Trade based money laundering: towards a working definition for the banking sector

This paper aims to explore in depth some of the main criminal elements involved in trade-based money laundering (TBML) and outlines the gaps in banking risk assessment as a result of this. The focus is on new and emerging risks due to criminal manipulation of the anti-money laundering (AML) risk assessment processes.

The paper uses secondary data to provide the current context in which TBML risk assessment is being carried out and how criminals have responded to this; it concludes the empirical section by surmising the emerging risks that AML risk assessment need to consider. The paper then introduces the basic components that future theoretical frameworks looking at banking AML risk assessment would need to consider. This includes a more in-depth understanding of how criminals are bypassing AML risk assessment so that countermeasures can be put in place and AML frameworks strengthened and updated.

The main findings are that sophisticated criminal processes exist that can be used to bypass and divert current banking risk assessment techniques. An overdependence on traditional customer due diligence and transaction monitoring can easily be thwarted, and banks need to develop a stronger AML assessment framework.

The research focused primarily on client documentation; however, another area of research would be needed to cover criminal manipulation of trade documents and other components of TBML transactions.

The implications from the research affect any financial organization undertaking AML risk analysis or compliance. It applies to the banking, insurance and auditing professions, as well as is of interest to academics working on TBML projects.

The social implications are that non-criminal clients within banks could be faced with tougher requirements for documentation and ID proof, which could reduce efficiency and, if not handled properly, even alienate further some sectors of society who are already struggling to access the main banking and financial services sectors.

The originality of this paper is the inclusion of criminal responses to TBML risk assessment and a review of flaws and gaps in AML risk assessment procedures. Dynamic risk assessment needs to be continuously updated and new emerging market risks appropriately addressed. This paper highlights some of the current and emerging AML risks for the banking and financial services sector.