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Countryside Landscape

Trade-based Money Laundering

We explore the current state of TBML solutions and the prevailing narrative in the community and ask some challenging questions

You understand the problem, but where is the solution?

As a Compliance professional, I'm sure you have done a lot of research on what are the best practices and approach to tackle TBML at your bank. In your searches, you would have found plenty of articles, posts and papers on trade products and trade finance as a high risk area for AML. The writers go into depth about the risk indicators, the trade-specific typologies, and the consequences of TBML on financial institutions and the focus of global and local regulators on this topic.

However, you might have noticed, when it came to offering a solution, there is an obvious lack of information. Most papers reiterate the risk and type of behaviors that banks should be wary of, but does not offer any concrete or practical approach or solution to this problem. Some writers do acknowledge this problem, and provides the reason why its difficult to tackle this problem is because of the complexity of trade products and trade finance.

Why is digitization and automation a TBML solution?

As you continue your research, you start to feel the stress and anxiety of the scale of the problem and the many regulator's emphasis in this area, so you begin to direct your attention to look for a solution to calm your nerves. You see the first post about digitization, then the 2nd, and 3rd and so on. Most proposed solutions talk about how the manual nature of trade finance and trade products at banks make monitoring and reviewing difficult. The paper-based problem needs to be solved first before banks should even think about implementing a solution.

However, even after digitization through OCR solutions or manual data entry, the next step is not to address the TBML risk. The proposed next step is to automate the manual operation process using RPA tools so it will reduce operation costs and human errors.

At this point, you are probably puzzled by the suggested solutions because none address your concerns related to AML risk, and the intermediate steps does not get you closer to a real solution. You start calling and asking consultants, compliance colleagues, and might even ask your regulators for better ideas. You hear the same story and begin to wonder maybe there is no solution and this problem is just too difficult and impossible to solve.

Our thoughts and approach to solve this impasse

Before we jump into the details of our approach, we want to reflect on why there is a lack of solutions in the market, even though there is such strong demand by the banks and regulators.

Legacy AML TM solutions are driven by the standard rule-driven AML transaction monitoring (TM) processes and data models. There is nothing wrong with a rule-based approach, however, trade product TM requires features outside of this framework, hence it would take a tremendous amount of software development resources. Furthermore, the manual nature of trade finance and trade product is an acceptable practice to banks and operators because each trade account yields hundreds and millions of dollars of revenue, so a dedicated team to handle trade paperwork is reasonable and might be necessary.

Our take on a TBML solution is a two-prong approach for banks. Firstly, we propose a cloud solution with a suite of tools to empower Compliance teams to validate data received from trade finance documents. Even though trade documents are stored as hard copy, the nature of the trade business generates numerous types of documents, which Compliance can leverage.

The second approach deals with the other side of the problem, which is to monitor Trade-based transactions. 80% of trade related transactions are through open accounts that do not require trade finance documents, so traditional TBML rules do not apply. This is an option overlooked and less talked about problem. We observed that most trade-related transactions are stored electronically, and can be monitored by AML rules. However, new AML logic need to be developed specifically for these types of transactions.

The way forward for TBML compliance

A true TBML solution would combine both the features of the TBML cloud solution and the traditional on-premise transaction monitoring solution.

The on-premise transaction monitoring component will target trade-based transactions by designing high value and low volume transactional behavior. Traditional monitoring rules could also be used to generate potential suspicious activities that are well understood by global and local regulators.

The main challenge that Compliance team face is the inability to review and validate trade-related data and documents, regardless of whether it is in hard or soft copy. Hence, the features from a TBML cloud solution would primarily be used to support KYC onboarding, KYC periodic reviews and case investigations of trade-based transactions and customers with trade open account. 

More specifically, these investigative features will include:

- vessel tracking and port history

- container and freight tracking

- text analytics to identify anamolies and legal language

- Indexed pricing and weight for commodity and manufactured goods

We believe that this is a logical and strong step forward to tackle the challenges of TBML compliance. Our solution and approach will be refined over time, the important thing to do now is take that first step in a new direction and not be satisfied and be complacent with existing narratives and limitations.

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