Guidelines to prevent TBML on the anvil

[Conclusion of a three-part article on 'Trade-Based Money Laundering']

Bangladesh's banking industry is coping with changing trade scenarios taking newer approaches, channels, products and challenges. The regulatory provisions for international trade facilitation in the country expedite greater involvement of the trade services departments with greater risks and greater opportunities to earn.

Like many countries around the globe, Bangladesh is said to be getting affected greatly by 'Trade-Based Money Laundering (TBML) and related illicit fund flows. Bangladesh Financial Intelligence Unit (BFIU), the national central agency, has been actively working to address TBML challenges as part of its broad approach to handling money laundering (ML) and terrorist financing (TF).

Several regulations have been enacted and coordination mechanisms developed with rules/law formulating/enforcing agencies both at national and international levels. Banking industries and their activities have already been brought under standard anti-money laundering (AML) compliance and monitoring framework.

As a relatively recent initiative, BFIU is in the process of finalising a 'Guidelines for Prevention of Trade-based Money Laundering' to guide the country's banks to enforce effective control measures for preventing ML and TF misusing international trade channels.

The document together with relevant laws and regulations are expected to bring notable beneficial outcomes through formation of a sound compliance framework for preventing TBML in the country.

BFIU rightly started venturing to prepare a trade-based money laundering guideline to ensure effective control measures through due compliance by the banking industry. However, these do not modify or supersede any applicable laws, regulations and requirements applicable to all banks operating in Bangladesh.

The Guideline is expected to be read together with certain relevant rules, regulations and guidelines; Audit is expected to focus mainly on the money laundering associated with trade related activities of banks with their customers and relevant third parties, and also trade-based money laundering risks connected with bank-to-bank relations.

The challenges of trade services in Bangladesh are also associated with the TBML vulnerabilities.  Thus, addressing these challenges is the key to creating right foundation for handling TBML challenges in the country. In several instances, the contracts or purchase/sale contracts in Bangladesh do not offer due protection to the contracting parties in the absence of insertion of right clauses. These hardly mention anything reading the regulatory coverage.

It is important for the country to ratify UN Vienna Convention on Contract of Sale for sound trade operation and protection of the contracting parties. Till date, 89 countries have ratified the convention.

'Know your customer' (KYC) is probably the most critical component of the TBML control mechanisms, and unfortunately KYC due diligence requirements and compliance issues have been major impediments throughout the globe.

To handle the risks by banks, it is very important to obtain information both for exporters and importers. In this connection, information required only to open a bank account does not serve. It is crucial to have information on the traders' business trend and involvement in other activities to avoid crime and money laundering risks.

In spite of notable development, in Bangladesh, KYC for traders is yet to get adequate attention. Regarding customer-level risk assessment, service providing bankers are to comply with trade-related customer-due-diligence (CDD) and extended due diligence (EDD) in addition to the regular KYC.

Also, service providing banks need adequate data and skilled service providers to analyse information on risk components covering trade customer business behaviour pattern, geographic locations of trade transactions and products as the key parameters of the customer-level risk assessment.

Ensuring adequate infrastructure is a key challenge for installing control mechanism as a measure to deal with TBML. Volume of transactions and size of service providers might be key determinants for installing the required infrastructure when cost is a big issue.

Trade service providing banks have already been burdened with huge compliance-related expenditure in recent years. Regarding infrastructure-level risk assessment, some banks have adopted or are in the process of adopting standard sanction screening process, database on regular transactions, subscription for publicly available online commodity pricing website and vessel tracking system.

Importers are obligated to import goods at maximum competitive prices, and banks are advised to take usual and reasonable cautionary measures to ensure that the price of the goods concerned is competitive in terms of prevailing price in the international market. The banks are also advised to verify, if needed, with the help of concerned Bangladesh mission abroad.

It's really difficult to follow the procedures in the absence of relevant business information on differentiated products. Moreover, many products are not traded in public markets and their market prices are also not publicly available.

At transaction-level risk assessment, determination of competitive price in executing trade transactions is one of the key concerns for banks.

Banks in Bangladesh facilitate trade payments and financing services, and documentary credit has been the most dominating payment technique in the country. Documentary collections are also extensively in use in case of exportation.

This contrasts sharply the global practice in general where 80 per cent payment transaction is said to be made through open account. However, greater use of L/C offers better protection, monitoring and control of the regulatory authority of the country.

Bangladesh is having favourable circumstances in this regard. Any attempt to move towards open account in line with global practices might prove to be risky from the point of view of TBML. Rather we should think of having a set of TBML risk management criteria before moving towards innovative approaches.

There is no alternative to skilled and capable manpower for effective enforcement of compliance and control measures. BFIU has been working on developing awareness and improving capacity of the key stakeholders.

Bank executives are taking part in relevant training and capacity development activities of BIBM and other global and national training/education providers. It is the skills and capacity on the blend of trade services and ML/TF issues that might work perfectly for handling TBML.

In spite of the development in the areas of internal and external coordination, a lot more has to be achieved for combating TBML.

Time has come to focus on enterprise risk management. Enterprise risk management is a relatively new area in the risk management framework. It is about an approach by the entire institution through engagement of the senior management in TBML risk assessment and mitigation at enterprise level. At the enterprise-level risk assessment, reviewing policy depending on TBML risk assessment, reviewing new trends and typologies related to TBML are crucial issues where involvement of board and top management is the key.

Dr Shah Md Ahsan Habib is Professor and Director (Training) at BIBM.

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