Trade-based money launderingWe need not wait for a financial disaster to combat this upgraded form of money laundering.
A big money laundering scandal concerning the Bank of Baroda in 2015 shocked the entire Indian banking system. It was deduced that trade-based money laundering (TBML) for financial gains made through illegal receipts of duty-based drawbacks had been in operation. It transpired that Indian companies exported overvalued products through fake bills, and the Hong Kong companies submitted counterfeit import bills to claim duty drawbacks—and this was all done through banking channels. Last year, the case of remitting funds to various companies in Singapore, China and Hong Kong in the guise of payments for the import of customised software was reported in India. The accused prepared forged invoices to the tune of IRs3 billion.
A report from the World Economic Forum explains that between 2008 and 2017, total financial losses from such crimes totalled as high as $9 trillion. Despite global trade complexities, such tasks require commitment and diligence to be effectively tackled. TBML is g
enerally done through invoicing scams where unscrupulous traders use under- or over-invoicing techniques, or through phantom shipments where shipments of goods don’t occur and where there is fake documentation of goods shipped.
Two significant reasons
There are two significant reasons why TBML should be brought into discussion in the Nepali context. The first is the scepticism that Nepal Rastra Bank officials have been harbouring for a while, reflected in the governor’s statement sometime back: Are we importing as much as we are paying? The report shows scepticism if we are importing less than what we are paying for and sending the illegitimate funds abroad through banking channels. The second reason why there exist possibilities of TBML happening is the increased proportion of capital flight that has been directly hitting the current liquidity state of the nation. Nepal was never in a much worse situation than this where banks and financial institutions were heavily dependent on the statutory liquid fund.
The first way to look for the TBML practice is through discrepancies monitoring. For a bank, discrepancies like late shipment and differences in proforma invoice and commercial invoice can be regular if the applicant accepts them, but this can be a clear sign of money laundering being done through letter of credit. Therefore, regulatory bodies must establish a department to monitor such discrepancies. If frequent amendments are being made, or if the expiry date of the letter of credit is often changed, there should be a potent monitoring agent to look into it. And this can be done either by the compliance section of commercial banks or the central bank itself.
One primary reason TBML is accessible in the Nepali context is that there is lack of a unified rate list. The same product imported through one bank by the same client can have a different price tag when imported through another bank. Differences in prices will be monitored less because it is not practical nor is it possible to conduct interbank verification of proforma invoices. The price of a particular product, in reality, will not be known either, hence banks have no option but to believe what is stated in the proforma invoice. There must be a unified price list, and minor discrepancies in the paperwork may be ignored, but significant differences should immediately trigger an investigation. An updated price list can be kept at customs, along with the harmonic code, or there can be some separate entities looking after this. Unless this unified practice is launched, controlling TBML will not be practical nor feasible.
The Uniform Customs and Practice for Documentary Credits 600 (UCP 600), which defines the regulations for international trade, has left a loophole for TBML by stating how banks should deal with documents, not products. This clause leaves banks liability-free regarding checking the imported goods. Banks will never know whether the products have or have not been imported. The practices of TBML can be significantly checked if banks regularly monitor the paperwork along with the products being imported into Nepal. This can be likened to bank personnel visiting a property to verify it before approving a mortgage. This kind of follow-up will help to minimise a large proportion of problems regarding TBML. Dealing simply with papers leaves loopholes for misconduct.
There is a provision for sanctioning every SWIFT communication. But what has been established is that there should be solid indicators that will define the risks. Banks should take the initiative to monitor unusual, complex or illogical corporate structures like shell companies that exist only on paper. It has been stated that there are trading deals involving third-party intermediaries who use complicated trade routes; such incidences should immediately be flagged and checked for authenticity.
Strengthening compliance norms can be equally helpful here. The people that look after international trade in any bank must be able to track various risks related to documents—inconsistencies, discrepancies, falsified documents, missing or counterfeit documents, or unjustified economic or commercial justification. The business credibility information report has imposed for transactions above $50,000, but it is not entirely justifiable in the current context.
Financial crime has existed since ages, from dacoits and bank robberies to today’s TBML. Modified and upgraded crimes require an upgraded way to control and solve them. TBML does not seem to have attracted much concern in the Nepali context.
What can be seen right now is that there are restrictions on imports. Import restrictions are undoubtedly a short-term measure; and with the easing of regulation, aspects of TBML should be looked into. We need not wait for a financial disaster to combat this upgraded form of money laundering.