makes a payment to the Lender. The Lender then releases a receipt and applies the Buyer’s payment to the loan. The Buyer then redeems receipt at the warehouse for the goods. o Pre-Export Finance: In pre-export finance, funds are paid to the supplier/exporter of the goods based on the confirmed orders from buyers. Typically, the borrower uses the funds to meet working capital needs which can include the purchase of raw materials, manufacturing costs, and costs associated with storing and movement of goods. LFIs should ensure they have controls in place so that a trade transaction matches the description provided at the time of pre-export financing. Warehouse Financing Vulnerabilities: LFIs that engage in warehouse financing should pay attention to the valuation of the inventory in trade since over-valuation may be used by illicit actors to gain funds that would otherwise not be available to them. Similarly, warehouse financing may be used to cover “phantom shipments”, referred to in Section 2.2.2. Over- and Under-Shipment of Goods and Services, and/or involve commodities trade, which is particularly susceptible to TBML. LFIs should consider conducting additional due diligence on the warehouse(s) and the supplier of the goods to make sure they are legitimate and operating businesses. Finally, in warehouse financing, the financing LFI may have little visibility into the origin of the goods or the underlying documentation that supports the trade transaction.
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Pre-Export Financing:
Figure 4 – The above figure illustrates a typical pre-export financing arrangement. The Buyer places an order
and receives an invoice that specifies the payment details and due date. The Supplier then enters a pre-export agreement with a Finance Provider and receives a percentage of the invoice value as a loan, after which, the goods are shipped to the Buyer. Based on the payment due date, the Buyer is required to pay the invoice payment as part of the escrow/collection terms with the Finance Provider, and the Finance Provider is informed of payment to the escrow/collection account. The Finance Provider sends the remainder of the invoice value, minus fees and interest to the Supplier (Exporter). (5) Countertrade: Countertrade is a reciprocal form of international trade in which goods or services are exchanged for other goods or services rather than for hard currency. This type of international trade is more common in developing countries with limited foreign exchange or credit facilities. A major benefit of countertrade is that it eliminates the need for one country to procure stable foreign currency that is often expensive and/or spend such currency from its reserves, which is a prime consideration for cash-strapped nations and provides an alternative to traditional financing that may not be available in developing countries. Offsetting is also more common for larger, more expensive items. Pre-Export Finance Vulnerabilities: In pre-export finance, an LFI has visibility only into one aspect of a trade transaction (i.e., activities by a borrower before shipment of goods). Therefore, in this scenario, it is harder for an LFI to identify any red flags or verify whether the borrower used the financing for the specified purpose. Thus, CDD/KYC measures play a particularly important role in pre-export finance, as further discussed in Section 4.2. CDD and EDD Measures.
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An example of countertrade is a barter arrangement, whereby the supplier/exporter exports certain goods to the buyer/importer, and instead of receiving a payment, the supplier/exporter receives a different type of a good or commodity from the buyer/importer or a third party nominated by the buyer/importer. Another example of a countertrade is a buyback agreement where a supplier/exporter exports certain manufacturing equipment and training services to the buyer/importer and accepts a percentage of the buyer/importer’s manufacturing output as a form of payment.
2.2. TBML Typologies
The following sections examine common features of TBML activities by outlining specific TBML typologies identified by global standard-setters and industry groups. TBML typologies—ranging from basic to highly intricate schemes—all capitalize on the movement of goods in exchange for payment to move value within and across borders. Illicit actors may engage in one or several TBML typologies to complicate a trade transaction. LFIs should therefore assess their exposure to trade activity and determine whether customers involved in trade transactions should be subject to EDD measures. When dealing with high-risk customer relationships, an LFI may decide to de-risk the relationship by either limiting the types of products offered to a customer or exiting the customer relationship if risks cannot be sufficiently mitigated. LFIs should incorporate this assessment into their AML/CFT program and update their policies, procedures, and processes with the aim to detect TBML and manage associated illicit financing risks. In addition to the typologies listed below, the Guidance provides several risk indicators across the following four categories in Annex 1:
11 Updated Strategic Analysis Report, Trade-Based Money Laundering, June 2024, The UAE’s FIU, available at https://www.uaefiu.gov.ae/media/vduba40z/updated-strategic-analysis-report-on-trade-based-money-laundering-rsas-2024.pdf Countertrade Vulnerabilities: Countertrade is the least transparent form of a cross-border trade since the parties do not involve any LFIs, and thus, are not subject to CDD/KYC, transaction monitoring or other transaction checks. It may also take place in a country with weak AML/CFT and recordkeeping regulations, making it nearly impossible to reconstruct the transaction or understand the parties involved.
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2.2.1. Over- and Under-Invoicing of Goods and Services
Over- or under-invoicing of goods and services is one of the most common techniques used by illicit actors to transfer value across borders without detection by law enforcement or customs officials. This technique requires a level of collusion between the “supplier” and “buyer” to misrepresent the price of the good or service. In some cases, the supplier and the buyer are part of the same criminal organization. While the value of goods and services could vary based on the quality of the underlying goods and services, LFIs are able to identify over- and under-invoicing by independently inquiring about the market value of the same, or similar, goods and services as those involved in a trade transaction. LFIs should consider using external resources to determine whether the price of underlying goods or services is in line with the market value, and in this context, identify over- or under-invoicing of the goods and services. Such external sources are most relevant in the context of commodities trading where the price of the commodity in question is less prone to variation. This control may also be referred to as “price-validation.” Over-Invoicing: By invoicing the goods or service at a price above the fair market price, the supplier is able to receive value (profit) from the buyer, as the payment for the goods or service will be higher than the value that the buyer receives when it is sold on the open market. Under-Invoicing: By invoicing the goods or services below the fair market price, the supplier transfers value (profit) to the buyer. The buyer sells the under-invoiced goods in the market for real value, and the difference between the real value and the invoiced price is the value (profit) transferred to the buyer. o Example: A criminal organization (i.e., supplier in this case) exports 1,000 high-end electronic widgets at the fair market cost of AED 6,000 per widget (total market value of AED 6,000,000). Commercial invoices, the sales agreement, and the bill of lading show an export of 1,000 widgets at the price of AED 5,000 each, as the criminals have under-invoiced the high-end electronic widgets. The customs officials in the exporting country release the export, as they can confirm that the exported goods are the same as described on the shipping documentation. The buyer, which is also part of the criminal organization in question, receives the widgets and pays the supplier AED 5,000,000 via a wire transfer through its bank, referencing the invoice number in the free text field. Since there is nothing suspicious on the face of the transaction, this transaction is not stopped for further review by the bank. The buyer proceeds with selling the widgets in the market at AED 7,500 each, the actual retail price, generating a total of AED 7,500,000 in their bank account. This effectively results in the supplier transferring a surplus (profit) of AED 2,500,000 to the buyer.
2.2.2. Over- and Under-Shipment of Goods and Services
Prices are not the only piece of information that can be misrepresented; the quantity of the goods shipped and the services provided are also subject to misrepresentation. By over- or under-stating the quantity of goods in a trade transaction, the supplier and the buyer can transfer value to one another. In extreme cases, the supplier may not ship any goods to the buyer but will send a fake invoice and other supporting documentation to the buyer for so-called “phantom shipments.” Phantom shipment was relevant in 61% of SARs and STRs filed in 2022 and 2023 analysed by the UAE’s FIU. 12 While LFIs normally do not have the opportunity to inspect the shipments to detect over- and undershipment of goods and services, they may compare different pieces of information provided to them by their
12 Id.
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CBUAE Classification: Public customer. For instance, the quantity of the shipped goods should match across different trade documents, such as invoices, shipping documents, and other custom clearing documents. Also, LFIs should ensure that the quantity of goods or services provided matches the profiles of the supplier, buyer, or any intermediary involved in the trade transaction, such as by reviewing the size and geographic location where the parties do business and have operations. When in doubt, LFIs may ask for attestation from the parties to the trade. o Example: Company A located in Dubai sells 10,000 laptops to Company B in Central Asia, at a fair market price of AED 4,500 each. However, Company A only ships 5,000 laptops to Company B (under-ships the declared number of goods) with the invoice and shipping documentation stating 10,000. Company B pays Company A AED 45,000,000 via a wire transfer. Company A reimburses its suppliers AED 22,500,000. This results in the surplus of AED 22,500,000 that Company A moved to Dubai for future use.
2.2.3. Multiple Invoicing of Goods and Services
Illicit actors may issue more than one invoice for the same trade transaction. In applying this technique, illicit actors request payment from different LFIs for the same underlying goods or services. This technique does not misrepresent any piece of information, and as such, it may be more difficult to detect. In addition, even if multiple payments relating to the same shipment of goods or delivery of services are detected, the illicit actors can claim “legitimate” explanations such as amendment of the price terms, payment of late fees, or additional logistics charges. Close examination of invoices to detect potential anomalies and evaluating the invoices in the context of the customer’s profile is beneficial to LFIs to detect such practices. LFIs should also be on the lookout for fictitious invoices. When the authenticity of a document is doubted, information accompanying the documents, including the meta data of the digital files, could help LFIs determine whether an invoice is fictitious or not. o Example: Company A located in Central America ships 500kg of bananas to Company B, a trading company in a Financial Trade Zone in the Middle East. Company A issues an invoice for AED 150,000 to Company B to be paid to Company A’s bank account held with Bank X. Company A has all the documents that proves the bananas were shipped at the stated price. Company A produces documents, including the bill of lading, that shows the delivery term was for Company A to deliver them to a Financial Trade Zone in the Middle East. Company A issues another invoice for AED 150,000 for the same shipment to Company C located in Central Asia to be paid to Company A’s bank account held at Bank Y. Company C, in fact, distributes illicit drugs throughout the region and often accumulates significant funds in its bank accounts. In this case, Company A uses the same documents that it used for Company B in the FTZ. The LFIs involved, which checked the documents, did not detect any irregularities, and as such, the transactions went through. The transaction helped Company C to move AED 150,000 to Central America under the disguise of payment for legitimate goods.
2.2.4. Falsely Described Goods and Services
Similar to misrepresentation of the value or the quantity of the goods shipped or services provided, the quality or type of good or service can also be misrepresented. In this case, there is a discrepancy between the description of goods on the shipping documents (such as a high-priced luxury item) and the goods that
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CBUAE Classification: Public the supplier actually shipped (such as a low-priced commodity item or a lower quality item). Falsely describing goods and services is also particularly relevant in the context of proliferation finance, as illicit actors substitute controlled or restricted goods for similar non-controlled or restricted goods. While this typology is very difficult for LFIs to detect, LFIs may ask for representation in cases where other red flags, including those listed in the Annex 1 of this Guidance, signal the risk of a false description of goods and services. o Example: Company A sends a shipment described as two tons of bronze to Company B in another country for AED 32,000, while in fact, the shipment contained two tons of silver valued at AED 2,755,000. By falsely describing the goods, Company A transferred AED 2,723,000 in value to Company B under the disguise of a trade transaction. Company A systematically declared the nature of the goods as bronze in all trade documents which went undetected by customs agents. Company A was the beneficiary of an LC issued by Company B’s bank. Company A takes all the documents, including customs clearing, bill of lading, and invoice, to the advising bank. The advising bank confirms the conformity of the documents and informs the issuing bank. Once the issuing bank approves the conformity of the documents, it pays AED 2,755,000 to Company A.
2.2.5. Use of Shell, Front, or Shelf Companies
The use of shell, front, or shelf companies is commonplace across different types of illicit finance activities; TBML is not an exception. Those engaged in TBML schemes involve shell, front, or shelf companies to conceal the beneficiaries behind trade transactions, obfuscate the payment flow, and otherwise complicate a trade transaction with the objective of making it difficult for LFIs and law enforcement to detect irregularities. Similarly, these types of companies are often used by sanctioned persons who cannot act in their own name, knowing that an LFI’s screening software would otherwise be able to detect their involvement. As a result, these sanctioned persons set up a front or shell company under a generic name to avoid detection. Corrupt government officials also hide behind shell or front companies, as many countries’ laws prohibit government officials from owning or operating a business. Strong initial and ongoing CDD/KYC controls are the most effective measures to mitigate the risks posed by the illicit use of such companies for TBML schemes. LFIs should be particularly aware of companies established in tax havens, at an address where hundreds of other companies are registered, or companies represented by lawyers, secretaries, or other agents appointed by a corporate formation law firm. Additionally, to detect front companies, LFIs may add scenarios to their transaction monitoring systems that are designed to detect sudden activation of a longstanding dormant account, a payment request under a trade finance document to an unrelated third party, unusual geographic patterns of a trade transaction, or transaction volumes that are not in line with a company doing a similar type of business as the party in question. Shell, front, and shelf companies are defined as follows:
o Shell company: A shell company is an incorporated company with no independent operations, significant assets, ongoing business activities, or employees. o Example: Members of a criminal organization with ties to a government official in Country A use shell companies to participate in cross-border trade backed by the government of Country A. Government contracts that involve importing goods to Country A are first directed to the shell companies, portrayed as legitimate actors. In fact, these shell companies are only intermediaries, buying low-quality goods in a third country and resupplying them to Country A at inflated prices, while keeping the price difference.
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CBUAE Classification: Public o Front company: A front company is another type of a company that may lack operations, assets, or employees. The only difference between a front company and shell company is that occasionally a front company is a functioning company created with an intent to hide the true beneficiaries or stakeholders. o Example: Company A is located in Country A with stringent export controls that prevents it from exporting goods to Country B. However, a purchaser in Country B is willing to pay a high premium for Company A’s goods. They agree that Company A will set up a front company with a different name and untraceable ownership in Country C. Company A then proceeds to ship the goods to Country C, where there are no restrictions, for further reexport to Country B, without raising a suspicion from its banks or law enforcement. o Shelf company: A shelf company is an incorporated company with inactive shareholders, directors, and secretary that is left dormant for a long period of time. Shelf companies may even have open bank accounts to bolster their legitimacy. An illicit actor may attract less scrutiny by using a company that on paper appears to have been incorporated and operating for several years. o Example: Company A was incorporated in 2010, and since then, has had no activity. In 2016, the company starts to engage in the trade of high-value electronic items. It engaged in over-invoicing activities and manged to transfer additional value under the disguise of trade. Company A was not subject to strict controls since the bank involved has lowered the risk rating of Company A as it did not have any high-risk transactions in the first five years of its relationship with the bank.
2.2.6. Use of Free Trade Zones
Free Economic Zones (“FEZ”) are designated areas within a country’s borders where certain economic activities are encouraged and facilitated by special regulatory and legal frameworks. One of the most common types of FEZs is a Free Trade Zone (“FTZ”). FTZs are designed to attract trade and investment by suspending the collection of import duties and taxes and also implementing simplified customs procedures. In addition, the process of setting up a company is typically less complicated in an FTZ. As a result, FTZs are ideal locations for storing and distributing products, and function as critical logistics hubs for importing, transshipping, and re-exporting goods. While FTZs promote legitimate trade, they also attract illicit actors who try to exploit the eased controls (such as through illicit goods manufacturing and smuggling) and high volume of trade conducted in FTZs. As a result, illicit actors benefit from minimal checks and transparency requirements in an FTZ,13 and for the UAE, the complexity of TBML in FTZs, combined with the country’s high number of FTZs, poses a significant challenge to LFIs in combatting illicit financing flows. Accordingly, LFIs can mitigate the risk of FTZs by inquiring about the reasons a customer chose to use a FTZ for their activity and to evaluate a customer’s response as part of the CDD/KYC process. LFIs may also ask for the names and the location of a customer’s counterparties to evaluate if there are any suspicious indicators involving the customer (e.g., whether the customer’s counterparties are all located in high-risk jurisdictions and lack a legitimate business connection to the customer).
13 To see more about the risks associated with FTZs, see Improving Governance and Tackling Crime in Free-Trade Zones, RUSI, October 2020, Available at: https://static.rusi.org/20201012_ftzs_web_2.pdf
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CBUAE Classification: Public o Example: Company A located in Country A’s FTZ orders navigation equipment from a manufacturer, Company B, in Country B. Country B has restricted the exportation and re-exportation of navigation equipment produced in Country B to Country C. Company A applies for a LC for the benefit of the manufacturer, Company B, in Country B. Once goods are shipped to Country A, the manufacturer, presents relevant documents to the advising bank which then passes them to the issuing bank. One of the documents is a bill of lading in which the consignee is Company A in Country A’s FTZ. Nothing on the face of the documents suggests that the navigation equipment will be transported elsewhere. The consignee from Company A in Country A’s FTZ receives the navigation equipment and re-packages the goods into boxes that suggest the navigation equipment are household kitchen appliances. The consignee from Company A in Country A’s FTZ re-exports these goods to Country C in violation of laws of Country B with a packing list stating the navigation equipment represents household appliances.
2.2.7. Illicit Cash Integration
Cash is vulnerable to abuse by illicit actors to conduct ML activities and finance criminal activities. Illicit actors use different techniques to integrate criminally derived cash into the financial system. The three main ways that illicit actors integrate cash into the financial system are the following: exploitation of non-bank financial institutions, offsetting schemes, and infiltration of legitimate supply chains. The specific characteristics of cash—anonymity, interchangeability, and transportability—make it an attractive method by illicit actors seeking to conceal the proceeds of crime within the context of trade. Unlike other monetary instruments, such as wire transfers, cash holds no record of its source or owner. Cash transactions are also instantaneous and widely accepted across jurisdictions. Strong CDD/KYC controls help LFIs to lower the risk of engaging with customers involved in criminal activities that generate illicit cash proceeds. Also, by filing reports to the FIU, LFIs contribute to helping the FIU detect illicit actors who use the following techniques to integrate illicit cash into the UAE’s financial system. o Exploitation of non-bank financial institutions: Illicit actors seeking to circumvent the AML/CFT controls applied by banks may opt to use non-bank financial institutions to introduce and integrate illicit cash into the financial system as part of a TBML scheme. While a large bank may detect unusual activity in the case of large or frequent payments and ask for supporting documentation, non-bank financial institutions are perceived to have less stringent controls to detect TBML schemes. Thus, by using non-bank financial institutions, the criminals ensure movement of funds without additional inquiries. This is particularly important as numerous financial technology companies with various degrees of compliance programs start offering payment services. o Offsetting schemes: When one criminal organization has excessive cash and another criminal organization needs cash, illicit actors may engage with one another and offset cash funds they have in different locations. One of the best ways for such illicit actors to offset their cash is to engage in trade. For example, one criminal organization can purchase high-value goods for cash and export it to a country where cash is the predominant means of payment. The buyer/importer sells the goods and transfers cash proceeds to another criminal organization operating in the importing country. By hiding behind trade transactions, illicit actors can move cash between criminal organizations. o Infiltration of legitimate supply chains: Sometimes illicit actors take over a stake in a legitimate business and use the business’ legitimate supply chain as a method to introduce and integrate illicit
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CBUAE Classification: Public cash into the financial system. Money launderers slowly and steadily increase the amount of illicit cash they introduce into the business while maintaining the business’ operations. o Surrogate shopping networks: A network of individuals, known as surrogates or personal shoppers, who purchase products on behalf of others to circumvent customs controls, export controls, or other forms of trade or tariff restrictions. These networks could be exploited as part of TBML schemes, whereby illicit actors provide local currency that are the proceeds of crime to surrogate shoppers to compensate for the items surrogates purchase using their credit cards, as well as incentives or fees. The decentralized and often anonymous nature of these transactions can make it difficult for LFIs to track the funds and identify the real beneficiaries, increasing the risk of money laundering. Example: Criminal organization A in Country A sells illicit drugs through a network of individuals, selling it for cash. Each individual deposits the cash they have collected to their personal accounts. Later they use their debit cards linked to the accounts at a point-of-sale in a supermarket that is owned by the criminal organization. While it appears that all these individuals are purchasing food items at the supermarket, in fact they are not purchasing anything. By doing so, they aggregate the funds collected from the sale of the illicit drugs in the account of the supermarket. Criminal organization A then uses the funds to pay to Company B for the supply of the illicit drugs to Country A under the disguise of a transaction related to importation of food items to the supermarket. None of these transactions appear to be related to any illicit activities. In this case, the criminal organization infiltrated the legitimate supply chain to launder funds under the disguise of trade between the supermarket, customers, and Company B which supplies the illicit drugs.
2.2.8. Third-Party Intermediaries
A third-party intermediary may take part in a trade transaction by settling an invoice on behalf of an illicit actor. Sometimes such third-party intermediaries are incorporated in offshore jurisdictions that offer corporate secrecy. Even though there may be legitimate grounds for a third party’s involvement in a trade transaction, whether financially or through physically supporting a trade (e.g., a service provider acting in the capacity of a shipping company), illicit actors have often used this technique to transfer value. This TBML technique is particularly challenging for LFIs to detect because it often occurs as part of open account trade where LFIs have very limited information about the underlying transaction. To the extent that information is available on an underlying transaction, LFIs should question the involvement of unrelated third parties if there is no economic justification for the third party’s involvement in the trade transaction and if the third party was not previously identified as a principal counterparty during the customer’s onboarding. o Example: Company A exported 500 widgets to Company B which is located in another country. 15 days after the delivery of the goods, Company A received funds from Company C located in yet another country. Company A’s bank stopped the payment and conducted due diligence. Since Company C is incorporated in an offshore jurisdiction which is perceived to be high-risk, the bank asked for further documents. Once Company A provided documents, it revealed a third party was paying for the goods delivered to Company B. The bank compliance proceeded to request further information, including trade documents, showing the relationship between Companies B and C, and the source of funds for the transaction coming from Company C. In providing the requested
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CBUAE Classification: Public information, Company A shared contradictory documents that did not match the transaction detail. Specifically, the information regarding the ultimate creditor of the transaction that was provided in the MX/ISO 20022 message did not match the information on the purchase agreement provided by the customer. The bank returned the transaction in question since it could not determine whether it was a legitimate transaction. The bank filed a suspicious activity report with the FIU that later led to an investigation that unearthed a ML scheme which involved the movement of funds gained from illegal gambling in a country where Company C was located.
2.2.9. Back-to-Back Letters of Credit
Back-to-back LCs are a financing arrangement made up of two distinct LCs, one issued by the buyer’s LFI for the benefit of an intermediary and the other issued by the intermediary’s LFI for the benefit of the supplier. Such back-to-back letters of credits can be used for legitimate purposes when, for example, the intermediary is a commodities broker purchasing goods at one price and then selling at a higher price to a willing buyer. In this case, the broker wishes to maintain a certain level of secrecy, because otherwise, in the future, the buyer can acquire goods directly from the supplier without the mark-up. However, this technique is also used by illicit actors to complicate the financing arrangements, making it harder to trace the flow of funds. This technique can also be used to evade sanctions. Back-to-back LCs allow the intermediary to hide certain information that could have led to detection of a sanctions target in the trade. For instance, if the issuing bank of the first LC is a sanctioned bank, with a back-to-back LC, the ultimate beneficiary receives the second LC from an unsanctioned bank of the intermediary without mention of the original issuing bank. LFIs should carefully consider when any customer requests to open back-to-back LCs and conduct appropriate due diligence on the customer. In addition, LFIs should monitor customer accounts for frequent incoming and outgoing funds transfers that occur in a short period of time and involve similar amounts, as this can be a sign of back-to-back transactions in a TBML scheme. o Example: An oil extraction company in Country A sells 200,000 barrels of crude oil to a broker in Country B. Country A is sanctioned by several jurisdictions prohibiting purchase of oil originating in it. The broker arranges for the oil to be transported via railroad to Country B that does not maintain sanctions against Country A, where it is then onloaded onto a vessel for delivery to Country C. The broker, using a bank in Country B, opens an LC in favour of the supplier. The buyer in Country C opens the second LC in favour of the broker (note that the buyer and buyer’s bank will be unaware of the nexus to Country A in the transaction and will not be able to conduct a sanctions analysis). The documentation provided as part of the second LC shows Country B as the origin country.
2.2.10. Fictitious Documents
Presenting fictitious documents is a ubiquitous technique money launderer use when transferring funds under the disguise of a trade transaction. As stated in the Updated Strategic Analysis Report on TBML published by the UAE’s FIU in June 2024, fictitious documents are the most frequently used technique used in TBML based on the SARs and STRs analysed by the FIU in 2022 and 2023.14 Trade transactions usually involve multiple documents, increasing the opportunity for criminals to temper with the documentation or
14 Updated Strategic Analysis Report, Trade-Based Money Laundering, June 2024, The UAE’s FIU, available at https://www.uaefiu.gov.ae/media/vduba40z/updated-strategic-analysis-report-on-trade-based-money-laundering-rsas-2024.pdf
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CBUAE Classification: Public create fake documents. Considering that there is no uniform model for trade-related documents, parties facilitating the trade, such as LFIs, shippers, vessel owners, and insurers, cannot always detect fraudulent documents absent obvious red flags. However, LFIs should conduct further due diligence in instances when there are clear discrepancies or visible alterations among documents presented. Additionally, LFIs may also benefit from creating an internal repository of different documents that are commonly used in trade finance by their customers to have a comparison point when reviewing documents. While there are several varieties for each type of document (e.g., several versions of invoices), this practice will help LFIs detect fictitious documents that can be carelessly generated by illicit actors who try to defraud the LFI. o Example: Company A in Asia exported 60 tons of steel to Company B in Africa. Both Companies A and B are in a secret agreement to inflate the volume of shipped steel to 600 tons. The two companies decide to settle the transaction via open account. Company B sends a wire with an MX/ISO 20022 message to Company A, but an intermediary bank stops the transaction as suspicious and asks for supporting documentation. Company B prepares a fictitious invoice and also finds online a sample export origin declaration prepared by a government authority of the Asian country. Company B drafts a fraudulent export origin declaration and submits both documents to the intermediary bank which finds them acceptable.
2.2.11. Accounts Used as Pass-Through
Money launderers and criminal organizations may set up accounts that are merely used to complicate the ability to trace funds. This could be achieved by opening a separate account for an existing shell or front company, or a legitimate business. Money launderers and criminal organizations may alternatively create new entities with no economic purpose other than acting as a pass-through account in a trade transaction. By passing funds through such accounts, money launderers try to make it more difficult for LFIs involved in payments to investigate the origin of funds or purpose of a transaction. Furthermore, if such pass-through accounts are opened at jurisdictions whose risk of ML is perceived to be lower, the money launderers will be able to move funds with less scrutiny. This technique can be used in TBML to further complicate the financial flows pertaining to trade transactions, which in many cases, are already complex. Trade transactions often involve multiple parties such as shippers, ship brokers, local transport companies, consignees, commodities brokers, and others, making it easier for illicit actors to justify multiple payments to pass-through accounts that serve no other purpose other than layering funds. LFIs should ask for more information if they find that a transaction is unnecessarily complicated. For example, LFIs should seek explanation in these cases: (1) when there are entities involved in a trade transaction without a rational justification; (2) when the trade transaction is going through several currency exchanges even though it is not necessary for the trade; or (3) where the shipping route passes through countries that makes the route longer without a clear purpose. o Example: A criminal organization located in Europe creates a legal entity, Company A, in the Middle East and opens a bank account for Company A at a local bank in the Middle East. It then creates a website for the company suggesting it is a local logistics company, even though Company A has no legitimate business operations. The criminal organization then starts making regular payments to Company A. When the bank asks about the purpose of the payments, Company A provides fake invoices suggesting it facilitates movement of goods that the criminal organization allegedly (or actually) exports to the Middle Eastern country. The criminal organization that has
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CBUAE Classification: Public control over Company A’s account effectively transfers funds from Europe to the Middle East and can use the accumulated funds to buy goods or services elsewhere.
2.2.12. Use of Registered Hawala Providers and Alternative Remittance
Systems
When illicit actors are seeking to place and layer illicit funds into the financial system, they often turn to alternative remittance systems to structure remittances for the import and export of potentially prohibited or restricted goods, disguising the illicit funds as legitimate transfers abroad. With regards to RHPs, RHPs are more vulnerable to abuse for TBML schemes if the provider conducts larger transfers on behalf of businesses to conduct commercial operations and trade-related transactions. For RHPs seeking to detect TBML schemes, RHPs should obtain a clear understanding of the intended purpose and nature of a transaction and whether it is consistent with what they know about the customer. If the customer appears to be acting on behalf of a business, the RHP should perform CDD/KYC on the business, and the business must be registered and based in the UAE to carry out transactions through the RHP. By conducting CDD/KYC on the customer, the RHP will be in a position to identify TBML and potentially suspicious activity associated with the customer (e.g., a customer who is from Country A states that they are sending funds to a family member, but the beneficiary is located in Country B; a customer who says he works as a labourer wishes to transfer a sum that is greater than the average yearly income for someone in his/her position; etc.). Example: Individual A, a representative of Company A in Country A, uses a local hawala service provider in Country A to transfer cross-border remittances to individual B, who was a representative of Company B, unbeknownst to the hawala service provider, in Country B. The payments were for counterfeit high-end apparel items sold by Company B to Company A, but were indicated to be funds that were sent to family members in Country B.
2.3. Services-based Money Laundering
To date, efforts to combat TBML have focused primarily on the trading of goods to facilitate ML, but TBML can also involve the provision of services as part of services-based money laundering (“SBML”) schemes. SBML schemes rely on exploiting the trade of services or other intangibles, such as information, to disguise the proceeds of crime. Global trade in services provides opportunities for ML as the intangible nature of services makes it difficult to detect anomalies in the price of services offered and to prove whether such services have been provided. For instance, it is common to bill for retainer or penalty fees in certain services sectors, such as in consulting and legal professions, even if the service has not been supplied. While this Guidance does not cover SBML schemes in great detail, it is important to understand that similar to TBML, SBML schemes utilize invoice fraud and manipulation in order to justify the movement of funds as payment for the invoiced services. This can involve billing for non-existent services, inflating the cost of services, or using legitimate services to mix illicit funds with legitimate revenue. The most common services and sectors involved in SBML schemes are parties that provide services related to gambling, software, financial services, consultancy and advisory, and intellectual property rights.15
15 FATF, Trade-Based Money Laundering: Trends and Developments, 2020, available at: https://www.fatf-gafi.org/content/dam/fatfgafi/reports/Trade-Based-Money-Laundering-Trends-and-Developments.pdf
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CBUAE Classification: Public
16 FATF:, Trade-Based Money Laundering: Trends and Developments, 2020, available at: https://www.fatf-gafi.org/content/dam/fatfgafi/reports/Trade-Based-Money-Laundering-Trends-and-Developments.pdf
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CBUAE Classification: Public
In this example, the illicit actors benefitted from a high-value, low-volume commodity, and the fact that one commodity can be substituted for another. In addition, the illicit actors were able to melt and recast the goods to resemble another type of good.
2.4.2. Agricultural Products and Food Items
Transactions related to agricultural products and food items may invite less scrutiny; however, they can also be exploited by illicit actors. Illicit actors may purchase foodstuffs from farmers or small suppliers for cash and then export the goods and receive incoming wire payments into their bank accounts.
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CBUAE Classification: Public authorities discovered that a drug cartel had been purchasing clothing items in Asia with criminally derived funds, exporting these clothing items to Country B, and then reexporting them from Country B to Country A. This scheme operated under the pretence that the clothes were made in Country B, enabling the cartel to gain a large margin of profit and introduce the illicitly gained funds into the banking system. In this example, illicit actors abused high-volume, low-value goods to conduct TBML. The cartel used fictitious documents (such as fake invoices and packing lists) to hide the origin of the goods. Because the traded goods had a large margin for price misrepresentation, the cartel inflated the value of clothing on the supporting trade documentation.
2.4.5. Portable Electronics
Portable electronics, especially high-end electronics (smart phones, laptops, or watches), can be deliberately misrepresented and incorrectly valued. As such, they create the opportunity to quickly move significant criminal proceeds.
17 FATF, Money Laundering and Terrorist Financing in the Art and Antiquities Market, Financial Action Task Force, February 2023, available at:
https://www.fatf-gafi.org/en/publications/Methodsandtrends/Money-Laundering-Terrorist-Financing-Art-Antiquities-Market.html
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CBUAE Classification: Public
In the future, the criminals can sell the sculpture, potentially at a higher price, generating additional profit. Even if the criminals sell the sculpture at the same price or slightly below the purchase price, the criminals were able to launder a substantial amount of money that now appear as legitimate funds.
2.4.7. Construction Materials
Due to their low-value-high-volume nature and at the same time prevalence in international trade, construction materials are appealing for over- or under-invoicing as well as over- or under-shipment. As stated in the Updated Strategic Analysis Report on TBML published by the UAE’s FIU in June 2024, construction materials were involved in 10% of the SARs and STRs filed in 2022 and 2023, analysed by the UAE’s FIU.
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CBUAE Classification: Public
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CBUAE Classification: Public discussion of all AML/CFT requirements imposed on LFIs. LFIs should therefore consult the UAE legal and regulatory framework currently in force. The controls discussed below should be integrated into each institution’s broader AML/CFT compliance program and supported by appropriate governance, independent audit, and training.
4.1. Enterprise-wide Risk Assessment and Risk-based Approach
Under Article 4 of the AML-CFT Decision, LFIs are required to identify, assess, and understand the ML/TF risks to which they are exposed in order to determine the nature and extent of AML/CFT resources necessary to mitigate and manage those risks. For this purpose, LFIs should also perform, document, and regularly update an enterprise-wide risk assessment that includes an assessment of risks related to trade. Conducting a risk assessment is the first step in LFIs effort to counter illicit finance, including TBML and illicit transshipment. Specifically, LFIs should evaluate the risks associated with customers involved in trade and the LFI’s geographies, products, services, and role in a trade transaction. To form a clear understanding of their risk exposure, LFIs may opt to perform a standalone risk assessment of their trade finance business. When performing the risk assessment, LFIs should take into account different categories of risk. The most common categories of risk are associated with customers, intermediaries, geographies, products and services, delivery channels, and operations.
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As discussed in Section 3, LFIs should also consider the risks related to landlocked countries, whether through their customers’ locations or the LFI’s own locations. A landlocked country may rent port space, warehouses, and other facilities from neighbouring countries that have seaports, and these neighbouring countries may be subject to restrictive sanctions or export controls. LFI should therefore seek to understand the true origin or destination of goods based on a thorough review of trade finance documents provided by their customers.
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CBUAE Classification: Public
4.2. CDD and EDD Measures
4.2.1. General CDD Measures
Under Article 5 of the AML-CFT Decision, LFIs should conduct CDD before or during the establishment of the business relationship or account, or before executing a transaction for a customer with whom there is no business relationship. An LFI’s CDD program should cover, at a minimum: customer identification and verification; beneficial owner identification and verification; understanding of the nature of the customer’s business and purpose of the business relationship; and ongoing monitoring. CDD, and where necessary EDD, are the core preventive measures that help LFIs manage the risks of all customers, particularly higherrisk customers. In the context of trade, each LFI should identify which party to a trade transaction is their customer and subject to the LFI’s CDD process. Although it is not the responsibility of the LFI to perform due diligence on all parties to a trade transaction, an LFI should have an appropriate understanding of their customer’s business model. CDD measures are particularly important for clients that engage in open account trade where it is difficult to gather information about each trade at transaction level. In addition, trade settlement on open account in and of itself may serve as a red flag if the underlying LFI customer is an exporter and/or if trade transactions involve particularly complex goods or delivery methods, since open account trade is one the least preferable means of settlement from the exporter’s perspective. As a best practice, the LFI should consider requesting specific information in order to appropriately understand the customer’s business model, which could include:
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CBUAE Classification: Public
LFIs should ensure proper documentation and record-keeping of both the CDD conducted at onboarding and any updated information collected on the customer throughout the customer’s business relationship (such as a record of site visits; call logs; and the rationale for onboarding a high-risk customer). Utilizing the information collected through general CDD, an LFI should screen the following parties against lists of sanctioned persons, internal watchlists (such as lists of customers previously exited for financial crime reasons), and, on a risk basis, relevant ML/TF information sources (such as adverse media databases) prior to a customer's onboarding:
18
Please see Section 4.3. to see more about sanctions screening best practices.
19 Available at: https://www.centralbank.ae/en/cbuae-amlcft.
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In the context of trade and as a best practice, in order to mitigate the risk of illicit transshipment, an LFI should consider implementing procedures to identify certain dual-use or high-risk goods, if warranted based on its risk assessment. Such procedures may include obtaining additional information when a customer provides a vague description of the goods (for example, software, chemicals, and technology), which presents challenges to reasonably identify the intended use for these goods. This may also include incorporating certain key search words into the LFI’s screening system (for example, defence, military, unmanned aerial vehicles, ammunition, and lasers) to ensure that screening software intersects payments referencing such items for manual review. More generally, if a customer appears to be involved in dual-use or high-risk goods, LFIs should request further information on the goods or services exchanged for this information to be screened by the LFI. As part of this due diligence, the LFI should also establish whether the customer will be trading goods subject to export or import controls and whether any of the goods traded by the customer will ultimately be transported to or through a sanctioned country. Additionally, LFIs should inquire whether their client engages in open account trade and if the client does, the LFIs must ensure that they understand the trade activities of their client. For particularly sensitive goods or industries (for example, goods with military applications, oil, minerals and other natural resources), an LFI may consider having a customer complete a tailored due diligence questionnaire, indicating its internal compliance policies. In cases where customers, products, or countries involved in a trade transaction are deemed to be “high risk;” where the goods are seen as being high risk or of a “dual use” in nature; or where a customer is the subject of frequent requests for information either from counterparty banks or from government authorities, LFIs should apply EDD which may include a combination of the following steps:
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CBUAE Classification: Public sampling, increasing the risk profile of customers engaged in such trade as determined based on KYC refresh, or adding particularly high risk clients engaged in such trade to internal watch lists to ensure manual review of their transactions meeting certain thresholds. LFIs may also detect unusual transactions using transaction monitoring tools. These measures may help LFIs in deciding whether EDD is necessary for a particular client or a transaction. Following the initial CDD and EDD, the LFI should perform ongoing monitoring. Ongoing monitoring has to be done continuously and if triggered by a specific event, the LFI should conduct additional scrutiny of transactions to determine whether they are consistent with the LFI’s knowledge of the customer and the nature and purpose of the business relationship. Monitoring also involves identifying changes to the customer profile throughout the relationship (for example, their behaviour, use of products, payment flows through the account, geographies of operations), and keeping it up to date, which may require the application of new, or additional, CDD measures.
4.3. Targeted Financial Sanctions Obligations
The AML-CFT Law and AML-CFT Decision require LFIs to promptly apply directives issued by the Competent Authorities of the UAE for implementing the decisions issued by the UNSC under Chapter VII of the Charter of the United Nations. In furtherance of this requirement, the Cabinet Decision 74 of 2020 sets out the legal and regulatory framework in the UAE regarding Targeted Financial Sanctions (“TFS”), including the UAE Local Terrorist List and the UN Consolidated List. In addition, under Article 21 of Cabinet Resolution No. (74) of 2020, LFIs are required to have suitable risk management systems and take sufficient measures to identify whether a customer, or the beneficial owner of a customer, has been added to an international sanctions list or the UAE Local Terrorist List. In practice, it will generally be appropriate to conduct screening prior to onboarding and ongoing screening on all customers. LFIs should take appropriate steps to screen customers and transactions. Trade transactions frequently use Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) messages, and LFIs with a high volume of SWIFT messages should determine whether their screening efforts are adequate to detect involvement of a sanctions target, particularly in the case of screening backlogs, unusual spikes in screening activity, updates to the relevant sanctions lists, and other operational events. All the information available to an LFI (e.g., payer’s information, payee’s information, and intermediary’s information) should be screened against relevant sanctions list to ensure there is no sanctioned person involved in the transaction. As a best practice, screening can also cover all additional documentation, outside of SWIFT messages, collected as part of a trade transaction. The timing of the screening should be in a manner that allows blocking of assets once such assets are in an LFI’s possession. For more information and details on obligations in relation to sanctions obligations, LFIs should consult the Executive Office for Control and Non-Proliferation (“EOCN”)’s Guidance on Targeted Financial Sanctions for FIs, DNFBPs, and VASPs20 and the CBUAE’s Guidance for Licensed Financial Institutions on the Implementation of Targeted Financial Sanctions” and Guidance for Licensed Financial institutions on Transaction Monitoring Screening and Sanctions screening.21
20 Available at: https://www.uaeiec.gov.ae/API/Upload/DownloadFile?FileID=7f006d28-4a65-4829-aa35-b9dc3059e89a. 21 Available at: https://www.centralbank.ae/en/cbuae-amlcft
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Best Practices: Sanctions Screening of Trade Transactions
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4.3.1. Confirmed Matches
If an LFI identifies a confirmed match of an individual, entity, or group to the key identifiers published in the UAE Local Terrorist List or the UNSC Consolidated List, LFIs are required to take the following actions:
22 See also EOCN, Guidance on Targeted Financial Sanctions for FIs, DNFBPs, and VASPs, section 4, available at:
https://www.uaeiec.gov.ae/API/Upload/DownloadFile?FileID=7f006d28-4a65-4829-aa35-b9dc3059e89a. Best Practices: Sanctions Screening of Trade Transactions (continued)
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LFIs are expected to submit a Partial Name Match Report (“PNMR”) through the goAML platform within five business days of implementing the suspension measures. LFIs should ensure that all necessary information and documents regarding the potential match are submitted to the PNMR.
4.4. Transaction Monitoring and Suspicious Transaction/Activity
Reporting
4.4.1. Transaction Monitoring
Under Article 16 of the AML-CFT Decision, LFIs must monitor activity by all customers to identify behaviour that is potentially suspicious and that may require filing of an STR, SAR, or other report types. Moreover, as required by Article 7 of the AML-CFT Decision, LFIs must continuously monitor all their transactions to ensure that the transactions conducted are consistent with the information they have about the customer, their type of activity, and the risks they pose, including, when necessary, the source of funds. Transactions may be suspicious simply by virtue of their individual characteristics (such as their value, source, destination, or use of intermediaries). Alternatively, transactions may be suspicious because, together with other transactions, they form a pattern that diverges from expected or historical transactional activity and may otherwise be indicative of illicit activity. Transaction monitoring programs should be calibrated to the size, nature, and complexity of each institution. Transaction monitoring can include manual monitoring processes and the use of automated and intelligence-led monitoring systems (e.g., intelligence related to the vessel routes can be integrated into the monitoring program of an LFI to tackle TBML), with automated solutions being the preferred option. LFIs with a larger scale of operations are expected to have automated systems capable of handling, in real time, the risks from an increased volume and variance of transactions. Such systems may incorporate external data points (e.g., use of international trade and commodities pricing databases) to increase the LFI’s capability in detecting suspicious activities. LFIs utilizing automated systems should apply rules with appropriate thresholds and parameters that are designed to detect common typologies for illicit behaviour. While smaller LFIs may rely on transaction monitoring systems that are less automated, they should still ensure that their systems and controls are appropriately executed to address the risks from their day-today transactional activity. With that understanding, smaller LFIs should look to employ automated systems wherever feasible.
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4.4.2. Suspicious Transaction/Activity Reporting
As required by Article 15 of the AML-CFT Law and Article 17 of the AML-CFT Decision, LFIs must file an STR, SAR or other report types with the UAE FIU when they have reasonable grounds to suspect that a Best Practices: Trade-related Transaction Monitoring
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CBUAE Classification: Public transaction, attempted transaction, or certain funds constitute, in whole or in part, or are intended to be used in a crime. This applies equally in relation to suspicious transactions involving trade-related activities. When an LFI is assessing whether to file an STR or SAR, it should, at a minimum:
23 Available at: https://www.centralbank.ae/en/cbuae-amlcft.
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4.5. Governance and Independent Audit
The specific preventive measures discussed above should take place within, and be supported by, a comprehensive institutional AML/CFT program that is appropriate to the risks the LFI faces and organized in accordance with the “three lines of defence” model. All three lines of defence should report up to and have the active support and oversight of the LFI’s senior management, defined broadly to include executives, senior leadership, and the Board of Directors. The senior management plays an important role in the fight against TBML by establishing a strong culture of compliance, allocating appropriate resources, ensuring independence of the compliance function, and supporting the compliance department’s efforts to detect and counter TBML. In particular, the senior management can take a proactive role in managing TBML and other ML risks by asking compliance functions to present periodic reports summarizing, for example, identified risks, any instances of non-compliance with LFI’s policies, if any, root cause analysis, and remediation measures. By putting in place appropriate governance, LFIs should be able to continuously monitor and manage TBML and illicit transshipment risks. As such, LFIs should ensure the following points are present in an AML/CFT program:
24 Ibid.
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More specifically, LFIs should ensure that the training:
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Annex 1. TBML and Illicit Transshipment Red Flags
The following is a list of red flags and suspicious activity indicators associated with TBML and illicit transshipment. This list is a compilation of guidance provided by the Dubai Financial Services Authority,25 FATF,26,27 and other regulatory bodies or industry groups. 28, 29 Red flags relating to payments and trade transactions:
25 Dubai Financial Services Authority, Trade Finance Report, 2016, https://www.dfsa.ae/application/files/1015/8425/3351/TF-ReportFINAL_Eng_12_october_2016_mid-res.pdf 26 FATF, Guidance on Trade-Based Money Laundering, 2006, https://www.fatf-gafi.org/content/dam/fatfgafi/reports/Trade%20Based%20Money%20Laundering.pdf 27 FATF, Trade-Based Money Laundering Risk Indicators, 2021, https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Trade-Based-MoneyLaundering-Risk-Indicators.pdf 28 BAFT, Combating Trade Based Money Laundering: Rethinking the Approach, 2017, https://www.amlc.nl/wpcontent/uploads/2018/11/baft17_tmbl_paper.pdf 29 Asia/Pacific Group on Money Laundering, APG Typology Report on Trade Based Money Laundering, 2012, https://www.fatfgafi.org/content/dam/fatf-gafi/reports/Trade_Based_ML_APGReport.pdf.coredownload.pdf
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30 For more information about how Free Trade Zones could be exploited in TBML, see: Money Laundering vulnerabilities of Free Trade Zones, Financial Action Task Force, March 2010, https://www.fatfgafi.org/en/publications/Methodsandtrends/Moneylaunderingvulnerabilitiesoffreetradezones.html
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Annex 2. Visual Synopsis
Recordkeeping
Funds
Goods or Services
Supplier/Seller Intermediaries Buyer
LFI
Risk
Assessment
CDD and
EDD
Sanctions
Screening
Transaction
Monitoring
Governance and
Independent
Audit
Training
Shipping
Company
LFIs in Other
Jurisdictions
Freight
Forwarder
Over/Under Invoicing; Over/Under Shipment; Multiple Invoicing; False Description of Goods and Services; Use of Shell, Front, or Front Companies; Use of Free Trade Zones; Illicit Cash Integration; Third-Party Intermediaries; Back-toBack LoCs; Fictitious Documents; Pass-Through Accounts; and Use of RHPs and Alternative Remittance Systems. Other Intermediaries
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Annex 3. Synopsis of the Guidance
Introduction
Purpose and
Scope of the
Guidance
The purpose of this Guidance is to assist the understanding and effective performance by CBUAE licensed financial institutions (LFIs) of their statutory obligations under the legal and regulatory framework in force in the UAE. Applicability This Guidance applies to all natural and legal persons, which are Financial Institutions or Licensees, or any other defined term which brings all entities within the scope of licensed and/or supervised entities by the CBUAE, in the following categories: national banks, branches of foreign banks, exchange houses, finance companies, payment service providers, registered hawala providers; and insurance and reinsurance companies, agencies, and brokers. Legal Basis
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Service-Based
Money
Laundering
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Governance and
Independent Audit
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Source: Central Bank of UAE — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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