(CTFC) TBFCC 2ed - Coastline Full Book

Trade Based Financial
Crime Compliance
Second Edition
James E. Byrne
with
Karl Marxen
Matthew Kozakowski The Institute of International
Michael Byrne Banking Law & Practice

Trade Based
Financial Crime
Compliance
Second Edition
2022
by
Professor James E. BYRNE
Dr. Karl MARXEN, LLM, LLD
Matthew J. KOZAKOWSKI, J.D.
Michael P. BYRNE
Copyright © 2022
All rights reserved
No reproduction of this material may be made without express written permission.
The Institute of International Banking Law & Practice, Inc.

20405 Ryecroft Court
Montgomery Village, MD 20886 USA
Phone: +1 301 869 9840
Fax: +1 301 926 1265
Website: www.iiblp.org
E-Mail: [email protected]
This Book is published for educational purposes and not as legal or professional advice.
Readers should consult with their own advisers and counsel. Readers should note that
this field is rapidly evolving and should check the Institute website or subsequent
editions of this Book for updates. The authors and the IIBLP make no representations
or warranties with respect to the accuracy or completeness of the contents of this
book and specifically disclaim any implied warranties of merchantability or fitness of
use for a particular purpose. Neither the author nor the publisher shall be held liable
or responsible to any person or entity with respect to any loss or incidental or conse-
quential damages caused, or alleged to have been caused, directly or indirectly, by the
information or programmes contained herein. No warranty may be created or extended
by sales representatives or written sales materials.
The First Edition was published in 2017, by authors Professor James E. BYRNE and
Justin B. BERGER, and was edited by Mary C. CISSEL and Karl MARXEN.
The services and products of the Institute of International Banking Law & Practice,
Inc. are described at the end of this Book.
Library of Congress Control Number: 2021917287
ISBN: 978-1-888870-79-4
ISBN: 978-1-888870-80-0 (ebook)
Trade Based Financial Crime Compliance is the course book for the Certification in Trade
Finance Compliance (CTFC) offered by the London Institute of Banking & Finance in
cooperation with the Institute of International Banking Law & Practice and Coastline
Software Solutions Ltd.
Trade Based Financial Crime Compliance is published by the Institute of International

Banking Law & Practice, Inc. Opinions expressed in it do not necessarily reflect the
official position of the Institute.
Trade Based Financial
Crime Compliance
Second Edition
2022
Professor James E. BYRNE

Past Director
Institute of International Banking Law & Practice, Inc.
Dr. Karl MARXEN, LLM, LLD

Research Associate
University of Johannesburg
Matthew J. KOZAKOWSKI, J.D.

Associate Counsel
and
Michael P. BYRNE
President & CEO
The Institute of International Banking Law & Practice, Inc.
Montgomery Village, MD, USA

Acknowledgements – Second Edition
Within a year of the First Edition of this Book being published, Professor
James E. BYRNE – the lead author and my father – passed away after short
but fierce battle with cancer. With a sad and heavy heart, we have picked up
his torch and continue his work. This update is several years in the making
and certainly later than intended. Jim so thoroughly and succinctly thanked
all of the help and support provided for the First Edition below, and trying
to repeat it here would not do it justice. So I have left Jim’s words alone and
reprinted them below.
I will use this opportunity to thank those who helped with the Second Edition
here while continuing to be thankful for the strong foundation provided by
the First Edition.
My co-authors Karl MARXEN and Matthew KOZAKOWSKI have been a part of

this project since day one of the First Edition, and their guidance and advice
throughout this update has ensured we continue Jim’s spirit. Lisa V. CHIN
(Global Head of AML at MUFG Bank) continues to provide guidance and com-
ments about what is missing and how to include it. Derek ENNIS and Stephen
CLINTON of Coastline Solutions plus Alex GRAY of the London Institute of
Banking and Finance (LIBF) continue to support IIBLP and our work.
Many thanks go to our esteemed colleagues and their various organisations

for providing expertise, advice, and sometimes just an ear to listen. Among
the many, most of whom need no introduction, are: Lisa CHIN (again), Byron
McKINNEY and the Maritime & Trade division of S&P Global Platts (formerly
IHS Markit), Lorna STRONG (HSBC), Neil CHANTRY (retired from HSBC),
Graham BALDOCK (Anglo-Gulf Trade Bank) and Kaushika RUWANGALLA
(HSBC), along with Vin O’BRIEN of ICC-UAE, SOH Chee Seng of IIBLP and
v
ABS, Alma ANGOTTI, Adam KLAUDER and Samantha PELOSI of Guidehouse,
and Andrew JACOBSON of Seward & Kissel. My thanks go as well to the entire
community of trade finance and compliance specialists who participated in
our various global TBFC conferences, helping to advance the conversation.
Additionally, the Keynotes from those events are second to none, and their
Keynote Addresses inspired the rest of the events to, as we say in America,
“hit it out of the park” (and I think that the Cricket equivalent would be “hit
it beyond the boundary” for a “six”). Those excellent leaders in the field are:
• Professor James E. BYRNE who gave the inaugural Keynote a month before
passing away (and to whom the Keynote Address is named);
• Rebecca HARDING of Coriolis Technologies who highlighted the change
in language used to discuss country trade partners globally from neutral
to inflammatory, and the downward effect it has on trade volume between
those “allies”;
• Alma ANGOTTI of Guidehouse who spoke on the benefits of a Board
of Directors of a bank inspiring a culture of compliance and the many
benefits that trickle down;
• Alexander RESCH of INTERPOL who discussed how they investigate
financial crimes and how valuable the STRs/SARs banks file are for these
investigations; and
• Raymond BAKER of Global Financial Integrity, who spoke to his business
experience covering illicit financial flows;
• And by the time this book is published, Alan KETLEY, the new Executive
Secretary of The Wolfsberg Group will have keynoted the first APAC Annual
Trade Finance & Compliance Conference and I’m sure it will be amazing.
All of the help and support from the multitude of contributors to make the
first edition as thorough and excellent as it is, are gratefully acknowledged,
and they are listed below.
vi
Acknowledgements – First Edition
Trade Based Financial Crime Compliance has two co-authors, myself and Justin
B. BERGER. We began this project in the summer of 2015, and have worked
with a multitude of contributors without whose help this Book would not
have been completed. It is my pleasant duty to acknowledge their assistance
and contributions.
Mary C. CISSEL and Karl MARXEN, have assisted in the management and
editing. Ms. Cissel has served as project manager and Mr. Marxen as Re-
search Director of the Institute. Others who have contributed to editing and
research are Tyler BALDING, Esq.; Mario ESCALERA; HUANG Li (Zhong Lun
Law Firm); Matthew J. KOZAKOWSKI; Christopher ROBERTSON; and Jacob
Evan SOLOMAN, Esq.
Special thanks are expressed to friends and colleagues who have provided
advice and comment on a wide variety of issues throughout the course of this
Book. Buddy BAKER, (Vice President, Investment Banking Division, Goldman
Sachs), Lisa V. CHIN (US FCC Head of Global Trade and Receivables Finance
HSBC Bank USA, N.A.); and Vincent MAULELLA (Associate Director of Institute
of International Banking Law & Practice).
The following professionals and colleagues took the time to provide thoughtful
reviews of various portions of the text: Michael BYRNE (Senior Advisor to the
Institute of International Banking Law & Practice); Christopher S. BYRNES
(Editor, Documentary Credit World); Jack CHAN (SVP & Senior Trade Technical
Advisor of a leading U.S. bank in Hong Kong); Jeffrey M. FRESHOUR; Paula
GREAVES (SVP, Global Trade Operations Bank of America Merrill Lynch); Jacob
MANNING (Partner, Dinsmore & Shohl LLP); Khalil MATAR (Head of Internal
Auditing, Arab Sudanese Bank); Dennis NOAH (IIBLP Associate and retired
banker); and SOH Chee Seng (IIBLP Associate Director, Technical Advisor
to the Association of Banks in Singapore ICC Malaysia and ICC Indonesia).
vii
Appreciation is also expressed to my former students and colleagues and
current staff members who have taken time from their busy schedules to
proof one or more chapters. They include Joseph CALASCIONE, Esq.; Ramsey
Robert SALEEBY, (Assistant General Counsel & Senior Manager of Program
Development, Association of Corporate Counsel); Daniel Hooper SMITH, Esq.;
Peter TRAISAK, J.D.
The following IIBLP staff members have contributed greatly to the production
of this Book: Maria BYRNE; Kathleen BLUMBERG; James E. BYRNE, Jr., who
has handled the layout and production; and Christopher SANDLER who has
worked on marketing and design.
This Book is also the basis for an online learning course developed by Coast-
line Software Solutions Ltd. The comments and reactions provided by Derek
ENNIS and Stephen CLINTON have been very useful in clarifying our language.
viii
About the Authors
Professor James Edward BYRNE is the past Director of the Institute of In-
ternational Banking Law & Practice, Inc. and was a member of the faculty of
George Mason University School of Law for over 30 years. He chaired and served
as Reporter for the International Standby Practices (ISP98) and the Council
on the International Standby Practices (CISP). He was the Editor-in-Chief of
Documentary Credit World, the leading monthly trade finace and compliance
journal, and has written or edited more than 30 books and numerous articles
and lectured extensively on LC law and practice, electronic commerce, inter-
national sales of goods, and commercial and financial fraud in more than 40
countries. He regularly attended meetings of the ICC Banking Commission, and
was a member of its consulting group on the revision of UCP500, its Working
Group on Electronic Credits which drafted the eUCP, and chaired the Task Force
that drafted the 2004 version of the International Standard Banking Practice
(ISBP 2004). He chaired the American Bar Association / U.S. Council on Inter-
national Banking Task Force Study of U.C.C. Article 5, served as head of the
U.S. Delegation to UNCITRAL in drafting the 1995 United Nations Convention
on Bank Guarantees and Standby Letters of Credit, was an Advisor in the 1995
revision of the U.S. domestic statute, Uniform Commercial Code Article 5, is
Past Chair of the American Bar Association’s Letter of Credit Subcommittee.
In the area of commercial fraud, he has conducted an extensive study of

Prime Bank Instrument schemes since 1987. He has been consulted by the U.S.
Office of the Comptroller of the Currency, the U.S. Securities and Exchange
Commission, the Office of Anti Boycott Compliance, the Federal Bureau of
Investigation, Scotland Yard, Standard & Poor’s, the International Maritime
Bureau, and various banks, corporations and numerous individuals regard-
ing financial frauds and has testified numerous times as an expert witness
throughout the world, and given written testimony in People’s Republic of
ix
China and Switzerland. He has been highly involved in UNCITRAL’s efforts to
combat commercial fraud. He has also served as the lead presenter at IIBLP
Trade Based Financial Crime Compliance Workshops held in the US, Europe,
Middle East, and Southeast Asia.
Professor Byrne held a Bachelor’s degree from the University of Notre Dame,
a Juris Doctor degree from Stetson University College of Law, and an L.L.M.
from the University of Pennsylvania College of Law. He clerked for the Hon-
ourable Paul H. Roney of the U.S. Circuit Court of Appeals for the Eleventh
Circuit and practiced law for several years in Florida. He was a member of the
Florida and Maryland bars.
Karl MARXEN is a Research Associate at the Faculty of Law at the University

of Johannesburg (South Africa), and a lecturer in private law, commercial law
and company law at WelfenAkademie Braunschweig (Germany). He is a Re-
search Fellow at the Institute of International Banking Law & Practice since
2018, and served as the Director of Research of the Institute in 2017-2018.
Since 2018 he is a member of the editorial advisory board of Documentary
Credit World (DCW). He holds an undergraduate degree in law from Hamburg
University (Germany), a postgraduate certificate in advanced international
trade law from the University of the Witwatersrand (South Africa), an LLM
degree cum laude from Stellenbosch University (South Africa), and earned a
doctoral degree in mercantile law (LLD) from the University of Johannesburg
(South Africa). He has published widely in the field of international commercial
and banking law, trade finance (letters of credits, independent guarantees,
standbys), financial crime compliance, and comparative law.
Matthew J. KOZAKOWSKI is Associate Counsel at the Institute of Interna-

tional Banking Law & Practice. He received his Bachelors of Science and Juris
Doctor degrees from George Mason University. While at George Mason Uni-
versity School of Law he was Associate Editor of the Journal of International
Commercial Law. He was admitted to the Maryland bar in December 2018.
Matthew is lucky to have been an intern for Jim Byrne during his final year
at GMU School of Law prior to his retirement from academia, and considers
himself lucky to have had Jim as both a teacher and a mentor during his en-
tire law school career. He worked with Jim and the IIBLP team as an intern
during his law school career, briefing cases, editing books and publications,
and helping Jim prepare for conferences and events. At IIBLP, Matthew is the
IIBLP’s top internal counsel, advising on letter of credit law and practice,
writing and preparing summaries and articles on the top global LC cases for
x
events and publications. Matthew is the Case Editor of Documentary Credit
World, IIBLP’s monthly trade finance and compliance journal, and has written
and authored numerous articles. Matthew has spoken extensively on letters of
credit, standbys, guarantees, as well as compliance issues such as sanctions,
trade-based money laundering, and commercial fraud.
Michael P. BYRNE is the President and CEO of the Institute of International

Banking Law & Practice since 2018. Around the letter of credit community
since a child, Michael was introduced to the giants of the field by his father,
Professor James E. Byrne. Michael continues the amazing work begun by Jim
by bringing global expertise together to share stories, problem, and most im-
portantly, to share solutions to these global trade problems. IIBLP continues
to offer conferences that bring global expertise to local problems, working
with the leading experts in trade, risk, sales, sanctions and trade operations
with the one goal: “you leave my event, and you have a number of lessons you
can apply tomorrow to your daily work”. Michael steered IIBLP successfully
through the global pandemic brought on by Covid, transitioning from fun and
interactive in-person events to fun and truly interactive online events. Addi-
tionally, Michael is the publisher of Documentary Credit World, the monthly
trade finance and compliance journal.
Prior to IIBLP, Michael served as an independent consultant to Philip Morris

International, advising on their commitment to sharing of all the scientific
research data gathered during the studies of their heat-not-burn nicotine
products. Not known for their transparency, PMI committed to sharing all of
their internal data to the public, convinced – and rightly so – that their heat-
not-burn products reduced harm for those who insisted on using nicotine.
Prior to PMI, Michael was the Director of Strategic Programs for the Global Bio-
logical Standards Institute (GBSI) since its founding in 2013. GBSI was founded to
improve the quality of biological research through promoting the use of leading
practices in academic research labs. An economic analysis we published in a
peer-reviewed journal found that about 50% of basic biological research coming
out of universities (and much of it public funded) was not reproducible, and many
of the core drivers were solvable by using standardised materials and processes,
plus properly documenting methodologies. Michael wrote and spoke on this
extensively, including publishing their 3x a week newsletter received by over
1,000 persons with a 70% average read rate – unheard of for email newsletters.
While GBSI closed in 2017, the work we began continues this day via scientific
publishers, funders such as the U.S. NIH, and more.
xi
In 2011, Michael began working in the supply chain ethics field for an excit-
ing start-up non-profit that worked with the global multinationals and their
supply chains to increase transparency, accountability and ethics in how they
worked with an MNCs intellectual property and trade secrets plus how they
adhered to anti-corruptions laws and policies.
After graduating from Florida State University in 2002, Michael worked for IIBLP
for almost a decade, beginning with driving the development of new products
and programs – including being among the first company of any size to offer
true webinars all the way back in 2005 and digitizing Documentary Credit World
to allow for email delivery – to offering our events globally in partnership with
local and regional organisations such as ICC National Committees.
xii
About the Institute of International
Banking Law & Practice
The Institute of International Banking Law & Practice is a not-for-profit edu-

cational and research organization dedicated to the harmonization of letter of
credit law and practice.
Headquartered in the United States with Associate Directors in Singapore and

Ireland and Associates and Fellows in more than 15 countries, the Institute
sponsors, undertakes, and cooperates in projects, programmes, and publications
related to letter of credit law and practice.
Since its formation in 1987, the Institute has been a leading force in the letter
of credit world, bringing together bankers, lawyers, regulators, academics, and
corporate users in forums and educational events. It has formulated widely
used practice rules, worked with leading organisations, published books, and
conducted highly influential programmes. The Institute has worked with organ-
isations such as the UN Commission on International Trade Law, SWIFT, BAFT,
the International Chamber of Commerce, ICC National Committees in more
than 15 countries, and various trade organisations and academic institutions
around the world. The Institute has also been at the forefront of combating
commercial fraud, seeking to encourage the exchange of information and pro-
active educational activities.
In addition to its work in the field of commercial fraud, the Institute has been
involved in issues related to trade based financial crime compliance. Its model
sanctions clause for letters of credit has been widely praised for its balance and
restraint. It has offered seminars on trade based financial crime compliance
in New York, London, Hong Kong, Singapore, Dubai, and Stockholm. You can
learn more about the Institute’s products and services by visiting www.iiblp.org.
xiii
About the London Institute
of Banking & Finance
The London Institute of Banking & Finance exists for a very simple reason
– to advance banking and finance by providing outstanding education and
thinking, tailored to the needs of businesses, individuals and society.
Their focus is on lifelong learning, equipping professionals with the knowledge,

skills and qualifications the sector demands to achieve what they want throughout
their career and life.
By providing a balance of experience, insight and thought leadership delivered by

industry leaders, thinkers and members of the banking and finance community,
they are at the forefront of advancing careers through education.
The London Institute of Banking & Finance has a rich heritage, dating back
to 1879, and has created connections and built long lasting partnerships
between people and business that makes banking and finance more accessible
and understood.
The London Institute of Banking & Finance, lifelong partners for financial
education.
Learn more about LIBF at: www.LIBF.ac.uk
xiv
About
Coastline Solutions
Coastline Solutions is the world’s leading online training and information

provider in the area of Trade Finance. Banks, traders, logistics companies and
law firms from over 100 countries use these services to save time, reduce costs,
and keep their staff up to date with the latest international trade practices.
To date we have trained over 70,000 Trade Finance professionals.
As a partner in the TBFC Certification Programme Coastline has developed

comprehensive online training on all of the contents of the Course Syllabus.
This is made available to candidates as part of their course materials when
signing up for the Programme.
Other Coastline Online Training Courses include:

• Supply Chain Finance – Techniques and practices
• Sustainability in Trade and Trade Finance
• Trade Based Financial Crime
• Incoterms Online Training: Online Training in the 2020 revised Incoterms Rules
• Introduction to Trade Finance
• Going Global: ICC Training on Trading Internationally
• Collections Online Training: Comprehensive training in collections and URC 522
• Mentor 600: Comprehensive training in letters of credit and UCP 600
• DC Master: Advanced online training in letters of credit
• ISP Master: Advanced training in ISP98 and independent undertakings
• URDG Master: Comprehensive training in Demand Guarantees and URDG 758
• ISBP Online: Comprehensive training in International Standard Banking
Practices (ISBP 745)
Contact: www.coastlinesolutions.com
xv
Summary of Contents
Part 1 Trade Based Financial Crime Compliance

Chapter 1 An Introduction to Trade Based Financial Crime Compliance.............3
Chapter 2 Trade.............................................................................................................. 19
Chapter 3 Financial Crime Regulation....................................................................... 59
Chapter 4 The Compliance Programme.................................................................... 95
Chapter 5 Exercising Due Diligence........................................................................127
Chapter 6 Indicators of Trade Based Financial Crime..........................................175
Part 2 Combating Financial Crimes

Chapter 7 Anti Money Laundering...........................................................................219
Chapter 8 Countering the Financing of Terrorism................................................247
Chapter 9 Sanctions....................................................................................................267
Chapter 10 Weapons of Mass Destruction..............................................................303
Chapter 11 Anti Bribery and Anti Corruption..........................................................327
Chapter 12 Commercial Fraud.....................................................................................335
Chapter 13 Anti Boycott...............................................................................................381
Part 3 Appendices
Appendix A Answers to Review Questions...............................................................393
Appendix B Sources of Red Flags / Indicators..........................................................407
Appendix C Glossary......................................................................................................409
Appendix D Abbreviations Related to Trade Based Financial Crime...................441
Appendix E Organisations.............................................................................................453
Index ......................................................................................................................461
xvii
Table of Contents
Acknowledgements – Second Edition.........................................................................................v

Acknowledgements – First Edition............................................................................................vii
About the Authors..........................................................................................................................ix
About the Institute of International Banking Law & Practice.............................................xiii
About the London Institute of Banking & Finance................................................................xiv
About Coastline Solutions...........................................................................................................xv
Preface to the Second Edition.................................................................................................xxix
PART 1 TRADE BASED FINANCIAL CRIME COMPLIANCE

Chapter 1 An Introduction to Trade Based Financial Crime Compliance...... 3
Section 1.1 Overview of this Book............................................................................. 4
Section 1.2 International Banking Operations......................................................... 5
Subsection 1.2.1 The Independence Principle................................................................... 5
Subsection 1.2.2 International Letter of Credit Practice................................................. 7
Subsection 1.2.3 The Fraud Exception................................................................................ 9
Section 1.3 The Compliance System........................................................................10
Subsection 1.3.1 The Impact of Public Policy on Letter of Credit Practice
and Law.....................................................................................................11
Subsection 1.3.2 The World of Regulatory Compliance................................................11
Section 1.4 Studying Trade Based Financial Crime Compliance........................13
Section 1.5 Summary and Review.............................................................................16
Subsection 1.5.1 Summary of Introduction......................................................................16
Subsection 1.5.2 For Reflection..........................................................................................16
Subsection 1.5.3 Exercise.....................................................................................................17
Subsection 1.5.4 Review Questions...................................................................................17
Chapter 2 Trade......................................................................................................... 19
Section 2.1 An Overview of Trade............................................................................20
Section 2.2 What is Trade? ........................................................................................21
Section 2.3 The Parties Involved in Facilitating Trade..........................................26
Section 2.4 Agreements Regarding Trade and Trade Finance............................29
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Section 2.5 The Delivery of Goods...........................................................................31
Section 2.6 Options for Payment or its Assurance ..............................................35
Section 2.7 The Trade Related Financial System and the Role of Banks..........39
Subsection 2.7.1 The Financial System Supporting Trade.............................................39
Subsection 2.7.2 The Financial Products Used in Trade Finance ...............................45
Section 2.8 Summary and Review ............................................................................56
Subsection 2.8.1 Summary of Trade ..................................................................................56
Subsection 2.8.2 For Reflection .........................................................................................56
Subsection 2.8.3 Exercise.....................................................................................................56
Chapter 3 Financial Crime Regulation.................................................................. 59
Section 3.1 An Overview of Financial Crime Regulation.....................................60
Section 3.2 What is Financial Crime?.......................................................................61
Section 3.3 Types of Financial Crime.......................................................................64
Section 3.4 Trade Based Financial Crime................................................................66
Subsection 3.4.1 Evolution of Trade Based Financial Crime.........................................66
Subsection 3.4.2 What is Trade Based Financial Crime?...............................................68
Subsection 3.4.3 The Implications of Trade Finance for Regulation of
Trade Based Financial Crime................................................................69
Subsection 3.4.4 Key Terms and Information...................................................................70
Subsection 3.4.5 Examples...................................................................................................71
Section 3.5 Governmental Regulation of Financial Crime...................................71
Subsection 3.5.1 Evolution of Government Regulations...............................................71
Subsection 3.5.2 Regulatory Bodies...................................................................................72
Subsection 3.5.2.1 Governmental Bodies ...........................................................................72
Subsection 3.5.2.2 Inter Governmental Organisations......................................................77
Subsection 3.5.2.3 Non Governmental Organisations......................................................79
Subsection 3.5.3 An Overview of Regulators and Regulations....................................80
Subsection 3.5.3.1 Layers of the Compliance Regime ......................................................80
Subsection 3.5.3.2 Legislative and Judicial Pronouncements..........................................81
Subsection 3.5.3.3 Regulatory Pronouncements................................................................81
Subsection 3.5.3.4 Bank and Financial Institution Examiners.........................................82
Section 3.6 General Comments Regarding Government Regulatory System.... 83
Subsection 3.6.1 Vagueness.................................................................................................83
Subsection 3.6.2 Pressure....................................................................................................83
Subsection 3.6.3 De Risking.................................................................................................84
Section 3.7 Privacy Issues ..........................................................................................85
Section 3.8 Operating in Multiple Regulatory Systems.......................................86
Section 3.9 General Reputational and Risk Issues................................................86
Section 3.10 The Consequences of Non Compliance............................................87
Section 3.11 A Tale of Two “Compliances”................................................................88
Section 3.12 Summary and Review ............................................................................91
Subsection 3.12.1 Summary of Financial Crime Regulation............................................91
xx
Subsection 3.12.2 For Reflection..........................................................................................91
Subsection 3.12.3 Exercise ...................................................................................................92
Chapter 4 The Compliance Programme............................................................... 95
Section 4.1 Regulatory Compliance Overview: The Current
Compliance Regime................................................................................96
Section 4.2 Elements of an Adequate Compliance Programme.........................99
Subsection 4.2.1 Assessment of Financial Crime Risks.................................................99
Subsection 4.2.2 The Written Compliance Plan........................................................... 101
Subsection 4.2.3 The Compliance Officer and Team................................................... 102
Subsection 4.2.4 The Contents of the Plan................................................................... 103
Subsection 4.2.5 Documentation.................................................................................... 106
Subsection 4.2.6 Training................................................................................................... 108
Subsection 4.2.7 Audit and Independent Testing......................................................... 109
Subsection 4.2.8 Implementation.................................................................................... 112
Section 4.3 Failures in Compliance Programmes................................................ 113
Section 4.4 Adding a Trade Based Dimension to Existing Compliance
Programmes.......................................................................................... 114
Subsection 4.4.1 The Impact of Trade on Compliance................................................ 114
Subsection 4.4.2 Assessment of Trade Based Financial Crime Risks....................... 115
Subsection 4.4.3 Supplementing the Compliance Programme................................. 116
Subsection 4.4.4 Enhancing the Compliance Administration.................................... 118
Subsection 4.4.5 Questions Regarding Adequate Trade Related Documentation.. 118
Subsection 4.4.6 Is the Compliance Training up to the Challenges
Posed by Trade?.................................................................................... 118
Subsection 4.4.7 Questions Regarding Adequate Testing and Evaluation............. 119
Subsection 4.4.8 Implementing Trade Based Financial Crime Compliance............ 119
Section 4.5 Introduction to BSA / AML Trade Finance Examination............. 119
Section 4.6 Summary and Review.......................................................................... 121
Subsection 4.6.1 Summary of The Compliance Programme...................................... 121
Subsection 4.6.2 For Reflection ...................................................................................... 122
Subsection 4.6.3 Exercise.................................................................................................. 125
Subsection 4.6.4 Review Questions................................................................................ 125
Chapter 5 Exercising Due Diligence...................................................................127
Section 5.1 Introduction to Due Diligence in Trade Based Financial
Crime Compliance............................................................................... 129
Section 5.2 Who is a “Customer”?......................................................................... 131
Section 5.3 Establishing and Monitoring the Relationship: Know Your
Customer (KYC) / Customer Identification Program (CIP)......... 134
Subsection 5.3.1 Identifying Your Customer................................................................. 134
Subsection 5.3.2 The KYC Plan ....................................................................................... 137
Subsection 5.3.3 The Customer’s Transaction Profile................................................. 138
Subsection 5.3.4 Screening Processes............................................................................ 139
Subsection 5.3.5 Reliance on Third Party Diligence ................................................... 142
xxi
Subsection 5.3.6 Know Your Customer’s Customer (KYCC) ..................................... 142
Subsection 5.3.7 Understanding the Customer’s Trade Business............................ 143
Section 5.4 Correspondent Bank Relationships................................................. 145
Subsection 5.4.1 What is a Correspondent Bank?....................................................... 146
Subsection 5.4.2 Diligence Regarding a SWIFT RMA................................................. 147
Subsection 5.4.3 Correspondent Banking and the Compliance Programme......... 149
Subsection 5.4.4 Compliance Consequences of Establishing a Correspondent
Relationship........................................................................................... 149
Subsection 5.4.5 Factors in Correspondent Due Diligence ...................................... 150
Subsection 5.4.6 Non Customer Financial Institutions............................................... 151
Section 5.5 Beyond “Customers”........................................................................... 152
Section 5.6 Ongoing Monitoring of the Customer and its Transactions ...... 152
Subsection 5.6.1 What is Involved in Ongoing Monitoring?..................................... 153
Subsection 5.6.2 When Should there be Ongoing Scrutiny?.................................... 153
Section 5.7 Degrees and Stages of Due Diligence ............................................ 155
Subsection 5.7.1 Degrees of Due Diligence.................................................................. 155
Subsection 5.7.1.1 The Appropriate Level of Diligence................................................. 155
Subsection 5.7.1.2 Enhanced Due Diligence.................................................................... 156
Subsection 5.7.1.3 Additional Scrutiny for High Risk Trade Transactions.................. 159
Subsection 5.7.2 Stages of Defence................................................................................ 161
Subsection 5.7.2.1 Operations / Processing Review ..................................................... 161
Subsection 5.7.2.2 Financial Crime Unit Scrutiny............................................................ 161
Subsection 5.7.2.3 Review.................................................................................................... 162
Subsection 5.7.2.4 Records................................................................................................... 162
Subsection 5.7.3 Documenting Due Diligence............................................................. 162
Section 5.8 Trade Based Products and Correspondent Relationships .......... 163
Subsection 5.8.1 Generally................................................................................................ 163
Subsection 5.8.2 Commercial (Documentary) Letters of Credit............................... 163
Subsection 5.8.3 Due Diligence by the Issuer with Respect to the
Applicant for Commercial LC............................................................ 164
Subsection 5.8.4 Due Diligence by the Issuer with Respect to Other
Banks or Situations.............................................................................. 165
Subsection 5.8.5 Due Diligence by Advising Bank....................................................... 166
Subsection 5.8.6 Due Diligence in Standby Letter of Credit or Independent
Guarantee Transaction........................................................................ 167
Section 5.9 Due Diligence in Documentary Collection Transaction.............. 169
Subsection 5.9.1 By the Remitting Bank........................................................................ 169
Subsection 5.9.2 By the Collecting / Presenting Bank in a Bank Collection.......... 170
Section 5.10 Example of How Ongoing Customer Due Diligence Unfolds.... 170
Subsection 5.10.1 Transaction Details.............................................................................. 170
Subsection 5.10.2 Course of Action for the Bank.......................................................... 171
Subsection 5.11.1 Summary of Exercising Due Diligence............................................ 172
xxii
Chapter 6 Indicators of Trade Based Financial Crime.....................................175
Section 6.1 An Overview of Indicators................................................................. 176
Section 6.2 The Name and Source........................................................................ 177
Subsection 6.2.1 The Name “Indicator” ......................................................................... 177
Subsection 6.2.2 Defined.................................................................................................. 178
Subsection 6.2.3 Sources of the Indicators .................................................................. 178
Section 6.3 Lists of Red Flags of Various Organisations................................... 179
Section 6.4 Using the Indicators............................................................................ 181
Subsection 6.4.1 Who is Using the Indicators.............................................................. 181
Subsection 6.4.2 In Records and Reports....................................................................... 182
Subsection 6.4.3 The Application of an Indicator to a Specific Crime ................... 183
Section 6.5 Cautions in Using the Indicators...................................................... 183
Subsection 6.5.1 Value....................................................................................................... 183
Subsection 6.5.2 Inappropriate Use................................................................................ 183
Subsection 6.5.3 Applicability to Trade Transactions.................................................. 183
Subsection 6.5.4 Linkage to Certain Types of Financial Crime................................. 184
Section 6.6 Detailed Discussion of the Indicators of Trade Based
Financial Crime..................................................................................... 185
Subsection 6.6.1 Indicator No. 1: Unusual Transaction.............................................. 186
Subsection 6.6.2 Indicator No. 2: Significant Deviations in Business Patterns..... 188
Subsection 6.6.3 Indicator No. 3: Collusion.................................................................. 190
Subsection 6.6.4 Indicator No. 4: Apparent Front or Shell Company
in Transaction........................................................................................ 192
Subsection 6.6.5 Indicator No. 5: Geographical or Jurisdictional Concerns.......... 193
Subsection 6.6.6 Indicator No. 6: Transactions in High Risk or High
Value Goods.......................................................................................... 195
Subsection 6.6.7 Indicator No. 7: Problematic Parties................................................ 197
Subsection 6.6.8 Indicator No. 8: Dual Use Goods ..................................................... 199
Subsection 6.6.9 Indicator No. 9: Apparent Inconsistencies in Proposed
Transaction............................................................................................ 202
Subsection 6.6.10 Indicator No. 10: Trade Structure Concerns ................................. 205
Subsection 6.6.11 Indicator No. 11: Letter of Credit Related Concerns .................. 206
Subsection 6.6.12 Indicator No. 12: Suspicious Actions............................................... 209
Subsection 6.7.1 Summary of Indicators of Trade Based Financial Crimes............ 213
Subsection 6.7.2 For Reflection....................................................................................... 214
Subsection 6.7.3 Exercise ................................................................................................. 214
PART 2 COMBATING FINANCIAL CRIMES

Chapter 7 Anti Money Laundering......................................................................219
Section 7.1 An Introduction to Money Laundering........................................... 220
xxiii
Section 7.2 Stages of Money Laundering............................................................. 221
Subsection 7.2.1 Placement Stage................................................................................... 222
Subsection 7.2.2 Layering Stage...................................................................................... 223
Subsection 7.2.3 Integration Stage.................................................................................. 223
Section 7.3 Effects of Money Laundering on Business..................................... 224
Section 7.4 Trade Based Money Laundering Defined....................................... 224
Section 7.5 An Introduction to Anti Money Laundering................................... 225
Subsection 7.5.1 Existing Non Trade Related AML Regime....................................... 225
Subsection 7.5.2 Trade Based AML Regime.................................................................. 226
Subsection 7.5.3 Institutional Aspects of a Trade Based AML Regime................... 226
Subsection 7.5.4 Substantive Aspects of a Trade Based AML Regime.................... 226
Section 7.6 Combating Trade Based Money Laundering.................................. 226
Subsection 7.6.1 Unusual Transactions.......................................................................... 228
Subsection 7.6.2 Significant Deviations in Business Patterns................................... 229
Subsection 7.6.3 Collusion ............................................................................................... 230
Subsection 7.6.4 Apparent Front or Shell Company in Transaction......................... 231
Subsection 7.6.5 Geographical or Jurisdictional Concerns........................................ 232
Subsection 7.6.6 Transactions in High Risk or High Value Goods............................ 233
Subsection 7.6.7 Apparent Inconsistencies in Proposed Transaction..................... 234
Subsection 7.6.8 Trade Structure Concerns.................................................................. 236
Subsection 7.6.9 Letter of Credit Related Concerns................................................... 237
Subsection 7.6.10 Suspicious Actions............................................................................... 238
Section 7.7 Common Techniques Used in Trade Based Money Laundering... 239
Subsection 7.7.1 Over and Under Invoicing.................................................................. 239
Subsection 7.7.2 Multiple Invoicing................................................................................ 240
Subsection 7.7.3 Over and Under Shipment................................................................. 240
Subsection 7.7.4 Phantom Shipments............................................................................ 241
Subsection 7.7.5 False Description of Goods or Services.......................................... 241
Subsection 7.7.6 A Note of Caution................................................................................ 242
Section 7.8 Bank Responses to Potential Trade Based Money Laundering ... 242
Subsection 7.9.1 Summary of Anti Money Laundering............................................... 243
Subsection 7.9.3 Exercise ................................................................................................. 244
Chapter 8 Countering the Financing of Terrorism...........................................247
Section 8.1 An Overview of Terrorism: What Constitutes Terrorism............ 249
Section 8.2 Terrorism Explained............................................................................. 249
Subsection 8.2.1 Terrorism ............................................................................................... 249
Subsection 8.2.2 Motives ................................................................................................. 249
Subsection 8.2.3 Terrorist Acts ........................................................................................ 250
Subsection 8.2.4 Terrorist / Terrorists ........................................................................... 250
Subsection 8.2.5 Terrorist Organisations ...................................................................... 250
xxiv
Section 8.3 Terrorism Financing ............................................................................ 251
Subsection 8.3.1 Financing of Terrorist Acts and Terrorist Organisations ............. 251
Subsection 8.3.2 Sources of Terrorism Financing ....................................................... 252
Subsection 8.3.3 Terrorism Financing Compared with Money Laundering .......... 253
Section 8.4 Countering the Financing of Terrorism........................................... 254
Subsection 8.4.1 Goals....................................................................................................... 254
Subsection 8.4.2 Methods................................................................................................. 254
Subsection 8.4.3 Criminalisation of Financing Terrorist Activity.............................. 255
Subsection 8.4.4 Other Methods..................................................................................... 255
Subsection 8.4.5 Organisations Combating Terrorism Financing............................. 256
Subsection 8.4.6 Designation as a Terrorist or Terrorist Organisation.................... 258
Section 8.5 Responses of Financial Institutions to Counter
Terrorism Financing............................................................................. 259
Subsection 8.5.1 Identifying Terrorism Financing Risks for Financial Institutions.. 259
Subsection 8.5.2 The Role of Financial Institutions..................................................... 260
Subsection 8.5.3 Actions by Financial Institutions...................................................... 260
Section 8.6 Relevant Indicators of Financial Crime........................................... 261
Subsection 8.6.1 Indicator No. 1: Unusual Transaction.............................................. 261
Subsection 8.6.4 Indicator No. 4: Apparent Front or Shell Company in
Transaction ........................................................................................... 262
Value Goods.......................................................................................... 262
Subsection 8.6.7 Indicator No. 7: Problematic Parties ............................................... 263
Transaction............................................................................................ 263
Subsection 8.6.10 Indicator No. 10: Trade Structure Concerns ................................. 263
Subsection 8.6.11 Indicator No. 11: Letter of Credit Related Concerns .................. 263
Subsection 8.7.1 Summary of Countering the Financing of Terrorism.................... 264
Chapter 9 Sanctions...............................................................................................267
Section 9.1 What is an Economic Sanction?....................................................... 269
Section 9.2 Types of Economic Sanctions............................................................ 269
Section 9.3 Purpose of Economic Sanctions....................................................... 270
Section 9.4 Specific Sanctions Regimes............................................................... 271
Subsection 9.4.1 UN Sanctions........................................................................................ 271
Subsection 9.4.2 U.S. Sanctions ...................................................................................... 272
xxv
Subsection 9.4.2.1 U.S. OFAC Terminology...................................................................... 273
Subsection 9.4.2.2 U.S. Country Based Sanctions........................................................... 274
Subsection 9.4.2.3 U.S. Targeted Sanctions...................................................................... 275
Subsection 9.4.3 Non U.S. Sanctions Regimes ............................................................ 277
Subsection 9.4.3.1 European Union................................................................................... 277
Subsection 9.4.3.2 United Kingdom................................................................................... 278
Subsection 9.4.3.3 Hong Kong............................................................................................. 282
Subsection 9.4.3.4 Singapore............................................................................................... 282
Subsection 9.4.3.5 People’s Republic of China................................................................. 283
Subsection 9.4.3.6 Other Jurisdictions.............................................................................. 284
Section 9.5 How to Detect Sanctions Violations............................................... 284
Subsection 9.5.1 Trade Finance Guidance to Address Illicit Shipping
and Sanctions Evasion Practices ..................................................... 288
Subsection 9.5.2 Disabling or Manipulating the Automatic Identification
System (AIS) on Vessels...................................................................... 289
Subsection 9.5.3 Physically Altering Vessel Identification......................................... 289
Subsection 9.5.4 Falsifying Cargo and Vessel Documents......................................... 289
Subsection 9.5.5 Ship-to-Ship (STS) Transfers.............................................................. 289
Subsection 9.5.6 Voyage Irregularities............................................................................ 289
Subsection 9.5.7 False Flags and Flag Hopping............................................................ 290
Subsection 9.5.8 Complex Ownership or Management............................................. 290
Section 9.6 Sanctions Responses........................................................................... 295
Subsection 9.6.1 Compliance with a Sanctions Programme...................................... 295
Subsection 9.6.2 Export Licenses.................................................................................... 298
Subsection 9.6.3 Consequences of Sanctions Violations........................................... 298
Subsection 9.7.1 Summary of Sanctions........................................................................ 299
Subsection 9.7.4 Review Questions ............................................................................... 300
Chapter 10 Weapons of Mass Destruction.........................................................303
Section 10.1 Importance............................................................................................ 304
Subsection 10.1.1 Weapons of Mass Destruction Explained...................................... 304
Section 10.2 Types of Weapons of Mass Destruction......................................... 305
Subsection 10.2.1 Chemical Weapons.............................................................................. 305
Subsection 10.2.2 Biological Weapons............................................................................. 308
Subsection 10.2.3 Nuclear and Radiological Weapons................................................. 309
Section 10.3 Efforts by the International Community and NGOs.................... 312
Subsection 10.3.1 The United Nations ............................................................................ 312
Subsection 10.3.2 Inter Governmental and Non Governmental Organisations ..... 314
Section 10.4 Proliferation and Proliferation Financing........................................ 316
Subsection 10.4.1 Who........................................................................................................ 316
Subsection 10.4.2 What....................................................................................................... 317
xxvi
Subsection 10.4.3 How......................................................................................................... 317
Section 10.5 The Role of Financial Institutions..................................................... 318
Subsection 10.5.1 Generally................................................................................................ 318
Subsection 10.5.2 Setting Up the Account...................................................................... 318
Subsection 10.5.3 Transaction Monitoring...................................................................... 318
Subsection 10.5.4 Heightened Due Diligence................................................................. 320
Subsection 10.5.5 Correspondent Banks ........................................................................ 323
Subsection 10.6.1 Summary of Weapons of Mass Destruction.................................. 323
Subsection 10.6.2 For Reflection....................................................................................... 323
Chapter 11 Anti Bribery and Anti Corruption.....................................................327
Section 11.1 An Overview of Bribery and Corruption........................................ 328
Section 11.2 Public and Private Misconduct Distinguished............................... 328
Section 11.3 Effects of Bribery................................................................................. 329
Section 11.4 Combating Bribery............................................................................... 330
Subsection 11.4.1 Anti Bribery Laws and Conventions ............................................... 330
Subsection 11.4.2 Implications for Banks........................................................................ 332
Subsection 11.5.1 Summary of Bribery and Corruption............................................... 332
Chapter 12 Commercial Fraud................................................................................335
Section 12.1 Overview of Commercial Fraud ....................................................... 337
Subsection 12.1.1 What is Commercial Fraud................................................................ 337
Subsection 12.1.2 Financial Crime..................................................................................... 337
Subsection 12.1.3 “Fraud”.................................................................................................... 338
Subsection 12.1.4 Types of Commercial Fraud............................................................... 338
Subsection 12.1.5 Commercial Fraud Explained............................................................. 340
Subsection 12.1.6 Losses and Risk Allocation................................................................. 340
Section 12.2 Impact of Commercial Fraud............................................................. 341
Subsection 12.2.1 Effect on Commerce .......................................................................... 341
Subsection 12.2.2 Types and Examples of Trade Related Commercial Fraud.......... 342
Subsection 12.2.3 Methods of Perpetrating a Commercial Fraud.............................. 344
Section 12.3 Responses to Commercial Fraud...................................................... 346
Subsection 12.3.1 Combating Commercial Fraud.......................................................... 347
Subsection 12.3.2 Distractors: A Warning....................................................................... 350
Section 12.4 Bank Responses to Trade Based Commercial Fraud.................... 351
Subsection 12.4.1 Indicator No. 1: Unusual Transactions ........................................... 351
xxvii
Subsection 12.4.4 Indicator No. 4: Apparent Front or Shell Company
in Transaction........................................................................................ 353
Value Goods.......................................................................................... 355
Subsection 12.4.7 Indicator No. 7: Problematic Parties................................................ 355
Transaction............................................................................................ 357
Subsection 12.4.10 Indicator No. 10: Trade Structure Concerns.................................. 359
Subsection 12.4.11 Indicator No. 11: Letter of Credit Related Concerns................... 359
Section 12.5 Summary and Review ......................................................................... 361
Subsection 12.5.1 Summary of Commercial Fraud........................................................ 361
Section 12.6 Cases....................................................................................................... 364
Subsection 12.6.1 Impala Warehousing & Logistics Co. v. Wanxiang
Resources Pte. Ltd............................................................................... 364
Subsection 12.6.2 Komercni Banka A.S. v. Stone & Rolls Ltd...................................... 365
Subsection 12.6.3 Mercuria Energy Trading PTE Ltd. v. Citibank, N.A...................... 370
Subsection 12.6.4 Dorchester Financial Holdings Corp. v. Banco BRJ. S.A............. 376
Subsection 12.6.5 DCD Factors Plc v. Ramada Trading Ltd......................................... 378
Chapter 13 Anti Boycott..........................................................................................381
Section 13.1 An Overview of Boycotts................................................................... 382
Section 13.2 Anti Boycott Regulations................................................................... 383
Section 13.3 U.S. Anti Boycott Regulations........................................................... 384
Section 13.4 What Financial Institutions Must Do.............................................. 386
Section 13.5 Summary and Review ......................................................................... 388
Subsection 13.5.1 Summary of Anti Boycott................................................................... 388
PART 3 APPENDICES
Appendix A Answers to Review Questions.......................................................... 393
Appendix B Sources of Red Flags / Indicators..................................................... 407
Appendix C Glossary................................................................................................. 409
Appendix D Abbreviations Related to Trade Based Financial Crime.............. 441
Appendix E Organisations........................................................................................ 453
Index ................................................................................................................. 461
xxviii
Preface to the Second Edition
What is “compliance”? I guess that depends upon whom you ask. OK, so what
then is “trade-based financial crime compliance”? Beyond the title and sub-
ject of this book, this term of art was unheard-of prior to 2017. As Jim Byrne
so succinctly put it, the concept of compliance has evolved, both from and in
its original intention, and as to what that means to you who are reading this
tome. To the first part, reprinted next is Jim’s original introduction to trade
based financial crime, presented at the first conference we held in London in
May 2018 just before his passing.
2018 Trade Based Financial Compliance Conference held in London
What is “compliance”? For years compliance involved determining wheth-

er documents presented under a letter of credit matched it terms and
conditions. This meaning of compliance was linked to the independent
character of the letter of credit (LC) undertaking and was in place for
more than a century. Today, and perhaps the last decade, when LC and
trade professionals talk about compliance, they’re often referring to the
regulatory system governing trade based financial crime.
Although not apparent from the simple union of the words, the notions
differ radically and may even conflict. In the world of LCs, documents are
examined on their face without regard to the underlying transaction or
the realities that they represent. In the world of regulatory compliance,
the underlying substance is what matters. What are the goods? Are there
any? Are they properly priced? Who is the recipient? Trade based financial
crime compliance, perhaps to a greater degree than any other aspect of
trade finance, is an ever-evolving field.
xxix
National governments are constantly issuing new regulations and laws:
ones that at times sharply contrast with the regulations and laws of
other nations. Intergovernmental and nongovernmental organisations
have been prodigious at releasing standards and guidance designed to
educate financial institutions and governments on the best practices to
guard against financial crime. Technology has advanced rapidly in recent
years, leading to increased and new difficulties in combatting financial
crime while simultaneously offering new innovative solutions to assist
financial institutions in remaining compliant.
However, despite the abundance of resources available to financial

institutions, there is perhaps no greater resource than the knowledge
and experience of those immersed in the field. One of the goals of this
event is to bring together leaders in the field of trade based financial
crime compliance and to offer an avenue where questions can be asked
and ideas can be shared. Trade based financial crime compliance is an
enormous and important field. It imposes great demands on financial
institutions and regulators because the stakes involved are so high:
stopping the laundering of funds that can be used to facilitate criminal
activity; combatting the financing of terrorism; preventing the violation
of sanctions that are designed to maintain national and global security.
This event will assist you in your efforts to achieve these goals and will
be a tremendous resource for the industry in years to come.
Professor James E. Byrne, May 2o18
As you see, “compliance” now means to most trade practitioners the regulatory
system governing behaviour of the parties to a transaction. But it has also
evolved the function of an LC, from completely independent of the under-
taking it is financing, to where document checkers are required to be aware
of political, social, or economic activities in the countries and parties to the
transactions. While long time doc checkers will complain about this evolution,
they now occupy a front row seat for their banks to remain “compliant” with
domestic and international laws.
Back to the beginning of this: what exactly is trade-based financial crime

compliance? Trade-based financial crime compliance (TBFCC) is an invented
phrase, a term of art really, that combines the currently siloed investigation
practices of sanctions, trade-based money laundering, fraud, deceptive shipping
practices, anti-boycott, and more into one phrase. At many financial institu-
tions, TBFCC is divided by those differing frameworks, but should they be?
xxx
This book, and its accompanying qualification – the Certificate in Trade Fi-
nance Compliance (CTFC) offered by the LIBF – makes an argument that they
do not exist in a vacuum. For example, a cargo vessel travelling from the port
of Fujairah in the UAE to the sanctioned port of Bandar Abbas in Iran likely is
not doing so for the joy of violating sanctions. They are doing it for the money.
Once completed, they must somehow launder the money in order to use it,
and thus sanctions and money laundering were used hand in hand in the same
crime. We argue that sanctions investigators must be aware of the latest AML
investigation practices, the trade people who understand how shipping works
must work with their risk group to understand how even a few days delay in
shipping could actually be a sanctions violation, and more.
The tie-ins can go on, but for the student to have a comprehensive understand-
ing of the various elements of TBFCC, they must have a strong understand of
the first word – trade. And thus:
This Book is broken into two parts.
Part I, discusses trade, explains financial crime regulation which delves into
the history of government regulation and current banking regulation, a bank’s
compliance programme, and the indicators for which financial institutions
need to look when dealing with their customer’s transactions.
Part II of this Book deals with various types of financial crimes, namely money
laundering, countering the financing of terrorism, violations of sanctions,
proliferation of weapons of mass destruction, anti bribery and anti corruption,
commercial fraud, and violation of anti boycott regulations.
This Book is the course book of the Certification in Trade Finance Compliance
(CTFC) offered by the London Institute of Banking & Finance.
Although every effort has been made to assure the accuracy of the informa-
tion contained in this Book, it is inevitable that there will be mistakes and
errors. We humbly ask the readers of the book to inform us of any mistakes
or errors or additional developments in the field which they may find and we
will endeavour to correct them online and in future editions by emailing us
at [email protected].
Michael Byrne
CEO, IIBLP
xxxi
Part 1
Trade Based
Financial Crime
Compliance
1
Chapter 1
AN INTRODUCTION TO TRADE BASED

FINANCIAL CRIME COMPLIANCE
LEARNING OBJECTIVE
After studying this chapter, students should be prepared to proceed with this
Book on trade based financial crime compliance.
CHAPTER OVERVIEW:
This chapter introduces Trade Based Financial Crime Compliance, providing
the student with basic concepts and introducing the relationship between
trade and financial crime.
WHERE THIS FITS IN THE BOOK:

Part I of this Book, Trade Based Financial Crime Compliance, discusses the in-
teraction between trade and financial crime. From this point, the student will
proceed to review what is Trade and how it operates in chapter 2, Financial
Crime Regulation in chapter 3, the necessary components of a Compliance
Programme in chapter 4, the steps of properly and effectively Exercising Due
Diligence in chapter 5, and the Indicators of Trade Based Financial Crimes that
should be utilised to identify instances of financial crime in chapter 6.
Part II of this Book, entitled Combating Financial Crimes, identifies and describes
the various types of crimes that can be trade based and the steps necessary for
financial institutions to combat them. Anti Money Laundering is addressed in
chapter 7, Countering the Financing of Terrorism in chapter 8, Sanctions in chap-
ter 9, the crime of facilitating the proliferation of Weapons of Mass Destruction
in chapter 10, Anti Bribery and Anti Corruption in chapter 11, Commercial Fraud
in chapter 12, and boycott regimes and Anti Boycott in chapter 13.
3
4 | Chapter 1
Outline of this Chapter

Chapter 1 An Introduction to Trade Based Financial Crime Compliance
Section 1.1 Overview of this Book
Section 1.2 International Banking Operations
Subsection 1.2.1 The Independence Principle
Subsection 1.2.2 International Letter of Credit Practice
Subsection 1.2.3 The Fraud Exception
Section 1.3 The Compliance System
Subsection 1.3.1 The Impact of Public Policy on Letter of Credit Practice and Law
Subsection 1.3.2 The World of Regulatory Compliance
Section 1.4 Studying Trade Based Financial Crime Compliance
Section 1.5 Summary and Review
Subsection 1.5.1 Summary of Introduction
Subsection 1.5.2 For Reflection
Subsection 1.5.3 Exercise
Subsection 1.5.4 Review Questions
Section 1.1 Overview of this Book
This Book is intended to examine the world of trade based financial crime compliance
in a systematic manner, attempting to place this subject in the context of the two re-
gimes on which it touches, namely that of financial crime compliance, and international
banking operations. It is not a study of financial compliance, as such. There are existing
treatments of anti money laundering, counter terrorism financing, sanctions, and the
other topics that are linked to financial crime compliance, and each topic deserves a more
thorough treatment than given here. Nor is it intended to be a study of international
banking operations as such. Again, ample literature already exists on this subject. But
there are hardly any treatments of trade based financial crime compliance, and those
that exist are largely in the form of policy papers often demonstrating insufficient
appreciation of the products which they impact. This Book is intended to fill that void.
Moreover, unlike most of the available literature, this Book is written from the per-
spective of international banking operations with a profound respect for this field,
and an appreciation of its subtleties. While providing a theoretical background for
the financial crime compliance system, it grapples with the challenges posed by that
system to international banking operations and the related products of trade finance.
While not deliberately avoiding relevant theoretical or intellectually challenging

issues, this Book is intended to be practical. It is intended for bankers and other busi-
ness people who use the international banking operations system, and also for those
who approach this subject from the perspective of financial crime compliance, that is,
regulators, bank examiners, and bank compliance personnel without a background in
trade related operations. And, of course, it was written with the inevitable lawyers in
An Introduction to Trade Based Financial Crime Compliance | 5
mind who service both regimes. They are tasked with the often difficult, sometimes
impossible and always unappreciated task of guiding their clients through the day to
day decisions which must be made in this field. As a result, it attempts to raise and
consider these practical issues in a constructive manner. This Book contains referenc-
es to various sources, many of which are freely available on the internet in order to
accommodate readers who wish to study background material.
Beyond the review questions and exercises throughout the Book, in certain chapters
renowned subject matter experts have provided additional comments in the form of
an “Expert’s Corner”. These comments are given to provide real life stories and situa-
tions they have encountered during their careers as risk and compliance experts, be it
regarding trade based money laundering, proliferation, sanctions, or otherwise. Their
experiences are invaluable teaching lessons and should be studied, learned from, and
applied as part of your practice.
Although this Book is intended to serve as the study text for the Certificate in Trade
Finance Compliance (CTFC) offered by the London Institute of Banking & Finance, it
could equally serve bankers and compliance officials who are interested in understanding
the subject better without reference to the certification programme.
Section 1.2 International Banking Operations
For more than a century and a half, the international banking operations system em-
ployed by banks and other financial institutions has facilitated trade and served as an
essential component of the system of international trade. Even more than transporta-
tion and insurance, both important components of international trade, international
banking operations has provided the essential infrastructure that has enabled buyers
and sellers to trade with one another—to deliver the goods and pay for them in a rel-
atively efficient and dependable manner.
Unlike the glamourous images conjured by the word “international”, however, inter-
national banking operations is a back office, document and data intense, and highly
technical system.
Subsection 1.2.1 The Independence Principle
To understand international banking operations and the challenges posed for it by trade
based financial crime compliance, it is necessary to understand letters of credit (LCs)
which are the centrepiece of international banking operations. However, to understand
letters of credit, it is essential to understand the independence principle (also referred
to as the principle of autonomy or abstraction). This principle is at the heart of every
6 | Chapter 1
letter of credit and is the main reason for the international success of letters of credit
as dependable instruments to facilitate international trade transactions and trade
finance. Letters of credit and international banking operations are discussed in detail
in chapter 2 (Trade), but it is essential that the student appreciate the independence
principle in order to understand the subject. It can too easily be overlooked or taken
for granted, obscuring its role and failing to appreciate its remarkable and unique
character in business and law.
Article 3 (Independence of undertaking) of the UN Convention on Independent

Guarantees and Standby Letters of Credit provides:
“For the purposes of this Convention, an undertaking is independent where the guar-
antor/issuer’s obligation to the beneficiary is not:
a) Dependent upon the existence or validity of any underlying transaction, or

upon any other undertaking (including standby letters of credit or independent
guarantees to which confirmations or counter-guarantees relate); or
b) Subject to any term or condition not appearing in the undertaking, or to any
future, uncertain act or event except presentation of documents or another
such act or event within a guarantor/issuer’s sphere of operations.”
In the first place, the independence principle is not essentially a legal doctrine but one
that emerged from the practices of business people and bankers. It works, as it was
designed to do, in everyday situations without the need to consult lawyers constantly,
and without the expense and trouble of lawsuits. Its hallmark is certainty: one to whom
a promise is made should be able to depend on it being fulfilled. And, to a remarkable
extent, the system has fulfilled that promise, and done so much more directly, than the
law of contracts or voluntary obligations. The principle of independence in letters of
credit ensures certainty, and without legal certainty many international trade trans-
actions would not be possible.
In the second place, it is founded on a fiction, namely, that in examining documents,

bankers close their eyes to the realities that the data in the documents represent and
only concern themselves with whether the data or representations contained in the
documents satisfy the requirements of the bank’s undertaking contained in the letter
of credit.
This constraint, of course, is interim. At the end of the day, the realities (are the goods
represented by transport documents and quality certificates in fact of reasonable qual-
ity?) and their implications will need to be sorted out. This may involve the question
whether payment of the contract price was really due and owed, and it will take place
after delivery and payment through the letter of credit. But the system is based on the
notion that it is the parties to the underlying transactions, the buyer and the seller,
who will do the sorting out and not the banks who make the “independent” promise
by way of issuance of a letter of credit. In effect, the fiction serves as a risk allocation
device, shifting the risk of who holds the funds and the goods during the pendency
of dispute resolution. The system is designed to place the funds in the hands of the
beneficiary of the bank’s promise for this period (that is, the seller) – conversely, the
risk and burden of recovery or repayment is thus allocated to the buyer. In this sense,
it resembles payment in advance but with additional layers of assurance that can serve
to comfort the buyer.
In the third place, it is structured and perceived as being operated by a banker who is
neutral, and as much interested in the integrity of the product and the bank issuing
it, and who is prepared to honour its promises even over the protests of its customer
(the applicant for the letter of credit, usually the buyer). To a considerable extent, this
perception is correct.
Subsection 1.2.2 International Letter of Credit Practice
International banking operations has been influenced by the articulation of its practices
in the form of written customs and by the standardisation of forms. This process has
taken 100 years and is still evolving. Because many letters of credits operate between
parties who are based in different countries, domestic laws are often insufficient or
unable to address potential problems and, in any event, in many cases it is unacceptable
for either party to agree to the application of the laws of the countries of the other party.
As a result, codified, standardised and articulated letter of credit practice – as oppose
to statutory or other domestic law – plays the most significant role in determining the
rights, obligations and procedures in international letters of credit.
The customary practices are captured, to an extent, in a document which has come to
be titled the Uniform Customs and Practice for Documentary Credits (hereafter “UCP”)
whose current edition at the time of publication of this Book is publication number
600 (“UCP600”). The UCP has been compiled under the auspices of the commission on
Banking Technique & Practice of the International Chamber of Commerce (ICC). The
UCP is regularly updated, and the last revision, UCP600, was finalised in 2007. In recent
years, two additional sets of rules have emerged to address the needs of a product that
also is intended to be independent but less linked to trade than the commercial or so
called documentary letter of credit, namely the standby letter of credit or independent
guarantee. These practice rules are entitled the International Standby Practices (here-
after “ISP98”) and the Uniform Rules for Demand Guarantees (hereafter “URDG 758”)
which were endorsed by, or written under the auspices of, the International Chamber
of Commerce, respectively.
8 | Chapter 1
ACTIVITY:
What practice rules are applicable to the independent undertakings with
which your financial institution or bank deals?
The UCP is based on the assumption that the independence principle applies to letters
of credit, and its text makes reference to this important principle in the following way:
UCP600 Article 5 (Documents v. Goods, Services or Performance)
“Banks deal with documents and not with goods, services or performance to which the
documents may relate.”
The principal contribution of the UCP is that it has created an authoritative, balanced
and sophisticated system of rules, and formulations of reasonable expectations and
procedures, under which letters of credit can operate with only limited resort to do-
mestic, statutory law or courts. While it is, of course, impossible to so operate where
disputes are brought before courts, most bankers thought and many think today that
the UCP is in fact law. Indeed, the UCP has been given remarkable deference by courts
and arbitral tribunals. Due to its drafting style and use of language, however, the UCP is
not easily understood by the uninitiated. Even recent efforts to update its provisions in
the most recent revision, UCP600, and make them comprehensible to non LC bankers,
have had only limited success in this regard.
The independent nature of standby letters of credit is also captured in the ISP98, where
it is provided:
ISP98 Rule 1.06(c) (Nature of Standbys)
“Because a standby is independent, the enforceability of an issuer’s obligations under

a standby does not depend on:
i. the issuer’s right or ability to obtain reimbursement from the applicant;

ii. the beneficiary’s right to obtain payment from the applicant;
iii. a reference in the standby to any reimbursement agreement or underlying
transaction; or
iv. the issuer’s knowledge of performance or breach of any reimbursement
agreement or underlying transaction.”
The success of the letter of credit banking community has been nothing less than
amazing. There has been worldwide acceptance of the independent status of the
commercial letter of credit, largely without statutory basis. Statutory provisions only
exist in a limited number of countries, for example the U.S., the Peoples’ Republic of
China, and in those nations which have adopted the UN Convention on Independent
Guarantees and Standby Letters of Credit. To the extent that there has been any resis-
tance or reluctance on the part of courts to accord independence to letter of credit type
undertakings, it has centred on instruments confusingly named “bank guarantees”, “first
demand guarantees”, and similar terms. All of these undertakings draw their name, and
often content, on a well established contract, guarantee or suretyship contract, which
is fundamentally not independent by its nature but rather accessory and dependent.
The attempts to change this traditional instrument (dependent guarantee, suretyship
agreement) into a truly independent undertaking have often failed due to poor drafting
or questionable interpretations by courts. Because of the potentially misleading labels
(“guarantee”) utilised in some jurisdictions, courts often assume that the undertaking
is dependent instead of independent.
The other reason for the success of the letter of credit has been the standardisation of
forms that are used. To a considerable extent, this process has been accelerated and
globalised by SWIFT, an international telecommunications network owned chiefly by
banks whose MT 700 series of messages has introduced a considerable degree of uni-
formity. The importance of this dimension was highlighted by the serious problems
encountered with demand guarantees for which there had not been a similar detailed
SWIFT Message Type. In November 2021, SWIFT introduced the MT 760 (Issue of a
Demand Guarantee/Standby Letter of Credit) to address these concerns. For issuance
of undertakings outside of SWIFT, however, issues remain for instruments with formats
drawn from true or traditional guarantees, which compound the difficulty of courts in
classifying them as either independent or dependent.
Subsection 1.2.3 The Fraud Exception
How strictly should the principle of independence be applied when a bank is faced with
a presentation that complies on its face with the terms and conditions of a letter of
credit, but where there is compelling evidence that the documents and the claim for
payment have no conceivable basis? For example, the beneficiary presents complying
documents evidencing a shipment but it can be proven in a timely manner, and before
the issuer of the letter of credit has honoured its undertaking, that the documents are
forged or falsified or the shipment is not of any goods whatsoever but of trash or things
which have no value to anyone.
In such situations, the letter of credit community has reluctantly acceded to the ten-
dency of most courts to order that payment be stopped pending determination of the
ultimate facts, or upheld the refusal of banks to honour.
10 | Chapter 1
The fraud exception was succinctly summarised in Lombard v. Landmark [2009] 4 All
SA 322 (SCA) (Supreme Court of Appeal) [South Africa], which states that for letters of
credit and independent guarantees, the “obligation is wholly independent of the un-
derlying contract of sale and assures the seller of payment of the purchase price before
he or she parts with the goods being sold. Whatever disputes may subsequently arise
between buyer and seller is of no moment insofar as the bank’s obligation is concerned.
The bank’s liability to the seller is to honour the credit. The bank undertakes to pay
provided only that the conditions specified in the credit are met. The only basis upon
which the bank can escape liability is proof of fraud on the part of the beneficiary. This
exception falls within a narrow compass and applies where the seller, for the purpose of
drawing on the credit, fraudulently presents to the bank documents that to the seller’s
knowledge misrepresents the material facts”.1
This judicial interference with the independence of the letter of credit, whether treated
as an exception to the independence principle or another doctrine, is unfortunately
named “fraud” in many jurisdictions, a term that is considerably wider and less clear,
rather than “letter of credit fraud” which preserves its unique character. Generally, the
fraud exception in letters of credit has been applied restrictively for fear that it will
undermine the letter of credit itself as a reliable vehicle of payment.
The limits to the fraud exception in letter of credit and independent guarantee transac-
tions are highlighted by the court in S. Satyanarayana and Co. v. W. Quay Multiport Pvt.
Ltd., Arbitration Petition (L) No. 647 of 2015 (Bombay H.C. 2015) [India]. In describing
the fraud exception, the court stated that “[t]he fraud itself must be of an egregious
nature so as to vitiate the entire underlying transaction. Even irretrievable injury or
injustice would imply some executional circumstance which would make it impossible
for the guarantor to reimburse [itself] if [it] were to ultimately succeed, there being
good prima facie case of such success.”2
Section 1.3 The Compliance System
Prior to 1980, it could be accurately stated that there were relatively few governmental
restrictions on letter of credit practice. Since that time, they have increased noticeably.
Although various names are used to refer to such restrictions, the one used in this Book
is linked to the word “compliance”, not because it is particularly fitting (for reasons
that will be explained in chapter 3 (Financial Crime Regulation) it is not), but because
it is universally recognised.
1 Institute of International Banking Law and Practice, 2010 Annual Review of International Banking
Law & Practice 566.
2 Institute of International Banking Law and Practice, 2016 Annual Review of International Banking
Law & Practice 432.
Subsection 1.3.1 The Impact of Public Policy on Letter

of Credit Practice and Law
In some senses, the Compliance System can be regarded as another exception to the
independence principle. Unlike letter of credit fraud, however, its origin is not letter of
credit law but found in the law of public policy under which illegality is a recognised
exception to the law of contracts or voluntary obligations. Under this principle, matters
that are expressly declared to be illegal by statutory law, regulation, or, in a more restric-
tive sense, judge made law, are treated outside of the ordinary principles applied to the
enforcement of voluntary undertakings and the freedom of parties to enter into them.
The incursion of public policy concerns into international banking operations practice
began with relatively limited sanctions imposed by governments that were intended
to achieve political or policy ends.
In the parallel universe of payments and funds transfers, the incursion began much
earlier and has been much more extensive. Policy makers quickly realised that restricting
the banking system provided a workable and inexpensive (for governments, at least)
means of limiting criminal activities such as organised crime and drug trafficking. But
there was no independence principle in that field, meaning that such restrictions had
a lesser need for justification.
Subsection 1.3.2 The World of Regulatory Compliance
Today an extensive system of regulatory compliance has been inserted into the world of
international banking operations. As will be seen from the treatment of compliance in
this Book, this system operates without much recognition of the relatively limited role
of financial institutions in the trade transaction and the relatively limited knowledge
possessed by banks of these transactions.
Moreover, it may be asked whether trade is properly classified as high risk? This assess-
ment of the misuse of trade and trade related financial products has been questioned
from some quarters. While trade and trade products are often used to perpetrate
commercial fraud, and involved in sanctions and boycott issues, there is little public
evidence that these products are matters of “high risk”. The examples typically cited
relate to behaviour that could hardly be classified as “trade” and that, in any event,
do not involve trade products. At a recent gathering of major U.S. bank compliance
personnel in late 2016, for example, a panel of highly placed experts discussing “case
studies” on trade related money laundering focused only on funds transfers and indi-
cated that they were unable to address concerns related to traditional trade products
beyond funds transfer. Indeed, the head of Compliance for one of the largest banks in
the world admitted that the bank was only now in the initial stage of considering what
12 | Chapter 1
steps should be taken. Generally, few instances have been publicly cited of the misuse
of trade products to perpetrate financial crime other than commercial fraud and the
violation of sanctions regimes.
Because at the time of publication of this Book the banking community is at a relatively
early stage of the process of trade based financial crime compliance, it is difficult to
predict whether the pendulum will swing back into balance as it has for the fraud ex-
ception. It is apparent that the full arsenal of the compliance regulatory system both
within banks and government is at work to “tame” bank operations. While nominal
deference is often voiced for the unique character of traditional trade products and
the independence principle, on the level of the bank processor and the bank examiner,
there are often two systems operating in parallel universes.
Where this process of adding new compliance regulations will end is difficult to predict.
But there are already signs that these intense and expansive regulations are produc-
ing unintended results. Banks are reportedly cutting back on offering trade products,
ceasing to deal with certain parts of the world and certain customers, and finding
profitability severely strained. This development occurs at a time when other pressures
are impacting international banking, such as increased capital adequacy requirements.
In light of the decreasing use of traditional bank trade products by buyers and sellers
in favour of open account transactions, it may be asked if the increase of regulations
is excessive and even counter productive. The use of traditional bank trade products
gives regulators a better window into transactions than does open account. Therefore,
effectively forcing banks and customers to move to open account transactions would
diminish the oversight potential and screening opportunities, and thus increase the
risk of financial crime going unnoticed.
The Wolfsberg Group,3 Trade Finance Principles (2019) section 1.1.6 (Introduction) notes
that “[t]he majority of world trade is carried out under ‘Open Account’ terms”,4 reducing
the role of a financial institution to that of clean payment.
Whether this scepticism is warranted, however, is irrelevant for financial institutions,

and beyond the scope of this Book. They are under pressure from bank examiners and
regulators to tighten their controls on trade in order to prevent its misuse for financial
crime.
3 The Wolfsberg Group, the International Chamber of Commerce (ICC) and the Bankers Association
for Trade and Finance (BAFT) jointly published the Trade Finance Principles (2019).
4 To view the Trade Finance Principles, visit https://www.wolfsberg-principles.com/sites/default/
files/wb/Trade%20Finance%20Principles%202019.pdf.
Section 1.4 Studying Trade Based Financial Crime Compliance
These reflections lead to the purpose of this Book, namely to assist the student in
studying trade based financial crime compliance. How can it help, and how is it or-
ganised and structured?
Organisation. The Book is organised into two parts. Part I treats the Compliance System
and its components, namely a Compliance Programme, the exercise of due diligence,
and the signs of trade based financial crime in addition to providing an introduction
to trade and the compliance regime. Part II takes up specific types of financial crime,
beginning with the most significant ones, namely money laundering, terrorist financing,
and violations of sanctions. These parts are followed by Appendices.
There is no strict necessity to this pattern and the reader should alter it where useful.
For example, someone with a strong background in international trade operations will
probably find chapter 2 (Trade) almost superficial and only helpful as a review. On the
other hand, a reader with a background exclusively in compliance may find it to be only
an introduction and may wish to expand his or her studies by drawing on supplemental
material which is suggested. The reverse can be said for those readers who are familiar
with compliance but not trade, who may have the same reaction to chapter 3 (Financial
Crime Regulation) and some parts of chapters 4 (The Compliance Programme) and 5
(Exercising Due Diligence), although even such people may find the portions of these
chapters which focus on trade to be useful.
Other readers may want to turn directly to a specific type of financial crime, such as trade
based money laundering, and work their way backwards and forwards to associated topics.
By general consensus, there are certain patterns of behaviour that are suspicious and
that warrant further attention. Sometimes described as “red flags” (akin to red lights),
they are called “Indicators” in this Book. The indicators of trade based financial crime
are discussed in detail in chapter 6 but they are relevant to virtually every chapter.
Indeed, in Part II most chapters contain a detailed series of examples of relevant indi-
cators at the risk of redundancy.
Repetition and Review. The pattern of repetition occurs with respect to other aspects
of the treatment of trade based financial crime in this Book. This pattern is deliberate.
There are two primary reasons for it. One is that it is expected that a reader will not
master the contents of this Book in one reading. Indeed, it would be exceptional were a
reader to be able to interiorise the subject matter of this Book in one go. It is expected
that a reader will read and re-read a chapter, particularly if he or she undertakes the
various exercises and visits some of the websites suggested for supplemental study.
Given the likelihood that most readers have other responsibilities, it is therefore
14 | Chapter 1
probable that the study of the content of this Book will be stretched out over several
months, assuming a realistic pace of one chapter per week. With this pace, revisiting
important concepts is useful. The second reason for this approach follows from the
first, namely that repetition and review are sound aspects of learning. The goal of the
Book is to bring the reader to a point where he or she has cumulatively mastered trade
based financial crime compliance. Each subsequent chapter reinforces the previous one
so that by the end the reader is prepared to take a practice examination and to sit for
the certification examination.
In accordance with the standards of the London Institute of Banking & Finance (LIBF)
and because of the international readership of this Book, it has adopted English
spelling as used in the United Kingdom. Thus, it refers to “programme” except where
the American spelling is appropriate in a name or term such as “CIP” (Customer
Identification Program). It also follows the punctuation protocols of the LIBF which,
among other things eschews the use of a hyphen in terms such as “anti corruption”
and other situations where a hyphenated word might seem more natural.
Tools. The chapters contain several tools intended to assist the reader in studying this
subject. They include:
• Activities: An attempt has been made to suggest activities designed to make
what is being discussed applicable to the reader’s current or past experience.
When doing the activities, the student may want to speak with financial
institutions or other colleagues.
• Review Questions: Each chapter contains review questions at the end designed
to assist the reader in assessing his or her understanding of the material. The
answers to the review questions for each chapter are located at the end of the
book in Appendix A.
FACTFIND
These boxes are contained within chapters, and provide readers with additional
sources of information. They are typically links that correlate to what the
student is reading in the respective chapter, and encourage further research
and reading.
Appendices. The Book contains several appendices intended to assist the reader and
containing information applicable to each chapter.
• Appendix A: Answers to Review Questions. As indicated, review questions
are contained at the end of each chapter. To assist the reader in self discipline
but to provide feedback, answers and an explanation are located in Appendix
A (Answers to Review Questions) together with an indication of where the
answer is explained in the material.
• Appendix B: Sources of Red Flags / Indicators. This appendix contains

the URLs of the documents containing the Red Flags / Indicators from the
following organisations:
- Hong Kong Association of Banks (HKAB)
- Monetary Authority of Singapore (MAS)
- Asia / Pacific Group (APG)
- U.S. Federal Financial Institutions Examination Council (FFIEC) Bank
Secrecy Act / Anti Money Laundering Examination Manual (BSA / AML
Exam Manual)
- U.K. Financial Conduct Authority (FCA)
This list is referred to throughout the text and primarily in Chapter 6 (Indi-
cators of Trade Based Financial Crimes).
• Appendix C: Glossary. An explanation of technical terms used in the Book

is given in the Glossary.
• Appendix D: Abbreviations. Contained in this list is the explanation of the
extensive abbreviations used not just in this Book, but that the reader would
come across in the world of Trade Based Financial Crime Compliance in
general. This is an important resource aiding the understanding of materials
written on the subject.
• Appendix E: Organisations. This Appendix contains a list of some of the
major organisations engaged in various aspects of combating financial crime.
Subject Matter Index. Key concepts and topics are indexed for convenience. There
are, therefore, two primary means of navigating through this Book in order to locate
topics: 1) the Table of Contents which lists each section and subsection; and 2) the
Index which provides guidance to substantive treatment of topics.
Interchangeable Words. It should be noted that the reader will come across various
terms and acronyms that can and will be used interchangeably throughout this Book.
The list includes, but is not limited to, terms such as:
• LC, Letter of Credit, and Credit.
• Commercial and Documentary Letter of Credit (or LC) (although the Book
generally opts for Commercial Letter of Credit).
• Standby, Standby LC, and Standby Letter of Credit.
• FI and Financial Institution and bank.
• U.S and US.
• Economic and financial crime (although the Book generally opts for “financial
crime”).
16 | Chapter 1
Such interchangeability reflects what is commonly used in practice and it was concluded
that there was no particular merit in imposing an artificial uniformity on this usage.
Subsection 1.5.1 Summary of Introduction
Chapter 1 (An Introduction to Trade Based Financial Crime Compliance) provided an

overview of this Book and its subject. It oriented the reader to its approach to finan-
cial crime, namely from the perspective of international banking operations and its
products. It noted that the critical term in this exercise was “trade” and the products
developed by financial institutions to facilitate it. As a result, it explored the under-
pinnings of the most important of these products, the letter of credit, noting that they
explained the difficulties presented in reconciling trade and compliance. The central
issues addressed were the independence principle and the role of international letter
of credit practice. The fraud exception to this principle, a legal concept that is part of
letter of credit law, was contrasted with the exception based on illegality which is a
matter of public policy and which is the basis for the exceptions that follow from trade
based financial compliance. Chapter 1 also introduced the compliance regime that is
now in place. Finally, the chapter summarised the organisation and approach of this
Book, and the tools available within it for studying the subject.
Bank A issues a letter of credit in favour of Company B requiring presentation

of documents A, B, and C. Company B makes a timely presentation of docu-
ments A, B, and C which on their face comply with the terms and conditions
of the letter of credit. Moreover, there is no evidence of letter of credit fraud.
However, Bank A concludes that there is a violation of a legal sanction in
the underlying transaction represented by the documents. Can it honour its
obligation? If not, on what basis?
In subsection 1.2.2, the reader was asked to investigate to what practice rules
its independent undertakings were subject.
• What is the policy behind the choice of practice rules?
• Is one rule preferred for standbys or independent guarantees? If so, which?
• Does your financial institution or bank have independent undertakings
that are not subject to any practice rules? What does it do about the added
risk posed by these undertakings?
Subsection 1.5.4 Review Questions5
Question 1-1. Which of the following answers is applicable to the independence

principle?
a) It is based on the neutrality of the issuer.
b) It involves review of presented documents on their face.
c) It is inapplicable where there is fraud by the applicant.
d) It operates even when the applicant cannot reimburse the issuer.
Question 1-2. What are the reasons for the success of the commercial letter of
credit as an instrument of payment?
Question 1-3. What is the difference between letter of credit fraud and the com-
pliance system?
ROAD MAP OF WHERE CHAPTER 1 FITS INTO THE BOOK:

Chapter 1 introduces Part I of the Book, Trade Based Financial Crime Com-
pliance. It introduces the student to the doctrinal underpinnings of inter-
national banking operations and letters of credit, namely the independence
principle and the fraud exception and contrasts these letter of credit based
doctrines with the compliance system. It also provides the student with an
overview of the Book and its approach, suggesting how to best utilise its
tools and features.
5 The Answers to these Review Questions appear in Appendix A.

18 | Chapter 1
HOW THIS CHAPTER RELATES TO THE BOOK:

Having received an introduction to Trade Based Financial Crime Compliance
in chapter 1, the student is now prepared to move forward with the balance
of Part I. Subsequent chapters will discuss Trade (chapter 2), Financial Crime
Regulation (chapter 3), The Compliance Programme and its role at a financial
institution (chapter 4), Exercising Due Diligence in the customer relationship
and its transactions and in correspondent banks (chapter 5), and the Indica-
tors of Trade Based Financial Crimes (chapter 6).
After Part I, the student will be prepared to study how to combat the var-
ious specific types of financial crime in Part II, Combating Financial Crime,
which covers Anti Money Laundering (chapter 7), Countering the Financing
of Terrorism (chapter 8), Sanctions (chapter 9), Weapons of Mass Destruc-
tion (chapter 10), Anti Bribery and Anti Corruption (chapter 11), Commercial
Fraud (chapter 12), and Anti Boycott (chapter 13).
2
Chapter 2
TRADE
LEARNING OBJECTIVE
After studying this chapter, students should be able to demonstrate a basic
understanding of trade and trade products.
CHAPTER OVERVIEW:
This chapter on Trade discusses what is trade, the parties involved in trade,
the agreements regarding trade and trade finance, the delivery of goods and
payment for them, and the role of banks in trade.

Part I of this Book, Trade Based Financial Crime Compliance, discusses the
interaction between trade and financial crime. The subject was introduced in
chapter 1.
In the remainder of Part I, Financial Crime Regulation is discussed in chapter
3, the elements of a Compliance Programme in chapter 4, Exercising Due Dil-
igence in chapter 5, and the Indicators of Trade Based Financial Crimes that
should be utilised to identify instances of financial crime in chapter 6.
Part II of this Book, entitled Combating Financial Crimes, identifies and de-
scribes the various types of crimes that can be trade based and the steps nec-
essary for financial institutions to combat them, including money laundering,
countering the financing of terrorism, and sanctions.
19
20 | Chapter 2

Chapter 2 Trade
Section 2.1 An Overview of Trade
Section 2.2 What is Trade?
Section 2.3 The Parties Involved in Facilitating Trade
Section 2.4 Agreements Regarding Trade and Trade Finance
Section 2.5 The Delivery of Goods
Section 2.6 Options for Payment or its Assurance
Section 2.7 The Trade Related Financial System and the Role of Banks
Subsection 2.7.1 The Financial System Supporting Trade
Subsection 2.7.2 The Financial Products Used in Trade Finance
Subsection 2.8.1 Summary of Trade
Section 2.1 An Overview of Trade
While banking is not necessarily connected to trade, trade forms a vital part of com-
mercial banking and trade is at the heart, in an historical and transactional sense, of
international commercial banking. Similarly, banks and banking are an important as-
pect of international trade, ranging from the financing of production and purchasing
of products, to facilitating their delivery, and payment for them.
A Note on “Banks”, “Banking”, and “Financial Institutions”.
Historically, banks or merchant banks have played an important role in facilitating

international trade. Indeed, early bankers were often traders as well as financiers and
bankers. Until the late 19th century, the great transatlantic banking houses such as
J.P. Morgan, Brown Brothers & Co., and Barings Bank maintained their own fleets of
vessels and traded for their own accounts, until it became apparent that their capital
and energies were more profitably employed in banking rather than trading. As a result,
trade products such as letters of credit and documentary collections are most intimately
related to banks and banking.
Although other financial institutions that are not banks also issue these trade products,
this Book refers to banks when it speaks of these products. Indeed, the vocabulary
associated with the products makes this connection. One speaks of an “issuing bank”
or “confirming bank” and not an “issuing financial institution” even though non bank
financial institutions do act as issuers. Otherwise, the term “financial institution” is used
in regard to trade based financial compliance since the regulations and the literature
do so. For the purposes of this Book, however, the terms are interchangeable unless it
is apparent from the context that a more particular meaning is intended.
Trade | 21
What is a “bank” and a “financial institution” is a topic beyond the scope of this Book.
Generally speaking, a bank is an entity licensed in a given jurisdiction to conduct the
business of banking and to describe itself as a bank. As such, it is heavily regulated in
most jurisdictions.
Generally speaking, a financial institution is an entity that engages in financial transac-

tions that includes banks, but also entities that are not banks. Some such institutions
are also heavily regulated such as pension funds, while others are less so. Non bank
financial institutions include, depending on local laws and regulations, organisations
that accept and invest deposits but are not banks, such as postal saving services con-
ducted by government agencies, credit unions, and other such entities which are not
commercial banks. They can also include insurance companies, securities firms, trusts,
investment banks, and underwriters.
Section 2.2 What is Trade?
In essence, trade consists of the purchase of goods and services by a buyer, and their
sale by a seller. Where there is an agreement to do so, the seller must deliver what is
purchased and transfer rights in it, and the buyer must accept what is delivered if it
conforms with the agreement, and pay for it. Of course, there is often more complexity
to international trade transactions. They usually involve a number of parties beyond
the buyer and seller, a variety of agreements with and between them, as well as various
standards and customary practices, and various bank products including those which
facilitate delivery and payment, and assurance of payment and performance.
ACTIVITY:
What types of trade products does your organisation offer or use that are
related to trade? What trade products do you encounter in the course of your
business with customers?
FACTFIND
The United Nations Convention on Contracts for the International Sale of
Goods (1980) (CISG) is a widely adopted multilateral treaty that provides a
legal framework for contracts for the international sale of goods.
To view the full CISG text, visit the following URL and click “Text Explana-
tory Note” under Additional Resources: https://uncitral.un.org/en/texts/sale-
goods/conventions/sale_of_goods/cisg.
Article 30 states: “The seller must deliver the goods, hand over any documents
relating to them and transfer the property in the goods, as required by the
contract and this Convention.”
22 | Chapter 2
Article 54 states: “The buyer’s obligation to pay the price includes taking
such steps and complying with such formalities as may be required under the
contract or any laws and regulations to enable payment to be made.”
Trade can be domestic or international. Domestic trade takes place within the confines
of a nation state. International trade is the exchange of goods or services between
parties in different nation states.
While international trade is typically the focus of trade based financial crime compli-
ance, purely domestic trade can also be used to launder funds, support terrorism, to
bribe public officials or private persons, or as a vehicle of commercial fraud. Because
there are typically no regulatory checks on domestic trade such as taxes or customs, it
is difficult to obtain statistics for domestic trade. It is, however, estimated to be equal,
if not greater than international trade in most countries.
For some economies such as Germany, the principal type of trade is international
(export transactions) whereas for others like the U.S., domestic trade overshadows in-
ternational trade. In geographically smaller political units such as Singapore and Hong
Kong, international trade represents most trade and is a significant part of their GNP.
Whatever the exact percentages, trade is essential to modern economies around the
world, and the process of globalisation is both a contributing factor to trade, and a
direct result of it.
According to the World Trade Organization (WTO) 2020 World Trade Statistical Review
the 2019 value of international trade in world exports was approximately USD 19.051
trillion. This value represents a 0.1% decrease in global volume in 2019. During 2018,
the world saw a 2.9% increase in global volume.
The 2019 value of commercial services traded was approximately USD 5.898 trillion,
including USD 1.416 trillion for travel, USD 1.118 trillion for transport, USD 3.168
trillion for other commercial services, and USD196 billion for goods related services.
Consequently, combined global trade in goods and services in 2019 totalled approxi-
mately USD 24.989 trillion.
FACTFIND
To retrieve the full 2020 WTO Statistical Review, visit:
https://www.wto.org/english/res_e/statis_e/wts2020_e/wts20_toc_e.htm.
Trade | 23
A Note on Methodology.
This chapter is written in layers, addressing the various roles of the buyer, seller, and
other parties, and their obligations with respect to payment and delivery of the goods.
As such, there is some overlap. For example, a letter of credit operates differently from
the perspective of the buyer, the seller, and the third party who must provide required
documents. Rather than seek artificially to simplify what is in reality very complex, the
chapter discusses these aspects of trade and trade finance products separately in the
partial belief that the overlapping references will reinforce points, and force the reader
to cross reference them so as to improve understanding and retention.
Parties to a Trade Transaction. Most trade transactions involve many more entities
than just buyers and sellers, as was pointed out above. They may include parties such
as guarantors, financiers, insurers, inspectors, brokers, and logistical intermediaries.
Government agencies, too, may play a variety of roles when it comes to trade. Government
and other state owned entities may also act as both sellers and buyers. The different
parties involved in international trade will be revisited in detail below at section 2.3
(The Parties Involved in Facilitating Trade).
While trade transactions are varied and complex in nature, at their core, they have a
simple challenge with which to contend: the delivery of goods, and payment for them.
In a transaction for the sale of goods, the seller does not wish to part with control over
the goods, that is, to deliver them without having received payment or dependable as-
surance of payment. The buyer, on the other hand, will not want to pay without having
goods in hand and being assured that they are “good”, that is of the agreed type, quality,
and quantity. Most of the details regarding delivery and payment involve balancing
these concerns, a process which is affected in accordance with the relative strength of
the positions of the parties, or their bargaining power.
There are similar concerns with the provision of services. The person providing the
service does not want to do so unless it is paid, but the person seeking the service does
not want to make payment until it is assured that the service is as promised.
Trade Finance. Financial institutions assist buyers and sellers in resolving these con-
cerns. Among other things, they extend credit to either the buyer to purchase goods, or
to the seller to produce and deliver the goods. Loosely, this service is referred to as trade
finance, although the term is not used with any precision and can be applied generally
to all the services provided by financial institutions supporting trade. In addition, banks
in particular have developed systems to forward documents, to make payment, and to
link payment to the presentation of documents through their correspondent networks
with other banks. These services often include the examination of documents related
24 | Chapter 2
to transport, insurance, customs, inspection, and receipt of the goods. As such, trade
finance services draw together the various strands of trade.
Multilateral. In some situations, trade is bilateral, that is, between a buyer and seller,
but more often it involves a series of buy / sell relationships including middlemen,
brokers, and component manufacturers in which the goods find their way from raw
materials to the ultimate end user, whether on a retail or commercial basis. In this chain
of transactions, there are relatively few buyers who are not also sellers.
Intermediaries. It is rare that the buyer and seller meet at a location and simply
exchange the goods for cash. Typically, there is a variety of additional parties who
intermediate the delivery of, and payment for, goods, often for each party in the chain
of sales until the product is delivered to the ultimate buyer. Third parties can also
include different intermediaries who transport goods as carriers, hold goods such as
warehousemen, import or export facilitators such as freight forwarders and customs
brokers, or inspectors. They also include those who provide financial services, including
banks, other financial institutions, and insurers. In addition, government agencies may
assume roles with respect to financing, delivery, payment, and insurance.
Stages. There are four general stages to international trade: Contracting, Delivery,
Payment, and Post Delivery.
Stage I: Contracting. The first stage involves concluding an agreement for the pur-
chase and sale of the goods. This process may be highly complex with various bids,
counter offers and negotiations, or it may be very straightforward with the submission
of a pro forma invoice by the buyer (or seller) followed by shipment by the seller. The
parties typically agree on the nature of the goods, the quantity and quality, the method
of delivery, the price, and the means of payment. There may not be any one moment
when that agreement was reached. Indeed, it may only be possible to conclude that
there has been an agreement from looking at the conduct of the parties, that is the
seller ships the goods and the buyer pays for them. Additional aspects such as the al-
location of risks and responsibilities, and any additional provisions such as warranties
or supplemental service obligations may be reached by agreement or supplied by the
applicable legal system. The first stage also involves the seller obtaining or producing
the goods, either by sourcing them from a third party, manufacturing or assembling
them, or otherwise obtaining them.
Stage II: Delivery. The delivery stage involves packaging the goods, obtaining permits
or licenses for export or import, obtaining any necessary inspections, arranging for their
transport, entrusting them to the carrier or a third party who is responsible for arrang-
ing for carriage, and shipping them or otherwise making them available to the buyer.
Trade | 25
Stage III: Payment. The payment stage involves seeking and making payment for the
agreed upon amount by the agreed means. Payment may occur before delivery, after it,
or may be partially before, during, and after delivery, all depending on the agreement
of the parties. Where the payment is based on the presentation of documents repre-
senting the goods or their transport, it is necessary to obtain the required documents
and arrange for their presentation which often occurs through the banking system. This
point is discussed in considerable detail below. It may also involve obtaining financing
for production and payment, although this dimension may occur at any stage.
Stage IV: Post Delivery. Following delivery of the goods, issues may arise regarding
the adequacy of the seller’s performance, the adequacy of the goods and any warranties
regarding the quality of the goods and of their continued quality. This constitutes the
fourth stage.
The financial system is relevant to each of these stages, with banks and other financial
organisations such as factors providing credit, documentary processing, and payment
services necessary to facilitate these transactions.
In addressing trade based financial crime, all of these components and stages of the
system of international trade and finance must be considered and adequately addressed,
utilising a risk based approach where they intersect with a financial institution.
FACTFIND
Purchase Orders. Another process of contracting for the sale of goods is
purchase order financing. Where a manufacturer of goods carries insufficient
funds to pay its suppliers, or a seller wishes to receive advanced funds while
offering its buyers extended payment terms, it may be desirable to approach
a financier, typically the seller’s financial institution, to advance funds on the
basis of purchase orders. A financial institution will generally require the seller
to demonstrate that it is a legitimate trading company and to forward verified
purchase orders showing detailed terms regarding the underlying goods.
These advanced funds could cover a variety of expenses for the party issuing
the purchase orders such as labour, raw materials, or shipment and insurance
costs. The process involves a buyer’s commitment to buy goods as evidenced
by a verified purchase order which is forwarded to the financier. When the
party that received the financing performs on the underlying sale of goods,
payment is made by the buyer to the financial institution, thus reimbursing
its advanced principle as well as any applicable interest and fees. Finally, the
financier remits the balance of the transaction, if any, to the seller. Purchase
order financing is a variation of factoring, which is typically based on invoices.
For more on factoring, see subsection 2.7.2 (The Financial Products Used in
Trade Finance).
26 | Chapter 2
Currency Controls. In the context of payments, it is worth noting currency

controls, also known as foreign exchange controls. These regulations are
imposed by individual governments and may either restrict citizens from
purchasing foreign currencies or purchasing the domestic currency abroad,
and generally aim to prevent capital flight. Importantly, the International
Monetary Fund (IMF) limits its members from utilizing currency controls
pursuant to Articles VIII and XIV of its Articles of Agreement. Conversely,
currencies such as the US dollar, Euro and Pound Sterling are freely convertible
and, particularly the US dollar, account for an overwhelming volume of cross
border payments. Particular to the Euro, European Union regulation (EC) No.
924/2009 requires banks of member states making payments in euros to
apply identical charges in cross border transactions as they apply to their
domestic transactions. In any event, the ability of a financial institution to
make a cross border payment can be impacted where an intended beneficiary
is subject to an applicable currency control.
To learn more about currency controls regarding specific jurisdictions, visit the
U.S. International Trade Administration (ITA), and search: currency controls,
https://www.trade.gov/.
ACTIVITY:
Identify the stages of a trade transaction in which your financial institution
or bank is involved.
Section 2.3 The Parties Involved in Facilitating Trade
There are multiple parties involved in international trade, ranging from the buyer and
seller to parties facilitating delivery and financing of the goods.
The parties involved in international trade include the following categories:

• Buyers. This category includes any entity which purchases goods or services
either for use, to manufacture into another product, or for resale.
• Sellers. This category includes any entity who sells goods or services to a buyer.
• Middlemen. This category includes any intermediary who may be involved in
the purchase and sale of goods, or the financing, facilitating, or transporting
of such goods and commodities.
• Financiers. This category includes any entity providing finance to another
entity which can be a seller, a buyer, an intermediary, a factor, or a bank or
other financial institution. For example, a seller can provide finance to a
component manufacturer, to sales agents, or even to the buyer. More typically,
it is a financial institution that provides financing.
Trade | 27
• Transport Providers. Where the goods are to be moved from the location
where the seller keeps them to another place, there is a need for transportation.
While either the buyer or seller can provide transportation, it is common to use
third parties. Historically, the mode of transport associated with international
trade was maritime or ocean transport which was the only practical, or the
cheapest, form of transport, particularly for bulk products. In this form of
transport, the goods are entrusted to the carrier by the shipper, who is the
seller or a third party who contracts with the party providing transport (the
carrier). The carrier is obligated to deliver the goods in accordance with the
terms of the contract of carriage. The principal modes of transport are water
(ocean or maritime by common carrier, chartered vessel, or inland water), rail,
road, or air. Except for bulk goods and commodities (for example: oil, iron ore
or other metals and mining products, grain, and sugar), most contemporary
transportation of goods is done by means of standardised containers. This
means of shipment has given rise to a significant increase in multimodal
transportation in particular; that is, transportation involving more than one
mode of transport without repacking or reconsolidation efforts necessary.
For example, the goods can be placed into a container which is loaded onto
a truck at an inland point, trucked to a railhead, loaded on board a train and
transported to a port, where the container is laden on board a marine vessel.
The reverse process can occur at the destination until the container reaches
the buyer’s facilities.
FACTFIND
For more information on the important invention of the shipping container,
and its impact on international trade, go to: http://www.economist.com/blogs/
economist-explains/2013/05/economist-explains-14.
For more information on shipping containers in general, see The Box: How the
Shipping Container Made the World Smaller and the World Economy Bigger by
Marc Levinson (Princeton University Press 2006) which is available at: https://
press.princeton.edu/books/paperback/9780691170817/the-box.
• Transport Facilitators. This category includes third party intermediaries who

facilitate shipment (freight brokers) or receipt (customs brokers).
• Warehousemen. Where the ownership of the goods is to be transferred
without them being physically moved, and where they are in the control of
a third person, a warehouseman will most likely be involved. The obligation
of a warehouseman is to deliver the goods to the person entitled to receive
them according to the warehouse agreement.
• Government Authorities. This category includes tax or excise agents,
inspectors, including health inspectors, and agencies responsible for granting
export or import licenses or permits.
28 | Chapter 2
• Insurers. This category includes entities that exist to spread the risk of
loss related to trade. There are various types of insurers that relate to trade,
including coverage of transport such as maritime insurance, that cover country
risk, or payment risk. Often provision of some type of insurance is part of
the bargained for agreement between the buyer and seller, or mandated by
financiers. It is not uncommon for insurance to overlap. Some insurers are
commercial enterprises while others are connected with government efforts
to encourage exports.
• Third Party Inspection Agencies. This category includes private sector
entities that inspect goods and certify the results according to requested and
commercially agreed standards. Such inspections provide comfort to buyers
and their financiers that the product being delivered reflects what was ordered.
Perhaps the best known such organisation is Société Générale de Surveillance
(SGS), which describes itself as “the world’s leading inspection, verification,
testing, and certification company”.
FACTFIND
For more information about SGS, see: http://www.sgs.com/.
• Financial Institutions. This category includes organisations established to

provide funding and support for trade, processing documents, and payments.
• Parties Providing Assurance of Payments (Sureties and Guarantors). In
addition to financial institutions, other entities provide assurance of payment
or otherwise lend their credit standing to facilitate trade as guarantors or
sureties. Their role is discussed in detail below.
• Attorneys. Virtually every phase of a trade transaction involves potential legal
issues and legal relationships. As a result, it is not uncommon for attorneys
to advise parties at an early stage of trade negotiations, draft or review
undertakings and documents, or to otherwise represent parties at any level
of, or after, the commercial transaction.
• Trade Associations and Standard Making Bodies. This category includes
organisations that represent entities involved in trade or related services on a
national or international level. Often they establish and issue standards, rules,
and provide various other services. Example of trade associations include the
Federation of International Trade Associations, the International Chamber
of Shipping, the British Exporters Association, and the Japanese Automobile
Manufacturers Association. The International Standards Organisation is
the world’s leading standards body. An example of a standards organisation
regarding trade finance products is SWIFT.
Trade | 29
ACTIVITY:
In what type of transaction would a warehouseman be typically involved?
Section 2.4 Agreements Regarding Trade and Trade Finance
Typically, the starting point for trade finance is a series of agreements. These agreements
may or may not be embodied in a highly formal written and signed contract, which
may be either concise or expansive. It is useful to note that the word “contract” has
two different meanings: the enforceable agreement of the parties, or the writing that
attempts to reflect that agreement. Where there is a written agreement, the question
arises whether it is a complete and final statement of what was agreed by the parties,
or if extraneous and additional circumstances and documents may supplement or
modify the agreement.
It is not uncommon for agreements to be rather informal, depending on the previous

dealings and experiences of the parties. The exchange of contradicting standard form
contracts, or other preformatted forms which are not aligned with each other, is a
regular occurrence in international trade (the so called battle of the forms). Typically,
however, the parties will eventually reach some accommodation regarding how the
seller is to deliver the goods, their types, quality and quantity, how the buyer is to pay
for them, and the total contract price.
The parties typically agree as to how and where delivery is to be effected, often in
shorthand terms which are supposed to be understood internationally by merchants.
Delivery issues include the place where control of the goods is passed, the role of third
party intermediaries, whether there are documents that represent control of the goods,
and the linkage of the delivery terms to the payment terms.
The agreement also typically indicates how the buyer is to effect payment. Common
payment options include:
• Credit with payment due in 30, 60, or 90 days after a certain event (for example,
the issuance of transport documents or the commercial invoice, or acceptance
of delivery at the buyer’s facility).
• Guarantee of payment on performance by seller by a third party which can
include parent or subsidiary entities, a guarantee company, factor, bank, or
export agency.
• Payment or acceptance of a draft or bill of exchange drawn on buyer on
presentation by its bank of indicated documents sent through the banking
system by the seller, enabling buyer to obtain the goods (so called documentary
collection, or bank collection).
30 | Chapter 2
• Promise by buyer to pay, backed by commercial standby letter of credit or

independent guarantee undertaking payable on demand.
• Commercial letter of credit issued by a third party in favour of seller indicating
to pay against the timely presentation of certain documents.
• Cash on Delivery (COD) [also called “Collect on Delivery”].
• Cash in advance: payment in advance, before delivery of the goods, of some or
all of the amount due.
The most important delivery and payment options in which financial institutions are
involved are discussed in more detail in subsequent sections in this chapter.
In addition to agreements directly and exclusively between the buyer and the seller,
there may also be a number of other agreements between the buyer or seller with
various intermediaries mentioned above, including:
• The carrier (relating to transport) or warehouseman (relating to storage and
possibly delivery or transfer of ownership) in the form of a bill of lading which,
among other functions, serves as a contract for carriage.
• An insurer in the form of an insurance policy or shorthand certificate.
• Various inspection agencies.
• A guarantor or factor.
• A customs broker or export broker.
• A bank for issuance of a commercial letter of credit, or a commercial standby
letter of credit, or an independent guarantee.
Barter. Although this Book focuses on trade based financial crime compliance, it is
worth noting briefly that trade may occur without the exchange of any currency. For
centuries, parties have engaged in bartering, which is defined as “the exchange of one
commodity or service for another without the use of money.” Black’s Law Dictionary
(11th ed. 2019). The flexibility of this form of trade allows parties to obtain needed or
desired goods or services without actually exchanging currency and without having to
rely on financial institutions or international payment systems. Conversely, as banks
facilitate trade with products such as letters of credit among parties typically dealing
at arms length, bartering traditionally favours parties having more formal or personal
relationships so as to guard against receiving deficient goods or insufficient services.
In the modern era, organisations such as the International Reciprocal Trade Association
(ITRA) strive to develop best practices and standards for the trade and barter system.
According to the ITRA, this system accounts for an annual volume of roughly USD 12
to 14 billion, although the ITRA stresses that many privately held companies do not
report their transaction volumes so its estimation could vary significantly. The ITRA
categorises the barter and trade system into four major sectors: “traditional retail
barter exchange companies, (also referred to as mutual peer-to-peer credit clearing
Trade | 31
systems), corporate barter companies, (who perform larger corporate barter transac-
tions), countertrade, (usually between sovereign governments and focused on import
and export of commodities) and complementary currency systems, (local/community
based currencies).”
To learn more about the IRTA and the modern trade and barter system, visit
https://www.irta.com/.
Interestingly, barter has been raised alongside the concept of trade based financial
crime as providing for possible avenues to evade sanctions regimes, particularly where
unilateral sanctions are viewed unfavourably, not only by the targeted government or
group, but even by traditional allies of the sanction imposing nation. A striking exam-
ple of this, although more complicated than traditional barter, is the INSTEX system
between EU nations and Iran. The acronym stands for “Instrument for Supporting Trade
Exchanges”. The INSTEX system is designed to fulfil the role of a clearing house, thus
facilitating international trade between European nations and Iranian entities without
the need to effect payment – and thus bypassing sanctions regimes aimed at certain
Iranian entities. In March 2020, the foreign minister of Germany confirmed the first
transaction of medical supplies through the system to its Iranian counterpart known
as STFI. Otherwise very little information was provided about the transaction, but the
statement expressed that more work was needed to improve the system for further
transactions. Apart from this more formal style of barter to avoid sanctions, one could
imagine any number of unknown arraignments with similar intent.
ACTIVITY:
Consider the types of agreements your bank or financial institution deals with.
Section 2.5 The Delivery of Goods
Generally. Delivery is one of the fundamental obligations of a seller in a contract for

the sale of goods. The word signifies tendering the goods from the seller to the buyer
or its representative. It can involve movement of the goods and the transfer of control
and ownership of them, or only the transfer of control and ownership without physical
movement of the goods themselves. The financial system almost invariably involves
third parties in moving the goods or holding them. They also involve questions of
possession and ownership of the goods. There are a variety of options by which the
control of the goods can be transferred from the seller to the buyer. Each involves
different features and risks. Financial institutions are not only familiar with them but
link their products to them. Typically, these options are reflected in the agreement
between the buyer and seller.
32 | Chapter 2
Shorthand delivery terms are frequently used in trade which reflect the relative obliga-
tions of the parties. The most commonly used terms are the International Commercial
Terms known as INCOTERMS®, a set of widely used shorthand terms that link delivery,
payment, various dimensions of documents, and obligations and risks of the respective
parties. It should be noted, however, that these shorthand terms are sometimes used
without reference to INCOTERMS and with slightly different meanings.
The relevant INCOTERMS are indicated here. The most recent edition of these is
INCOTERMS® 2020. It should be noted that certain INCOTERMS only apply to certain
modes of transport. Some INCOTERMS are to be used only with sea and inland water-
way transport, while others are multi-modal.
FACTFIND:
There are important differences between INCOTERMS® 2010 and 2020.
The former term DAT (Delivered at Terminal) has been renamed to DPU
(Delivered at Place Unloaded) to better capture that delivery may occur at
any place, not just a “terminal” and, unlike the term DAP (Delivered at Place),
the seller unloads the goods under DPU; under DAP, the seller does not
unload goods. INCOTERMS® 2020 also updated the term FCA (Free Carrier)
to provide for circumstances where one party requests a bill of lading with an
on board notation; parties may agree for the buyer to request the carrier to
issue an on board B/L to the seller once the goods are loaded. The B/L is then
tendered from seller to buyer, typically through the seller’s bank. Each term
now lists costs under “Allocation of Costs” sections to alleviate confusion
such as shifting carrier pricing structures and back charged terminal handling
fees. INCOTERMS® 2020 allows for buyers to use their own forms of
transport under FCA terms, and for sellers to do the same under D terms.
Clear security allocation requirements have been added to A4 and A7 of
each term, with necessary costs included in A9 / B9. Finally, each term has
expanded explanatory notes to assist users and prevent misinterpretation
and / or misuse of the 2020 terms.
To learn more about INCOTERMS® 2020, visit:
https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/.
Options. The options for delivery commonly include:

• Transfer of control without physically moving the goods. Trade does not
involve transport of goods from the seller to the buyer in situations where the
goods are in the possession of a third person. This situation most typically
arises where the goods are stored in a warehouse facility. For example, an
agricultural product such as cotton or wheat might be stored in a warehouse
facility. In such a situation, the seller instructs the warehouseman to deliver
the goods to the buyer or according to the order or instruction of the buyer.
This process can be accomplished by the use of a warehouse receipt. Warehouse
Trade | 33
receipts are governed by local law and may or may not constitute negotiable
documents whose possession by a person to whom they are duly entrusted
confers the rights of ownership (typically referred to as a “document of title”).
In a situation where they do serve this function, due transfer of the warehouse
receipt from the seller to the buyer entitles the buyer to receive the goods
from the warehouseman. The buyer could also sell the right to the goods to a
third person while they remained, physically, in control of the warehouseman.
• Make goods available at seller’s facility. The seller could also hold the
goods at its facility for the buyer who would be responsible for collecting
them. Whether the seller must load the goods on the transport provided
by the buyer is a matter for the parties to arrange. The INCOTERM for this
arrangement is “Ex Works” or “EXW”, and it constitutes the most convenient
delivery option from the perspective of the seller. Other terms are seller
delivers goods to carrier or other nominated person at seller’s premises or
other named location (FCA, CPT).
• Seller delivers goods to, or at, mode of transport. The seller could also
agree to deliver the goods to the mode of transport made available by the
buyer. In such a situation, the buyer arranges for transportation at a port or
other transport facility, and the seller transports the goods to this location
and either delivers them there, or causes them to be laden on board the vessel
used in the transport. There are a number of INCOTERMS that cover this
arrangement, depending on the relative obligations of the buyer and seller
with respect to loading the goods and contracting for freight and insurance,
including Free Carrier (FCA), Carriage Paid To (CPT), Cost and Freight (CFR),
and Cost, Insurance and Freight (CIF).
• Modes of transport. Delivery is affected by the mode of transport utilised.

In some situations, the parties can elect a mode and in others there are no
practical choices. Each mode of transport is also affected by the regulatory
scheme to which it is subject. Modes of transport may include water, rail, road
and air, or a combination of these modes (multimodal transport).
Water transport is traditionally divided into ocean (maritime) and inland (which would
include rivers and inland seas or lakes). Water transport can be carried out via line car-
riers which follow regular schedules, or specific charters. Except for bulk goods, most
modern transport is by container which lends itself to multimodal transport, blurring
the lines between ocean and other modes of transport. Thus, goods can be picked up
at the seller’s facility, taken by truck to the railhead, transported to an ocean port to
be placed on an ocean vessel, and the process reversed at the destination.
34 | Chapter 2
Air transport can also be by chartered equipment or by regularly scheduled carrier.
Each carrier issues various documents related to the mode of transport, unless a
combined multimodal bill is available. Depending on the applicable law and practice,
transport documents typically include a receipt for the goods, which may also serve as
evidence of the contract of carriage. Some transport documents are negotiable in the
sense that the undertaking of the carrier is to deliver the goods to the person to whom
the document runs by negotiation where it is issued to the order of the consignee, the
named person to whom the goods are to be delivered, or to the bearer of the bill of
lading where there is no named consignee. If this is the case, the transport documents
may confer constructive possession which, in some jurisdictions, may be sufficient
for the passing of ownership for goods in transit. International transport is normally
governed by international conventions which contain rules regarding the obligation
and liability of the carrier towards the shipper or cargo owner.
• Seller transports the goods to the buyer. The seller could also agree to
deliver the goods at a location other than the place where it, the seller, is
located. In such a situation, the seller is responsible for transport of the goods
to the place where the buyer is located, if so agreed in the sale contract. There
are a number of INCOTERMS that cover this situation, depending on whether
the goods are merely to be moved to the buyer’s country, or delivered to the
buyer’s location: Taken through customs at the country of destination (DDP);
delivery directly to the buyer at its designated facility in the destination
country (DAP); goods delivered by the seller once unloaded at named place,
which can be a terminal, or any other agreed upon facility or location (DPU).
The renamed term DPU replaces the former term DAT (Delivered at Terminal).
There are several international transport conventions and rules that may govern par-
ticular modes of carriage. Entering into force in 1992, the United Nations Convention
on the Carriage of Goods by Sea (Hamburg, 1978) (the Hamburg Rules), provides for
uniform rules and obligations to shippers, carriers and consignees under contracts for
carriage by sea. The applicability of the Hamburg Rules is covered by Article 2 of its
text. Building on the Hamburg Rules, among others,1 is the Rotterdam Rules, or more
formally, the United Nations Convention on Contracts for the International Carriage of
Goods Wholly or Partly by Sea (New York, 2008). The Rotterdam Rules build on these
prior rule sets by addressing technological advances in trade and commerce, particu-
larly the modern appetite for single contracts for door to door carriage and electronic
1 Principally, the International Convention for the Unification of Certain Rules of Law relating to
Bills of Lading (Brussels, 25 August 1924) (The Hague Rules), and its Protocols (The Hague-Visby
Rules).
Trade | 35
transport documents. To read more on these rules, visit: https://uncitral.un.org/en/

texts/transportgoods.
Risks and Various Obligations. The terms of the agreement between the seller and
the buyer should allocate the risk of loss, the obligation to insure, the duty to arrange
for a transport contract, the obligation to package, etc. The advantage of shorthand
forms such as INCOTERMS is that each term includes various allocations of respon-
sibility. It should be noted, however, that parties often use INCOTERMS in a manner
for which they were not designed, or rely on prior versions without updating their ac-
quaintance, or use them without indicating to which version they refer (e.g. reference
to INCOTERMS or use of one term without indicating whether INCOTERMS®1990, 2000,
2010 or 2020 is intended). Since there are differences between the various versions, use
of an INCOTERM without indicating the year can cause difficulties.
Financial institutions are familiar with these delivery terms which are often linked to
payment obligations. Their advice and involvement can be, therefore, valuable in order
to avoid uncertainty or disputes between the buyer and the seller.
ACTIVITY:
Identify which delivery options your bank or financial institution typically
encounters in trade transactions with its customers.
Section 2.6 Options for Payment or its Assurance
Generally. Many different payment options are available, ranging from extension of credit
by the seller to the buyer who receives the goods in exchange for a promise to pay in the
future, to payment by the buyer in advance of manufacture of the goods. The options
reflect the allocation of the risk of payment correlated with possession of the goods. From
its perspective, the most advantageous situation for the buyer is to have possession of
the goods with an obligation to pay for them in the future. This option is referred to as
“open account” terms. From the seller’s perspective, the most advantageous situation is
to receive payment in advance of preparation of the goods (“payment in advance”). The
terms of the contract will reflect the individual bargaining power of the parties involved,
each seeking to include the most favourable clause from its point of view.
Extension of Credit. Where the seller trusts the buyer to pay, or where the seller has
a security interest in the goods that provides it with assurance, the seller may deliver
the goods to the buyer on open account in the expectation of subsequent payment.
Open Account. The majority of trade transactions occur through open account terms.
According to the International Chamber of Commerce (ICC) 2020 Global Survey on Trade
36 | Chapter 2
Finance, up to 80% of trade relies on some form of trade finance, the bulk of which
takes place on open account. As part of the 2019 revision, the Wolfsberg Group, Trade
Finance Principles (2019) added new Appendix IV: Open Account to provide discussion
on the typical structure of open account transactions and the role banks serve therein.
The basis of open account trade transactions involves some degree of mutual trust
between the seller and buyer which dispenses with the need for third party mediation,
processing and risk mitigation services. The seller and buyer negotiate contractual
terms regarding the goods as well as delivery location with one party typically driving
the standard terms and payment method. Appendix VI notes that banks are generally
uninvolved with open account transactions “until a clean payment is made at the end”,
which could occur after goods are delivered. Moreover, the parties “will generally not
provide the Banks…with supporting documentation, reducing the information available
to Banks to assess and review. The clean payment triggered by an Open Account trade
transaction will be subject to standard payment services controls.”2
Figure 1: Chart of Payment Options

© 2017 Institute of International Banking Law & Practice
Relatedly, banks often support open account transactions with supply chain finance
mechanisms. To read more on Supply Chain Financing, see subsection 2.7.1 (The
Financial System Supporting Trade).
ACTIVITY:
Who would benefit the most from a term that entrusted possession of
goods to the buyer with an obligation to pay in 30 days (i.e. open account
on credit)? What delivery and payment terms do you commonly encounter in
your organisation?
2 https://www.wolfsberg-principles.com/sites/default/files/wb/Trade%20Finance%20Principles%20
2019.pdf.
Trade | 37
Delivery of Documents of Title. The parties can agree that the seller will fulfil its
delivery obligation by delivering documents representing control of the goods. As indi-
cated, a bill of lading is issued by the carrier; it is “consigned to the order of” a named
person which might be the bank or the seller or its agent. Where it is negotiable, the
carrier promises to deliver the goods to the person possessing the bill of lading and to
whom it has been duly endorsed. Where a document of title is used in the transaction,
the risk of loss is affected by the manner of delivery of the document. This risk may
be unrelated to the actual location of the goods or their delivery. The delivery of the
documents is typically by documentary collection through the banking system, or via
commercial letter of credit. Both options are explained immediately below.
Documentary Collection. In a documentary collection, the seller sends the documents

to the buyer’s bank via its own bank. The buyer’s bank will not turn over the documents,
except in accordance with the instructions given by the seller in a transmittal letter that
accompanies the documents. Where the seller is willing to ship the goods or provide
documents representing control of the goods, the seller bears the risk that the goods
may be damaged at the place of destination in the event that the buyer defaults on its
payment obligation. However, the seller retains technical control of the goods unless
paid, and can resell them to a third party, keeping the right to seek damages from the
buyer. In a documentary collection, the bank makes no promise other than to exercise
reasonable care in carrying out the seller’s instructions. Documentary collections are
often subject to the Uniform Rules for Collections, a set of standard practices issued
by the International Chamber of Commerce (URC No. 522).
Payment by Commercial / Documentary Letter of Credit. Where the seller wants

the assurance of a solvent third party, usually but not necessarily a bank, it may agree
to deliver documents representing the control of the goods against a promise by the
third party to honour a presentation of complying documents. This promise is a com-
mercial letter of credit (often abbreviated “LC” or “L/C”), sometimes referred to as a
“documentary letter of credit”—although all letters of credit are promises related to the
presentation of documents. In a commercial letter of credit, the documents required
for a compliant presentation are commercial documents. In this situation, the buyer
bears the risk that the goods do not conform to the underlying contract even when
the documents do, either as a result of breach of contract by the seller, or fraud. The
promise embodied in a commercial letter of credit is independent from the transactions
that give rise to it, and the obligation of the buyer to reimburse the bank that issues
the letter of credit. Independence means that the beneficiary of the LC can enforce the
promise under the LC when it makes a timely presentation of complying documents,
even where it has breached its underlying contract or where the buyer is insolvent and
unable to reimburse the bank issuing the LC. Where the seller / beneficiary of the letter
of credit desires additional assurance from a financial institution (usually a bank) in
its own country, it may require that the LC be “confirmed”, that is, that a nearby bank
38 | Chapter 2
adds its independent undertaking to that of the issuing bank by which the confirming
bank undertakes to honour a complying presentation, even if it will not be reimbursed
by the issuing bank.
Other Independent Assurances of Payment: Standby Letter of Credit or Independent

Guarantee. Where the seller is willing to deliver the goods to the buyer based on its
promise to pay, it may desire additional assurances from a third party that are not
dependent on the underlying performances, but merely on the compliance of required
documents. Such independent undertakings that are not linked to the delivery of goods
but to performance of the payment obligation, are types of letters of credit known as
standby letters of credit, or independent guarantees (also known as demand guaran-
tees, bank guarantees, or first demand guarantees). In such promises, the issuer of the
standby or independent guarantee bears the risk that the seller will present documents
that comply on their face, when the amount claimed is not in fact due. Some standby
LCs and some independent guarantees are described as “commercial”. Such commercial
standbys / independent guarantees are transactions in which the buyer receives the
goods and promises to pay within a time period (e.g. 30 days) but also causes its bank
to issue a commercial standby / independent guarantee that can be drawn in the event
that the buyer fails to make the payment.
Dependent Assurances of Payment. Where a seller is willing to deliver the goods

to the buyer based on its promise to pay, it may desire the assurance of a third party
that this third party will answer for the debt of the buyer. As indicated in the previous
paragraph, this assurance can be in the form of an independent promise. It can also
be, however, in the form of a dependent promise. Such an undertaking is an accessory
guarantee or suretyship (sometimes “guaranty”) promise. The person making such a
promise (surety or guarantor), however, can raise defences available to the buyer as
well as its own defences arising from actions of the seller affecting the rights of the
surety, or guarantor, such as impairment of collateral or extension or alteration of the
underlying obligation.
Payment in Advance. In some transactions, the seller is not willing to perform or to

ship the goods without payment in advance. This situation is particularly common
where the goods are specially designed to the order of the buyer, and therefore not
readily able to be resold to alternative buyers should the original buyer default on its
payment obligation. In such situations, it is common for the seller to require full or
partial payment in advance. In some such situations, the buyer, in turn, requires the
seller to provide an assurance that the seller will deliver the goods in the manner and
quality promised (sometimes described as a so called advance payment bond) in the
form of a dependent or independent undertaking (standby or independent guarantee).
This enables the buyer to reclaim the funds advanced should the seller default on its
obligations.
Trade | 39
The nature of the banking products involved in these payment options is discussed
subsequently.
Combinations. The parties can also agree to a combination of these methods as illus-
trated above in the case of an advance payment. It is also possible to combine partial
payment on delivery, and an exchange of standby letters of credit to assure full payment
and to assure performance, for example.
ACTIVITY:
Which payment terms are commonly used or encountered by your bank or
financial institution? Have you noticed whether customers opt for different
payment terms when dealing with parties in particular countries or regions?
Section 2.7 The Trade Related Financial System

and the Role of Banks
The financial system plays an important role in supporting international trade. It pro-
vides financing, facilitates the transmittal of documentation and data, and processes
payments in addition to providing various mechanisms to assure performance and
distribute risk.
Subsection 2.7.1 The Financial System Supporting Trade
The financial system supporting trade consists of financial institutions, including banks,
their international networks, communications systems, and the devices and mechanisms
used in supporting trade. This subsection will consider financial institutions and their
networks. The next subsection 2.7.2 (The Financial Products Used in Trade Finance)
will address the products and mechanisms supporting trade in detail.
In supporting trade, commercial banks extend credit, facilitate the presentation and
transmittal of the documentation underlying trade, process payments, and provide
various undertakings to assure performance and payment. While there is a popular
impression that taking deposits or the extension of credit is the principal activity of
commercial banks, that notion is not correct with respect to trade. Although banks do
provide credit in some situations, they do much more beyond that. Indeed, their prin-
cipal role in international trade is to facilitate the transmittal and / or examination of
documents representing the goods and services. These documents are critical to the
delivery of, and payment for, goods and services.
40 | Chapter 2
As noted at that beginning of this chapter, the terms “financial institution” and “bank”
are used interchangeably in this Book, although it is more common to speak of banks
in terms of trade related financial products.
Services of Commercial Banks. In the context of the stages of international trade,

commercial banks provide various services:
Creation of Goods. Delivery of Goods.

Extension of credit Processing documents
to mine or other- related to the delivery
wise acquire raw of goods; extending Payment for Goods.
materials; extension credit against such Financing the sale,
of credit to obtain documents or ad- processing the
facilities for manu- vancing funds based payment.
facture or storage; on them pending
making payment for payment, sometimes
these products. called “packing loans”.
Creation of Goods. Extension of credit to mine or otherwise acquire raw materials;

extension of credit to obtain facilities for manufacture or storage; making payment
for these products.
Delivery of Goods. Processing documents related to the delivery of goods; extending

credit against such documents or advancing funds based on them pending payment,
sometimes called “packing loans”.
Payment for Goods. Financing the sale, processing the payment.
Correspondent Banking Network. International banking primarily consists not just

of specific banks but, more importantly, of the network of banks that maintain corre-
spondent relations with one another. Few banks maintain a presence in most countries
in the world. As a result, banks depend on correspondent relationships with other banks
to enable their customers to conduct business with entities in other countries. From
the emergence of banks in the middle ages in Europe, correspondent relationships
were central to banking. Originally, a correspondent banking relationship involved
maintenance of correspondent accounts, but with the widespread availability of funds
transfers, the relationship is much more complex, involving credit lines and agreements
to undertake various services. Correspondent banks provide a variety of services for their
bank correspondent customers including funds transfers, foreign exchange services,
clearing services, documentary collection, messaging services, and cash management.
Trade | 41
“Correspondent” Defined. It is difficult to frame a precise definition of correspon-

dent banking. It is a relationship between banks to receive or provide banking ser-
vices. Most attempts at definitions that go beyond this basic description list some of
the products provided. Some attempts seek to characterise the relationship as one of
principal / agent, a classification that is overly broad and not necessarily accurate. Such
attempts do not succeed in capturing the breadth of the use of the term. For a more
precise formulation, it is necessary to examine the details of a particular relationship.
In chapter 4 (The Compliance Programme) and chapter 5 (Exercising Due Diligence),
the corresponding bank system is analysed further with respect to issues relating to
the compliance programme, and due diligence.
Figure 2: Correspondent Banks in LC Transactions

Documents. An original and primary role of banks in trade finance is to move docu-
ments representing the goods and services from sellers to buyers, and to move pay-
ment from buyers to sellers. This process typically involves the use of the system of
correspondent banking.
eCommerce. In a paper based world, documents in the context of trade facilitation

involved paper documents. In a world of eCommerce, it has increasingly involved the
issuance of undertakings electronically and the exchange of data electronically. However,
the shift to eDocuments has been restricted in international trade by the absence of
an international legal regime regarding documents of title, such as bills of lading and
warehouse receipts. On the other hand, most letters of credit related to international
trade are issued electronically. Documentary collections, on the other hand, are almost
entirely paper based.
42 | Chapter 2
SWIFT. One of the principal means of electronic communication between banks is

the SWIFT network of financial telecommunications. This network permits secure
authenticated messaging between correspondent member banks, including issuance
of financial undertakings, their advices, communications about them, and payments.
However, not every member of SWIFT is automatically able to send and receive au-
thenticated messages with each other. To do so, there must be a successful exchange of
a SWIFT Relationship Management Application (RMA) between the individual banks,
which is one important dimension of a correspondent banking relationship.
Other Financial Institutions. As indicated, banks are not the only type of financial
institution relevant to international trade. They can include insurers, investment
companies, and trust companies. Such institutions are also regulated by governmental
bodies although not necessarily to the same degree or by the same regulator as a bank.
While such institutions usually do not provide services supporting trade other than
lending or trade finance, they do issue products such as standby letters of credit or
independent or dependent guarantees that can be used to back up trade transactions.
Non Financial Institutions Providing Trade Finance. Trade finance can also be
provided by institutions that would not be typically classified as financial institutions.
Such organisations can include financiers, traders, factors, and other companies in a
given industry or supply chain. Whether and to what extent these entities are regu-
lated depends on the legal regime in the country in which they operate. Usually such
regulation is minimal in comparison to that with which a bank must typically comply.
Shadow Banking. “Shadow banking” is a term that has come to describe institutions
that carry out traditional banking functions outside the regulatory scheme in which
traditional banks operate. In 2012, the former Chair of the U.S. Federal Reserve Bank,
Ben S Bernanke, explained in a conference paper (“Some Reflections on the Crisis and
the Policy Response”) that it “comprises a diverse set of institutions and markets that,
collectively, carry out traditional banking functions—but do so outside, or in ways only
loosely linked to, the traditional system of regulated depositary institutions.” Shadow
banks can affect trade as was demonstrated in the infamous Tsingtao Commodity Fraud.
A detailed description of this fraudulent scheme is contained in a webinar entitled
Tsingtao: More Than Just a Beer, offered by the IIBLP. See www.iiblp.org.
EXPERT’S CORNER
Introduction to Islamic Finance. Islamic Finance is considered a competitive

alternative financing solution to traditional financing. Though it was practiced
1400 years ago during the Prophet Muhammed’s (PBUH) era under the Islamic
economy, it has gained popularity as an alternative financing option during the
last 40 years, witnessing an impressive double digit growth over this period.
Trade | 43
When we talk about Islamic banking, it is a system of banking that is consistent

with Shariah principles or Islamic law (a set of Islamic religious law that governs
aspects of day to day life for Muslims in addition to religious rituals), and is
governed by Islamic economic concepts. These rules of trade and finance are
part and parcel of the religion by which Muslims conduct their lives.
What distinguishes Islamic Finance? (1) Prohibition of Usury (Interest / Riba);

(2) No uncertainty and ambiguity (Gharar); (3) No speculation or game of
chance (Maysar); (4) Ethical transactions only; (5) Commitment to share risk
and profit; and (6) Undertake transactions that are only asset backed.
Islamic trade financing is purely based on buying and selling, unlike traditional
trade finance where financing is against documents, either representing goods
or no goods! Also, the idea of shared risk / reward is a core tenet, requiring
banks to build a clear understanding of what is being financed. There are at
least three different Islamic Banking products that are popular and widely
used in Islamic trade finance: Murabaha, Musharaka, and Ijarah.
The most popular and commonly used, the Murabaha, is where the bank buys
goods and sells them to the customer with a profit mark up (cost plus profit).
Under Murabaha, an Islamic Bank receives a Promise to Purchase upfront from
its customer. The bank later takes constructive or physical possession of the
goods. For constructive possession, the bank receives the shipping documents
and then signs the Murabaha Sales Contract with its customer. The bank then
enables the customer to take delivery of the goods by endorsing the transport
document. For physical possession, the bank inspects and takes possession of
the goods and then delivers them to the customer upon signing the Murabaha
Sales Contract. By taking either constructive or physical possession, the bank
takes the risk of ownership (including destruction) whereas conventional banks
only deal in documents. In addition, the Islamic bank has to bear the currency
exchange risk which, in no case, can be transferred to the customer. Further,
Islamic banks will only deal in Shariah compliant goods and will not deal in
interest or any interest based elements.
Islamic Banks take very high precautions when it comes to trade financing
transactions, especially while on boarding a trade finance customer. They ensure
that they adequately understand the customer’s business and the customer’s
business model. Further, the bank has a say on what type of goods they will
finance under Murabaha Finance. The banks will be reluctant to finance any
perishable goods, due to the risks involved, as well as high value goods that
are subject to price fluctuations. These are part of Shariah guidelines as well.
44 | Chapter 2
Trade Finance Compliance in Islamic Banking
There is no exception or leniency for Islamic banks when it comes to adherence

of Compliance, Sanctions and Regulatory rules. They conduct all the possible
checks to ensure that the transactions and parties with whom they are dealing
are legitimate. In addition, they are also subject to abide by the stringent Sha-
riah rules and any violation or non compliance may result in penalties, such as
requiring profits be given to a charitable organisation. As part of Shariah Audits,
transactions are reviewed by an uncompromised auditor who neither accepts
nor condones any lapses. Such Auditors perform various tasks such as checking
prices of goods, Compliance to Halal aspect, invoice value (over or under), pur-
pose of goods, parties involved, etc. This last line of defence is safeguarding the
Islamic Bank and upholding the principle of Shariah Banking. With profound
regret, however, commercialisation of Islamic Banking may compromise core
principles and tenets.
Islamic finance deters criminals and money launderers, as there are underlying
goods, supporting documents and many contracts to be signed apart from the
normal conventional legal documents (Islamic financing is broadly document
intensive). The other factor that has safeguarded Islamic Banks is holding
and taking charge of the goods either constructively or physically. Criminals
and money launderers who deal in fictitious transactions will withdraw from
Murabaha transactions where the goods require inspection; eventually if
there are no goods, or no justification is given, their accounts will be closed.
A bank ensuring goods are available under a transaction has fulfilled about 80
to 90% of the compliance requirements as the rest have been done while on
boarding and during transaction processing. Moreover, to be valid for Mura-
baha, the asset must be purchased from a third party. Islamic Banks will pay
directly to the third-party supplier / dealer from whom they buy. If a customer
wants to purchase heavy machinery, the bank will buy the machinery from
the dealer and will pay the dealer / supplier and will not provide a loan. This
also discourages criminals and Money Launderers as they need either quick
cash, direct payments or cheques instead of receiving goods. These unique
and innovative features of may be regarded as additional prevention of ML
/ CFT by Islamic Banks and Shariah compliant trade financing, if done with
the true spirit of Shariah compliance.
ACTIVITY:
In what ways do commercial banks support international trade?
Trade | 45
Subsection 2.7.2 The Financial Products Used in Trade Finance
There are a variety of devices by which trade is facilitated. These products are common-
ly, but not necessarily, issued by banks. However, regardless of who issues them, there
are various degrees of involvement by the issuer in the trade transaction, depending
on the financial product. Letters of credit, standbys, independent guarantees, and
bank collections have been described above in section 2.6 (Options for Payment or its
Assurance). The treatment in this subsection is more systematic.
The discussion of these products here is divided by the nature of the product and the
degree of involvement and commitment typical of the financial institution. The categories
are 1) Independent Undertakings; 2) Payments Including Funds Transfers; 3) Collection
Type Undertakings Including Drafts and Bills of Exchange; 4) Dependent Undertakings
(Suretyship and Accessory Guarantees); and 5) Loans and Capitalisation of Buyers.
1. Independent Undertakings. An independent undertaking is an obligation

of the entity making it that is separate from the underlying commercial
transactions that gave rise to it. The undertaking is therefore independent of
the underlying transaction, and documentary in nature. The party making the
undertaking is obligated to honour when the required documents are presented
and comply on their face with its terms and conditions. In most jurisdictions,
the only exceptions to the obligation to honour the undertaking are forged or
falsified documents, or fraud that seriously impacts the underlying transaction.
The several types of independent undertakings that are used in connection
with trade based finance were described above in Section 2.6 (Options for
Payment or its Assurance).
• Commercial (Documentary) Letters of Credit. A commercial letter
of credit (commercial LC) is an undertaking to honour a complying
documentary presentation. The documents typically presented relate to a
current transaction for the sale of goods or services. The classic example
is the ocean transport of goods in which the seller presents an on board
ocean bill of lading, made out to its order and blank endorsed, together
with a commercial invoice and other required documents (e.g. insurance,
inspection certificates, export or import licences). If the issuer of the
undertaking (issuer or issuing bank) honours, the documents conferring
entitlement to delivery of the goods are passed on to the applicant for
the undertaking (typically the buyer). In some parts of the world, this
type of undertaking is also known as a “documentary credit” or “DC”.
This term is not necessarily precise since all independent undertakings
are documentary in nature. Almost invariably will a commercial letter
of credit be issued subject to the Uniform Customs and Practice for
Documentary Credits (UCP 600).
46 | Chapter 2
• Confirmations. A confirmation is a separate undertaking that is usually

added to another independent undertaking. It is a means of reducing the
risk that the issuer will not honour its undertaking because of currency,
governmental, or credit problems. In such a case, the beneficiary (typically
the seller in a commercial letter of credit) looks to the confirmer to honour
its promise embodied in the confirmation. For example, a beneficiary
/ seller in Germany is not comfortable with an LC issued by a Crimean
bank and desires to have the LC confirmed by a bank in Germany. In that
case, the beneficiary / seller can look to the German confirming bank for
payment without having to consider country or other risks of non payment.
• Advice. An advice is a communication of a letter of credit by a third party

(almost invariably a bank) which assures the authenticity and accuracy
of the undertaking communicated. As adviser, a bank does not make any
undertaking, although an advising bank may also be authorised to add
its confirmation or to negotiate or pay. If it does so, it will have a dual
role in the transaction as advising bank and nominated bank (either as
confirming bank or negotiating / paying bank)
Figure 3: Advice
• Standby Letters of Credit. A standby letter of credit is also an undertaking

to honour a complying documentary presentation. The required documents,
however, are usually not “live” documents, that is documents that entitle
the person who holds them to delivery of the goods. The classic situation
in which a standby is used in connection with trade is as a commercial
Trade | 47
standby backing up the obligation to pay where there has been delivery of
the goods to the buyer on open account. Accordingly, if in such a situation
the buyer fails to effect payment, the beneficiary of the standby can turn to
the issuer and demand payment in accordance with the standby. Standby
letters of credit are commonly issued subject to the International Standby
Practices (ISP98 ICC Publication No. 590).
• Independent Guarantees. Independent guarantees have a variety of

names including bank guarantees, demand guarantees, and first demand
guarantees. Because of the use of the word “guarantee”, they are often
confused with traditional dependent (accessory or suretyship) guarantees,
and the terms of such guarantees are often not particularly helpful in
distinguishing them from one another. An independent guarantee is also
an undertaking to honour a complying documentary presentation, and
is similar to a standby letter of credit. Typically, independent guarantees
are used in trade based transactions to guarantee the performance of
a product, or in lieu of a warranty. Independent guarantees are most
commonly issued subject to local law. If they are subject to practice rules,
it is commonly UCP600 and if not, it is increasingly the Uniform Rules for
Demand Guarantees (URDG 758), or the above mentioned ISP98.
Standby letters of credit or independent guarantees can be used to:
• Assure payment for the shipment of goods if the buyer fails to make payment.
For example, the buyer intends to pay the seller directly on an open account
basis, but the seller requires a so called commercial standby that it can draw
if the buyer does not effect payment within the agreed time after delivery of
the goods (e.g. 60 days).
• Assure the performance of one party in terms of the underlying agreement.

For example, an independent guarantee is issued in favour of a building owner
to assure that a specific construction project will be completed on time. In
this example, the independent guarantee is utilised in lieu of the contractor
providing a suretyship contract, or the owner withholding a portion of periodic
payments. In the latter case, the independent guarantee would be called a
retention money guarantee.
• Assure the payment of any other monetary obligation. For example, a commercial
tenant provides the landlord with an independent guarantee covering the first
and last month’s rent to be drawn in the event of a default in making timely
payment.
48 | Chapter 2
• Counter Undertakings. Where the seller does not wish to take the credit
risk of the buyer’s bank and prefers an undertaking from its own bank, the
parties may also opt for a counter undertaking instead of a confirmation.
In a counter undertaking, the buyer’s bank (Counter Undertaking Bank)
would issue its counter undertaking in favour of the seller’s bank (Local
Bank) which, in turn, would issue its undertaking (Local Undertaking) to
the seller (Local Beneficiary). The counter undertaking may be a counter
standby or a counter guarantee. The undertaking of the Local Bank may
be a dependent or independent promise.
• Irrevocable Reimbursement Undertakings. When a bank nominates

another bank to act under a letter of credit, that bank will typically
decline to act unless it is able to claim reimbursement. Where there is
no credit line or correspondent bank relationship between the issuer and
the nominated bank, issuing banks authorise correspondent banks with
whom they maintain accounts or a credit line to effect reimbursement.
The bank authorised to effect reimbursement may make a separate
undertaking to reimburse, known as a reimbursement undertaking, to
the bank nominated under the LC, which itself becomes an independent
undertaking by the reimbursing bank. There are specialised rules for such
irrevocable reimbursement undertakings, the Uniform Rules for Bank-
to-Bank Reimbursements under Documentary Credits (URR 725) by the
International Chamber of Commerce, although UCP600 also contains
provisions for bank reimbursement.
• Banker’s Acceptances. An acceptance is the signed engagement of

the bank / drawee of a draft or bill of exchange by which it promises to
honour, that is pay, at maturity. Maturity can be at sight or over time
(also called usance). Absent such an acceptance, the drawee of a draft or
bill of exchange has no obligation on the instrument. When accepted,
the undertaking becomes that of the acceptor which is typically a bank
or financial institution. Time acceptances can be discounted and even
traded. Banker’s acceptances are often, but not necessarily, linked to letter
of credit obligations. In that case, the undertaking of the LC issuing bank
is to accept a draft or bill of exchange when it is presented accompanied
by complying documents.
• Deferred Payment Undertakings. Where there is an obligation of the

buyer to pay over a period of time but no draft or bill of exchange is
involved, a deferred payment obligation arises. These obligations are linked
to letter of credit obligations. Under a deferred payment obligation, the
issuer or confirmer of the letter of credit engages to pay at maturity after
Trade | 49
it acknowledges the obligation, or fails to give timely notice of refusal and

is precluded from asserting that the presented documents do not comply
with the terms and conditions of the letter of credit. This device provides
the functional equivalence of a banker’s acceptance.
• Bank Payment Obligation (BPO). A Bank Payment Obligation (BPO)

is a recently developed device by which the buyer’s and seller’s banks
effect payment based on the exchange of data. The seller’s bank incurs
an irrevocable obligation to pay based on matching data in an electronic
purchase order from the buyer through its bank, and effects payment on
receipt from the seller of matching data regarding shipment. There are
practice rules issued by the International Chamber of Commerce for this
device whose use is currently limited to a few large scale transactions by
major entities. While its legal character is not entirely clear, it resembles a
letter of credit type transaction in that there is an obligation to honour the
presentation of complying data. There are Uniform Rules for Bank Payment
Obligations (URBPO, ICC Publication No. 750). BPOs are seldom used only
in limited circumstances as of the time of publication of this Book.
• Uniform Rules for Digital Trade Transactions (URDTT). URDTT Version

1.0 became effective October 2021. The URDTT aim to be a modern framework
for rules, obligations, and standards for digitalisation of trade transactions.
The structure of the rules contemplates a fully digital environment and
are unbiased regarding technology platforms and messaging standards.
Moreover, the rules are written to be compatible with UNCITRAL Model
Laws such as Electronic Commerce, Electronic Signatures and Electronic
Transferable Records. Additionally, the rules were drafted not only for
banks but for use by non bank entities offering financial services as well
as for corporates. As a general matter, a Digital Trade Transaction (DTT),
is a representation of an underlying agreement between a buyer and seller
and constitutes the procedure by which contract terms are recorded and
carried out. A DTT is distinguishable from the underlying commercial
contract: conforming to DTT terms means proper tender of electronic
documents (and an electronic payment mechanism), whereas satisfaction
of the contract means actual performance.
FACTFIND
To learn more about the Uniform Rules for Digital Trade Transactions (URDTT),
go to: https://2go.iccwbo.org/uniform-rules-for-digital-trade-transactions-urdtt-
version-1.html.
50 | Chapter 2
ACTIVITY:
Discuss whether your bank issues the full range of independent undertakings
(commercial letters of credit, standbys, independent guarantees) on a regular
basis.
Standardisation and Practice Rules. As explained in chapter 1 (Introduction to Trade

Based Financial Crime), trade finance has been the subject of attempts towards inter-
national standardisation and harmonisation of law and practices. Much of this process
has been through the development of standardised definitions (e.g. INCOTERMS®), the
creation of standardised forms, and the evolution of rules of standardised practice.
These rules are contractual in the sense that the parties accede to their application.
Most commercial legal systems defer to them, and even look to them, as an authoritative
expression of standardised usage of trade or customary practices when interpreting
commercial contracts and adjudicating trade disputes. Examples are UCP600, ISP98,
and URDG 758. These practice rules were discussed above in section 2.6 (Options for
Payment or Its Assurance). As explained, these practice rules are based on, and reinforce,
the principle that banks do not consider the underlying transactions represented by
the documents presented to them, but only examine these documents “on their face”.
Defences and objections to the obligation to honour the instrument based on the un-
derlying transaction are, generally, not available. This abstraction accounts for the high
degree of certainty which is attributed to letters of credit and independent guarantees.
The Wolfsberg Group, Trade Finance Principles (2019) Section 1.2.3 (Parties in Trade Trans-
actions): “International Standard Banking Practice recognises that [Financial Institution]s
deal with documents and not with transport, delivery, goods, services, or performance
to which the documents may relate. [Financial Institution]’s do not get involved with the
physical goods nor do they have the capability to do so. This overarching principle is the
basis for defining what degree of scrutiny and understanding an [Financial Institution]
can bring to the identification of unusual activity involving a Trade Finance transaction.”3
Despite recitals recognising the significance of the independence principle, as suggested

in chapter 1 (An Introduction to Trade Based Financial Crime Compliance), there is
a conflict between the trade based financial crime compliance regime and that of the
standard practice for the examination of documents. At the least, however, it is accepted
by regulators that bankers do not as a matter of ordinary practice verify whether what
is stated in the documents presented to them in fact reflects reality, that is, whether
the goods stated in the documents exist and are actually laden aboard the indicated
vessel, or whether the performance did or did not occur.
2019.pdf.
Trade | 51
2. Payments Including Funds Transfers. Payment devices are means that are
used to effect payment from the buyer to the seller. They can be connected to
other financial products or used as stand alone means of payment.
• Draft / Bill of Exchange. A draft or bill of exchange is an order given by the

person making it (drawer) directed to a third party (drawee) instructing it
to make payment to the person indicated or its order (payee). Typically,
this order is given by the buyer to its financial institution, ordering it to
effect payment to the seller.
• Funds / Wire Transfers. A funds transfer is a transfer of credit from one

entity to another. To be effective, it requires a relationship between the
sender and receiver. Within a given country, these payment orders can be
immediately effective where they are backed by the central bank (e.g. FedWire
in the U.S.), or can be run through clearing houses and be subject to their
rules (e.g. CHIPS or CHAPS). Such transfers can be a means of payment
for all transactions, running from open account to payment in advance.
FACTFIND
For more examples of international clearing houses, go to this website:
http://www.corporatetobank.com/resources/payment-clearing-and-settle-
ment-systems/.
3. Collection Type Undertakings Including Drafts and Bills of Exchange.

Unlike independent undertakings in which a third party assumes an obligation
to pay and payment devices by which payment is effected, collection devices are
means of facilitating the collection of funds through a system of intermediation
without payment obligations by parties to the system.
• Documentary / Bank Collections: As discussed in section 2.6 (Options for
Payment or its Assurance) sellers and buyers can use the banking system to
collect through the forwarding of documents. In a collection, the bank makes
no undertaking to pay. Its role is to follow the instructions contained on the
collection or transmittal letter, and to forward or present the accompanying
documents. Apart from counting the documents and ensuring that all
the documents listed are present, the bank disregards the content of the
52 | Chapter 2
documents including any instructions that they contain. It is only liable for
negligence for failure to release documents accompanying the collection
letter in the manner indicated. There are two types of instructions: documents
against payment (“D / P”), and documents against acceptance (“D / A”). In
the first case, the bank presenting the documents is obligated to obtain
payment (cash) and remit it to the seller before releasing the documents.
In the second case, the bank presenting the documents is obligated to
obtain the acceptance of the drawee of the collection letter on the draft
accompanying the collection letter. Once the draft has been accepted, the
bank releases the documents relating to the goods to the buyer or its bank.
Figure 4: Bank Collection

The practice rules relating to collections, the URC, provide a basic frame-
work for a bank collection transaction. In a collection, the seller bears
the risk that the buyer will not pay or accept, as appropriate, the draft.
However, the seller retains control of the documents which are not to be
released to the buyer until it pays or accepts. As a result, the seller can
redirect the goods in the event of non payment, or non acceptance, and
seek an alternative buyer.
Documentary collections are not, strictly speaking, a form of trade finance

but do represent a trade product handled by banks. Under a documen-
tary collection, the bank merely forwards documents but does not make
any undertaking except to exercise care in delivering the documents in
Trade | 53
accordance with the instructions it is given, particularly with regard to

turning over the documents to the buyer.
• Trade Acceptances. A trade acceptance is a draft / bill of exchange that

contains the signed engagement of the buyer / drawee, its agent, or a surety
acting on its behalf. It is an acceptance in that it is an absolute obligation
of the drawee, but differs from a banker’s acceptance in that the drawee
is not a bank. Depending on the creditworthiness of the person accepting
the draft / bill of exchange, it can be used as collateral for an advance
payment and be discounted in the financial market. In such situations,
the draft moves without regard to the transaction that gave rise to it or
to any documents representing that transaction. A trade acceptance can
arise out of a documentary collection or otherwise.
• Promissory Notes. The buyer can issue a promissory note to pay for the
goods. While such a promise is similar to a contractual obligation, it has
the added benefit of reflecting the promise in the form of a negotiable
instrument which can be used as collateral, and utilised to obtain advances
from financiers or other financial institutions.
• Factoring and Forfaiting. These methods enable the seller (exporter

of goods) to acquire payment earlier than initially envisioned, and thus
improve its cash flow in open account transactions. Both methods involve
the purchase of a seller’s receivables at a discount, that is at a rate lower
than the book value of the debt. These finance techniques are similar
and are sometimes interchanged. Depending on the jurisdiction and
industry involved, such finance transactions may be defined differently.
Therefore, transactions relating to the purchase of receivables – referred
to as factoring, forfaiting or similar terms – must be individually analysed
and understood properly to avoid unforeseen consequences and pitfalls.
In a factoring agreement, the seller assigns its claim for payment against
the buyer under the sales agreement to a third party, usually a bank, fi-
nance house or financial institution. The third party is referred to as the
factor. In exchange for the assignment of the claim, the factor will pay
the seller immediately a certain percentage of the invoice amount and
increase the seller’s liquidity.
Factoring may be with or without recourse against the seller. In the

former case, the factor reserves the right of recourse against the seller
in case the purchased debt cannot be realised or enforced. In such a
situation, the factor may reverse the purchase of receivables and claim
54 | Chapter 2
back the discounted amount it paid for the assignment of the claim. If
a factoring agreement is concluded on a non-recourse basis, the factor
assumes the risk associated with non-payment of the purchased debt.
This considerable risk will be reflected in the discount rate the factor is
willing to pay to the seller.
In forfaiting, the sales agreement typically relates to goods that are

commodities, capital goods, or items of higher value. Also, the tenor of
the extension of credit is longer, usually more than six months. Often, a
negotiable financial instrument is involved in the transaction, and the
receivables purchase is on a non-recourse basis. In contrast, factoring
agreements relate to accounts that represent short term obligations (often
30-180 days) for ordinary goods sold in (international) trade.
Attempts to harmonise the law and practice of factoring in an international

context, such as the UNCITRAL Convention on the Assignment of Receiv-
ables in International Trade from 2001, and the UNIDROIT Convention on
International Factoring from 1988, have so far failed to have significant
impact due to the lack of signatory states in sufficient numbers. It remains
to be seen whether the ratification of the UNCITRAL Convention by the
US government in late 2019, for example, may generate renewed interest
and momentum. Helpfully, the Wolfsberg Group, Trade Finance Princi-
ples (2019), added Appendix IV (Open Account), which introduces these
financing techniques and the due diligence that banks should apply. The
Appendix, however, adopts different terminology, following the approach
of the Global Supply Chain Finance Forum: Payables Finance (factoring)
and Receivables Purchase (forfaiting), respectively.
FACTFIND
To learn more about the Global Supply Chain Finance Forum, go to:
http://supplychainfinanceforum.org/.
To learn more about forfaiting rules, visit the International Chamber of
Commerce (ICC) Uniform Rules for Forfaiting (URF800):
https://2go.iccwbo.org/uniform-rules-for-forfaiting-urf800-english-version+-
book_version-Book/.
4. Dependent Undertakings (Suretyship and Accessory Guarantees). These

products were already mentioned above. Dependent undertakings are financial
products that are linked to the performance of the underlying transaction
to some degree, and that are subject to various defences that arise from the
underlying transaction and from the undertaking to pay on behalf of the
primary debtor. A suretyship undertaking or guarantee is an undertaking by
Trade | 55
a third party to answer for the debt of another person. Such undertakings
are given a variety of names (accessory, traditional, dependent, or “true”
guarantee), and sometimes linked to an indemnity which is an undertaking
to hold another person harmless. When dealing with such undertakings, it
is necessary to examine their terms and conditions carefully. Because of the
confusion between dependent and independent guarantees and poor drafting,
many undertakings contain elements of both dependent and independent
undertakings, forcing a judicial determination as to their legal character.
The extent to which the guarantor / surety is involved in the performance of
the underlying transaction depends on the transaction, the creditworthiness
of the principal debtor (usually the buyer) and the nature of the goods and
its collateralisation. While the surety / guarantor of a traditional suretyship
undertaking can raise defences arising from non performance of the underlying
transaction, and of the suretyship agreement, such agreements often contain
extensive waivers. Such waivers limit the surety’s ability to rely on some of
the defences when payment is demanded, therefore somewhat strengthening
the beneficiary’s position.
5. Loans and Capitalisation of Buyers.

• Loans. In some situations, simple loan agreements are used instead of
trade finance devices. A buyer, for example, might be the recipient of a
credit line which includes a portion that can be used for trade related
activities. The extent to which the lender is involved in the underlying
transaction varies depending on the transaction, the collateral, and the
financial circumstances of the borrower (the buyer).
• Leases. Sometimes parties use a lease transaction as a vehicle for the sale of
goods. Such leases are often financial vehicles in which a lender is distinct
from the manufacturer of the goods. In some transactions, the lender is
removed from the underlying transaction with all guarantees and warranties
regarding performance of the goods coming from the manufacturer, and the
obligation to pay running to the financial lessor “come hell or high water”,
as the clause distinguishing these undertakings is named.
6. Blockchain Technology and Trade Finance. Systems with blockchain

technology can be used to issue, exchange, verify and redeem digital documents
relating to trade transactions and trade finance, such as receipts, payment
instructions, bills of lading, payment undertakings or other electronic data
of value and importance. Blockchain databases can be particularly useful in
scenarios where no single trusted party exists that controls the database, but a
multitude of parties participate in the data exchange by reading, transferring
and creating information stored on the blockchain. Also, blockchain technology
56 | Chapter 2
ensures that each document can only be used (for example, transferred to a third
party) by an authorised party once, so that “double spending” is prevented. This
is an essential feature that appeals to providers of digital database technology,
and some have introduced blockchain systems for electronic bills of lading,
warehouse receipts and other digital documents that are fundamental to
international trade and the financing thereof.
Subsection 2.8.1 Summary of Trade
Chapter 2 (Trade) explained what constitutes trade and its various aspects, including
the different parties involved, and the role of agreements. It considered the obligation
of the seller to deliver the goods and the obligation of the buyer to pay for them, and
the mechanisms by which these obligations are fulfilled. It then went on to discuss the
role of banks and other financial institutions in this process, and the various services
and products offered with special attention to independent undertakings and bank
collections.
Consider the following scenario: Seller in the UK wants to export 5,000 toy
buses to Buyer in India, and desires assurance of payment.
• Identify the options available to Seller.
In section 2.2 (What is Trade?), the student was asked to consider what types
of trade products their organisation offers.
• Is the majority of your organisation’s trade related business domestic or
international?
• What role does your organisation play in trade or trade facilitation?
Trade | 57
Question 2-1. What is a bank’s role in documentary collections, and is it liable if

the buyer fails to pay?
Question 2-2. What entities and third party intermediaries are typically involved
in international trade, the transport of goods, and facilitation and
financing thereof? Select all that apply.
a) Warehousemen.
b) Public office of the insurance ombudsman.
c) Freight forwarder.
d) A retail consumer.
e) Customs brokers.
Question 2-3. The INCOTERMS® option “Ex Works / EXW” is typically most con-
venient for the buyer, because it makes the seller responsible for
delivery of the goods. True or false?
Question 2-4. Why would the buyer typically favour “open account” as a payment
option?
Question 2-5. The guarantor / issuer of an independent guarantee must honour the
undertaking upon the presentation of complying documents. True
or false?
Question 2-6. What abbreviation stands for international rules and practices relating
specifically to independent undertakings?
a) URC 522.
b) INCOTERMS®.
c) ISP98 (ICC Publication No. 590).
d) Ex Works / EXW.
e) None of the above.

Chapter 2 (Trade) identified what is trade, who the parties are involved in fa-
cilitating trade, discussed the agreements regarding trade and trade finance
and banks’ products that support trade.

Having received an Introduction to Trade Based Financial Crime Compliance
in chapter 1 and discussed Trade in chapter 2, the student is now prepared
to move forward with the balance of Part I. Subsequent chapters will discuss
Financial Crime Regulation in chapter 3, the structure of a Compliance Pro-
gramme in chapter 4, Exercising Due Diligence in chapter 5, and the Indica-
tors of Trade Based Financial Crimes in chapter 6.
After Part I, the student will be prepared to study how to combat the various
specific types of financial crime in Part II, Combating Financial Crime which
is covering Anti Money Laundering in chapter 7, Countering the Financing of
Terrorism in chapter 8, Sanctions in chapter 9, Weapons of Mass Destruction
in chapter 10, Anti Bribery and Anti Corruption in chapter 11, Commercial
Fraud in chapter 12, and Anti Boycott in chapter 13.
3
Chapter 3
FINANCIAL CRIME REGULATION
LEARNING OBJECTIVE
After studying this topic, students should be able to demonstrate an understanding
of what constitutes financial crime, and the role of government regulations and
regulators in trade based financial crime compliance.
CHAPTER OVERVIEW:
This chapter on Financial Crime Regulation provides an overview of financial
crime regulation, identifies key terms, and characterises the regulatory bod-
ies and governmental, inter governmental and non governmental organisa-
tions involved in combating financial crimes. It describes the different layers
of the compliance regime, and discusses the consequences for banks in non
compliance with regulations.

interaction between trade and financial crime. After an introduction to the
subject in chapter 1, chapter 2 explained Trade and trade products.
The remainder of Part I examines the elements of The Compliance Pro-
gramme in chapter 4, Exercising Due Diligence in chapter 5, and the Indica-
tors of Trade Based Financial Crimes that can identify instances of financial
crime in chapter 6.
scribes the various types of crimes that can be trade based, and the steps
necessary for financial institutions to combat them, including money launder-
ing, countering the financing of terrorism, and sanctions.
59
60 | Chapter 3

Chapter 3 Financial Crime Regulation
Section 3.1 An Overview of Financial Crime Regulation
Section 3.2 What is Financial Crime?
Section 3.3 Types of Financial Crime
Section 3.4 Trade Based Financial Crime
Subsection 3.4.1 Evolution of Trade Based Financial Crime
Subsection 3.4.2 What is Trade Based Financial Crime?
Subsection 3.4.3 The Implications of Trade Finance for Regulation of Trade Based
Financial Crime
Subsection 3.4.4 Key Terms and Information
Subsection 3.4.5 Examples
Section 3.5 Governmental Regulation of Financial Crime
Subsection 3.5.1 Evolution of Government Regulations
Subsection 3.5.2 Regulatory Bodies
Subsection 3.5.2.1 Governmental Bodies
Subsection 3.5.2.2 Inter Governmental Organisations
Subsection 3.5.2.3 Non Governmental Organisations
Subsection 3.5.3 An Overview of Regulators and Regulations
Subsection 3.5.3.1 Layers of the Compliance Regime
Subsection 3.5.3.2 Legislative and Judicial Pronouncements
Subsection 3.5.3.3 Regulatory Pronouncements
Subsection 3.5.3.4 Bank and Financial Institution Examiners
Section 3.6 General Comments Regarding Government Regulatory System
Subsection 3.6.1 Vagueness
Subsection 3.6.2 Pressure
Subsection 3.6.3 De Risking
Section 3.7 Privacy Issues
Section 3.8 Operating in Multiple Regulatory Systems
Section 3.9 General Reputational and Risk Issues
Section 3.10 The Consequences of Non Compliance
Section 3.11 A Tale of Two “Compliances”
Subsection 3.12.1 Summary of Financial Crime Regulation
Section 3.1 An Overview of Financial Crime Regulation
This chapter deals with financial or economic crime, terms which are used interchange-
ably, although the term “financial crime” is used in this Book because it emphases the
linkage with the financial system.
The “financial” portion of the term “financial crime” does not necessarily refer to a
crime against a financial institution, although it could, and many such crimes do impact
Financial Crime Regulation | 61
financial institutions directly or indirectly. As the term is used in this Book, however,
it involves obtaining or transferring wealth for ends that are illegal through the use or
misuse of financial institutions or their products. While some of the financial crimes
discussed in this Book are perpetrated for the relatively straightforward (if unsavoury)
purpose of illegally obtaining wealth, many are for the use of that wealth, however
obtained, for other illegal, harmful, or anti social ends.
The “crime”, then, is in obtaining, transferring, or misusing financial wealth illegally,

or for anti social purposes.
When infamous bank robber, Willie Sutton, was asked why he robbed banks, he is
reputed to have answered “that’s where the money is.”1 In the case of financial crime,
the interest in financial institutions is not only in “robbing” them (and certainly not
with something as crude as a gun—at least typically), but in using financial institutions
and their products to “rob” others, or to commit other crimes against society by means
of the money extracted from, or channelled through, them.
Financial crime regulation is the response of governments and, to an extent, the private
sector, to financial crime. It encompasses a number of crimes whose magnitude and
impact have increased dramatically in recent years.
ACTIVITY:
Consider the concept and meaning of a “trade based financial crime” and reflect
on how it is used in your bank or financial institution as you study this chapter.
Section 3.2 What is Financial Crime?
Financial crime is not new. Historically, it has involved the misuse, or abuse, of the
financial system for improper ends. Typically, a species of commercial fraud or theft
which is handled civilly, such conduct is also sanctioned by criminal law, so there are
both civil and criminal remedies to deal with financial crimes.
Financial Crime involves the systematic gathering and use of the means of wealth to
support illegal activities.
While financial crimes can be international in nature, the remedies for them, wheth-
er civil or criminal, are rooted in the law of nation states. Deceit, concealment, and
1 This possibly apocryphal comment is attributed to Sutton, although he denied it in his

autobiography (co-authored with Edward Linn), Where the Money Was (Viking Press 1976). For
the background of this quotation, see http://quoteinvestigator.com/2013/02/10/where-money-is/.
62 | Chapter 3
violation of trust are at the root of these crimes. Financial crimes also include bribery,
fraud, embezzlement, identity theft, money laundering, tax evasion, terrorism financ-
ing, and insider trading. Some of these financial crimes cause direct harm to persons
while others only involve institutional or societal harm. For example, identity theft
can harm the person whose identity is stolen, whereas improper avoidance of taxes is
typically a matter of societal harm.
In short, financial crime involves the misuse of the financial system for improper ends.
Financial crime is not a specific crime, as such, in most jurisdictions, but a grouping
of similar criminal and fraudulent activities. They are grouped together because the
methods required by regulators to scrutinise banking activities are designed to expose
financial crimes and, in this connection, are of interest to bank examiners.
The Wolfsberg Group, Trade Finance Principles (2019) (Summary and Highlights) describes
“financial crime” by stating that it “refers to money laundering (all crimes including but
not limited to, fraud, tax evasion, human trafficking), bribery and corruption, terrorist
financing, the financing of proliferation of weapons of mass destruction, and other
related threats to the integrity of the international financial system.”2
Money may not be the only goal of criminal enterprises, but it is necessary for them to
operate. It is a means to an end. Money is necessary to pay subordinates, obtain real
and personal property necessary to conduct the enterprise, pay for goods and services
that cannot be obtained through other means, and bribe officials and others.
Financial crime involves the movement of money obtained illegally into the normal
system of commerce so that it appears legitimate or hiding such funds from authorities
through the financial system. It can also involve the illegal use of the financial system
to misuse legitimate funds.
There are two major categories of financial crime: 1) money laundering; and 2) the
movement of goods or money in violation of governmental sanctions, or prohibitions,
against such movement including support of terrorist elements. Other aspects of finan-
cial crime covered in this Book are either subsets of these matters, such as weapons of
mass destruction, or related in the sense of bribery, commercial fraud, and sanctioned
boycotts.
In addition to the criminalisation of financial frauds between private parties, nation

states have criminalised the use of the financial system to move wealth improperly.
2019.pdf.
Moving funds improperly may be an attempt to evade taxes or currency controls, in

which case the funds are typically legitimate, or an attempt to move wealth that is
the product of a criminal activity. While no person may be directly harmed by such
movement, there is direct or indirect societal harm. Since the 1970s, governments have
increasingly focused their efforts on attempting to identify what has come to be known
as money laundering. Money laundering is the criminal practice of processing illegally
obtained money by placing it into the legitimate financial system, in order to make it
appear as though it were derived from lawful activities. Ill gotten cash is placed within a
legitimate company, which will then undergo a number of fake transactions to distance
the cash from its illegal source (i.e. layering). The laundered funds are integrated into
the economy through the banking system to appear as normal business earnings for
genuine commercial activities.
Money laundering, which is discussed in further detail in chapter 7 (Anti Money

Laundering) and other financial crimes have no necessary relationship to trade or to the
trade products of the banking system. However, trade based financial crime has come
to attract significant attention in the evolution of the efforts to control the movement
of money and goods to support illegal activities, ranging from illegal drug trafficking
to terrorist activities. As governmental and private sector efforts have impacted the
more obvious methods by which money and goods are moved, attention has shifted to
trade based financial crimes.
What constitutes trade based financial crime, however, is less easy to specify. Saying
that trade products are used to mask criminal activities or cloak them with legitimacy
explains, rather than formally defines, trade based financial crime. This explanation
is imprecise because it attempts to capture a type of behaviour that is relatively new,
and is itself a combination of a variety of types of behaviour, utilising legitimate means
of trade finance and trade banking products in a variety of ways for a variety of illegal
ends. This observation will be developed further subsequently.
Trade based financial crime as a concept is problematic, because it is not a formal defi-
nition of a crime since, to date, there is no such precise crime. Such misconduct may
involve one or more formal crimes, each of which involves specific elements that must
be proven. These crimes, however, are applicable to other conduct beyond just trade
based financial crimes. The notion of trade based financial crime permits misconduct
related to trade finance to be grouped together. Doing so facilitates the study of the
phenomenon by identifying patterns of behaviour that are similar, and assessing the
effectiveness of the means used to identify and combat it.
A Phenomenon. Trade based financial crime is a description of a phenomenon. It is

an anti social phenomenon. Anti social elements that operate on a larger scale require
access to considerable amounts of money. Moreover, there is a significant limit to how
64 | Chapter 3
much of this money can be readily used in the form of paper money or even moved in
the case of specie.
The theft in 1997 of a 100 kilo / 220 pound gold coin from a Berlin museum with an
estimated value of USD 4 million colourfully illustrates the difficulty of moving specie.
See: http://uk.reuters.com/article/uk-germany-theft-coin-idUKKBN16Y1PQ.
Financial crimes often involve wrongfully taking funds, or moving them, so that the
funds can be readily spent without attracting the attention of governments. Since
currency denominations are relatively small (e.g., the highest value bank notes in the
EU and the US are EUR 500 and USD 100, respectively), the physical transfer of large
amounts of paper currency would require shipping containers. Shipping, sending, and
/ or spending large amount of cash may draw unwanted attention from the enforce-
ment authorities. Therefore, the use of paper currency is not an ideal method for the
perpetrators of serious financial crimes to transfer their ill gotten gains.
While not the exclusive nexus to these services, banks and other financial institutions
constitute the primary means of access to handling large sums of money required to
finance anti social activities.
ACTIVITY:
Identify the two major categories of financial crimes and some of their key
characteristics which your bank or financial institution has encountered.
Section 3.3 Types of Financial Crime
There is a wide variety of financial crimes. To some extent, what constitutes financial
crime depends on who is asking, and why. There is no one set of classifications of
financial crime that is accepted by all parties involved. For purposes of this Book, the
categories that have been chosen are those that are most likely to involve the misuse
of trade products, and that are most heavily emphasised by regulators.
Money Laundering. There is consensus as to the inclusion of money laundering as

a financial crime. What constitutes money laundering is addressed in chapter 7 (Anti
Money Laundering). Generally speaking, money laundering is the movement of ille-
gally obtained funds in order to hide its origin. It is a financial crime because of the
illegality of the predicate offense (i.e. the source of the funds) and, secondarily, because
of the misuse of the financial system in order to hide the origin, and thus, seeking to
legitimise the illegitimate funds.
Terrorism Financing. There is also consensus that terrorism financing is a type of finan-
cial crime. It is addressed in chapter 8 (Counter the Financing of Terrorism). Generally
speaking, it is the misuse of the financial system to finance terrorist activities. In the
same sense as money laundering, the criminal aspect is two fold and, in some cases, tri
fold. Although the funds are not necessarily obtained illegally, some are, which would
be the first criminal level. Masking the movement of the funds is the second level of
criminality. The third level of criminality is the financial support of terrorism, which
is illegal in most jurisdictions.
Sanctions. Most experts and jurisdictions would classify the violation of sanctions
as a type of financial crime. It is addressed in chapter 9 (Sanctions). In an attempt to
shape political agendas, nation states and inter governmental organisations have voted
to impose sanctions on people, organisations, governments, certain types of goods or
actions, and have urged their member states to implement these measures. They have
used the financial system as one tool to enforce these sanctions by blocking or freezing
funds. The violation of these sanctions is not only a crime for the entity who does so,
but for any institution, or person, who aides them, including financial institutions.
Weapons of Mass Destruction (WMDs). Few would debate the proposition that the
support of the proliferation of weapons of mass destruction is criminal. Proliferation
of WMDs is addressed in chapter 10 (Weapons of Mass Destruction). The question
is whether and under what circumstances it is a financial crime. The answer is “yes”
when an entity engages in financing proliferation or distribution, or uses the financial
system to mask these actions. Once again, there are two criminal actions in operation:
1) misusing the financial system, and 2) committing the crime of WMD proliferation.
Bribery. Obtaining results or actions to which one is not entitled by normal commercial
or other legitimate methods, is highly unethical. Further, it is criminal in most juris-
dictions when it involves a public official, and in some jurisdictions even where the
person bribed is in the private sector. Bribery is addressed in chapter 11 (Anti Bribery
and Anti Corruption). When the financial system is used to facilitate the payment of
the bribe, the crime of bribery is compounded by the related financial crime, usually
money laundering.
Commercial Fraud. The financial system can be used to perpetrate commercial fraud
either through the payment of money or the misuse of financial products. Commercial
fraud is addressed in chapter 12 (Commercial Fraud). The victims of commercial fraud
include not only commercial entities and governments, but also in many cases financial
institutions. Fraudsters have long mastered the misuse of the financial system, forging
financial documents, undertakings, and kiting or recycling funds and commodities.
66 | Chapter 3
Violation of Anti Boycott Prohibitions. Boycotts are economic measures intended

to place economic pressure on the target of the boycott. When states seek to impose
boycotts on the citizens of other states, those states have sometimes adopted mea-
sures to prevent their citizens from being coerced to assist in a boycott which is not
aligned with its policies. Such anti boycott regulations are addressed in chapter 13
(Anti Boycott). In order for anti boycott measures to be effective, a boycott must be
observed and enforced. Enforcement of anti boycott controls through the agency of
government and the criminal law, or sanctions systems, often draws reactions which
include compliance requirements imposed on the financial system. The violation of
boycott orders and measures is a criminal act in most jurisdictions.
Other Crimes with a Financial Dimension. The crimes listed above are not an ex-
haustive list of financial crimes. Among others that could be included are the evasion
of taxes, retail financial crimes in which consumers are defrauded, medical fraud,
securities fraud, theft, identity theft, violation of foreign exchange controls, forgery,
and counterfeiting. While they have a financial dimension and also impact financial
institutions to some degree, these crimes are typically not the accepted focus of trade
based financial crime compliance. Therefore, these additional crimes are not discussed
in this Book.
ACTIVITY:
Identify the types of financial crimes that most likely involve the misuse of
trade products, and that are most heavily emphasised by regulators.
Section 3.4 Trade Based Financial Crime
As indicated, the focus of this Book is on trade based financial crime, which is one
facet of financial crime. The attention given to trade based financial crime is explained
by the historical evolution of the fight against money laundering and, subsequently,
terrorism financing. The concept of trade based financial crime was introduced above.
Its nature is discussed below in greater detail.
Subsection 3.4.1 Evolution of Trade Based Financial Crime
Historically, misconduct in trade has not resulted in criminal prosecution. For example,
a seller shipping garbage instead of proper commercial goods may have committed
fraud, but it is unlikely that a buyer would seek relief, primarily, in the criminal system.
Prosecutors and law enforcement do not have the time, energy, or resources to pursue
such actions that are often matters of commercial or contract dispute, and criminal
prosecution rarely results in repayment to the buyer in any event.
Trade fraud or commercial fraud can involve misconduct by the seller in knowingly de-
livering inadequate goods, no goods, lesser quantities or qualities of goods, or different
types of goods. Often it involves the use of forged or fraudulent documents. It can also
involve misconduct by the buyer in receiving the goods without fulfilling the promise
to pay for them, or only making partial (or additional) payment. Further, defrauding
third parties such as financiers, carriers, insurers, or guarantors, can also occur.
However, something more must typically be involved to trigger a criminal prosecution.

For example, if a large amount of money was involved, or there were political or social
aspects to the case causing more than monetary harm, it would be of elevated interest
to law enforcement. And, where the fraud is used to launder money, promote terrorism,
violate sanctions, or support bribery, it would become a matter of special concern for
criminal prosecutors and law enforcement officials.
In these situations, there are dual remedies: 1) civil ones, which are grounded in com-
mercial fraud and breach of contract, and 2) criminal remedies based on investigations
and prosecutions by public authorities.
ACTIVITY:
Explain why, historically, it was unlikely that one who had been a victim of
fraud would seek, primarily, relief in the criminal system.
When governments began to address money laundering seriously, the funds were
typically drug related cash. As a result, the focus of government efforts was on the
movement of cash, funds, or readily moveable items of high value such as jewels,
either physically through couriers, or through the financial system. Over time, other
forms of organised criminal activity including revolutionary or political groups which
collected large amounts of cash sought to launder it by the use of the same methods.
These methods also came to be used by terrorist organisations. To target these criminal
activities, governmental agencies concentrated on banking and other funds transfer
systems. For almost thirty years, government regulators and law enforcement officials
have focused on limiting the use of the banking system to move ill gotten cash, con-
centrating on depositing and transferring funds from illegal sources.
With governments becoming more successful at stopping or reducing the transfer of

funds, they shifted their attention to alternative means of moving wealth, suspecting
that criminal elements were increasingly using them. In particular, attention was drawn
to trade and trade finance.
Trade also involves the movement of large sums of money. This fact coupled with its
often complex, non systematic, and decentralised nature, were thought to have made
trade an ideal vehicle for crimes such as money laundering. It was believed that trade
68 | Chapter 3
activities were manipulated to provide cover for the movement of funds, either in vio-
lation of currency controls or to evade / lessen taxes or duties. Government agencies,
therefore, have recently begun to focus intensely on addressing trade based financial
crimes primarily through imposing controls on the banking system, and effectively
re-engineering it to identify and flag these activities.
Subsection 3.4.2 What is Trade Based Financial Crime?
In order to understand trade based financial crime, it is necessary to understand its

components, which include its character as:
• an explanation rather than a definition.
• a description of a phenomenon.
• relating to trade (may include services).
• having international and domestic features.
• involving misuse of the financial system.
• being conducted by or for criminal elements.
• done for illegal purposes.
Simply put, it is the misuse of legitimate instruments of trade and trade finance for
illegal ends. The components are discussed below.
Trade based financial crime involves the misuse of the financial system that facilitates
the purchase and sale of goods in order to mask illegal activity.
Description. The explanation given here is a description of a phenomenon and not a

definition, because it is premature to attempt a formal definition. Moreover, there is
no need for a formal definition since there is no crime by that particular name. Instead,
the explanation covers activities that may give rise to, or occur in, the context with
trade activities or trade related products.
Abuse of the Financial System. Trade based financial crime involves the abuse of
the financial system. Commercial fraud could be committed by the buyer / applicant,
forwarding a forged or fraudulent letter of credit or other financial assurances, to the
seller, inducing the seller / beneficiary to ship goods on the basis of an undertaking
on which the seller / beneficiary cannot possibly make a complying presentation, or
where the beneficiary presents a set of fake commercial and / or transport documents.
Such fraudulent activities can also be perpetrated against banks or providers of finan-
cial services as a result of collusion between the buyer and seller, or involving other
parties of the trade transaction, for example inducing the bank to pay when it will not
be reimbursed.
Scope of Trade Based Financial Crime. Trade based financial crime is a broad concept
that can include a number of criminal activities. In addition to money laundering and
terrorism financing, depending on the applicable regulatory system, it can include
activities or entities sanctioned by governments, the violations of boycott measures,
export controls (including import or export of prohibited substances, technologies,
and weapons of mass destruction), or control of foreign exchange, and other corrupt
practices. This introduction will focus on combating money laundering (called anti
money laundering) and countering the financing of terrorism, and will also discuss
these other aspects of trade based financial crime. Each of these areas will be treated
in depth in later chapters in this Book.
In one of the earliest efforts to address the trade component of financial crime, the
Wolfsberg Group, Trade Finance Principles (2019) Section 1.1.5 (Introduction) states
that “Trade Based Money Laundering (’TBML’) has become a widely used term. It cov-
ers a broad spectrum of financial and other services, including those financial services
referred to as Trade Finance, but also transactional activities across current and deposit
accounts and payments for example, which are not in the purview of Trade Finance
operations of [Financial Institution]s.”
ACTIVITY:
In addition to money laundering and terrorism financing, what other criminal
activities can trade based financial crime include?
Subsection 3.4.3 The Implications of Trade Finance for

Regulation of Trade Based Financial Crime
Historically, the role of trade finance in trade has been restricted to ensuring payment
for the delivery of goods or services. In some transactions, financing involves intense
scrutiny of the borrower to ensure that the lender’s rights are protected. Often that
step means ensuring that the goods are sound, meet contract specifications, are sale-
able, and are shipped and stored properly. In many transactions, however, lenders base
their financing decisions on the financial standing of the borrower without regard to a
specific transaction that would typically fall under defined lines of credit.
In independent undertakings, for example commercial letters of credit, standbys, or

independent guarantees, the limited role of financial institutions is even more obvious.
In a sense, the limitation of their involvement is institutionalised in law and banking
practice. The nature of independence is that the issuer of an independent undertaking
does not concern itself with the underlying transaction. Its only concern is that the
documents required to be presented must comply on their face with the terms and
70 | Chapter 3
conditions of the independent undertaking. The role of the issuer of such an under-
taking is limited to the documents and their examination.
This system is vulnerable to abuse by criminal elements. The challenge of combating

the misuse of trade based finance in connection with financial crimes is to find a means
of identifying abuse of the system, without impeding an important tool for legitimate
commerce.
ACTIVITY:
What are some of the challenges faced by banks and financial institutions in
combating trade based financial crime?
Subsection 3.4.4 Key Terms and Information
In discussing trade based financial crime, it is necessary to recognise some of the key
terminology. These terms are further discussed in the context of the various chapters
of this Book.
Compliance. The word “compliance” is commonly used for addressing trade based
financial crime. Traditionally in trade, however, the term “compliance” signified that
documents presented under a letter of credit complied with its terms and conditions.
Under the trade based financial crime regime, on the other hand, “compliance” refers
to the question of whether or not a bank, or other financial institution, has complied
with trade based financial crime regulations, or its compliance programme relating
thereto. Section 3.11 (A Tale of Two “Compliances”) illustrates this dual use of the
term “compliance”.
Sanctions. The word “sanctions” generally signifies a penalty, fine, or restriction. In

reference to trade based financial crime, however, it signifies a rule or policy set forth
by a nation state or international body (such as the UN) designed to accomplish na-
tional or international policy positions by restricting or prohibiting organisations and
persons under its authority from conducting certain activities with specified products,
persons, organisations, or nation states.
Abbreviations. In addition to the specialised use of words, there is a wide variety

of abbreviations which are used regularly in this field. They include “ML” and “AML”
(money laundering or anti money laundering), and “TF” or “CFT” (terrorism financing
or countering the financing of terrorism). Many of the commonly used abbreviations
encountered in connection with trade based financial crime are collected in a table of
Abbreviations located in Appendix D.
Sources of Information. There are a number of studies and position papers issued
by governmental, inter governmental, and non governmental organisations on trade
based financial crime in addition to its non trade related aspects. Some of these papers
and studies are listed in the Bibliography in this Book.
ACTIVITY:
What key terms and abbreviations related to financial crime are commonly used
by your bank or financial institution?
Subsection 3.4.5 Examples
The following examples illustrate instances in which trade based financial crime could
occur through the misuse of a common financial product, such as a letter of credit:
1. In trade operations, financial crime often consists of misconduct by the
beneficiary in drawing on a letter of credit type undertaking in situations
where there was no entitlement to do so. This misconduct could consist of
presenting forged or fraudulent documents (including third party documents),
shipping goods of less value than is indicated on the presented documents,
or not shipping any goods at all.
2. Commercial fraud could also be committed by the buyer / applicant. This
misconduct would occur where the buyer submits a forged or fraudulent letter
of credit, or other financial assurances, to the seller. Another form would be
inducing the seller / beneficiary to ship goods on the basis of a letter of credit
on which the seller / beneficiary cannot possibly make a complying drawing
due to the specific documentary conditions set forth in the undertaking.
3. Abuse of a common financial product could also be committed by collusion,
in which the beneficiary and the applicant act together to defraud the issuer
of the letter of credit.
4. Another form of commercial fraud could include the forging of multiple sets
of documents to defraud other banks, insurers, and additional third parties.
Section 3.5 Governmental Regulation of Financial Crime
Subsection 3.5.1 Evolution of Government Regulations
The international banking system is specifically designed for the movement of vast
sums of money. It is estimated that more than USD 3 trillion moves through the New
York banks via SWIFT, FedWire, and CHIPS on each business day. Because other means
of moving large amounts of money are difficult and inefficient, criminal elements have
sought to use the bank payment system to launder money. Since at least the 1970s,
72 | Chapter 3
governments have undertaken increasingly serious efforts to attempt to identify the

laundering of criminal proceeds and cut down the means by which it is done.
The governments of many countries play a critical role in the battle against financial
crimes through legislative rules, regulations and enforcement. These rules and regu-
lations have been imposed on financial institutions to combat money laundering, the
financing of terrorism, bribery, boycott violations, and the finance and / or acquisition of
weapons of mass destruction. Banking regulations have been in place since at least the
1970s (for instance in the US, Congress passed the Currency and Foreign Transactions
Reporting Act commonly known as the “Bank Secrecy Act”). Following the terrorist
attacks on 11 September 2001 in the United States, these regulations were significantly
strengthened in an attempt to cut off terrorism funding by expanding the framework
of the regulations required of banks.
Government agencies have also focused intensely on addressing trade based financial
crimes primarily through imposing controls and restrictions on the banking system,
and seeking to require the banks to monitor and report suspicious account and trade
activities.
ACTIVITY:
What is the purpose of the expansion of the framework of regulations required
of banks and financial institutions regarding the transfer of funds?
Subsection 3.5.2 Regulatory Bodies
There are a number of governmental, inter governmental, and non governmental

organisations that have issued various papers and studies on trade based financial
crime. In addition, many organisations and most nations have statutes and regulations
regarding money laundering. A list of organisations dealing with trade based financial
crime can be found in Appendix E (Organisations).
Subsection 3.5.2.1 Governmental Bodies
Government Involvement. Government agencies are the primary force combating trade
based financial crime, which includes bank regulators. The US has played a leading role
in this effort, with other notable governments including Germany, the United Kingdom,
Singapore, Hong Kong and Canada. The following discussion of governmental bodies
is by no means exhaustive.
FACTFIND
PwC has compiled a convenient reference of the financial regulators for each
nation, accessible at: https://www.pwc.com/gx/en/financial-services/publi-
cations/assets/pwc-anti-money-laundering-2016.pdf.
Government agencies issue papers on trade based financial crime, release guidelines
for compliance, and commission studies. Most nations have statutes and regulations
regarding money laundering. Below are some of the leading countries, and their ap-
proaches and regulators:
The United States of America. The US government has been very active in combating
trade based financial crime, as it has with the entire field of financial crime. It oper-
ates through a number of agencies, including FinCEN (Financial Crimes Enforcement
Network) and OFAC (the Office of Foreign Assets Control), both of which are part of
the US Department of Treasury, and US bank regulators including the Federal Reserve
Bank, to name a few.
Federal Republic of Germany (Bundesrepublik Deutschland). The Federal Financial

Supervisory Authority (BaFin) is the primary supervisory body in Germany, and is
charged with overseeing banks, financial service providers, and insurance companies.
It reports to the German Federal Ministry of Finance. BaFin has broad powers to in-
vestigate the solvency of banks and financial institutions, the transparency of stock
exchange trading with respect to insider trading and manipulations, oversees company
mergers, and may issue authoritative guidance papers and interpretations relating to
the financial market. BaFin is also tasked with investigating cases of money laundering
and terrorism financing.
FACTFIND
To find out more about the German Federal Financial Supervisory Authority
(BaFin), go to: https://www.bafin.de/SharedDocs/Downloads/EN/Broschuere/
dl_b_bafin_stellt_sich_vor_en.pdf.
There are also other German authorities concerned with terrorism financing, money laun-
dering, and sanctions. The existence of multiple authorities is due to the complex federal
system in Germany, which is additionally impacted by directives and other European
Union law. Several governmental authorities are involved in ensuring compliance with the
applicable legislation regarding terrorism financing, money laundering, and embargoes
and sanctions relating to weapons, restricted goods and financial services. The agencies
are, among others, the German Federal Police Services (“Bundespolizei”), the Federal
Criminal Investigations Police Bureau (“Bundeskriminalamt”), the above mentioned
Federal Financial Supervisory Authority (BaFin), the Federal Office for Economic Affairs
and Export Control (BAFA), and the German Central Customs Authorities (“Zoll”).
74 | Chapter 3
The United Kingdom of Great Britain and Northern Ireland. The Financial Services
Act 2012, along with the Bank of England and Financial Services Act 2016, sets the
regulatory framework for the financial systems and financial services companies in
the United Kingdom. The Financial Services Act amended the Financial Services and
Markets Act 2000. The Financial Services Act created two new organisations to mon-
itor and police the financial system, the Financial Conduct Authority (FCA) and the
Prudential Regulation Authority (PRA).
FACTFIND
To read the Financial Services Act 2012, visit:
http://www.legislation.gov.uk/ukpga/2012/21/contents/enacted.
To read the Bank of England and Financial Services Act 2016, visit:
http://www.legislation.gov.uk/ukpga/2016/14/contents/enacted/data.htm.
The FCA operates independently of the UK government and is financed by collecting

fees from the institutions it regulates, while the PRA is a limited company wholly owned
by the Bank of England. The FCA focuses more on UK consumers and is charged with
ensuring that the financial markets in the UK are fair and effective by regulating the
conduct of UK businesses. The goal of the FCA is to protect consumers, protect the
integrity of the UK financial markets, and promote competition. The PRA, on the other
hand, is more targeted toward financial institutions. It is responsible for regulating and
supervising banks, building societies, credit unions, insurers, and investment firms by
promoting safety, soundness, and competition.
FACTFIND
For more information on the Financial Conduct Authority, visit their website
at: https://www.fca.org.uk/.
For more information on the Prudential Regulation Authority, visit their
website at: http://www.bankofengland.co.uk/pra/pages/default.aspx.
The Republic of Singapore. The Monetary Authority of Singapore (MAS) is charged

with the regulation and supervision of financial institutions located in Singapore. It
issues rules which are supplemented by legislation, directions, notices, and regulations,
and authoritative guidelines regarding best practices.
Its monograph on Objectives and Principles of Financial Supervision describes its objec-
tives, the functions it performs, and the principles that guide its supervisory approach.
The key theme is that all stakeholders have a shared responsibility to achieve a sound
and progressive financial services sector.
FACTFIND
To see the supervision objectives of MAS, go to: https://www.mas.gov.sg/
publications/monographs-or-information-paper/2004/objectives-and-
principles-of-financial-sector-oversight-in-singapore.
The Hong Kong Special Administrative Region of the People’s Republic of China.
The financial regulatory system of Hong Kong is made up of four bodies. They are:
1. The Securities and Futures Commission.
• Regulates public investment offerings.
• Supervises and regulates brokers, advisers, and other such intermediaries.
• Regulates mergers and takeovers of companies that are publicly listed.
• Oversees exchanges which themselves regulate publicly listed companies.
2. Hong Kong Monetary Authority.
• Supervises and regulates banks and institutions that take deposits.

• Regulates banks and their staff who are registered with the Securities
and Futures Commission.
3. Mandatory Provident Fund Schemes Authority.
• Regulates and supervises Mandatory Provident Funds (MPF) and their

trustees.
• Registers certain Mandatory Provident Fund intermediaries who conduct
banking, insurance, and securities business.
4. The Insurance Authority (took over regulatory functions of the Office of the
Commissioner of Insurance on 26 June 2017).
• Independent of government and insurance industry

• Authorises and supervises insurance companies.
• Regulates insurance agents and brokers, and other intermediaries.
• Supervises and enforces the Anti Money Laundering (AML) regulatory
regime for the insurance sector.
FACTFIND
The Securities and Futures Commission:
https://www.sfc.hk/web/EN/index.html.
Hong Kong Monetary Authority:
https://www.hkma.gov.hk/eng/.
Mandatory Provident Fund Schemes Authority:
http://www.mpfa.org.hk/eng/main/.
76 | Chapter 3
Insurance Authority (IA):

https://www.ia.org.hk/en/index.html.
For a useful overview of the financial regulatory structure, see: https://www.
thechinfamily.hk/web/common/pdf/publication/en/IEC-quick-guide-to-hk-
financial-system-and-services.pdf.
Recently, the relationship between the Hong Kong Special Administrative Region
and the mainland of the People’s Republic of China has changed considerably. On 30
June 2020, the Standing Committee of the PRC National People’s Congress passed a
National Security Law (NSL)3 for Hong Kong, which was promulgated by the HKSAR
chief executive the same day. As many observers have expressed, the NSL constitutes
a serious diversion from the “one country, two systems” guarantee made when the
former British colony was restored to Chinese sovereignty in 1997.
Importantly, the aforementioned Hong Kong agencies and regulatory bodies remain
active as of October 2021.
Canada. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
is the financial intelligence arm of the Canadian government charged with detection
and prevention of money laundering as well as countering the financing of terrorism.
FINTRAC is one of several agencies under the Canadian Department of Finance, and was
brought into law by the principal AML / CFT legislation in Canada, the Proceeds of Crime
(Money Laundering) and Terrorist Financing Act (PCMLTFA). According to its website,
“FINTRAC’s core product is case specific financial intelligence”, i.e. it analyses suspicious
activity reports from all businesses and organisations (often referred to as “Reporting
Entities”) under its regulatory umbrella on a case by case basis; where analysis of the
suspicious reports generates “reasonable grounds” for further investigation, FINTRAC
will disclose its financial intelligence to law enforcement for appropriate action.
The Canadian government amended several provisions of the PCMLTFA, which became
effective on 1 June 2021. These amendments included revised definitions; new benefi-
cial ownership obligations for all Reporting Entities along with new ongoing customer
due diligence requirements; new obligations regarding politically exposed persons
(PEPs); new record keeping obligations and time restrictions on reporting suspicious
transaction reports (STRs), and many other changes.
To read more on the PCMLTFA and recent amendments, visit FINTRAC’s website:
https://fintrac-canafe.canada.ca/guidance-directives/compliance-conformite/Guide4/4-eng.
3 The official title is the “Law of the People’s Republic of China on Safeguarding National Security
in the Hong Kong Special Administrative Region.”
Subsection 3.5.2.2 Inter Governmental Organisations
The United Nations. The United Nations has addressed certain aspects of trade based
financial crime. The United Nations Office of Drugs and Crime (UNODC) is responsible
for anti money laundering programmes and combating terrorism financing. The UN
Commission on International Trade Law (UNCITRAL) has issued a list of indicators of
commercial fraud as a tool to help financial institutions and law enforcement detect
and prevent commercial fraud. The UN Office for Disarmament Affairs (UNODA) pro-
motes the strengthening of disarmament regimes of nuclear, biological, and chemical
weapons. The responsibility for imposing economic sanctions lies with the UN Security
Council under Article 41 of the UN Charter. The UN Security Council is involved in
several other areas of trade based financial crime as well, mostly through the drafting
and implementation of UN Conventions.
FACTFIND
For more information on UNODC, visit their website at:
https://www.unodc.org/.
For more information on UNCITRAL, visit their website at:
https://www.uncitral.org/.
For more information on UNODA, visit their website at:
https://www.un.org/disarmament/.
For more information on the UN Security Council, visit their website at:
https://www.un.org/en/sc/.
To learn more about the UNODC goAML software solution for Financial
Intelligence Units (FIUs), visit:
https://unite.un.org/goaml/.
The European Union. The European Parliament and the Council are empowered,
through the Treaty on the Functioning of the European Union, to set up a legal frame-
work to prevent and fight money laundering, terrorism, and related illegal activities.
Article 75 of the European Union Treaty on the Functioning of the European Union reads:
“Where necessary to achieve the objectives set out in Article 67, as regards preventing
and combating terrorism and related activities, the European Parliament and the Council,
acting by means of regulations in accordance with the ordinary legislative procedure,
shall define a framework for administrative measures with regard to capital movements
and payments, such as the freezing of funds, financial assets or economic gains belong-
ing to, or owned or held by, natural or legal persons, groups or non-State entities. [...]”
78 | Chapter 3
The European Union, through its various bodies and agencies, has introduced a num-
ber of legislative initiatives and executive measures to combat money laundering and
terrorism financing activities. The Cash Control Regulation, the Regulation on Funds
Transfers, and the Anti Money Laundering Directive are such examples.
FACTFIND
For information regarding the latest developments on proposed new changes
to the Anti Money Laundering Directive, visit the European Council’s website,
which also contains a timeline of the progress made thus far:
http://www.consilium.europa.eu/en/policies/fight-against-terrorism/fight-
against-terrorist-financing/.
Given the complex organisational structure of the European Union, many endeavours
to implement legislation require the assistance and active participation of the indi-
vidual member states. For example, European Union “Directives” typically do not have
immediate legal effect unless implemented by the individual member states. While
this process can be cumbersome, it grants the different member states some degree of
independence and flexibility in the law making process. For instance, in regard to the
above mentioned Anti Money Laundering Directive, each member state must initiate
legislative and / or executive activities so that the Directive is actually implemented.
Any European directive, therefore, contains a time frame within which the individual
member states must execute the implementation process.
The European Police Office (Europol) is involved in the strategic task to facilitate
cooperation between the different police and law enforcement agencies of the mem-
ber states, and the European authorities. Recently, Europol also created the European
Counter Terrorism Centre to intensify the international and European joint efforts to
take on terrorism financing. Moreover, Europol is part of the Financial Intelligence
Units system which collects and analyses data related to fund transfers and other
financial transactions.
Another European institution, Eurojust, also focuses on the cooperation of European

authorities and member states concerning terrorism, money laundering, and other
serious crimes. Eurojust’s focus, however, is exclusively on judicial activities and pros-
ecutions in this respect.
FATF (Financial Action Task Force). FATF is another inter governmental organisation
dedicated to combating money laundering, terrorism financing, and other threats to
the international financial system. It has issued recommendations and guidelines for
countries to follow when implementing sound banking policies. FATF’s success in hav-
ing its recommendations implemented and followed rests on its network of similarly
structured Regional Bodies and 39 jurisdictional and regional organisation members.
To view the full list of FATF regional bodies and members, visit http://www.fatf-gafi.
org/about/membersandobservers/.
ACTIVITY:
What consideration does your bank give to inter governmental organisations
in your bank’s Compliance Programme?
Subsection 3.5.2.3 Non Governmental Organisations
In addition to governmental and inter governmental organisations, there are also non
governmental organisations that offer guidance on trade based financial crime.
These organisations include the Wolfsberg Group, which is composed of major in-
ternational banks. The Wolfsberg Group has released numerous papers containing
standards and guiding principles for sound banking practice. Trade associations such
as the International Chamber of Commerce (ICC) through its Commission on Banking
Technique & Practice have also played a role.
National bank organisations such as the Bankers Association for Finance and Trade
(BAFT), a US based organisation affiliated with the American Bankers Association, have
been active, as are the ICC’s national committees.
The Royal United Services Institute (RUSI) is a U.K. based non profit think tank focusing
on security and defence matters from an international perspective. RUSI has published
insightful work on illicit shipping practices designed to evade sanctions, particularly
regarding North Korea and the city of Dandong, China. Among its other publications
and articles, RUSI also offers a podcast on financial crimes, discussing a variety of
trending global issues. To learn more, visit: https://www.rusi.org/.
Global Financial Integrity (GFI) is a Washington, D.C. based think tank focusing on illicit
financial flows, trade based financial crime, anti corruption and tax sheltering, among
other issues regarding illegal movements of currency from one country to another. To
learn more about GFI’s advocacy and research, visit: https://gfintegrity.org/.
ACTIVITY:
What consideration does your bank’s compliance programme give to non
governmental organisations and their policy papers and recommendations?
Many of these non governmental organisations are listed in Appendix E (Organisations).

80 | Chapter 3
The Wolfsberg Group, Trade Finance Principles (2019) Section 1.2.4 (Parties in Trade
Transactions) states that “[r]elevant stakeholders at both a national and international level
(which may include national bodies such as Governments, Law Enforcement Agencies,
Financial Intelligence Units, Regulators, FATF, Export Credit Agencies, Customs and
Excise, Tax Authorities, Port Authorities and businesses such as Shipping Agents and
Carriers) should continue to recognise the need for on-going participation and co-op-
eration in ensuring financial crime is not facilitated through Trade Finance activities.”4
Subsection 3.5.3 An Overview of Regulators and Regulations
While regulators and regulations play an important role in compliance, understanding

what that role is and how to respond to their initiatives pose interesting challenges.
ACTIVITY:
What challenges does your bank or financial institution face in meeting the
requirements set forth by the bank examiners and regulators?
Subsection 3.5.3.1 Layers of the Compliance Regime
Several Layers. There are several layers involved in both creating an anti money laun-
dering (AML) regulatory regime, and in executing an AML compliance programme.
• Lawmakers: They formulate the laws which are then interpreted by the courts,
and enforced by the executive branches of the state or organisation.
• Regulators: They are typically empowered to draft regulations designed to
institute a system of anti money laundering controls.
• Bank Examiners: They visit, audit, and investigate banks in order to oversee
their compliance with the various laws and regulations.
• Organisational Compliance Personnel (in banks and other financial
institutions): They are charged with assuring institutional observance of
these laws and regulations.
• General Management: Management at the banks who, in addition to concerns
about compliance, have reputational concerns.
While the names of these entities may differ from country to country, and from bank
to bank, their functions do not.
2019.pdf.
The lawmakers, regulators, bank examiners, and personnel each have a different per-
spective on the AML policies which, in turn, can interfere with successfully executing
the programme.
FACTFIND
To find out more about the origin of the need for banking regulations, go to:
http://www.metricstream.com/whitepapers/html/financial_services.htm.
Understanding these layers is important because the tone of the “guidance” from the
regulators has changed in recent years. As pointed out by Deloitte,5 “historically, guid-
ance was in the form of what banks ‘should’” consider but, with respect to compliance,
“’should’ is being interpreted as ‘shall,’ at least for larger organisations.”
ACTIVITY:
Identify the role of a bank examiner. How does that differ from the role the
organisational compliance personnel has to fulfil?
Subsection 3.5.3.2 Legislative and Judicial Pronouncements
Typically, legislative pronouncements are on the most general level of policy, and if they
mention trade, which is unlikely, it is typically in the most abstract manner. Therefore,
banks and financial institutions can in many cases only derive general policy goals,
and not concrete instructions or steps to follow. Such legislative pronouncements are
also most likely to delegate authority to government bodies, and to impose penalties,
e.g., the U.S. Money Laundering Act (1986).
Judicial pronouncements interpret terms in legislation, and rule on disputes as to their

application and enforcements.
Subsection 3.5.3.3 Regulatory Pronouncements
In some countries, there is more than one regulator who is responsible for combat-
ing trade based financial crime or various aspects of it. Regulators set forth general
legislative requirements with greater specificity. Regulations are often more detailed
regarding the structural aspects of the scheme and its penalties, but are rarely specific
regarding what actions are to be reported by the banks and other financial institutions.
Trade based financial crime, if mentioned, is addressed in a more general manner.
5 http://deloitte.wsj.com/riskandcompliance/2014/07/29/for-banks-rethinking-regulatory-
compliance-management/.
82 | Chapter 3
The vagueness of these regulatory pronouncements is reflected in the range of actions

taken by different countries:
• In some countries, there may be multiple regulatory authorities involved with
combating trade based financial crime.
• In federal systems such as Germany and the US, there are multiple bank
regulators at the federal level, and also bank regulators at the state level.
• Other programmes, such as export controls or government sanctions, may be
within the scope of other agencies.
ACTIVITY:
Compare and contrast the actions of regulators to those of legislative bodies.
Subsection 3.5.3.4 Bank and Financial Institution Examiners
Absent clear guidance, it is left to the bank and financial institution examiners, those
officials charged with visiting banks and overseeing their regulatory compliance, to
apply the general provisions of statute and regulation to the actual conduct of the
financial institution. The operational process of examiners differs, depending on the
jurisdiction they work in, but also depending on the size of the bank or financial in-
stitution they are investigating or auditing. For a large financial institution, there can
be multiple examiners who are permanently embedded in the bank, and, as indicated,
may belong to different supervisory and regulatory agencies.
An example of the approach of examiners is contained in the U.S. Bank Secrecy Act / Anti
Money Laundering Examination Manual, formerly a 440 page document. Application
of the general provisions to a specific situation is a matter of judgment and discretion;
reasonable persons may disagree regarding the result. Sometimes, what is expected
emerges from discussions between the examiners and the banker, and depends on the
personalities, the seniority level of the banker within the bank hierarchy, the under-
standing of the business by the bank examiner, the questions asked, and how they are
understood and answered.
Bank examiners apply the general provisions of statutes and regulations to the actual
conduct of the bank. In a large bank, there are typically multiple examiners, and some
may be sent from different agencies. The Bank Secrecy Act / Anti Money Laundering
Examination Manual contains the approach of examiners in the United States.
To view the Bank Secrecy Act / Anti Money Laundering Examination Manual, now a
fully digital InfoBase, go to: https://bsaaml.ffiec.gov/manual.
EXAMPLE OF BANK EXAMINER APPROACH:
If a bank examiner asked a letter of credit (LC) document processor whether LC examin-
ers determine the location of the vessels indicated in bills of lading, the proper answer
would be that it is not LC practice to do so.
If, however, the question was whether a bank could do so, the answer might be in the
affirmative, even though banks do not do so in their practice absent exceptional circum-
stances, and doing so would result in a deviation from standard letter of credit practice.
Were the latter answer to be given, the examiner would probably (and from the per-
spective of the examiner, reasonably) expect the bank to do so in the future and carry
the same expectation forward into other examinations.
Furthermore, examiners may require actions beyond those contemplated by the regulators.
For example, the regulations typically do not require financial institutions to check into
the whereabouts of vessels, but some banks do so at the insistence of bank examiners.
ACTIVITY:
What is the role of examiners within the overall trade based financial crime
compliance apparatus?
Section 3.6 General Comments Regarding

Government Regulatory System
Subsection 3.6.1 Vagueness
Throughout this field, there is an unsettling element of vagueness. A bank must take
“appropriate” measures, it must exercise “due diligence”, and act “reasonably”. There is,
however, no clear definition as to what is sufficient or satisfactory. Whether intentional
or not, this approach leaves the bank potentially exposed if certain steps are not taken,
or certain questions not asked. Given the importance of (legal) certainty for commercial
transactions and banking and finance in general, this is worrisome.
Subsection 3.6.2 Pressure
The dynamic of this interaction is compounded by the pressure able to be exerted by

examiners. Banks, financial institutions, and their employees do not want to irritate
or provoke examiners, and do not want to challenge them due to the enormous discre-
tion that examiners have. Therefore, financial institutions are often pushed to carry
out certain checks, steps, or procedures that are not, strictly speaking, required by the
regulations. However, because of the flexibility and vagueness of the applicable regula-
tions, and the considerable authority and discretion accorded to bank examiners, banks
84 | Chapter 3
typically decide not to test the limits. As a result, there is a creeping line of greater and
more intense scrutiny than has ever been the case; for instance, under standard letter
of credit practice as pointed out in the example above.
The financial institution’s internal compliance department adds another layer of

regulation and pressure. Its rationale is not to challenge examiners or regulators, but
to prevent any difficulties from emerging. As a result, the compliance department’s
approach tends to be more conservative than is strictly required by law or regulations.
At times, the lack of understanding of the business by both the examiners and bank
internal compliance can give undue pressure of strict compliance to regulations.
ACTIVITY:
Explain why compliance departments tend to have a strict and conservative
approach when considering their compliance programme.
Subsection 3.6.3 De Risking
It should be noted that as a result of the extensive regulation, some financial insti-
tutions and particularly banks have restricted their activities in relation to trade and
trade finance due to the cost and risk associated with it (so called “de risking”). These
decisions by the banks to restrict their operations can run from not dealing with certain
high risk regions, ending relationships with certain correspondent banks, to closing
their trade or trade finance facilities altogether. This de risking process is the result of
a cost benefit analysis undertaken by the banks, which shows that the potential risks
(reputational or financial) sometimes outweigh the potential benefits of engaging or
facilitating a particular transaction or customer.
The issue of de risking has generated significant consternation in the trade finance
field, especially regarding correspondent banking in countries or territories designated
as high risk. Where the cost benefit analysis mentioned above has resulted in banks
significantly discontinuing their higher risk correspondent relationships, it makes it
exceptionally difficult for good faith actors to access the legitimate financial system
and receive high quality trade finance services. These trends have been alarming in
the trade community, and the outcomes run expressly contrary to the International
Chamber of Commerce’s mission to promote global trade as a vehicle for growth and
prosperity. Fortunately, there has been considerable progress and standardisation in
this area due to the SWIFT KYC Registry. To learn more about the SWIFT initiative, see
Chapter 5, subsection 5.4.2 (Diligence Regarding a SWIFT RMA).
Section 3.7 Privacy Issues
The banking system is founded on the notion of privacy or secrecy of the information
about the accounts that are held. This system of privacy is usually well recognised in the
majority of legal systems. Bank secrecy, however, raises problems for the enforcement
of trade based compliance regulations.
A bank’s duty with respect to secrecy is well established in common law. “The case of
the banker and his customer appears to be the one in which the confidential relationship
between the parties is very marked. The credit of the customer depends very largely
upon the strict observance of that confidence”, Tournier v. National Provincial and Union
Bank of England [1924] 1 KB 461 at 474 [England].
This duty for secrecy is understood to be incredibly broad. A banker’s duty of secrecy
to its customers extends to any banking transaction which is effected for a customer,
whether in the provision of ordinary or specialised services, Royal Bank of Canada v.
IRC [1972] 1 Ch 665 at 680 [England].
Because each jurisdiction has different rules and principles of privacy and reporting, it
is vital that financial institutions have compliance staff who are trained to ensure that
they are party to the development of products, customer relationships, and operating
model governance.
Many regulations and statutes related to compliance expressly address the issue of
secrecy, requiring disclosure to proper authorities when it is in the public interest.
For example, the interest of customers in privacy is overridden by the possibility that
funds are being used to purchase weapons for a terrorist act. In the US, 31 USC Section
5318(g)(3) protects banks who report suspicious activities to proper authorities. Some
jurisdictions also allow exceptions to, or infringements of, bank secrecy in order to
investigate and prosecute tax avoidance schemes, or other serious crimes, and require
banks to release and report account information in some instances. Banks often address
the need to comply with regulatory bank reporting through client consent to disclosure
in documentation.
ACTIVITY:
Explain why many regulations require financial institutions to disclose details
of their customers’ transactions to proper authorities.
86 | Chapter 3
Section 3.8 Operating in Multiple Regulatory Systems
In addition, it is important that financial institutions understand the laws and regulatory
scheme of the jurisdictions in which they operate, as they will be required to abide by
those laws and regulations. Thus,
• Financial institutions that operate only in one jurisdiction need to understand
the trade based financial crime regime in the country in which they are situated.
• For financial institutions operating in multiple jurisdictions, it is necessary that
they be in compliance with the regulatory requirements of each jurisdiction.
• Financial institutions with facilities in the United States, or who conduct
transactions such as dollar clearing in the United States, are subject to US
regulations whether or not: 1) they operate in the United States, 2) the
transaction was booked in the United States, or 3) any of the parties involved
in the transaction are domiciled in the United States.
• Financial institutions should also be aware of regulations in other countries,
and by inter governmental bodies, to which they are exposed such as the
United Kingdom, the European Union, Singapore, Hong Kong, China, and the
UN, to name a few.
Operations in Other Countries. Where a financial institution has operations in more

than one country, the governmental apparatus described above multiplies. Added to
these concerns is the possibility of conflicting regulations which can place the bank in
an awkward position, or regulations which are not in serious conflict, but are different
in terms of strictness (threshold amounts, for example).
ACTIVITY:
Does your bank or financial institution operate in one jurisdiction, or multiple
jurisdictions? If multiple jurisdictions, how does your compliance programme
address operating in multiple jurisdictions?
Section 3.9 General Reputational and Risk Issues
In addition to these factors, there are serious reputational concerns for senior manage-
ment. No bank wants to see its name appear in the press in connection with activities
that are highly unfavourable.
As a result, banks have declined to be involved in certain areas of legitimate trade, in

spite of government approval, for reputational reasons. It is possible that a bank may
refuse to engage in a transaction that would not have been prohibited by regulations
or examiners but is deemed not to be in the interest of the bank, either for reputational
reasons, or because of the potential for other risks. For example, a bank may decline to
facilitate a permitted transaction involving the sale of surveillance devices to a police

department, situated in a foreign country with a questionable human rights record, in
order to avoid negative press. A more general concern is financial risk, both of incur-
ring massive fines and also of damage to the bank on a more general financial level.
Generally, the decision to de risk operations can have unfortunate consequences for
parties based in such high risk countries, who, despite only pursuing legitimate busi-
ness interests and transactions, will find it increasingly difficult to obtain finance, or
financial products, on the international market.
Section 3.10 The Consequences of Non Compliance
The consequences of non compliance can be serious for a bank or financial institution,
often involving government imposed fines, or substantial settlement offers to avoid
prosecution, litigation and fines.
For instance, a fine of HKD 7.5 million was issued to a bank in Hong Kong (State Bank
of India Hong Kong), and a bank in the UK (Standard Bank Plc) was made to pay GBP
7.65 million. Even more drastic fines were given to banks by the US government.
Further Examples of Consequences of Non Compliance:
• United Arab Emirates (UAE) Central Bank fines 11 banks USD 12.5 million in
2021 based on an enforcement action against 11 banks for having insufficient
anti money laundering and sanctions controls at the end of 2019. The fines were
leveled following mid 2019 government directives demanding banks strengthen
their compliance controls.
• Capital One, National Association paid USD 290 million in 2021 based on
alleged failures by its Check Cashing Group to maintain an effective anti money
laundering program as well as alleged Capital One, N.A. failures to timely submit
relevant suspicious activity reports.
• U.S. Bank National Association paid USD 185 million in 2018 due to an allegedly
inadequate anti money laundering program, failure to timely process suspicious
activity reports, and alleged failure to appropriately report currency transactions.
• BNP Paribas paid USD 8.97 billion in 2015 after alleged violations of US sanctions
on money transfers in Sudan, Iran, and Cuba for transactions in US dollars which
were intended to take place outside of the United States.
• HSBC paid USD 1.92 billion in 2012 after alleged failings in the United States
and Mexico, as well as alleged violations of US sanctions on money transfers to
/ in Iran, Cuba, Libya, Sudan, and Myanmar.
• JPMorgan Chase paid USD 1.70 billion in 2014 after alleged AML programme
failings linked to Bernie Madoff’s Ponzi scheme.
88 | Chapter 3
• Standard Chartered paid USD 667 million in 2012 after alleged violations of US
sanctions placed on money transfers to / in Iran, Sudan, Libya, and Myanmar.
• ING paid USD 619 million in 2012 after alleged violations of US sanctions on
money transfers to / in Cuba and Iran.
• Credit Suisse paid USD 536 million in 2009 after alleged violations of US
sanctions on money transfers to / in Iran, Sudan, Libya, Myanmar, and Cuba.
Other penalties for banks that have failed in the compliance area include:
• Subjected to in depth regulatory examinations.
• Deferred prosecution agreements.
• Forced discharge of certain employees.
• Retain or pay for an independent monitor.
• Restrictions in certain direct dollar clearings.
Future penalties that may be imposed can include prison sentences for bank directors
and officials, and the loss of banking licences in significant international jurisdictions,
which would have severe, adverse consequences for the banks concerned. Therefore,
banks should take regulations regarding trade based financial crimes very seriously.
As was pointed out, violations of these regulations can result in significant monetary
penalties, loss of reputation, and other penalties including criminal prosecution.
ACTIVITY:
Discuss and consider the following: Has your bank or financial institution
ever been investigated, or even penalised, for failure to comply with financial
crime regulations?
Section 3.11 A Tale of Two “Compliances”
When discussing compliance, a terminology issue must be recognised. It relates to the

use and meaning of the word “compliance”. In the course of this Book, there are two
main instances in which “compliance” is used. One relates to international banking
and trade (letter of credit and independent undertaking practice), while the other use
is in connection with trade based financial crime.
Traditionally in trade and international banking operations, the term “compliance”

has signified that documents presented under a letter of credit or other independent
undertaking complied with its terms and conditions. In LC practice, therefore, “com-
pliance” relates to whether Document A which is presented under a letter of credit
satisfies the requirements of the LC.
For example, in International Banking Operations and Letters of Credit:
Presentation under
Letter of Credit
Letter of Credit
requires:
consists of:
Document A, Noncompliant
Document A,
containing Terms
containing Terms
1, 2, & 3.
1, 2, & 4.
On the other hand, if a letter of credit requires an invoice for 500MT of coal, and the
invoice presented is for this quantity, issued by the beneficiary of the letter of credit,
and addressed to the applicant, it is said to comply. This example relates to compliance
in the sense of documentary compliance in international banking operations and letter
of credit practice.
However, in the context of trade based financial crime, “compliance” refers to whether
or not a bank or other financial institution has complied with trade based financial
crime regulations or its own compliance programme. In trade based financial crime,
“compliance” means meeting these regulatory requirements.
For example, in Financial Crime Compliance:

• A bank is said to “comply”, if its compliance systems are designed to identify
the risk of money laundering and terrorism financing.
• A compliance plan must be risk based in order to “comply”.
• If a bank’s compliance plan does not take risk into account, it is “non compliant”.
Therefore, in the sense of trade based financial crimes, compliance refers to either the
regulations of inter governmental or government agencies, an institution’s compliance
programme, or an institution’s actions in accordance with external and internal rules
and regulations.
Complying with External Rules / Regulations. Government requires that suspicious

activities be reported. A bank complies when it has a system to identify suspicious ac-
tivities and reports them to the proper authority. Banks are also compelled to comply
with regulations in relation to trade transactions.
Internal Rules and Regulations. A bank may decide that it will conduct due diligence
for cash deposits in excess of EUR 7,000 even though the applicable government reg-
ulation sets the amount higher, or when the client used a certain type of transaction.
90 | Chapter 3
Therefore, when the expression “compliance” is used in discussions, it must be deter-

mined from the context whether the word refers to international banking and trade
(and letters of credit practice in particular), or whether it relates to compliance with
respect to trade based financial crime regulations and programmes.
In honour of Professor James E. Byrne, the editors of this Book have decided to republish
the wise words he offered to the 2018 Trade Based Financial Compliance Conference
held in London. Tragically, Professor Byrne passed away shortly after that event, but
his contributions to this field are monumental, and will continue to impact students
and professionals for years to come.
What is compliance? For years compliance involved determining wheth-

er documents presented under a letter of credit matched it terms and
conditions. This meaning of compliance was linked to the independent
character of the letter of credit (LC) undertaking and was in place for
more than a century. Today, and perhaps the last decade, when LC and
trade professionals talk about compliance, they’re often referring to the
regulatory system governing trade based financial crime.
Although not apparent from the simple union of the words, the notions
differ radically and may even conflict. In the world of LCs, documents are
examined on their face without regard to the underlying transaction or
the realities that they represent. In the world of regulatory compliance,
the underlying substance is what matters. What are the goods? Are there
any? Are they properly priced? Who is the recipient? Trade based financial
crime compliance, perhaps to a greater degree than any other aspect of
trade finance, is an ever-evolving field.
National governments are constantly issuing new regulations and laws:

ones that at times sharply contrast with the regulations and laws of
other nations. Intergovernmental and nongovernmental organisations
have been prodigious at releasing standards and guidance designed to
educate financial institutions and governments on the best practices to
guard against financial crime. Technology has advanced rapidly in recent
years, leading to increased and new difficulties in combatting financial
crime while simultaneously offering new innovative solutions to assist
financial institutions in remaining compliant.
However, despite the abundance of resources available to financial

institutions, there is perhaps no greater resource than the knowledge
and experience of those immersed in the field. One of the goals of this
event is to bring together leaders in the field of trade based financial
crime compliance and to offer an avenue where questions can be asked

and ideas can be shared. Trade based financial crime compliance is an
enormous and important field. It imposes great demands on financial
institutions and regulators because the stakes involved are so high:
stopping the laundering of funds that can be used to facilitate criminal
activity; combatting the financing of terrorism; preventing the violation
of sanctions that are designed to maintain national and global security.
This event will assist you in your efforts to achieve these goals and will
be a tremendous resource for the industry in years to come.
Professor James E. Byrne, May 2o18
ACTIVITY:
From your experience, formulate two sentences that use the two different
meanings attached to the words “compliance” / “compliant”.
Subsection 3.12.1 Summary of Financial Crime Regulation
Chapter 3 (Financial Crime Regulation) provided the student with details regarding
the regulatory scheme governing compliance, and trade based financial compliance in
particular. It considered what constitutes financial crime, surveyed the types of financial
crime, discussed the evolution of compliance which resulted in the current emphasis
on trade based crime, noted key terms, and gave examples. In addition, it introduced
the various bodies charged with responsibility for regulations, and the consequences of
their work, including de risking. It also reviewed privacy issues, and the consequences
of failing to comply with the regulatory scheme. To enable the student to transition
from what was learned in chapter 2 (Trade) to trade based financial compliance as
discussed in this Book, chapter 3 ended with a comparison of the dual meanings of
the word “compliance”.
Consider problems related to financial crimes compliance that a bank, financial

institution, or company engaged in trade faces when it operates in multiple
jurisdictions.
For example, Bank A is incorporated in the US state of New York where it

also maintains its headquarters. It has trade operations in London, Brussels,
92 | Chapter 3
Hong Kong, and Singapore. The Hong Kong branch issues a letter of credit for
a Japanese customer who is buying lamps from an Australian company based
in Sydney. The transaction is being conducted in US dollars.
Which regulations must be observed by Bank A in this transaction?
What should the bank do if it faces conflicting requirements by the different

applicable compliance regimes?
In Section 3.1, the student was encouraged to consider the concept and meaning of a
“trade based financial crime” and consider how it relates to his or her bank or financial
institution.
In what ways has studying the material in this chapter changed or deepened your
understanding of the subject matter?
Question 3-1. Financial crime is a crime against a financial institution: True or false?
Question 3-2. What is the definition of “Financial Crime”?
Question 3-3. Which of the following is not a financial crime? Select all that apply.
a) Anti money laundering.
b) Terrorism financing.
c) Violation of prohibited boycotts.
d) Commercial fraud.
e) All of the above.
Question 3-4. Which of the following does not explain trade based financial crime?
a) Misuse of the financial system.
b) Operates against accepted social norms.
c) Uses the internet.
d) Seeks to take advantage of consumers.

Question 3-5. Which of the following is not a United Nations agency involved in
the fight against trade based financial crimes? Select all that apply.
a) UN Security Council.
b) UN International Children’s Emergency Fund.
c) UN Office of Drugs and Crime.
d) UN Commission on International Trade Law.
e) UN Population Fund.
Question 3-6. Why would a bank possibly decline to facilitate a trade transaction,
despite having governmental or regulatory approval to do so?

Chapter 3 (Financial Crime Regulation) provided the student with informa-
tion about what a financial crime is, the importance of the regulatory re-
gimes applicable to a bank or financial institution, how financial crime is be-
ing combated by the different organisations and regulatory bodies, and the
importance to adhere to the regulatory requirements and consequences for
violating them. Furthermore, this chapter presented the different meaning of
“compliance” in the context of this Book, and introduced the concept of de
risking undertaken by multiple banks.

in chapter 1, this Book discussed Trade in chapter 2.
This chapter discussed government regulators and regulations of Financial
Crime Regulation in chapter 3.
The student is now prepared to move forward with the balance of Part I, and
review the structure of The Compliance Programme in chapter 4, the impor-
tance of Exercising Due Diligence in chapter 5, and the Indicators of Trade
Based Financial Crime in chapter 6.
specific types of financial crime in Part II (Combating Financial Crime), which
covers Anti Money Laundering in chapter 7, Counter Terrorism Financing in
chapter 8, Sanctions in chapter 9, Weapons of Mass Destruction in chap-
ter 10, Anti Bribery and Anti Corruption in chapter 11, Commercial Fraud in
chapter 12, and Anti Boycott in chapter 13.
4
Chapter 4
THE COMPLIANCE PROGRAMME
LEARNING OBJECTIVE
of what a Compliance Programme is, its importance, and its elements.
CHAPTER OVERVIEW:
This chapter on The Compliance Programme provides an overview of what
is involved in a compliance programme, identifies elements of an adequate
compliance programme, discusses the necessity of auditing and independent
testing of a bank’s compliance programme, the role of the bank’s compliance
officer and team, the common failures of a compliance programme, and the
impact of trade on compliance.

subject in chapter 1, chapter 2 explained Trade and trade products, and chap-
ter 3 discussed Financial Crime Regulation.
The remainder of Part I examines Exercising Due Diligence in chapter 5, and
the Indicators of Trade Based Financial Crimes that can identify instances of
financial crime in chapter 6.
scribes the various types of crimes that can be trade based, and the steps
necessary for financial institutions to combat them, including money launder-
ing, countering the financing of terrorism, and sanctions.
95
96 | Chapter 4

Chapter 4 The Compliance Programme
Section 4.1 Regulatory Compliance Overview: The Current Compliance
Regime
Section 4.2 Elements of an Adequate Compliance Programme
Subsection 4.2.1 Assessment of Financial Crime Risks
Subsection 4.2.2 The Written Compliance Plan
Subsection 4.2.3 The Compliance Officer and Team
Subsection 4.2.4 The Contents of the Plan
Subsection 4.2.5 Documentation
Subsection 4.2.6 Training
Subsection 4.2.7 Audit and Independent Testing
Subsection 4.2.8 Implementation
Section 4.3 Failures in Compliance Programmes
Section 4.4 Adding a Trade Based Dimension to Existing Compliance
Programmes
Subsection 4.4.1 The Impact of Trade on Compliance
Subsection 4.4.2 Assessment of Trade Based Financial Crime Risks
Subsection 4.4.3 Supplementing the Compliance Programme
Subsection 4.4.4 Enhancing the Compliance Administration
Subsection 4.4.5 Questions Regarding Adequate Trade Related Documentation
Subsection 4.4.6 Is the Compliance Training up to the Challenges Posed by Trade?
Subsection 4.4.7 Questions Regarding Adequate Testing and Evaluation
Subsection 4.4.8 Implementing Trade Based Financial Crime Compliance
Section 4.5 Introduction to BSA / AML Trade Finance Examination
Subsection 4.6.1 Summary of The Compliance Programme
Section 4.1 Regulatory Compliance Overview:

The Current Compliance Regime
Generally. Banks, other financial institutions, and corporations in virtually every

country are required to have in place a system to address the threats of financial crime,
in particular money laundering and terrorism financing. The Wolfsberg Group, Trade
Finance Principles (2019) Section 1.1.4 (Introduction) states that “[Financial Institution]
s should have an end-to-end [Financial Crime Risk] management programme”.1 This
system should include policies, mandates from, and access to, senior management, a
trained leader, a bureaucracy, systems, and adequate resources to fulfil its mandate.
This system is commonly referred to as the “Compliance Programme”, and it should
2019.pdf.
The Compliance Programme | 97
be articulated in a written “Programme” which is also referred to as the “Compliance

Programme”.
As is apparent from the preceding paragraph, there is a duality in the use of the term
“Compliance Programme”. In one sense, it signifies the entire compliance regime at
a bank and in a narrower sense it signifies the written Compliance Plan. The context
often indicates which meaning is intended, but in other situations the terms overlap
whether by design or inadvertence. Such an overlap is not problematic because in
theory at least the actual “Compliance Programme” should reflect and be reflected in
the written “Compliance Programme.” Where this Book refers to a written compliance
programme exclusive of the overall regime it will be described as a written programme
or a compliance plan.
In major financial institutions, compliance programmes have been in place in some

form (although not necessarily under that name) since at least the early 1970s. The US
has tended to be in the lead regarding attempts to require compliance programmes, and
has been followed, more or less, by other countries. These efforts were driven largely
by governmental and industry concerns about drug related money laundering and that
of organised crime through the misuse of money transfer systems, and the deposit or
withdrawal of paper currency (cash / bank notes).
FACTFIND
For additional reading on Compliance Programme elements, see Geoffrey P.
Miller, The Compliance Function: An Overview (November 2014), especially from
p.12 on. To retrieve the paper visit: http://www.law.nyu.edu/sites/default/files/
upload_documents/The%20Compliance%20Functiion%20an%20Overview.
Miller.pdf.
Because anyone working with trade based financial crime compliance must work within
the context and contours of an existing system of compliance, it is important to under-
stand the existing compliance programme before considering the implications of trade
based financial crime. Therefore, section 4.2 (Elements of an Adequate Compliance
Programme) of this chapter considers what constitutes an adequate compliance pro-
gramme before turning to identifying and addressing the implication of trade based
financial crime for banks’ compliance programmes in section 4.4 (Adding a Trade Based
Dimension to Existing Compliance Programmes).
ACTIVITY:
Consider these questions: Is trade finance specifically addressed in the compli-
ance programme of your organisation? If so, in your opinion, is the programme
adequate to address the threats of financial crime to trade finance? Is there a
system in place to train employees in trade based financial crime compliance?
98 | Chapter 4
Is there a system in place to update the programme regarding trade related

financial crime? Are employees given training in these updates to the Pro-
gramme? Is there a system to assess errors, problems, and deficiencies in the
current trade finance compliance system, and to correct them? Are employees
trained to document their trade related compliance activities and decisions?
EXPERT’S CORNER
Whether you are a seasoned professional or just starting out on your financial
crime awareness journey, you will find this book invaluable. When we talk
about financial crime, the topic covers multiple crimes which have their own
nuances and complexity, for example, terrorist financing can be carried out
through the use of legitimate funds, not just illicit funds, and also through the
movement of goods. The complexities of these crimes and the way they are
carried out presents challenges for identification and mitigation, requiring a
full understanding of the methods to commit these crimes.
Trade is complex and through its cross-border nature has a number of touch
points and parties involved; thus, a holistic assessment of the activity is needed
to fully understand Trade Based Financial Crime. Collaboration of everyone
tasked with rooting out the bad actors is key. Working in a silo as we investigate
and endeavour to mitigate financial crime results in the individual potentially
only seeing a portion of the activity. We need a joined up approached not just
between the Public and Private sectors but also between in house teams. What
the Sanctions teams see could have an impact on the AML teams.
Crime can cause significant economic and social problems to individuals and
communities; it is therefore imperative that we continue to work together and
continue to learn how criminals conduct all crimes as they impact our world.
The awareness journey never stops, in the same way as criminals attempt to
change their methods, we need to expand on our understanding. Remember,
what we read so do the criminals and they can adapt to the changing landscape
quicker than those who are endeavouring to identify and mitigate crime.
Good luck on your journey, it is at times frustrating; however, it is very inter-

esting and if you put the effort in, rewarding.
Dr. Graham Baldock

Section 4.2 Elements of an Adequate Compliance Programme
Having an adequate compliance plan and implementing it is essential for a financial

institution. It is one of the primary concerns raised by bank examiners in their assess-
ments, and therefore to be taken seriously.
An adequate and thorough written compliance plan will enable the bank and its exam-
iners to assess the adequacy of the bank’s compliance programme and its approach to
trade based financial crime, and to measure its actions in implementing the programme.
The eight elements of such a programme are listed in the following box:
ELEMENTS OF A COMPLIANCE PROGRAMME
1) Assessment of Financial Crime Risks.

2) The Written Compliance Plan.
3) The Compliance Officer and Team.
4) The Contents of the Programme.
5) Documentation.
6) Training.
7) Audit and Independent Testing.
8) Implementation.
Subsection 4.2.1 Assessment of Financial Crime Risks
In order to prepare an adequate compliance programme, a financial institution must

assess the risks inherent in its business and customer base, as well as the risks inher-
ent in its own staff, and the exposure of the financial institution’s services and staff
to financial crime. Risk assessment is essential to an adequate programme. Unless a
financial institution understands its exposure to risks, it cannot address them ade-
quately. In many ways, such an assessment is not new to banks. Financial institutions
are always assessing, managing, and attempting to mitigate their exposure to risk in
all facets of their business. The principal difference is that in the past, the assessment
has been primarily with respect to credit and commercial risks.
In the financial crime compliance context, however, risk assessment involves under-
standing the financial institution’s financial crime risk profile. This process involves
a variety of factors, including an understanding of the retail and corporate customers,
knowing the identity of the customers and / or the beneficial owners, their business
profiles and noting any recent or drastic changes to these profiles. Furthermore, it ex-
tends to the geographical locations in which the financial institution and its customers
100 | Chapter 4
operate, the use of cash, the use of funds transfers, problems that have previously
occurred, and regulatory and supervisory assessments and warnings.
The financial crime risk assessment should inform the compliance programme, which
in turn should address the identified risks. Moreover, it is crucial that the risk assess-
ment be written, and that the procedures involved in conducting the risk assessment
be presented to the appropriate personnel within the structure and operations of the
financial institution.
Generally, there are two steps involved in developing a financial crime risk assessment.
The first step is to identify the specific risk categories for the financial institution, such
as: products, services, customers, transactions (including the number of transactions
and whether they are automated or done face to face with the bank), and geographical
locations. The second step involves a more detailed analysis of these categories to
determine what level of risk is associated with each unique category.
FACTFIND
To learn more review the Financial Action Task Force (FAFT), Guidance for
a Risk-Based Approach: The Banking Sector (October 2014), Section I, Part C
(Application of the Risk-Based Approach):
http://www.fatf-gafi.org/media/fatf/documents/reports/Risk-Based-Ap-
proach-Banking-Sector.pdf.
It is important to note that the risk assessment is not a one time process. Financial
institutions must continuously monitor their risk assessment and exposure, and update
it as their risk profiles change as customers leave the bank, and new customers are
brought in with potentially different risk attributes. It must be emphasised, therefore,
that the process of risk assessment is an ongoing activity.
The following products and services have been identified as potentially posing a higher
risk for financial crime, particularly money laundering and terrorism financing:
• Electronic funds payment services such as: prepaid cards, funds transfers,
automated teller machine (ATM) transactions, third party payment processors,
and other types of services related closely to electronic funds payment services.
• Electronic Banking.
• Private Banking.
• Foreign Exchange.
• Foreign Correspondent Accounts.
• Monetary Instruments.
• Lending Activities such as: loans secured either by cash collateral or marketable
securities.
• Certain customers should also appear in the risk assessment as posing a higher
level of risk. Such customers may be:
- Foreign Financial Institutions (including banks and money services providers).
- Non Bank Financial Institutions (including money services providers,
casinos, security brokers, and precious stone / metal dealers).
- Politically Exposed Persons (PEPs).
- Non resident aliens and foreigners.
- Foreign corporations, particularly offshore shell companies and those
located in high financial crime risk geographic areas.
- Cash intensive businesses.
Clearly, the listed products and services comprise a wide range of financial activities and
circumstances, so some discretion has to be exercised to focus attention and resourc-
es of a financial institution’s compliance programme in accordance with a particular
financial institution’s profile and activity.
Geographical factors should also be taken into account when conducting a risk as-
sessment. Financial institutions should note whether a customer is located, or does
business, in a country which is subject to sanctions or identified as high risk for money
laundering or other types of criminal activity. They must also be aware of the regulatory
regime or regimes to which they are subject. This issue was discussed in more detail
in chapter 3 (Financial Crime Regulation).
Having assessed the risks, it is necessary for the financial institution to structure and
implement a compliance programme that addresses these risks in an adequate fashion.
ACTIVITY:
Identify the two essential steps involved in developing a financial crime risk
assessment for any financial institution.
Subsection 4.2.2 The Written Compliance Plan
While not required in every jurisdiction, it is better practice for the compliance pro-
gramme to be in writing. By putting the programme in writing, there is greater clarity
regarding its contours, the allocations of responsibility, and its policies. This step makes
the financial institution’s commitment to the compliance programme clear within the
financial institution to its own staff, and importantly, also to the examiners who are
tasked with investigating and auditing it. A written compliance plan also better ensures
that the programmes will remain intact and in effect despite turnover of personnel,
which will invariably happen over the years.
102 | Chapter 4
ACTIVITY:
Why is it important for financial institutions to have a compliance programme
in writing?
Subsection 4.2.3 The Compliance Officer and Team
It is necessary to designate a properly qualified senior person to act as a compliance

officer, and to allocate sufficient resources to enable the fulfilment of responsibilities.
One of these responsibilities includes maintaining an adequate budget. There are sev-
eral important points to note about a compliance officer. In the literature, this aspect
of the programme is described as regulatory compliance management, although the
term is more expansive than just the compliance officer, and includes assessment as
well as training. Some key aspects must be noted:
• Access to the Board. The compliance officer must have direct access to the
Board of Directors or to an appropriate committee of the Board, and in some
jurisdictions, that committee must be composed of a majority of outside
directors. The compliance officer must also have access to senior management
of the bank or financial institution.
• Staff and Resources. It is also necessary that the compliance officer be

supported by sufficient staff in order to perform the mandated tasks, and
have access to sufficient resources. The compliance staff, of course, must also
be adequately qualified and have sufficient independence to carry out their
duties. In one of the penalty citations, it was noted that the compliance officer
had multiple unrelated responsibilities and no staff, making it impossible
for the officer to carry out its functions, even though the programme was
satisfactory on paper.
• Budget and Resources. Financial institutions should provide for the necessary
budget and resources to accomplish their compliance goals. The budget process,
as it relates to compliance, should be reflected in the compliance programme.
Compliance Officer: The FFEIC, Bank Secrecy Act / Anti-Money Laundering Examination
Manual (2014),2 informs the reader that a senior person who is properly qualified to act
as a compliance officer must be designated for the post:
The board of directors is ultimately responsible for the bank’s BSA/AML compliance
and should provide oversight for senior management and the BSA compliance officer
2 https://bsaaml.ffiec.gov/manual/AssessingTheBSAAMLComplianceProgram/04.
The BSA compliance officer should regularly report the status of ongoing compli-
ance with the BSA to the board of directors and senior management so that they
can make informed decisions about existing risk exposure and the overall BSA/
AML compliance program.
Examiners should confirm that the BSA compliance officer has the appropriate
authority, independence, and access to resources.
In October 2018, the major U.S. financial regulatory bodies issued an interagency state-
ment regarding BSA resource sharing. The Agencies addressed collaborative agreements
whereby banks contractually bind themselves to share resources to more effectively
manage their BSA / AML obligations. The statement emphasises that these agreements
“are most suitable for banks with a community focus, less complex operations, and
lower-risk profiles for money laundering and terrorism financing.” The statement cau-
tioned, however, that collaborative agreements for BSA resource sharing are distinct
from the collaborative agreements regarding information sharing available under the
US PATRIOT Act Section 314(b). Banks wishing to pursue that form of collaboration
must do so through FinCEN. The statement also provides examples of how resource
sharing could be applied to internal procedures, audits and BSA training programmes,
but cautioned sharing a BSA officer between non affiliated banks.
To view the Interagency Statement on Sharing Bank Secrecy Act Resources (October 2018), visit
https://www.fincen.gov/news/news-releases/interagency-statement-sharing-bank-
secrecy-act-resources
ACTIVITY:
List several examples of the type of support required by a compliance officer
in a financial institution.
Subsection 4.2.4 The Contents of the Plan
The compliance plan for a financial institution needs to contain a variety of items. This
subsection lists the most important ones.
Goals and Policies. The plan should contain formulated compliance policies, and
indicate a means by which future policies can be formulated, and modified policies
presented. These policies should address specific products, transactions, types of goods,
geographical areas such as countries or specific regions, and Politically Exposed Persons
(PEPs). It should also provide for the introduction of new products should the financial
institution decide to expand or alter its activities. Means of assessing the effectiveness
of the programme and of staff training should be expressly addressed. The plan should
104 | Chapter 4
also identify criteria for staff acquisition, including criminal background checks or links
to problematic causes or countries, and provide for screening of current employees for
risk factors, and pre screening of new hires.
KYC Policies. The compliance plan should state the financial institution’s goals and
policies regarding setting up customer relationships (“Know Your Customer” or KYC
or, in the US, “Customer Identification Program” or CIP), conducting ongoing customer
due diligence, monitoring transactions in light of the customer’s business profile, main-
taining internal communications between relevant areas of the financial institution,
and an internal reporting system. The policies adopted should be risk based and reflect
a serious commitment of the financial institution to a trade based compliance regime.
These matters are discussed in greater detail in chapter 5 (Exercising Due Diligence).
FACTFIND
To find out more about the US mandated “Customer Identification Program”,
go to: https://bsaaml.ffiec.gov/manual/AssessingComplianceWithBSARegu-
latoryRequirements/01.
Applicable Areas of the Bank. The programme should specify the areas of the fi-
nancial institution to which it applies and the relative responsibilities of each area.
It is likely that the compliance programme will track the organisational chart of the
financial institution with roles for each unit, particularly with respect to those areas
with a high profile in the financial institution’s risk assessment.
Reporting and Decision Making Process. The plan should also delineate the reporting
and decision making process. A problem identified in many of the summaries of fines
and penalties is the failure of financial institutions to indicate lines of communication,
and of failure of the various departments to communicate with each other. In struc-
turing a compliance programme, it is necessary that there be clarity in documentation
regarding staff roles and responsibilities, and defining what the obligations are of each
staff member or area.
Further, the plan must include internal controls and management information systems
that enable senior management to have access to the information that it needs in order
to manage the risk.
FACTFIND
To find out more about the components of a compliance risk management
plan, go to: http://deloitte.wsj.com/riskandcompliance/files/2014/07/banks_
compliance_mgmt.png.
Sharing Specialised Information. Each unit has access to specialised information that
may not be accessible to other units within the financial institution. Therefore, it is not
only essential that there be a clear delineation of responsibility but also a method by
which specialised information can be shared, if needed and appropriate, in an efficient
manner. For example, the relationship manager may have access to information about
the customer’s overall patterns of conduct which the operations department probably
would not have. But access to this information may enable operations to recognise
certain changes in patterns or behaviour, and thus, potentially, identify indicators or
other signs signalling a change of risk exposure to the bank’s operations. Moreover,
it is essential that it be clearly set forth in the plan who is responsible for what deci-
sions so that the relevant information can be routed properly and particularly to the
decision maker, whether it is compliance, operations, the relationship manager, legal,
or some level of management. A statement from the Monetary Authority of Singapore
emphasises this point:
“The middle office/back office staff processing … transactions would be bet-

ter informed when identifying related party transactions if there is effective
sharing of information between the front office, which would have collected
information on their customers’ related entities as part of the customer
on-boarding and regular review process, and the control or operations units
processing the trade transactions”.3
Furthermore, the programme should indicate when and how escalation of the review or
monitoring process is to occur. It should also specify the stages of the escalation process
and what units of the bank are responsible for making a decision regarding reporting.
Employee Vetting. The programme should identify criteria for vetting staff including
checks for criminal background or links to problematic causes or countries, screening
of current employees for risk factors and pre screening of new hires. In the past, sev-
eral cases of serious criminal conduct have been reported which were initiated, or at
least abetted, by banking staff members who exploited weaknesses within the bank’s
oversight systems, or who passed on specific knowledge of such to fraudsters and other
criminals outside the institution.
This situation runs contrary to past business practices where links to certain countries,
industries, or companies were regarded as a positive asset. However, where that link
involves an entity or country that is problematic, care needs to be taken to assure that
the employee is not assisting the customer in circumventing the compliance system.
Vetting should occur not only at the time of initial employment or promotions but on
3 MAS, Guidance on Anti-Money Laundering and Countering the Financing of Terrorism Controls in
Trade Finance and Correspondent Banking at 2.2.3.2 (p. 15), available at https://www.mas.gov.sg/.
106 | Chapter 4
a regular basis because a person’s circumstances change (i.e. marriage to someone with
potentially problematic links) and because the regulatory and sanctions environment
changes (i.e. regime change in country with which the person is linked resulting in
sanctions) regularly over time.
Reporting Suspicious Activities. Under all trade based AML regimes, there is a re-
quirement that a bank report suspicious activities. It is not, however, simply a matter
of reporting every instance where a question is raised, as this practice would lead to
an information overload and excessive reporting—a matter criticised by regulators.
Therefore, the financial institution is expected to sift through potential unusual ac-
tivities, ask appropriate questions, and only report such activities that represent the
financial institution’s considered judgment as being suspicious. There are a variety of
reasons for screening and filtering potentially unusual activities, which include pre-
venting overwhelming the system and causing unnecessary difficulties for customers
engaged in legitimate business activities. Accordingly, the compliance plan should
indicate a process by which reviews are assessed and, if necessary, escalated, ensuring
that questions are asked where appropriate without indicating to the customer that a
compliance review is underway. Decision making responsibility should also be clearly
allocated as stated above. The plan should provide that records of each step in this
process be made and retained, so that management and also supervising authorities
(regulators) may be able, at a later stage when necessary, to understand and retrace the
decision making process. This aspect of documentation and record keeping is revisited
in detail below in subsection 4.2.5 (Documentation).
Points to be kept in mind when structuring a Compliance Plan:

• There should be clarity in documentation regarding rules and responsibilities,
both at the staff and the departmental level.
• Setting the criterion for baseline checks is essential in order to determine riskier
or more complex transactions. The process involved in sufficient monitoring of
these transactions accompanied by periodic training on Indicators of financial
crime or suspicious transactions also needs to be considered beforehand.
ACTIVITY:
Identify at least four topics and items that should be addressed in a compliance
plan.
Subsection 4.2.5 Documentation
An adequate trade based financial crime compliance programme must also give
considerable emphasis to documentation. Because the financial institution’s super-
visory personnel and, more importantly, regulatory supervisors can only deal with
the programme retroactively, they must rely on third person means of recapturing
what has been done. In this effort, memories and recollections are highly unreliable
because they can be self serving and tend to change as time passes in light of what has
actually occurred subsequently. For that reason, considerable importance is attached
to contemporaneous records.
Record Keeping. As a result, it is important to document decisions taken and their

rationale. It is also essential to have a record keeping plan by which these records can be
preserved in a manner in which they can be accessed, searched and retrieved upon the
request of regulators and examiners. It is essential that detailed records be kept so as
to document what the financial institution has done in each aspect of the programme,
and why. The financial institution must determine the minimum retention period for
records, what records must be kept, and who must create and file them. In this regard,
consideration must be given as to whether the institution’s normal retention policy is
adequate since some of the issues raised by compliance matters can arise many years
later, unlike the legal considerations normally at work in designing document retention
policies such as the applicable statute of limitations or, in certain civil law countries,
prescription period.
Applicable Policies and Statutes. Above all, the financial institution must be sure
to align its record retention policy of compliance records with the policies of the reg-
ulators (particularly where a financial institution is exposed to regulatory scrutiny in
more than one country with different record retention policies), and confirm that its
policy does not differ from that applicable to general records.
Action and Inaction. A proper documentation and record keeping policy applies to
every decision, whether it results in action, or a decision not to act. Indeed, it may be
more important to record a decision not to act than to record a decision to act. Where
there is action, the actions may speak for themselves and, at least, indicate that the bank
responded to a perceived problem. The actions do not, however, necessarily indicate
why the bank elected to take this action and thought that it was more appropriate than
other possible actions. Records should reveal that. Where there is no action, however,
it is not apparent that the financial institution considered the problem at all, or why
it decided that action was not warranted. Accordingly, keeping records of the decision
making process is of importance.
Having emphasised records and record keeping, it is important that the records be
kept accurately formulated. It is neither worthwhile nor useful to record every thought
expressed in a general discussion because such a record may give an inaccurate sense
of the meeting, the factors weighed, the decisions made, and why. To avoid such in-
accuracies, someone senior should either be responsible for records or, at the very
least, review them before they are finalised and subsequently archived and retained.
108 | Chapter 4
This way, records later retrieved and reviewed will give an accurate picture of the risk
assessment and compliance process.
FACTFIND
For additional information about documenting and record keeping, see FATF,
International Standards on Combating Money Laundering and the Financing of
Terrorism & Proliferation, Section D (Preventative Measures)
http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/
FATF_Recommendations.pdf.
Emails. Particular attention must be attributed to all communication via emails. When
business persons communicated by letter, some thought was given to what was said
before putting it into writing. There was a degree of informality and casual comments
tended to be avoided or expressed orally. Email, however, does not have the formality
or seriousness attached to it that is associated with a formal letter. Employees of finan-
cial institutions should give careful consideration to putting casual comments about
compliance into emails. What is being said here is not intended to supress truth but
to urge precision of expression. The kind of casual comments that appear in emails is
remarkable, comments that would never have been made on proper reflection or, for
example, in a letter. The problem is that, once made, they are accessible to examiners.
Even more dangerous is humour which may appear to be funny in context but whose
context would not be apparent to a third party (e.g. “Well, I just stashed another USD
200,000 towards my retirement.”, or “I am thinking of retirement. I guess that I should
increase the percentage of my skim.”). Since such communication may be reviewed in
a subsequent investigation or audit, careful consideration must be given at the time
of communication, irrespective of what medium is used.
ACTIVITY:
Discuss the following issues relating to the compliance plan:
What provisions does your organisation have regarding documentation of its
compliance activities and decisions?
Who is responsible for keeping compliance records and verifying their accuracy?
Subsection 4.2.6 Training
A satisfactory and detailed compliance plan must provide for adequate overall compli-
ance training for staff, and specific training with respect to trade based financial crime
for those units of the financial institution dealing with trade.
New Staff. Thorough compliance training must be given to new personnel

that takes into account their intended position and exposure to compliance
risk related issues within the financial institution organisation.
Ongoing Training for All Staff. Training must be given to all staff in accor-
dance with their duties and responsibilities, including directors and senior
management. There should be periodic refreshers and updates, so that it is
ensured that all staff members are familiar with, and prepared for, any com-
pliance impact that new products, operations and developments may have.
Content. The content of the training must not be merely superficial but enable
the employees to understand the purpose and rationale of the various policies
and rules, and be applicable to practical situations.
Records. As indicated, complete records of training must be kept and main-

tained, so that banks and financial institutions can show evidence of their
seriousness regarding compliance issues during an investigation or auditing
process undertaken by regulators or other third parties.
New Products. It is important that training be available when the financial

institution introduces new products, or expands its operations (new customer
base, geographical areas, and so forth).
Staff and management, and not just new employees, should undergo routine training on
a regular cycle in order to stay current with the latest trends, information, and advances
in the field. The compliance plan should expressly address the means of assessing the
effectiveness of staff training, so that the financial institution ensures quality training
to its staff and management.
ACTIVITY:
What provisions are there for regular training in your organisation’s
compliance plan?
Subsection 4.2.7 Audit and Independent Testing
Once a compliance plan is in place, its effectiveness must be monitored, and adjusted
if the need for that arises. There are three levels of such monitoring: 1) internal; 2)
external; and 3) independent.
Internal monitoring points to analysing and adjusting, if needed, the compliance plan
and programme by means and personnel that are internal to the financial institution.
110 | Chapter 4
This topic is revisited below. External monitoring involves assessment by third parties.
While some external sources of monitoring may be third party auditors retained by
the financial institution, the most important source of external monitoring will be the
feedback from regulatory examiners.
Most governments require that there be independent “testing” or audit and monitor-
ing of the effectiveness of a compliance programme. Independent testing means an
audit undertaken by a unit of the bank and person that was not responsible for having
set up the plan or connected with it. Those conducting the testing must report to the
board and have access to the directors. This monitoring can be done internally, or by
an external organisation that is not part of the financial institution, such as an ac-
counting or law firm, or a combination of both. Adequate resources must be devoted
to the testing process. Even where not mandated by a government or the applicable
compliance regime, such independent testing is valuable to ensure that the programme
is functioning as intended, and to show commitment in ensuring compliance in the
organisation’s activities and operations.
FACTFIND
To learn more on auditing and independent testing, see FFIEC, Bank Secrecy
Act / Anti-Money Laundering Examination Manual: https://bsaaml.ffiec.gov/
manual/AssessingTheBSAAMLComplianceProgram/03.
What is wanted is an organisation wide compliance approach “that generates mean-

ingful compliance risk information and analysis capabilities, not just static reporting.”4
Internal monitoring involves self assessment by the financial institution, chiefly through
its compliance department. “Strategic self-assessments can be important tools for
identifying and assessing how compliance risks are being overseen at both the line-of-
business and enterprise levels.”5 This function should involve gathering information
and feedback about the effectiveness of the programme. Of particular interest are the
comments (especially critical ones) from independent auditors and regulatory bank
examiners. Not only are these comments likely to be the source of added scrutiny on a
subsequent examination or audit, they are also invaluable in refining the programme
and making it more effective and credible.
Financial institutions are well advised to pay attention to problems that arise from
insufficient knowledge or lack of experience in working with the requirements of a
regulation. Such problems are foundational and will be of great concern to regulators.
4 https://www2.deloitte.com/us/en/pages/risk/articles/rethinking-compliance-risk-management-
financial-services.html.
5 Id.
Both the findings and the recommendations that are contained in examination and audit
reports can be used to assist in evaluating the overall effectiveness of the compliance
programme. As the institution receives its readout of findings and recommendations,
it is very important to ask the examiner or auditor for specifics regarding the under-
lying justifications for findings so that the compliance programme can be improved
upon in the future.
Experts suggest following a five step procedure for regulatory finding:

• Be sure that the finding is really understood and not disregarded or ignored.
• Identify the root cause behind the finding.
• Create an action plan to address the finding, decide on steps, and set due
dates for implementation of such, and make someone responsible to ensure
appropriate actions are taken.
• Assign someone else to monitor progress.
• Double check (“validate”) the response before checking it off.
Purpose. What must be determined by the testing is whether the plan and programme,
as it exists, meets the indicated goals, whether it is effective, and whether adequate
resources have been devoted to it. The compliance plan must indicate how often the
testing must occur, and to what extent.
Examination of a particular compliance programmes is a test of how well risks were

identified and how effective resources were internally allocated.
Periodic. Testing must be conducted on a periodic basis. What is tested should not
only relate to a specific unit, but be organisation wide on a regular basis. With respect
to trade based financial crime, however, there will be particular focus on those units
of the financial institution dealing with trade products, and with other units of the
financial institution, to ensure that they are aware that special attention and reference
must be given to trade products whenever encountered.
Scope. The testing and assessment should take into account the entire compliance
programme and its effectiveness. These audits should also analyse communications
between various areas and units, decision making, and clarity of lines of responsibility.
As with every aspect of the compliance programme, complete records must be main-
tained of the testing and assessment efforts.
Testing:
• Must be conducted on a periodic basis.
• Should be an organisation wide operation, and not just of a specific unit.
However, with respect to trade based financial crime, there will be particular
focus on those units of the financial institution that deal with trade products.
112 | Chapter 4
Testing other units of the organisation will ensure that they are aware that
special attention and reference must be given to trade products.
• Those conducting the testing must report to the board of directors and have
direct access to them.
• Adequate resources must be devoted to the testing process.
• These audits should also assess communications between various areas,
decision making, and clarity of lines of responsibility.
• Complete records of the testing and assessment process must be maintained.
ACTIVITY:
How often and to what degree is your organisation’s compliance programme
tested?
Why is independent testing of a financial institution’s compliance programme
important?
Subsection 4.2.8 Implementation
It is not enough to have a well designed compliance plan, or that the plan indicate how
implementation is to occur; it must actually be implemented. Who is to implement
what aspect of the programme must be identified, and a time table established for
implementation. Records should indicate difficulties or delays encountered, and any
amendments to the programme that were undertaken, in the process of executing the
plans.
Putting the compliance plan into effect is as important as having an adequate com-
pliance plan.
Implementation Schedule. It is also important that the plan indicate how, and the
time frame in which, it is to be implemented, that there be allocated adequate time
and resources, including personnel, to carry out the programme.
There should be target dates for each step of implementation and a top executive should
be accountable for the implementation to signal to staff the importance attached to
the programme. By stating that “[d]emonstration of executive accountability and tone
at the top is key in satisfying regulatory expectations”,6 an international accounting
firm aptly emphasised the weight ascribed to the involvement of senior management
in this regard.
6 https://www2.deloitte.com/us/en/pages/risk/articles/rethinking-compliance-risk-management-
financial-services.html.
Implementation. For the plan to be implemented, it is important to determine the

following at the very beginning:
• Identify the people who are to implement the plan.
• Determine who will implement what aspect of the plan.
• Establish a timetable.
• Maintain a record which indicates the difficulties or delays encountered, and
any amendments that were undertaken, in the process of executing the plan.
Section 4.3 Failures in Compliance Programmes
As mentioned earlier, financial institutions should take regulations regarding trade

based financial crimes seriously. A breach in this area leads to monetary penalties and
also brings about a loss of reputation for financial institutions.
It has been observed that the actions that typically incurred penalties were not acci-
dental omissions. Rather, the penalised activities were wilful, systematic, or grossly
negligent. Some actions were deliberate and included activities from structuring plans
that disobeyed, or were intended to avoid, compliance regulations, to covering up those
activities and failing to cooperate with regulators.
What follows below is a list of failures cited in more than 100 releases by regulatory
authorities. It is worth careful consideration. This list includes failures by financial
institutions to:
• Implement or maintain adequate AML programmes to effectively risk rate
customers.
• Assess the institution’s money laundering risks and effectively design an AML
compliance programme addressing those risks.
• Utilise automated checks to search for whether the parties to a transaction
are on a government sanction or terrorist list.
• Adequately inform staff on the bank’s compliance programme.
• Conduct adequate staff training to keep staff informed of latest developments
that are appropriate to each staff member’s level. For example, relationship
managers should undergo different training than that of compliance personnel,
or trade operations personnel.
• Sufficiently monitor and control the activities of the organisation’s employees.
• Develop and implement adequate Know Your Customer (KYC) or Customer
Identification Programs (CIP).
• Maintain adequate records associated with the Know Your Customer protocols.
• Develop and implement adequate due diligence for foreign accounts, and to
continuously monitor the business relationship with these customers.
114 | Chapter 4
• Understand or identify politically exposed persons (PEPs) and properly classify

them as high risk.
• Take a risk based approach and conduct enhanced due diligence procedures
when the risk assessment signalled a need to do so.
• Detect and report suspicious transactions (in a timely manner).
• Comply with notification requirements.
• Act in a timely manner when indicators of financial crime are identified.
• Establish and maintain adequate controls to ensure ongoing compliance.
• Maintain a programme appropriate for the financial institution’s size and type
of business.
• Adequately tailor the parameters and aspects of the system to meet the specific
needs of the financial institution and its business.
FACTFIND
Read Part I (The Problem) of Lanier Saperstein, Geoffrey Sant & Michelle Ng, The
Failure of Anti-Money Laundering Regulation: Where is the Cost-Benefit Analysis?,
91 Notre Dame L. Rev. Online 1, 2 (2015) , and then continue to the following
Activity. http://scholarship.law.nd.edu/cgi/viewcontent.cgi?article=1015&con-
text=ndlr_online.
ACTIVITY:
After reading Part I in the FACTFIND Box above, consider how your organisation
can use the information provided in this chapter to improve its compliance
programme.
Section 4.4 Adding a Trade Based Dimension to

Existing Compliance Programmes
Each element of the compliance plan and programme should be revisited in light of
trade based financial crime, so that appropriate consideration can be devoted to address
and manage the implications brought about by such types of risk and crime.
Subsection 4.4.1 The Impact of Trade on Compliance
It is important to recognise that while trade uses the same funds transfer mechanism
to pay and be paid, it does not follow that the current programme for funds transfers is
adequate to address any trade risks. An adequate trade based compliance programme
must take into account the products that are unique to trade, trade finance tools, and
correspondent banking implications. Financial institutions are more actively involved
with respect to trade transactions than they are typically with respect to funds transfers.
While these points are applicable to any financial institution engaged in facilitating
trade and to corporates engaging in trade, banks are so closely associated with trade
products such as letters of credit and collections, that it is more normal to refer to
banks when discussing these products and that practice is followed in this section.
Trade related issues may be integrated into the existing plan or separate appendices,
or may combine both since there are some aspects that are unique to trade while other
aspects fall within the category of general compliance. An example of general compliance
would be compliance policies regarding advising banks, negotiating banks, confirming
banks, and documentary collections (bank collections).
It should be recalled that there is another duality in the meaning of “compliance” when
it comes to trade in addition to the dual use of “Compliance Programme” noted at the
beginning of this chapter. As pointed out in chapter 3 (Financial Crime Regulation)
section 3.11 (A Tale of Two “Compliances”), on trade finance, the term “compliance”
is understood to relate to the question of whether or not documents presented under
a letter of credit type undertaking comply, on their face, with the terms and conditions
of the undertaking itself.
As explained in chapter 1 (Introduction to Trade Based Financial Crime Compliance),

the general rule is that the promise embodied in the letter of credit is conditioned on
the facial compliance of required documents. It is illustrated in Article 14(a) (Standard
for Examination of Documents) of the Uniform Customs and Practice for Documentary
Credits (UCP) published by the International Chamber of Commerce, Publication No.
600 (2007), which is used for virtually all commercial letters of credit. It provides that
banks “must examine a presentation to determine, on the basis of the documents
alone, whether or not the documents appear on their face to constitute a complying
presentation.”
This trade practice meaning of “compliance” causes problems for financial crime
compliance in the field of letters of credit, since LC bankers traditionally only look
at the documents, and avoid any scrutiny of the underlying commercial agreement
that gave rise to them or that they represent. Therefore, there is not only a problem
of translation of the word “compliance” to trade professionals, but also the cultural
transition towards engaging in a process that is fundamentally different than their
training and orientation.
Subsection 4.4.2 Assessment of Trade Based Financial Crime Risks
In order to supplement an existing compliance programme to adjust for trade based

financial crime risks, it is necessary to assess those risks in the bank’s current busi-
ness. As with every aspect of a compliance programme, the trade based compliance
116 | Chapter 4
programme must be risk based. While not all trade poses a high credit risk, and, indeed,
has long been regarded as safe from this perspective, most banks classify trade as an
area of high risk from the perspective of financial crime compliance at the insistence
of regulators. It is likely to take time for banks, regulators, and examiners to sort out
how to adjust and handle this risk, as it did for funds transfer, so as to establish areas of
relative comfort and be able to handle them in a manner that does not unduly impede
trade or unduly tax the bank’s compliance resources and focus those resources on areas
of higher risk. Because the risk is not always equally high, it follows that some trade
represents an even higher risk.
The starting point for a trade risk assessment is the trade profile of the bank’s customers.
While the current customer profile may have taken into account trade risks, it should
be revisited with this particular issue in mind so as to establish a base line in order to
enable the bank to more readily identify deviations. In addition to questions of the
geographical areas in which the customer’s trade activity occurs, the products traded,
the profiles of the companies’ customers, and whether they are related entities, the
bank should consider the type of financing, whether it is consistent with the resale cycle
of the goods, global trends in those goods, and the prices charged. Special attention
should be paid to the indicators of trade based financial crime, which will be discussed
in detail in chapter 6 (Indicators of Trade Based Financial Crimes).
FACTFIND
For more information on risk assessment, review Section III(A) of the following
FATF document: http://www.fatf-gafi.org/media/fatf/documents/reports/Risk-
Based-Approach-Banking-Sector.pdf.
ACTIVITY:
Does your organisation have customer profiles?
Who is responsible for maintaining them? Who has access to them?
Who can amend them?
Subsection 4.4.3 Supplementing the Compliance Programme
As indicated, most financial institutions already have a compliance programme in place.

In light of regulatory concern about the misuse of trade to perpetrate financial crime,
it is necessary for banks and other financial institutions engaged in trade finance to
revisit their existing plan and programmes to include a trade based financial crime
dimension. The financial institution should consider which aspects of its compliance
programme are inadequate in light of trade based compliance risk.
These questions would include considering whether there was any consultation with
trade operations or products personnel in developing the compliance programme,
whether these departments are included in special training that takes into account
trade risk and general training regarding compliance, and whether there is a plan for
independent auditing and testing for trade based compliance risk.
In particular, the various stakeholders in the bank’s trade related departments should
be included in the process of developing and implementing a plan to encompass trade
based risk. Because of the complex nature of trade, several units of a bank are typically
involved in a trade transaction. Depending on the organisation of the bank, these areas
include the unit handling the extension of credit, may include the unit handling trade
products or marketing, correspondent banking, the customer relationship manager, trade
risk management, the international operations department and operations personnel
handling back office matters, in addition to risk management (if different from trade
risk), legal, management, and, of course, the compliance department. Each unit has a
role in a transaction related to compliance.
In addressing trade based financial crime, a bank should consider the use of statistical
analysis methods on trade data. An example of an area where this approach might be
helpful is the use of linear regression models. The bank should also consider the pos-
sibility of comparing trade data such as description of the goods, consignee or details,
routing, value, and origin, to spot irregularities and potential risk manifestation. In
this respect, general import / export data may offer assistance. Particular attention
should be given to any activity that falls within the scope of the indicators of trade
based financial crime, which will be discussed in detail in chapter 6 (Indicators of Trade
Based Financial Crimes).
In December 2018, the major U.S. financial regulatory agencies issued a joint statement
directed to “banks” (both domestic and foreign) regarding innovative efforts in com-
bating financial crimes. The statement was issued to “encourage banks[] to consider,
evaluate, and, where appropriate, responsibly implement innovative approaches to meet
their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance obligations, in
order to further strengthen the financial system against illicit financial activity.” The
Agencies highlighted the utility of private sector solutions in both enhancing the effec-
tiveness of existing BSA / AML compliance programmes as well as applying innovative
technologies to internal financial intelligence units. The Agencies also noted that they
would not “penalize or criticize banks” that maintain effective BSA programmes without
employing innovative technologies. Moreover, the Agencies stressed that the decision
to utilize innovative solutions “will not result in additional regulatory expectations.”
118 | Chapter 4
To view the Joint Statement on Innovative Efforts to Combat Money Laundering and
Terrorist Financing (December 2018), visit https://www.federalreserve.gov/newsevents/
pressreleases/files/bcreg20181203a1.pdf.
ACTIVITY:
Identify departments or units within your organisation that should be included
in supplementing your compliance plan to address trade based financial crimes
concerns. Are they?
Subsection 4.4.4 Enhancing the Compliance Administration
In considering the effectiveness of the financial institution’s compliance officer in

facing trade based risk, the organisation should consider whether the officer has any
background in trade, and, if not, whether she or he is aware of the importance of this
area, has subordinates who can provide necessary insights and assistance, and is willing
to defer to their expertise.
Subsection 4.4.5 Questions Regarding Adequate

Trade Related Documentation
Questions such as these should be asked and answered, and may provide guidance
in respect of ensuring adequate documentation: Is the trade staff familiar with the
documentation requirements and procedures regarding compliance risks? Are they
following these procedures?
Subsection 4.4.6 Is the Compliance Training up to the

Challenges Posed by Trade?
Examples of necessary updates would include situations in which certain geographical

areas of a country are being used to facilitate trade such as a given garment district in
Los Angeles, or certain counties in Florida that are higher risk for money laundering.
In addition, specific training is necessary for staff shortly after being hired, as was
pointed out above.
The following questions may be helpful when designing or assessing the training
provided to employees:
• Are the trainers competent to train staff regarding trade based financial crime
compliance? If not, what steps are being taken to augment the training staff?
• Are there special needs for training of all staff regarding trade based financial
crime risks, so as to acquaint them with the enhancement of the compliance
programme?
• Are specially directed training programmes being developed for those employees
on the front line of the organisation’s trade functions?
• Have arrangements been made to train new hires regarding trade based financial
crime risk at least at a general level, and as appropriate for their position?
• Are senior management receiving training regarding trade based financial
crime risks?
• Are there arrangements in place for training regarding updates in trade based
financial crime compliance?
Subsection 4.4.7 Questions Regarding Adequate

Testing and Evaluation
The regular monitoring function of compliance must be developed to include a trade

based dimension. This monitoring should follow the regular monitoring process but
expressly consider trade issues, revisiting the indicators of trade based financial crime,
new information or patterns of behaviour, the effectiveness of what has been done,
and comments from examiners and audits. The latter are of particular importance.
Where there have been suggestions or critical comments regarding trade, they should
be given particular consideration and utilised to ensure a steady improvement of the
compliance programme and its monitoring.
Likewise, the financial institution should ensure that the independent testing takes
into account trade based risk.
Subsection 4.4.8 Implementing Trade Based

Financial Crime Compliance
As is the case with compliance plans in general, a well developed trade based finan-
cial crime compliance plan on paper will not suffice. It must be implemented and the
programme itself should provide for implementation.
Section 4.5 Introduction to BSA / AML Trade

Finance Examination
The U.S. Bank Secrecy Act / Anti-Money Laundering Examination Manual, maintained
by the Federal Financial Institutions Examination Council (FFIEC),7 provides extensive
guidance for bank examiners on evaluating the efficacy of compliance programmes
across different financial institutions and banking activities as well as providing guid-
ance on evaluating and proposing appropriate remedies and, if necessary, disciplinary
7 https://bsaaml.ffiec.gov/manual.
120 | Chapter 4
actions such as fines or more. As mentioned previously, the BSA / AML exam manual
has gone through periodic updates and stylistic changes.8 At the time of the 1st pub-
lication of this Book, the trade finance overview and exam procedures were located
under the heading “Expanded Examination Overview and Procedures for Products and
Services” in the 2014 manual. The manual is now an online, digital document with a
slightly new structure. The overview and exam procedures for trade finance are now
under the section “Risks Associated with Money Laundering and Terrorist Financing,
Trade Finance Activities.”9
Apart from appearance and structure, this particular guidance is the same as the guid-
ance in the 2014 manual. In the overview, the manual provides a general background of
trade finance and the roles that banks may undertake for the benefit of the examiner
while also providing a basic framework for how banks are to apply a risk based approach
to trade finance. The overview instructs banks to “review documentation, not only for
compliance with the terms of the letter of credit, but also for anomalies or red flags
that could indicate unusual or suspicious activity.” The manual provides examples
of suspicious activity which largely mirror the “red flags” or “indicators” that will be
discussed later in this Book. For the benefit of the student, and in anticipation of this
Chapter’s reflection exercise, the trade finance exam procedures are reprinted here.
FACTFIND
“EXAMINATION PROCEDURES
Trade Finance Activities
Objective. Assess the adequacy of the bank’s systems to manage the risks as-
sociated with trade finance activities, and management’s ability to implement
effective due diligence, monitoring, and reporting systems.
1. Review the policies, procedures, and processes related to trade finance activities.
Evaluate the adequacy of the policies, procedures, and processes governing
trade finance-related activities and the risks they present. Assess whether the
controls are adequate to reasonably protect the bank from money laundering
and terrorist financing.
2. Evaluate the adequacy of the due diligence information the bank obtains for
the customer’s files. Determine whether the bank has processes in place for
obtaining information at account opening, in addition to ensuring current
customer information is maintained.
8 To view a table of changes, visit https://bsaaml.ffiec.gov/docs/change_history_log_20210621.pdf.

9 https://bsaaml.ffiec.gov/manual/RisksAssociatedWithMoneyLaunderingAndTerroristFinanc-
ing/19.
3. From a review of [Management Information Systems] and internal risk rating

factors, determine whether the bank effectively identifies and monitors the
trade finance portfolio for suspicious or unusual activities, particularly those
that pose a higher risk for money laundering.
4. Determine whether the bank’s system for monitoring trade finance activities
for suspicious activities, and for reporting of suspicious activities, is adequate,
given the bank’s size, complexity, location, and types of customer relationships.
5. If appropriate, refer to the core examination procedures [regarding OFAC]
Transaction Testing
6. On the basis of the bank’s risk assessment of its trade finance portfolio, as well
as prior examination and audit reports, select a sample of trade finance accounts.
From the sample selected, review customer due diligence documentation to
determine whether the information is commensurate with the customer’s
risk. Identify any unusual or suspicious activities.
7. Verify whether the bank monitors the trade finance portfolio for
potential OFAC violations and unusual transactional patterns and conducts
and records the results of any due diligence.
8. On the basis of examination procedures completed, including transaction
testing, form a conclusion about the adequacy of policies, procedures, and
processes associated with trade finance activities.”
Subsection 4.6.1 Summary of The Compliance Programme
A compliance programme must be in place and implemented by a financial institution.

It must be based on customer relationships, risk weighted, involve adequate screening
and monitoring of transactions as well as persons, require reporting of suspicious
activity, regarding the types of persons involved, the transactions and the countries
involved, and must contain regular assessments of the programme. As indicated in an
examiner’s manual, the test of a compliance programme is whether it is appropriate
to manage the organisation’s AML / CTF risk.
The challenge presented by this course is to adapt the compliance programme in

place at a financial institution to the risks of trade based financial crime. To do so in
an adequate manner, the compliance programme must be aware of the risks posed
to the financial institution by trade, including the trade profile of its customers and
correspondents, and the risks posed by its trade products. Such awareness must be
grounded in an understanding of trade and trade products.
122 | Chapter 4
The following is a summary of examination procedures issued by the US Of-

fice of the Comptroller of the Currency,10 a regulator of U.S. national banks.
Although it was developed for bank examiners to determine compliance with
consumer regulations, it provides a useful insight into the approach that an
examiner is likely to take regarding trade based financial crime compliance,
and has been modified accordingly. The modifications are shown in brackets
and replace text related to consumer compliance.
1. Evaluate the level of supervision of . . . compliance . . . provided by the board of

directors by reviewing board minutes and board reports, and through discussions
with management. Consider the extent and frequency to which the board:
a) Approves the compliance management system.
b) Approves bank wide policies and procedures that address [trade based
financial crime and related regulations].
c) Considers the staffing, compensation, and budgetary needs of the
compliance program [with respect to trade based compliance].
d) Reviews the effectiveness of the [trade based] compliance management
system.
e) Assesses and monitors the risks associated with the bank’s [trade based]
compliance activities.
2. Review reports provided to the board concerning [trade based] compliance

issues to identify significant or unresolved deficiencies and determine whether
the reports allow the board to determine if policies are followed and corrective
action is taken when complaints, compliance reports, internal / external audit
reports, or the compliance officer indicates that action is necessary…
3. Based on the above, form a conclusion regarding the adequacy of the board’s
involvement.
4. Evaluate the level of supervision of [trade based] compliance … provided by

senior management, and form a conclusion about the adequacy of senior
management involvement. Review reports (see previous note) and other
appropriate documents to determine whether:
a) [Relevant] laws are taken into account when developing or revising
products, policies and procedures.
...
c) Regulatory changes are monitored and disclosure and procedural changes
are implemented promptly in response to those changes.
10 https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/index-
comptrollers-handbook.html
d) Operating personnel receive appropriate training [in trade based financial

crime compliance].
e) Deficiencies noted in prior reports of examination were corrected.
f) There are significant deficiencies or recurring areas of noncompliance.
g) Management recognises, controls, and monitors [trade based] compliance
risks.
5. Through discussions with management and review of the following documents,

determine whether the bank’s internal controls are adequate to ensure [trade
based financial crime compliance] . . . Identify procedures that are used daily
to detect errors / violations promptly. Also, review the procedures used to
ensure compliance when changes occur:
- Organisational charts.
- Process flowcharts.
- Policies and procedures.
- Trade finance documentation and disclosures.
- Checklists / worksheets and review documents.
- Computer programs (e.g., APR program).
6. Evaluate the bank’s training program to determine how employees are trained
to ensure [trade based financial crime] compliance.
7. Form a preliminary conclusion as to whether policies, procedures, internal

controls, and training are adequate to ensure ongoing [trade based] compliance.
8. Summarise the results of the Internal and External Audit examination as it

applies to consumer compliance in the following areas:
a) Competence and independence of the auditor(s) / reviewer(s).
b) Board or board committee supervision.
c) The scope and frequency of the compliance review / audit function as it
relates to all relevant laws and regulations and transaction testing of all
of the bank’s activities, products, and decision centers . . .
d) Management’s responsiveness in correcting noted deficiencies.
9. Form a preliminary conclusion regarding the reliability of the compliance audit

/ review function. (Further review and testing of the audit / review function
will be performed during the onsite testing phase of the examination.)
10. Review the current examination strategy to determine whether any changes
should be recommended to the supervisory office. To identify areas of high
risk, consider whether:
a) The compliance review / audit function was reviewed at the last
examination, and whether it was considered acceptable or whether any
deficiencies were identified.
b) The scope of the compliance review / audit function covers all relevant
laws and regulations and includes transaction testing of all of the bank’s
activities, products and decision centres.
124 | Chapter 4
c) Significant deficiencies were noted at prior examinations or internally.

d) There were any areas with a significant incidence of consumer complaints.
e) Any law or implementing regulation changed significantly since the last
examination.
f) Any personnel, policies, procedures, or reporting lines of the compliance
review function changed significantly since the last examination.
g) The time since a regulatory area (e.g., Truth in Lending) was last examined
is significant.
11. Based on the results of the above steps, determine the areas that will be
examined in further detail. Place in those work programs information about
internally identified deficiencies, complaint activity, and deficiencies noted
in prior examinations…
12. Upon completion of the examination procedures for the areas examined,
review work papers and determine whether they have been completed in
accordance with existing standards and that the scope and conclusions are
adequately documented.
13. Based on the examination findings, summarise your conclusions concerning

the bank’s compliance management system, focusing on:
a) The structure of the system and any identified weaknesses in the system.
b) Violations of law, rulings, regulations, or significant internal control
deficiencies, emphasising particularly their causes.
c) The overall conclusion as to the adequacy and reliability of the bank’s
compliance management system.
14. Based on findings of the [trade based financial crime] compliance examination,
rate the following:
a) For large banks, the quantity of compliance and transaction risks as low,
moderate, or high.
b) For large banks, the quality of risk management for compliance and
transaction risks as weak, acceptable, or strong.
c) For all banks, the composite reputation risk, and the aggregate level of
supervisory concern regarding compliance and transaction risks as low,
moderate, or high.
d) For all banks, the direction of compliance, transaction, and reputation
risks over the next 12 months as decreasing, stable, or increasing.
...
16. Discuss overall conclusions with management and obtain corrective action
when necessary.
17. Draft the report of examination, ensuring that all findings are substantiated
in the work papers. Determine if violations or deficiencies in the compliance
management system are significant enough to merit bringing them to the
board’s attention in the report of examination. If so, summarize information
for inclusion under the heading, Matters Requiring Board Attention and for
inclusion in a Type 75 follow-up analysis.
...
19. Prepare a memorandum for the work papers and SMS outlining planning and
strategy considerations for the next examination and, if appropriate, interim
follow-up.
At the beginning of this chapter, the student was encouraged to review the com-
pliance programme at his or her organisation, or to review a sample programme,
and consider whether it addressed trade based financial crime. Having studied
this chapter on compliance programmes, consider the following questions:
• Is the role of trade finance specifically addressed in the programme?
• If so, in your opinion, is the programme adequate to address the threats
of financial crime to trade finance? Is there a system in place to train
employees in trade based financial crime compliance?
• Is there a system in place to update the programme regarding trade
related financial crime?
• Are employees given training in these updates to the programme?
• Is there a system to assess errors, problems, and deficiencies in the current
trade finance compliance system and to correct them?
• Are employees trained to document their trade related compliance
activities and decisions?
Question 4-1. Identify the eight elements of an adequate compliance plan.
Question 4-2. In order for a compliance officer to be able to fulfil his or her role,
what components are crucial?
Question 4-3. A financial institution’s compliance programme must provide for

adequate training for staff for all of the following, except which?
Select all that apply.
a) Directors.
b) New staff.
c) Senior Management.
d) Beneficiary.

126 | Chapter 4
Question 4-4. It is enough to have a well designed compliance plan indicating how
implementation is to occur. True or false?
Question 4-5. What is the purpose of independent testing of a compliance pro-

gramme?
Question 4-6. Explain why it is important to have a compliance plan which is in

writing?

Chapter 4 (The Compliance Programme) outlined the elements needed for
a financial institution to have an adequate financial crime compliance pro-
gramme and considered how to adapt this programme for trade based finan-
cial crime.

in chapter 1, this Book discussed Trade in chapter 2, and Financial Crime
Regulation in chapter 3.
This chapter 4 discussed the structure of The Compliance Programme.
The student is now prepared to move forward with the balance of Part I, and
consider Exercising Due Diligence in chapter 5, and the Indicators of Trade
Based Financial Crime in chapter 6.
specific types of financial crime in Part II (Combating Financial Crime), which
covers Anti Money Laundering in chapter 7, Countering the Financing of Ter-
rorism in chapter 8, Sanctions in chapter 9, Weapons of Mass Destruction
5
Chapter 5
EXERCISING DUE DILIGENCE
LEARNING OBJECTIVE
of the role and importance of due diligence in trade based financial crimes.
CHAPTER OVERVIEW:
This chapter on Exercising Due Diligence discusses the level of care that a
financial institution needs to exercise in its actions with respect to financial
crime compliance. These actions include so called “on boarding” of customers
under which the bank must “know its customer” including the customer’s
business profile and background. In addition, the bank must monitor custom-
ers in an ongoing manner. It also discusses monitoring customer transactions.
A financial institution must exercise due diligence in all of its actions even if
customers are not involved. Similar analysis must be applied to correspon-
dent banking relationships including international branches or affiliates of
the bank. In general, a financial institution must act reasonably, applying a
risk based approach, and exercise due diligence in carrying out its banking
or financial business and, with respect to trade based banking, must exer-
cise this level of care to identify trade based financial crime. The degree of
diligence that is due and the policies by which it is determined and recorded
should be set forth in the bank’s compliance programme.

subject in chapter 1, chapter 2 explained what constitutes Trade and trade
products, chapter 3 discussed Financial Crime Regulation, and chapter 4 ex-
amined the elements of a Compliance Programme. After studying due dil-
127
128 | Chapter 5
igence in chapter 5, the student will study the final chapter of Part I, the
Indicators of Trade Based Financial Crimes that should be utilised to identify
instances of financial crime.
scribes the various types of crimes that can be trade based and the steps nec-
essary for financial institutions to combat them, including money laundering,
countering the financing of terrorism, and sanctions.

Chapter 5 Exercising Due Diligence
Section 5.1 Introduction to Due Diligence in Trade Based Financial Crime
Compliance
Section 5.2 Who is a “Customer”?
Section 5.3 Establishing and Monitoring the Relationship: Know Your
Customer (KYC) / Customer Identification Program (CIP)
Subsection 5.3.1 Identifying Your Customer
Subsection 5.3.2 The KYC Plan
Subsection 5.3.3 The Customer’s Transaction Profile
Subsection 5.3.4 Screening Processes
Subsection 5.3.5 Reliance on Third Party Diligence
Subsection 5.3.6 Know Your Customer’s Customer (KYCC)
Subsection 5.3.7 Understanding the Customer’s Trade Business
Section 5.4 Correspondent Bank Relationships
Subsection 5.4.1 What is a Correspondent Bank?
Subsection 5.4.2 Diligence Regarding a SWIFT RMA
Subsection 5.4.3 Correspondent Banking and the Compliance Programme
Subsection 5.4.4 Compliance Consequences of Establishing a Correspondent
Relationship
Subsection 5.4.5 Factors in Correspondent Due Diligence
Subsection 5.4.6 Non Customer Financial Institutions
Section 5.5 Beyond “Customers”
Section 5.6 Ongoing Monitoring of the Customer and its Transactions
Subsection 5.6.1 What is Involved in Ongoing Monitoring?
Subsection 5.6.2 When Should there be Ongoing Scrutiny?
Section 5.7 Degrees and Stages of Due Diligence
Subsection 5.7.1 Degrees of Due Diligence
Subsection 5.7.1.1 The Appropriate Level of Diligence
Subsection 5.7.1.2 Enhanced Due Diligence
Subsection 5.7.1.3 Additional Scrutiny for High Risk Trade Transactions
Subsection 5.7.2 Stages of Defence
Subsection 5.7.2.1 Operations / Processing Review
Subsection 5.7.2.2 Financial Crime Unit Scrutiny
Subsection 5.7.2.3 Review
Subsection 5.7.2.4 Records
Subsection 5.7.3 Documenting Due Diligence
Section 5.8 Trade Based Products and Correspondent Relationships
Subsection 5.8.1 Generally
Exercising Due Diligence | 129
Subsection 5.8.2 Commercial (Documentary) Letters of Credit

Subsection 5.8.3 Due Diligence by the Issuer with Respect to the Applicant for
Commercial LC
Subsection 5.8.4 Due Diligence by the Issuer with Respect to Other Banks or
Situations
Subsection 5.8.5 Due Diligence by Advising Bank
Subsection 5.8.6 Due Diligence in Standby Letter of Credit or Independent
Guarantee Transaction
Section 5.9 Due Diligence in Documentary Collection Transaction
Subsection 5.9.1 By the Remitting Bank
Subsection 5.9.2 By the Collecting / Presenting Bank in a Bank Collection
Section 5.10 Example of How Ongoing Customer Due Diligence Unfolds
Subsection 5.10.1 Transaction Details
Subsection 5.10.2 Course of Action for the Bank
Subsection 5.11.1 Summary of Exercising Due Diligence
Section 5.1 Introduction to Due Diligence in Trade

Based Financial Crime Compliance
Due diligence signifies the exercise of care that is appropriate for the situation or cir-
cumstances. It is a vague and flexible concept, which explains in part why it is used so
often in connection with compliance in general, and with Trade Based Financial Crime
Compliance (TBFCC) in particular. The term has the advantage of covering considerable
ground including matters that are not logically related. Its vagueness also serves to
place the burden of showing compliance on the person required to exercise it, inducing
more conservative conduct than might otherwise be exercised.
Adding to the confusion, the term is or could be used in a variety of different contexts
and possibly in different senses. While it is common to speak of taking a risk based
approach, this approach is, in effect, the exercise of due diligence appropriate to
the relative risk involved. Therefore, due diligence must be exercised by a financial
institution in designing its compliance programme, in implementing it, in assessing
new customers and establishing relationships with them, in monitoring the ongoing
relationship, and in establishing and monitoring a correspondent bank relationship.
In addition, the financial institution must exercise due diligence in assessing the re-
sults of its compliance programme. In some situations, it must exercise enhanced due
diligence as appropriate.
What is “due” diligence or, more accurately, what diligence is due in a given situation?
That is, indeed, the question, and the answer is not entirely clear. Is it based on what
is known at the time that a decision is made or is it to be determined retrospectively
130 | Chapter 5
after a problem has surfaced? Because hindsight is, so to speak, perfect, the possibil-
ity that decisions will be reviewed from this perspective by examiners leads to more
conservative conduct by financial institutions.
Fortunately, some things are clear about due diligence in TBFCC programmes.
1. Due diligence is risk based. The extent of diligence must be determined on the
basis of risk. Therefore, risks must be identified and the measures taken at any
given point must correspond to the identified risks. Accordingly, the amount
and extent of diligence conducted will not be the same for all customers or
correspondents. Similarly, when one of the parties involved in the transaction
is classified as representing a higher risk, or when the transaction itself is
classified as a higher risk, financial institutions should also implement a
higher level, or enhanced due diligence process.
2. Due diligence is customer oriented. It is a process that focuses on the bank’s
customer with collateral controls regarding parties who are not customers but
who are related to the transaction. Other banks, including branches or offices
of the bank in other countries may fall into the category of a “customer” in
the sense that the bank must conduct due diligence with respect to them, but
this matter is discussed in this chapter under the heading of Correspondent
Banking Relationships in section 5.4 since it involves different considerations
than an ordinary corporate customer.
3. Due diligence is ongoing and not a one time process. There are multiple events
that require the exercise of due diligence.
a) A financial institution should exercise due diligence when a relationship
with a customer or correspondent bank is established.
b) It also must be exercised when carrying out certain transactions, such as
transactions over the reporting threshold for the given country involved,
or wire transfers that lack complete information regarding the originator
of the wire transfer or the beneficiary of the transfer. The question is
whether the transactions fit into the customer profile.
c) The level of diligence due must be increased at any time when the financial
institution has concerns or questions regarding the accuracy or continuing
correctness of previously obtained information regarding the customer.
While a negative event may trigger such increased scrutiny, it could also
be triggered by ordinary occurrences such as a merger, acquisition, or
even change of country of domicile.
d) It must be elevated whenever the financial institution has a suspicion
that a financial crime may be occurring.
4. Although banks can outsource aspects of their compliance efforts, the entity
to whom they are outsourced must meet the same standards as if it were part
of the bank itself. Outsourcing differs from reliance on a correspondent bank
to undertake due diligence regarding AML compliance. This topic is covered

in particular in the USA PATRIOT Act.
ACTIVITY:
At what stages in a relationship with a customer does your bank exercise due
diligence?
Since banks already have established customer relationships and have protocols in
place for establishing new ones, the focus of this chapter in accordance with the theme
of this Book is the impact of trade based crime on established and new relationships.
Since trade relies heavily on the role of correspondent banks, the impact of trade based
due diligence must be considered with respect to correspondent banks, as well.
FACTFIND
For more information on customer due diligence, review the FATF Recom-
mendations on diligence and record keeping (Recommendations 10 and 11,
respectively): https://www.fatf-gafi.org/media/fatf/documents/recommen-
dations/pdfs/FATF%20Recommendations%202012.pdf.
Section 5.2 Who is a “Customer”?
All AML / CTF regulations focus on the exercise of due diligence in relationships with
customers. Therefore, it is necessary to determine who is a “customer” for purposes
of TBFC compliance.
This process starts with defining a “customer”.

• In its 30 November 2015 Notice, the Monetary Authority of Singapore (MAS)
defined a customer as “a person (whether a natural person, legal person
or legal arrangement) (a) with whom the bank establishes or intends to
establish business relations; or (b) for whom the bank undertakes or intends
to undertake any transaction without an account being opened.” (MAS Notice
626 November 2015 - Prevention of Money Laundering and Countering the
Financing of Terrorism, p.2).1
• The U.S. Bank Secrecy Act (BSA) Examination Manual states that “[a] customer
is a ‘person’ (an individual, a corporation, partnership, a trust, an estate, or
any other entity recognised as a legal person) who opens a new account, an
individual who opens a new account for another individual who lacks legal
1 To retrieve the Notice, visit https://www.mas.gov.sg/ and search “MAS Notice 626”. http://
www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulatory%20
and%20Supervisory%20Framework/Anti_Money%20Laundering_Countering%20the%20
Financing%20of%20Terrorism/MAS%20Notice%20626%20%20April%202015.pdf.
132 | Chapter 5
capacity, and an individual who opens a new account for an entity that is not
a legal person.” (FFIEC, Bank Secrecy Act / Anti-Money Laundering Examination
Manual).2
• Under the German Law on Money Laundering (“Gesetz über das Aufspüren von
Gewinnen aus schweren Straftaten”), banks and other financial institutions
have to properly identify a customer. A customer, for that purpose, is loosely
defined as anyone with whom a business relationship (“Geschäftsbeziehung”)
is to be formed.
• The UK’s FCA addresses “customer” in a glossary on its website at https://
www.handbook.fca.org.uk/handbook/glossary/?starts-with=C. The treatment
is challenging, to say the least.
FACTFIND
For more information about how a customer is defined see the Wolfsberg Group,
Trade Finance Principles (2019), Section 1.2 (Parties in Trade Transactions), p.11
These provisions, and similar ones, make it clear that opening a bank account gives
rise to a customer relationship. Therefore, an entity seeking to engage a bank in trade
related activities is a “customer” if it already has an account. In recent years, for pricing
reasons many banks would not issue a letter of credit or related trade products for a
corporation or person who was not already a customer or had not applied to establish
such a relationship. In light of the emphasis on trade based financial crime, this practice
is now virtually universal in most countries. As a result, many of the questions related
to whether an applicant for a letter of credit is a “customer” in trade finance have al-
ready been addressed and resolved in connection with retail banking and traditional
lending and banking activities.
As the example given in the preceding paragraph suggests, customer oriented questions
at the outset of a relationship historically have been focused on credit risk for most
banks, and not on financial crime risk. While there is some overlap, the exercises are
quite different. The challenge under Trade Based Compliance, however, is to determine
what degree of diligence is required in trade activities that do not fall within the pattern
of traditional retail or corporate banking or lending, and with respect to correspondent
banking activities unique to trade.
In particular, the issue arises in situations where the contact is from another bank acting
for the applicant or the issuing bank, or from the beneficiary. For example, does a cor-
respondent bank that requests a bank to issue a letter of credit for the correspondent’s
customer also have to be a “customer”? Moreover, is the correspondent’s customer a
“customer” of the bank issuing the LC? Likewise, if a parent (or subsidiary) undertakes
2 https://bsaaml.ffiec.gov/manual/AssessingComplianceWithBSARegulatoryRequirements/01.
to reimburse a bank that issues a letter of credit on behalf of its subsidiary (or parent),
is the subsidiary (or parent) a “customer”?
These issues are complicated because the relationships and obligations that flow from
them are not entirely clear under letter of credit law or practice. To a considerable ex-
tent, they are ad hoc, that is, based on reimbursement agreements. At a minimum, the
extension of credit on behalf of an entity gives rise to a customer relationship whether
or not there is a formal bank account relationship. This point is specifically addressed
in the USA PATRIOT Act. Thus, the applicant for a letter of credit is a “customer”. The
answer becomes less clear where the “applicant” stated in the letter of credit is not the
entity to whom the issuing bank looks for reimbursement. In letter of credit practice,
a confirmer or other nominated bank relies on the credit of the issuing bank which is
its “customer”.
The Hong Kong Association of Banks (HKAB), in its Guidance Paper on Combating Trade-
Based Money Laundering (1 February 2016),3 notes “indicative factors” of a customer
relationship in a trade context. They include:
• The entity giving instructions to the bank.
• The nature and degree of the connection with the entity giving instructions.
• The banking services to be provided and the capacity in which they are provided.
• Who benefits from the banking services provided and in what way.
• Other parties involved and their roles.
• The structure of the services: revenue, profits, how these things are handled
on the books of the bank, how operational costs are handled, how payments
are made.
• The legal structure and its treatment from a tax perspective.
• What rights and obligations arise with respect to the transaction under standard
international practice?
Whatever policy a financial institution follows should be clearly set forth in its com-
pliance programme, discussed in chapter 4 (The Compliance Programme), for bank
personnel to follow and for bank examiners to review.
Before pursuing these questions about relationships between financial institutions

and others regarding trade products, we will consider what diligence is expected once
a financial institution determines that it is dealing with a customer.
3 http://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/aml-cft/Guidance_
Paper_on_Combating_Trade-based_Money_Laundering.pdf.
134 | Chapter 5
Section 5.3 Establishing and Monitoring the

Relationship: Know Your Customer (KYC) /
Customer Identification Program (CIP)
The truism that “a bank should know its customer” is the hallmark of traditional bank-
ing. Knowing Your Customer (“KYC”) refers to the process whereby a bank or financial
institution gets to know its customer, its business, credit standing, and prospects for
the future. This process is also a noun. It is an essential predicate to establishing a
customer relationship. Therefore, the objective behind conducting KYC is simple – to
understand your customer. In traditional banking, the focus of this process is typically
the creditworthiness of the customer, what is its need for credit, and its ability to repay.
In compliance, the process is to understand the risk of financial crime. It is not a one
time or one transaction activity, as was pointed out above.
The abbreviation “KYC” is used here for simplicity. Other terms appear and are com-
monly used in different regions. They include “CIP” for Customer Identification Program
which is used in the U.S., “CDD” for Customer Due Diligence and “KYCC” for Know
Your Customer’s Customer. The notion of CIP is more narrow than KYC. Customer
Identification Program relates to a plan for establishing a customer relationship,
while Knowing Your Customer is a concept that relates to every aspect of the customer
relationship.
There are two dimensions to KYC. One is establishing the relationship and the other
is monitoring the relationship. The abbreviation “KYC” can apply to both. This section
considers what is involved in both dimensions. Another type of customer relationship,
correspondent banks, is considered in section 5.4 (Correspondent Banking Relationships).
ACTIVITY:
Review the KYC process for your organisation.
Subsection 5.3.1 Identifying Your Customer
Establishing a customer relationship begins with identification of the customer and

moves on to knowing the customer’s activities and transactions. The process of estab-
lishing the customer relationship is sometimes referred to as “on boarding”. As with all
aspects of compliance, the KYC programme should be based on risk and give particular
attention to those customers who are of high risk and continues to the exercise of
enhanced due diligence for their transactions. The goal of the opening phase of a KYC
programme ends with establishing a customer relationship or deciding not to do so
after gathering sufficient verifiable information or failing to do so.
In this chapter, “CIP” is used chiefly with respect to the initial phase of the programme
unless the context otherwise indicates.
In the context of customer identification, KYC involves having sufficient knowledge of

the customer and its business adequate to assess its risk for committing, or being used
for, money laundering or terrorism financing or other financial crimes. The financial
institution must be able to form a reasonable belief that it knows the true identity of
the customer.
The KYC programme should enable a financial institution to know the true identity
of its customer. As indicated, a customer can be a natural person (or individual) or a
person who is not an individual, such as a corporation, partnership, or trust called a
“legal entity”. Knowing the customer’s true identity is achieved by gathering customer
information, verifying that information, conducting checks against sanctions lists,
and maintaining customer records. Verification can occur through documents or non
documentary methods. It should be noted that many countries have laws or regulations
that specifically mandate minimal information that is required for CIP or KYC exercises.
Recently, the U.S. Financial Crimes Enforcement Network (FinCEN) issued an amend-
ment to the Bank Secrecy Act regulations regarding customer due diligence for new
accounts. The final rule, Customer Due Diligence Requirements for Financial Institutions,4
enhanced bank verification and identification requirements for natural persons (also
“beneficial owners”) of legal entities “who own, control, and profit from companies
when those companies open accounts.” Specifically, the rule carries four core require-
ments: (1) initial verified identification of customers; (2) verified identity of beneficial
owners; (3) clear assessment of the customer risk profiles; and (4) ongoing customer
monitoring, reassessment of risk profile and, if necessary, suspicious transaction re-
ports. Pursuant to core requirement (2), regarding beneficial ownership, banks must
“identify and verify the identity of any individual who owns 25 percent or more of a
legal entity, and an individual who controls the legal entity.” Critically, these amend-
ed due diligence requirements only apply to accounts opened after 11 May 2018, and,
while not required by the new rule, FinCEN recommends that ongoing customer risk
assessment be made on a tailored, individual basis.
In early 2021, the US Congress passed, as part of a larger piece of legislation, the Anti
Money Laundering Act 2020 (the AML Act). The AML Act constitutes the most impact-
ful anti money laundering legislation since the 2001 US PATRIOT Act. Among other
provisions, such as amending the purpose of the BSA to effectively codify the AML/
CFT risk based approach, the AML Act establishes new beneficial ownership reporting
4 https://www.fincen.gov/news/news-releases/fincen-reminds-financial-institutions-cdd-rule-
becomes-effective-today.
136 | Chapter 5
requirements for the development of a non public database to be administered by

FinCEN. These new reporting requirements aim to close the beneficial ownership infor-
mation gap arising from the fact that US limited liability companies, corporations and
foreign entities registered to do business in the US (referred to in the Act as “reporting
entities”), register through individual state offices. Those registration processes are
generally not verified nor do they require updated beneficial ownership information.
The AML Act requires FinCEN to promulgate implementing regulations within a year
of the law’s passing, and applicable reporting entities will have two years thereafter to
provide the required information to FinCEN. Beneficial owners are generally defined
as those who directly or indirectly “exercise substantial control” over the entity or who
own or control more than 25 percent of the ownership interest of reporting firms, very
similar to the FinCEN rule standard discussed above. The AML Act also charges the US
Treasury Department to revise the customer due diligence rule to avoid duplicative
requirements in light of the new beneficial ownership reporting requirements.
According to § 154 of the German Fiscal Code (“Abgabenordnung”), it is illegal to

open a bank account “under a false or fictitious name, for himself or for a third party”.
Further, the German Fiscal Code imposes the obligation on “[w]hoever keeps accounts,
holds valuables in safe custody or as a pledge or rents out safety deposit boxes shall
make certain before doing so of the identity and the address of the authorised drawer
and shall record the relevant particulars in suitable form, in the case of an account in
the account itself.”5
FACTFIND
For more information about Customer Identification Programs, see the FFIEC,
Bank Secrecy Act / Anti-Money Laundering Examination Manual, https://bsaaml.
ffiec.gov/manual/AssessingComplianceWithBSARegulatoryRequirements/01.
Documentary Verification
For a natural person, documentary verification involves reviewing governmentally

issued identity documents and, where it is possible to forge or falsify these documents,
more than a single document. The bank must review sufficient documents to enable
it to form a reasonable belief that it knows the person’s true identity. Also of interest
is the nationality of the person and a photo. For a legal entity, the bank should review
the legal documents that establish the entity’s existence and legal status. In both cas-
es, it is important to obtain and verify physical addresses as opposed to postal boxes.
5 The translation was provided by the Language Service of the German Federal Ministry of Finance.
However, it is an unofficial translation, and may only be used for convenience.
Non Documentary Verification
Non documentary verification involves the use of methods which should be set out in
bank procedures. They can include contacting the person, comparing information that
is publicly available, checking references, and obtaining financial statements. It can
also involve searching the internet and / or archives and databases for sources such as
news articles or reports. Some banks have a time frame for these searches. Use of such
information also raises questions about reliability.
If the identity of the customer cannot be adequately verified through the methods
detailed above, or if the customer engages in a variety of activities deemed to be of
high risk, additional or enhanced scrutiny is required. It therefore follows that financial
institutions should not keep anonymous accounts or accounts that are opened under
obviously fictitious names or identities as such practices would inhibit their ability to
know the customer and undertake the proper due diligence. For example, bearer share
companies have caused serious difficulties for banks because it is impossible to know
the real parties in interest.
ACTIVITY:
What documentary sources does your organisation regularly use in its KYC
programme to verify a customer’s identity?
Transactions
Transactions are relevant to establishing a customer relationship, although more com-

monly they are thought of in the context of monitoring the relationship. Transactions
can be relevant in that the motive for establishing the relationship is a particular
transaction on which the potential customer requires bank assistance. Moreover, the
process of establishing a customer profile involves understanding the nature of the
would be customer’s business including the types of transactions and products that
it has used or will use. However, the focus of the regulations is on the customer rela-
tionship. Transactions are relevant in determining the customer’s risk profile and in
monitoring the relationship insofar as they fit or do not fit within the customer profile.
Subsection 5.3.2 The KYC Plan
KYC measures should give the bank confidence that the customer is who it says it is
and whether its business is what it says that it is and that the nature of that business
is as stated.
138 | Chapter 5
A financial institution should have a plan for establishing a customer relationship.

The following considerations should be taken into account in formulating a KYC plan:
• Financial institutions must have a KYC plan that is appropriate for its size
and type of business. It is prudent (and required in many countries) that this
plan be in writing. The Customer Identification Program (CIP) more properly
belongs to this plan, as was pointed out above.
• The KYC plan should include certain minimum requirements, including those
requirements mandated by applicable law. One of these minimal requirements
is to screen the customer’s name against various compliance lists.
• The plan should be incorporated into the financial institution’s compliance
programme (see chapter 4, The Compliance Programme).
• The plan must include account opening procedures that specify the identifying
information that is obtained from each customer (name, date of birth for
individuals, address, identification number, legal papers for legal entity, and
ownership information).
• It must include reasonable and practical risk based procedures for verifying the
identity of each customer and, in the case of a legal entity, of who controls it.
ACTIVITY:
What procedures are included in your organisation’s KYC programme?
Subsection 5.3.3 The Customer’s Transaction Profile
While the identification process described is important in establishing a customer

relationship, a bank must also understand the risk profile of the customer and its busi-
ness. In the case of KYC, understanding its customer is achieved by obtaining detailed
information on the customer and making it available internally within the bank.
It is best practice for banks to gather together data about a customer’s business in-
cluding the type of businesses in which it engages, its customers, geographical reach,
and credit profile, use of trade products, mode of carriage, etc. This data should be
collected and placed in a database, which may have various names such as “Customer
Sheet” or “Trade (Customer) Survey Sheet”. Despite the intimation of a piece of paper,
it is typically in the form of electronic data. The goal of this exercise is to enable the
bank to predict with reasonable certainty the type of transactions which the customer
will undertake and to assess the risks that are connected with this customer.
This information should be accessible to all interested parties in the financial institu-
tion such as the relationship manager, document processor, management, compliance,
and legal department, and regularly updated. It should be consulted in determining
whether a transaction fits into the customer’s profile.
Subsection 5.3.4 Screening Processes
In the exercise of due diligence, whether in establishing or maintaining a customer

relationship, it is necessary to screen relevant data about the customer and the trans-
actions in which the customer is involved.
There are two ways in which a transaction can be screened with regard to due dili-
gence, namely automated, including application of Artificial Intelligence, and manual
processes. Most compliance programmes employ both methods.
1. Automated process: This method involves running checks for various data or
information, names, countries, and other types of information that appear on
various lists and databases. It is done through computers and thus “automated”.
This type of activity is commonly referred to as “screening”. There are various
lists available commercially as well as from government agencies. They are of
persons, entities, geographical locations and other things whose involvement
in a transaction raises serious issues. Certain types of information related to
individuals, Politically Exposed Persons (PEPs), countries, and types of goods
lend themselves best to machine scrutiny rather than manual scrutiny. The
advantage of automated lists is that it reduces the possibility of human error
but such lists are only as good as the data they contain, and when and how
they are used.
If a name or other data involved in a transaction produces a potential “hit”, it

should serve as a signal to the bank that further scrutiny of the customer or
the transaction is required. Many banks may choose to rely on third parties to
provide up to date databases.
For further information from SWIFT about KYC and the KYC Registry, visit:
https://www.swift.com/our-solutions/compliance-and-shared-services/financial-
crime-compliance/kyc-registry
For Frequently Asked Questions, visit: https://www.swift.com/our-solutions/compliance-

and-shared-services/financial-crime-compliance/sanctions-solutions/name-screening/
name-screening-your-questions-answered.
Customer information and government sanctions lists are constantly evolving.

Therefore, some financial institutions have policies regarding whether an op-
eration such as issuance of a letter of credit amendment must be rescreened
after it is delayed for a certain amount of time. A common time frame is a
business day, that is whether the action has occurred during a given business
140 | Chapter 5
day or is delayed to the next day in which case it must be rescreened, or a time
frame of exactly 24 hours.
It should be noted that most financial institutions are at an early stage of

the process of automation of trade data. Either through the use of third party
providers or even government agencies, they are able to scan transactions for
names of designated nationals, certain dual use goods, and similar informa-
tion. Many aspects of due diligence in trade based compliance rely on human
interaction.
The Wolfsberg Group, Trade Finance Principles (2019) Section 2.3.3 (Name Screening)
states that financial institutions “should have robust internal list management proce-
dures in place to assist in reducing the numbers of repeat ‘False Positive’ hits. This is to
help reduce the possibility of too many false positives obscuring true positive hits and
causing reviewers to miss actual issues.”6
FACTFIND
An apt example of automated processing gone wrong is provided by CSB
Bank. The bank was founded in 1920 in India, and today has more than
400 branches in the country. Until June 2019, however, the bank was
incorporated as “Catholic Syrian Bank Limited” and traded under this name.
Following armed conflicts and civil war in Syria in 2011, international
sanctions targeted many Syrian entities and sectors, such as the petroleum
and banking industry. Around the world, banks and financial institutions
updated their lists of keywords and phrases accordingly to detect transactions
that involved sanctioned parties or transactions related to Syria. Because
of the inclusion of the word “Syrian” in its name, however, Catholic Syrian
Bank Limited, its customers and their transactions were frequently flagged
by automated systems of correspondent banks and institutions. This led to
enhanced due diligence activity, delay of transactions and, in some instances,
the requested transactions or undertakings were rejected by international
counterparts (banks and merchants) solely based on the occurrence of the
word “Syrian” that formed part of the Indian bank’s name. In June 2019, to
avoid further unnecessary enhanced diligence checks and related problems,
the bank finally changed its official name to CSB Bank.
2. Artificial Intelligence. In recent years, the utilisation by banks of financial

technology (often referred to as “FinTech”), artificial intelligence (“AI”), or
machine learning has seen a dramatic increase. The appeal of these systems
2019.pdf.
is due in large part to two factors: the substantial labour costs that banks face
to be compliant with financial crime regulations, and the ability of advanced
financial technology to reduce the number of “false positive hits” requiring
human intervention.
The application of AI, however, is going beyond screening for sanctions, PEPs,
or even issues of particular vessels and their transport histories. AI is being
used to record and assess the myriad, and often non uniformly structured,
traditional trade finance documents. Through the use of optical character
recognition (OCR) technology, trade documents can be scanned and their
data established into machine readable form. Once converted into a digital
medium, application of AI natural language processing (NLP) can interpret
and extract the relevant trade information from the documents for analysis.
Through these increasingly complex algorithmic systems, banks, their trade
departments and compliance personnel can more rapidly understand trade
transactions and more reliably be alerted to “red flags” or indicators of financial
crime. In fact, through reassessment of “false positive hits”, AI systems can
become more accurate, further diminishing the need for human intervention.
Such large application of data analytics to trade finance has demonstrated
that advanced AI can uncover complex money laundering schemes that would
otherwise be nearly impossible to detect by individual document checkers
working across various trade departments. As mentioned previously in sub-
section 4.4.3 (Supplementing the Compliance Programme), the major U.S.
financial regulatory bodies issued guidance encouraging, where appropriate,
the adoption of “innovative approaches” to combat financial crime.7 Critically,
however, any bank that decides to adopt advanced technology must ensure
that the processes be made transparent and the underlying justifications of
decision making be reasonably articulated to compliance examiners. In any
event, although the rise in artificial intelligence solutions continues, manual
processes are the primary means by which alerts are investigated and addressed.
3. Manual (human) process: There are aspects of a transaction which cannot be

scrutinised effectively by machine or artificial intelligence due in considerable
part to the complexity of trade finance and its products. For the same reasons,
trade products have remained basically paper based. These aspects require
a knowledgeable person to examine the documents and their particulars
to make judgments regarding the nature and type of the transaction and
documentation. Here, the critical word is “knowledgeable”. This method involves
manual examination of the transaction in light of criteria developed by the
7 Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing
(December 2018).
142 | Chapter 5
bank. In the case of high risk transactions, a financial institution must look
at factors such as the number and volume of transactions, the geographical
area in which they are undertaken, the nature of the customer relationships,
the products or services, and the entities involved.
At this stage, the financial institution should ask questions such as the type
of transactions in which the customer engages, the countries related to the
customer’s transactions, the type of goods, the business profile of the customer,
the history of transactions, and whether or not these transactions meet the
profile of the financial institution with respect to its customer. The financial
institution should also identify the types of entities / persons with whom
the customer transacts business which is likely to include suppliers and the
customer’s customers. Obtaining this information does not signify that due
diligence is necessarily required on these entities.
Subsection 5.3.5 Reliance on Third Party Diligence
Where it is reasonable to do so, a financial institution can rely on an affiliate or another

financial institution to perform some of the elements of KYC on boarding. Such reliance
should be part of the financial institution’s compliance plan and it should comply with
local requirements. Factors in determining the reasonableness of risk or delegation
include whether the institution is subject to the same or an acceptable compliance
regime, whether such reliance is reasonable, and whether there is an agreement or, in
the US, a formal contract covering the delegation, and annual certification regarding
maintenance of the compliance programme.
ACTIVITY:
What type of customer transaction profile does your organisation maintain?
To whom is it made available?
Subsection 5.3.6 Know Your Customer’s Customer (KYCC)
While a financial institution is not expected to do due diligence on the customer of a

customer, there are situations where a financial institution must undertake a degree of
due diligence regarding a party that is neither the financial institution customer nor a
correspondent bank, but is the customer of the correspondent bank’s customer. They
typically involve situations where it obtains this information or where it is appropriate
to do so in the context of the transaction. Due diligence of a customer’s customer is also
common in supply chain finance and receivables finance counter parties. A common
level of diligence for such parties would be a CIP analysis and a negative news check.
The amount of due diligence that is required to be exercised on a customer’s customer

will vary depending on the role in which the bank is acting. If a bank is serving as an
advising bank, then screening the name of the non customer against reference sources
may be all that is required. Where, however, the bank is making payments on behalf
of another financial institution after handling documents, the financial institution
should, in addition to screening, only make payment to a financial institution, which
has itself been screened, through established payment channels.
As with establishing a relationship with a customer, there is no “one size fits all” ap-
proach to due diligence of a customer’s customer. The risk based approach requires a
financial institution to assess the situation on a case by case basis and adjust the level
of due diligence appropriately based on the risk factors.
Nonetheless, in a trade transaction, a financial institution would be expected to screen,

using automated lists, the information about a customer’s customer and exercise height-
ened due diligence if any hits occur or the information about the transaction and the
customer’s customer triggers any of the Indicators discussed in chapter 6 (Indicators
of Trade Based Financial Crimes).
FACTFIND
For additional information on Know Your Customer’s Customer, go to:
https://www.swift.com/insights/press-releases/swift-addresses-the-know-
your-customer_s-customer-compliance-challenge.
Subsection 5.3.7 Understanding the Customer’s Trade Business
In the process of formulating a customer profile, it is important for a financial in-

stitution to acquaint itself with the customer’s trade related business transactions.
Transactions) states that it is not enough for financial institutions to have “a thorough
understanding of their customers’ business model at on-boarding…. It is becoming
more and more apparent that regulators expect that this knowledge, obtained from
customers, is reviewed (where appropriate) in conjunction with information provided
during the actual trade transactions that the customer undertakes. . .”8
This process includes making an initial determination that the customer engages in
trade activities through its relationship with the bank. Once it is so determined, the
financial institution should take into consideration the relevant factors including:
2019.pdf.
144 | Chapter 5
• The type of trade in which the customer is engaged: whether it produces parts,
components, or end products.
• The character and use of the products that the customer produces.
• For whom it produces these products and the uses for the products by the
ultimate buyer.
• The possibility of the misuse of the products.
• The price structure of the products.
• The countries to which the products are shipped, the means / mode of transport,
and points of transhipment.
• The history of the relationships between the customers and its customers.
In its recent guidance paper, Financial Crime Compliance Checks on the Price of Goods in
Trade Transactions – Are Price Checking Controls Plausible (June 2019), the International
Chamber of Commerce (ICC) outlined steps that would be necessary for a financial
institution in establishing effective trade finance price checking controls. As a general
matter, the guidance states that “beyond a common sense check for manifestly unusu-
al pricing, [Price Checking] is extremely challenging for Financial Institutions [FIs]
to carry out when processing trade documentation.” The paper also notes that only
price checking for commodities could be subject to reliable ranges based on publicly
available information. For other goods, the paper lists fourteen (14) factors which, at
a minimum, would have to be considered before a financial institution could assess
whether a price is unreasonable for a given transaction. Ultimately, the paper concludes
that “it is not plausible for an FI to develop a binary financial crime control for price
checking. Instead, mitigation is more effective to consider a wider control framework
which includes manual escalation and/or post transaction analysis, as well as sound
policies and procedures.”
To view the ICC paper on price checking, visit https://iccwbo.org/publication/finan-

cial-crime-compliance-checks-price-of-goods-trade-transactions-price-checking-
controls-plausible.
For more information on customer due diligence, go to: https://bsaaml.ffiec.gov/manual/

AssessingComplianceWithBSARegulatoryRequirements/02.
ACTIVITY:
What should your bank do when it determines that there is trade between
two companies that are both owned by a third company?
Section 5.4 Correspondent Bank Relationships
In addition to traditional customer relationships, it is necessary for a financial insti-

tution to “know” its bank correspondents; that is, banks with which it regularly does
business.9 Correspondent banks are also “customers” for purposes of compliance.
Correspondent banking has long been an important dimension of international bank-

ing operations. It enables a bank effectively to reach jurisdictions in which it is not
physically present, offering valuable services to the bank’s customers who deal with
entities in such countries.
Modern banking relies heavily on correspondent banks. Indeed, the existence of a

correspondent network is thought by many to be the essential distinguishing point
between other financial institutions which loan money, take deposits, and handle
investments on the one hand, and commercial banks on the other hand. While a few
banks are present throughout the world in virtually every country, most banks operate
in a limited number of countries, and only through correspondent networks in other
countries.
Many aspects of international banking involve correspondent relationships, most nota-

bly funds transfers and foreign exchange payments. This section of this Book, however,
focuses on correspondent banking insofar as it relates to trade products. The additional
requirements of trade based financial crime compliance have added a new perspective
to correspondent banking, requiring an adjustment of goals and approaches.
According to Section 2 of The Wolfsberg Group, Anti-Money Laundering Principles for

Correspondent Banking,10 a correspondent banking relationship exists where a current
account or some other type of credit line or liability account is maintained with another
financial institution that is used to make third party payments, for cash clearing, short
term liquidity arrangements, or foreign exchange trades. For purposes of compliance,
correspondent banking includes relationships with branches, agencies, subsidiaries,
or affiliates of the bank. These relationships are not one time incidental transactions
but are typically characterised by an “ongoing repetitive nature”. Financial institutions
should, however, review the definitions of correspondent banking under the compliance
regime applicable to them since it might be broader or narrower than this explanation.
9 Although financial institutions have correspondents, it is more common to refer to “correspondent

banks” which is the custom followed in this section.
10 https://www.wolfsberg-principles.com/sites/default/files/wb/Wolfsberg-Correspondent-Bank-
ing-Principles-2014.pdf.
146 | Chapter 5
Review of another financial institution is also appropriate where an account holder is

in some manner affiliated with another financial institution, although the nature and
degree of review will depend on the nature and extent of the relationship and control.
Subsection 5.4.1 What is a Correspondent Bank?
There have been three stages in the historical evolution of trade related correspondent
banking: traditional, modern, and post compliance. Correspondent banking can be
traced to the beginning of modern banking in the High Middle Ages.
Historical Note: For a fascinating account of a Florentine merchant banker, Francesco

Di Marco Datini who lived from 1335 to 1410, see The Merchant of Prato by Iris Origo
(1979). The account is based on access to the more than 150,000 letters, 500 ledgers
and account books, and business documents which Datini had preserved, and which
Origo was able to review. Through basing relatives in critical cities, he was able to es-
tablish a widespread correspondent banking network.
Correspondent relationships enable smaller banks to take advantage of the services of

larger banks in distant locations, allow major banks to extend the reach of their banking
activities, and provide a secure and trusted network for the international (and in some
countries such as the U.S. with no system of national banking and a large country,
domestic) business of banking.
“A key element in international banking is that banks throughout the world are
active customers of one another and readily assist each other in various aspects
of their business. This correspondent banking relationship is the cornerstone for the
functioning of international banking.
… International banking works because banks in different countries are willing to

cooperate in doing business with each other. Each bank serves its own national
or local market and at the same time is willing to assist the other bank, thereby
accommodating each other’s customers.
… Major banks become international correspondents of each other to provide their

customers with services in each other’s markets. Small banks become correspon-
dents of large international banks to obtain services in a major market and also to
obtain specialised assistance, including lines of credit to support their operations.
Larger banks become correspondents with smaller banks to gain access to regional
markets.” Peter K. Oppenheim, International Banking 61-62 (6th Ed. 1991).
Traditionally, correspondent banking involved maintenance of accounts at the other

institution. It also involved providing the other bank with signatures which were typ-
ically maintained in a signature ledger.
By the end of the 20th century, this approach had been modified. Communication by
telegraph and then telex (“tested telex”—sometimes “TT” although the initials have
various meanings) involved the exchange of various test keys. The exchange of SWIFT
keys (later, the exchange of a SWIFT RMA or Relationship Management Application)
opened new possibilities and banks deemphasised the importance of correspondent
bank accounts in exchange for credit lines. However, the goal of many banks was to
maintain a large correspondent banking network.
Figure 5: Correspondent Banks in LC Transactions

In his text, International Banking, Peter K. Oppenheim wrote: “The role of governments
in [correspondent banking] is slight” (p.61). Even then, that statement was less true.
In the post compliance era, however, this situation began to change dramatically. At
first, it manifested itself in terms of funds transfers but with the onset of trade based
financial compliance, the requirement of the exercise of due diligence in correspondent
relations increased the cost and problems of maintaining a correspondent relationship,
and many banks have significantly reduced such relationships. This subsection considers
due diligence of a correspondent bank relationship and its implications. The diligence
which is due for certain trade based products is discussed specifically in section 5.8
(Trade Based Products and Correspondent Relationships).
Subsection 5.4.2 Diligence Regarding a SWIFT RMA
An exchange of SWIFT test keys is an important aspect of correspondent banking.

While some banks will not enter into an RMA relationship with an entity that is not a
correspondent bank, other banks will do so for some purposes, exercising a less rigorous
148 | Chapter 5
form of diligence. Whatever the degree of diligence, such exchanges can be expensive,
and financial institutions have decreased their correspondents, “de risking” or cutting
back on other institutions that do not provide a minimal amount of business to justify
the expenses involved in an RMA and subsequent due diligence requirements. The
unintended result is that it becomes increasingly difficult to conduct banking business
with certain countries and impossible with some due to the lack of active correspondent
bank relationships.
As the costs of establishing and maintaining effective financial crime compliance pro-
grammes have only increased, SWIFT launched its KYC Registry in 2014 to assist banks
in their on boarding and periodic risk review processes of customers, particularly their
correspondent banking relationships. Although it was initially unclear how successful
the KYC Registry would be, the SWIFT Registry is currently utilised by over 6000 financial
institutions across more than 200 countries and territories to share KYC information
and receive information from counterparties. Generally, the collected information can
be categorised as (1) basic customer identification; (2) ownership; (3) type of business;
(4) compliance programme details; and (5) tax status. As is understandable, the early
years of the Registry’s operation saw difficulties in the standardisation of the data
submitted to SWIFT. To aid SWIFT on this issue, and to encourage more financial insti-
tutions to use the Registry, the Wolfsberg group developed its Correspondent Banking
Due Diligence Questionnaire (CBDDQ) first published in October 2017. The most re-
cent iteration of the CBDDQ was published on 17 April 2020, and has been translated
into several languages. With the assistance of the Wolfsberg group and other globally
active banks, the SWIFT KYC Registry has become the standard tool for customer and
correspondent banking due diligence. Moreover, building on the success of the KYC
Registry, SWIFT announced that the platform would open to corporate customers on
16 December 2019.
FACTFIND
To read more on the SWIFT KYC Registry, visit https://www.swift.com/our-
solutions/compliance-and-shared-services/financial-crime-compliance/kyc-
registry.
To retrieve the Wolfsberg CBDDQ, visit
https://www.wolfsberg-principles.com/wolfsbergcb.
For information about SWIFT RMA, go to: https://www.swift.com/insights/
news/rma-and-rma-plus_managing-correspondent-connections.
Subsection 5.4.3 Correspondent Banking and the

Compliance Programme
As indicated in chapter 4 (The Compliance Programme), it is essential that a financial

institution’s compliance programme contain policies and procedures for correspondent
banking relationships. Responsibility should be clearly delineated. Section 3 of the
Wolfsberg Group, Anti-Money Laundering Principles for Correspondent Banking, calls
for “a formal governance body” to oversee correspondent banking with provisions
for approval by a senior officer for establishing a correspondent relationship. Regular
review is also important. Where appropriate, the bank should conduct an on site visit
to the correspondent’s premises.
ACTIVITY:
What are the policies of your organisation regarding correspondent banking?
Where are they found?
FACTFIND
To see the Wolfsberg Anti-Money Laundering Principles for Correspondent
Banking (2014), go to: https://www.wolfsberg-principles.com/sites/default/
files/wb/Wolfsberg-Correspondent-Banking-Principles-2014.pdf.
To see the FATF Guidance Correspondent Banking Services (October 2016), go
to: http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-Corre-
spondent-Banking-Services.pdf.
Subsection 5.4.4 Compliance Consequences of Establishing

a Correspondent Relationship
In certain circumstances, a financial institution can rely on the due diligence exercised
by a correspondent bank. The financial institution must assure itself whether the entity
on which it relies has exercised the same degree of diligence or better than that the bank
itself would exercise. It must also ensure that this entity implements the compliance
programme with at least the same degree of vigour as the bank. Standards regarding
third party reliance vary from country to country and must be carefully studied and
followed before relying on another party.
One of the critical questions to be analysed in exercising due diligence is who should
exercise due diligence regarding whom. In some situations, it is appropriate for both
parties to the relationship to exercise due diligence. In other situations, different
degrees of due diligence are appropriate depending on the relative risk and function
of the banks. This point will be clearer in considering trade based relationships. To
provide an example, the risk borne by a confirmer of a letter of credit is different than
150 | Chapter 5
the risk assumed by an issuer. The confirmer may rely on the issuer to do due diligence
regarding the applicant and its LC related transaction, whereas the issuer may rely on
the confirmer to exercise due diligence regarding the beneficiary where it is its customer.
ACTIVITY:
How many correspondents does your organisation have today as opposed to
five years ago?
Subsection 5.4.5 Factors in Correspondent Due Diligence
A bank must exercise due diligence necessary to determine that it is appropriate to

deal with that correspondent. This determination includes assessment of the corre-
spondent’s risk profile and the nature of the business relationship. The bank may rely
on external facts or reports in assessing the risk.
Factors include:
• Geographical risk: Is the correspondent candidate located in a jurisdiction with
(in)adequate AML / CTF standards? Is its regulatory supervision adequate? What
is the regulatory status and the details of its relationship with its regulators?
• Are there increased risks of terrorism financing?
• Does it operate in fields or geographic areas which are the targets of sanctions?
• Where is its parent company headquartered? How are the correspondent’s
ownership and management structures organised?
• The relationship between the correspondent and other affiliated banks, whether
parents, subsidiaries, or the like.
• The services that the correspondent offers to its own clients.
• The correspondent’s customer base.
• The quality of the correspondent’s AML programme.
• Whether the financial institution is publically held.
In December 2014, SWIFT started operating the Know Your Customer (KYC) Registry,
which is a common repository for financial information relating to banks and financial
institutions. The enrolled members retain control over their own data, allowing them
to initiate and limit sharing with other correspondent banks. The information retrieved
through the registry is typically used for purposes of due diligence and KYC exercises
in respect to correspondent banks.
By way of collecting data from the members and providing a so called “baseline” of
information, participating banks benefit from this programme by reducing the time
and effort typically spent to gather the necessary data for due diligence exercises.
Risks are further heightened when a correspondent bank allows its customers to ex-
ecute direct transactions through its account at the correspondent bank. With direct
transactions, there is little means to verify who is the customer. For such situations,
it must be ensured that a correspondent institution requires an employee to order
correspondent services operating within a system of compliance controls.
The financial institution should also take into account any correspondents maintained
by the institution (so called “downstream correspondents”). Questions to be asked
include the nature and type of clients, scale, the geographic factors, past issues, the
diligence exercised by the potential correspondent with regard to its clients, and the
AML / CTF controls that are in place.
A financial institution should also assure itself that the correspondent is not a shell
bank and does not service such.
Other concerns which would warrant enhanced due diligence would be involvement
with Politically Exposed Persons (PEPs) and so called “downstream correspondent ac-
tivity” by the correspondent in which it provides correspondent services to other banks.
The factors considered in this subsection do not take into account questions that would
arise outside of the context of trade, such as pass through accounts. These matters are
part of the general due diligence requirements of an AML / CTF regime and are beyond
the scope of this Book.
Where any of these matters give rise to elevated concerns, additional scrutiny and
greater samples of data or information may be required, so that the need for heightened
due diligence can be satisfied.
ACTIVITY:
What are the tests used by your organisation in assessing a risk in establishing
a correspondent bank relationship?
Subsection 5.4.6 Non Customer Financial Institutions
Where the financial institution does not have a payment account relationship with
another bank, it is unable to make clean payments through the other bank. Where it
has an RMA agreement with that bank, it can, however, engage in LC related transac-
tions (issuance, advice, confirmation, also in relation to standby LCs, and independent
guarantees) and documentary collection activities using the SWIFT MT 700 series mes-
sages even though it is not a correspondent. Whatever due diligence is undertaken is
limited because of the lack of important information. Indeed, the financial institution
152 | Chapter 5
is limited to the information that is contained in the undertaking or the documents

involved. And even if a financial institution is not a customer, a financial institution
must exercise due diligence in its dealings with it.
ACTIVITY:
Does your bank have a policy regarding non customer / correspondent banks
with whom it will deal occasionally?
Section 5.5 Beyond “Customers”
It should be noted that financial institutions also have due diligence obligations in
dealing with or doing business with persons and legal entities who are not customers
should they decide to deal with them. The difference is that the level of due diligence
is reduced or constricted to the information available, and minimally involves an au-
tomated check of the data that the financial institution has about the person or entity,
and an assessment of other information available to it.
For example, a bank requested to effect payment to a third party under a letter of credit
in which the bank is nominated as negotiating bank would not have a duty of customer
due diligence by virtue of the nomination if the beneficiary was not a customer of the
bank. But it would have a duty to exercise appropriate diligence before effecting pay-
ment by running automated checks related to incoming and outgoing funds transfers
against various lists and ensuring that there are no hits.
FACTFIND
For more information on third parties, read heading two, “The Silver Lining,
Reliance on Third Parties”, at:
https://corpgov.law.harvard.edu/2016/02/07/fincen-know-your-customer-
requirements/.
Section 5.6 Ongoing Monitoring of the

Customer and its Transactions
In addition to exercising due diligence in establishing a customer relationship, it is also

necessary to monitor the customer and its business in an ongoing fashion. Companies
change, their markets change, and their ownership structures may change. It is important
that the bank conduct ongoing diligence in a regular manner and that it do so when
any significant change occurs to the customer. These processes should be reflected in
the compliance programme, and observation of those processes should be reviewed
by the bank and its examiner.
Transactions) states that it is not enough for financial institutions to have “a thorough
understanding of their customers’ business model at on-boarding…[I]t is becoming more
and more apparent that regulators expect that this knowledge, obtained from customers,
is reviewed (where appropriate) in conjunction with information provided during the
actual trade transactions that the customer undertakes with the [financial institution].”11
Subsection 5.6.1 What is Involved in Ongoing Monitoring?
After having established the bank customer relationship, the bank must monitor the
customer and its banking transactions in an ongoing manner. This process is referred
to here as ongoing customer due diligence. Such ongoing monitoring is important
because circumstances of businesses and their business itself may change, impacting
the risk to which a customer (and the bank itself) is exposed.
The objective of ongoing customer due diligence is to enable a bank to identify potentially
suspicious transactions or patterns of behaviour, which were not apparent or present
at the beginning of the bank customer relationship. While conducting this ongoing
due diligence, the bank not only investigates its customers and their transactions but
also examines other entities with whom the customers deal and other banks who play
a role in the transactions.
The extent of information which must be gathered and assessed will vary depending
on the categorisation of risk.
ACTIVITY:
Why is it important to verify and update customer information periodically?
Subsection 5.6.2 When Should there be Ongoing Scrutiny?
Scrutiny should not be a one time occurrence. The scrutiny of a customer should be
ongoing. Having said that, however, it is not possible to give a specific rule as to when
ongoing due diligence exercises should occur. This question should be considered and
mapped out in the compliance programme. It should take into account the relative risk
posed by different types of customers.
2019.pdf.
154 | Chapter 5
There are several factors that should be considered. In the first place, changes in
the situation of the customer should evoke additional scrutiny. These changes could
consist of new lines of business, new geographical regions in which the customer op-
erates, new types of goods, changes in the trade products used, acquisition or change
of management, or adverse news or events. In the second place, the occurrence of an
event which elevates the extent and need for scrutiny should actually lead to additional
scrutiny by the bank or financial institution. Beyond these general principles, banks
differ. Some financial institutions conduct a full level of due diligence analysis on every
application for a letter of credit or amendment to such a letter of credit. Others do so
only when there is a deviation from the customer profile. Still others conduct a simpler
version of due diligence. Almost every institution runs an automated screening and
many will do so within a time period of the prior one (e.g. if there is a delay in issuing
an amendment) due to the frequency of the changes in the data.
Without respect to these considerations, there should be a regular cycle of diligence,

such as once per year based on the risk rating of the customer established at on boarding
or as of the last review date.
All of these considerations are impacted by the level of risk assigned to a customer.
A customer of 50 years which produces standard paper products is at a different level
than a company that sells land mines.
Where it is determined that there is a higher risk with respect to a customer or trans-
action, a bank should undertake more scrutiny because the transaction could pose a
higher risk of money laundering or terrorism financing.
FACTFIND
For more information on ongoing due diligence, go to the FATF Recommenda-
tion 10: https://www.fatf-gafi.org/media/fatf/documents/recommendations/
pdfs/FATF%20Recommendations%202012.pdf.
ACTIVITY:
Review your organisation’s policies regarding ongoing diligence.
Section 5.7 Degrees and Stages of Due Diligence
Due diligence is not an exercise that occurs only when the customer relationship is
established. Because it is risk based, the extent to which it is exercised beyond on
boarding the customer depends on the level of risk. There are generally stages in which
it is exercised, with the degree of scrutiny being increased as a concern that there is a
financial crime is passed on from stage to stage.
Subsection 5.7.1 Degrees of Due Diligence
Under most TBFCC regimes, trade transactions are uniformly classified as “high risk”
as indicated in chapter 1 (An Introduction to Trade Based Financial Crime Compliance)
of this Book, which means that some form of serious scrutiny is appropriate by default.
However appropriate this may be, some trade transactions are of higher risk than
others, and still others are of even higher risk. For example, in 2017, the regular sale
and shipment of meat products by an agricultural related company from Argentina to
Spain would have less financial crime risk than, say, the sale of agricultural products
that have dual use potential for weapons (e.g., chemicals used in fertiliser) to Dubai
for resale. The shipment of the same dual use chemicals to Libya in 2014 would have
been an even higher risk due to the armed conflict in the region at that time. Closely
monitoring regional risk situations as a part of your overall due diligence program
ensures you can rank trade transactions by level of risk, then assess next steps based
on risk appetite.
Subsection 5.7.1.1 The Appropriate Level of Diligence
In the course of establishing a customer relationship, a level of risk should be as-

signed to the customer according to the scale established at the financial institution.
The appropriate level of due diligence is affected by the situation in which the question
arises. In typical trade based financial crime analysis, most transactions do not warrant
increased scrutiny notwithstanding the nominal recital that all trade is said to be “high
risk”. Were all transaction assigned increased scrutiny, the system would not function.
Because of the limitation of resources, the transactions which pose higher risk are to
be given greater attention.
When a party to the transaction or in situations where the goods involved in the trans-
action fall into a higher risk category, the financial institution should automatically
apply a more stringent enhanced due diligence process. As may be apparent from the
name, enhanced due diligence goes beyond the normal due diligence practices and
may require a financial institution to investigate the trade cycle by establishing the
countries in which the other party trades, the type of goods they exchange and trade,
and the parties the other party transacts with. It is important to note that whether or
156 | Chapter 5
not enhanced due diligence is needed may not be readily apparent at the beginning
of the transaction. However, once a transaction or party is designated as high risk,
immediate ongoing action must be taken.
Subsection 5.7.1.2 Enhanced Due Diligence
There are two senses in which the word “enhanced” is used with respect to the exercise
of due diligence. One sense relates to the risk classification assigned to a customer.
Where it is determined that the customer represents a higher risk, it is appropriate
to necessitate that the banking business of that customer be subject to enhanced due
diligence. Another use of the term relates to a customer whose risk rating does not
warrant increased scrutiny but where something occurs which raises issues regarding
additional risk.
In the course of ongoing monitoring of the customer and its transactions, issues may
arise which require enhanced scrutiny or an upgrading of the risk level of the customer.
As used in this sense, the notion of enhanced due diligence is easily confused with a
situation where a customer falls within a higher risk category.
FACTFIND
For more information on Enhanced Due Diligence, see the FFIEC, Bank
Secrecy Act / Anti Money Laundering Examination Manual regarding Enhanced
Due Diligence for Higher-Risk Customers: https://bsaaml.ffiec.gov/manual/
AssessingComplianceWithBSARegulatoryRequirements/02.
One such issue may result from a transaction that contains an indicator of financial
crime. As explained in chapter 1 (An Introduction to Trade Based Financial Crime
Compliance), there are a number of Indicators or “Red Flags” that suggest the in-
creased possibility of financial crime. The indicators are discussed in detail in chapter
6 (Indicators of Trade Based Financial Crimes). When one of these indicators is present
in a transaction, enhanced due diligence is warranted. Where more than one indica-
tor is present, the risk of financial crime increases considerably, requiring even more
heightened diligence. For example, if the trade transaction is between related parties,
additional scrutiny is warranted. The level should be even higher if the transaction
involves a problematic geographical area. While the presence of an Indicator may not
signal trade based financial crime, it does raise questions which should be addressed with
answers subsequently documented and recorded. Examples of some of these warning
signs include unusual transactions, suspected or likely collusion between transacting
parties, transactions in high risk goods, etc.
ACTIVITY:
Give an example of a situation that has occurred in the recent past at your
bank that warranted enhanced due diligence.
Exercising enhanced due diligence may require further determinations regarding who
or what is involved. This investigation should focus on the parties concerned, the banks
and financial institutions involved, the type of goods exchanged, the mode of transport,
the alleged or suspected uses of the goods, and similar matters.
In some instances, it may also involve gathering external information regarding the
other party, any middle parties or brokers, vessel movements, vessel names, ownership
structures and histories, and any information or warnings regarding bills of lading or
other documents of title.
As explained in chapter 2 (Trade), it is common for businesses to use intermediaries

to handle transport, including freight forwarders, customs brokers, shipping brokers,
and others (“trade facilitators”). These entities perform an important role in trade and
commerce. From the perspective of trade based financial compliance, however, such
parties add another dimension to the exercise of due diligence because of the potential
for being co-opted for purposes of facilitating financial crime. As a result, due diligence
is required regarding such entities where their role is apparent in the documentation
available to a financial institution.
Various factors are relevant in exercising due diligence with respect to a trade facili-
tator. They include:
• The name of the trade facilitator and information regarding the duration of
its operations.
• Is the trade facilitator known in the areas in which it operates? To port
authorities or customs agencies, for example, in the U.S. the National Customs
Brokers Association of America or in the UK the British International Freight
Association. An international organisation is the International Federation of
Customs Brokers Associations that can provide the names of local organisations.
Membership in such an organisation adds to the credibility of the trade
facilitator. Does it belong to organisations or similar entities?
• Does it participate in ISO 28000? The ISO 28000 standards apply to supply chain
management of certain goods such as chemicals. Does it have documentation
of a recent and satisfactory ISO 28000 audit?
• Is it accredited or certified by accrediting organisations such as BSI Group,
Bureau Veritas, or SGS?
• Other scrutiny may include credit checks, powers of attorney that are filed,
membership in professional organisations, and references from other businesses
or banks.
158 | Chapter 5
While the exercise of due diligence relates to a customer, it also relates to transactions,
including the mode of transport. The Monetary Authority of Singapore (MAS) in its
Guidance on Anti Money Laundering and Countering the Financing of Terrorism Controls in
Trade Finance and Correspondent Banking (22 October 2015) (Section 2.10) indicates that
the following information is relevant to due diligence with respect to marine transport:
“The type and timing of the additional information obtained depend on the bank’s role
in the transaction and should be in line with a risk-based approach. This also applies
to cases where a bank provides credit lines for, or facilitates open account trades (e.g.
invoice financing, pre-shipment financing, inventory financing) of its customers. Exam-
ples of such additional information are:
a) trading partners or counterparties of the customer (including buyers, sellers,
shippers, consignees, notifying parties, shipping agents, etc.);
b) nature of the goods traded;
c) country or countries of origin of the goods (including whether the goods
originate from any sanctioned country);
d) trade cycle;
e) flag of vessel, flag history and name history (to check whether it is related to
any country in the list of sanctioned countries);
f) name and unique identification number (e.g. International Maritime Organisation
(“IMO”) number) of any vessel proposed to be used (e.g. to better identify if it
is ultimately owned by a sanctioned party);
g) beneficial owner, commercial operator and registered owner of the vessel
involved in the transaction to trace the history of former ship owners with
focus on country of residence;
h) port of loading, ports-of-call and port of discharge (including whether the
goods originate from, or are sold to any sanctioned country) and the trade
routes proposed to be used…”12
FACTFIND
To find out more about transport and maritime issues, go to:
National Customs Brokers & Forwarders Association of America.
www.ncbfaa.org/.
The British International Freight Association.
http://www.bifa.org/about-bifa/overview.
12 To retrieve the MAS Guidance Paper, visit https://www.mas.gov.sg and Search: Guidance on
Anti-Money Laundering and Countering the Financing of Terrorism Controls in Trade Finance
and Correspondent Banking (22 October 2015). http://www.mas.gov.sg/~/media/MAS/News%20
and%20Publications/Monographs%20and%20Information%20Papers/Guidance%20on%20
AML%20CFT%20Controls%20in%20Trade%20Finance%20and%20Correspondent%20Banking.
pdf
U.S. Customs and Border Control.

ttps://www.cbp.gov/border-security/ports-entry/cargo-security/c-tpat-cus-
toms-trade-partnership-against-terrorism.
In agreement with the International Maritime Organisation (IMO), IHS Markit
is the sole originating source of IMO Ship Numbers. To learn more, visit:
https://imonumbers.ihs.com/Home/About.
The International Chamber of Commerce (ICC), Commercial Crime Services
and International Maritime Bureau (IMB): https://www.icc-ccs.org/icc/imb.
Subsection 5.7.1.3 Additional Scrutiny for High Risk Trade Transactions
Some examples of situations that warrant additional scrutiny, namely those that involve
high risk trade transactions follow.
There are a number of high risk jurisdictions. These jurisdictions are noted by the
Financial Action Task Force (FATF) in its regular publications. Some do not cooperate
with AML programmes and others are simply classified high risk. There are also a variety
of lists issued by governments or international organisations. The bank’s system ought
to have regular access to this information and to various updates. As of February 2020,
the Democratic People’s Republic of Korea and the Islamic Republic of Iran were listed
under FATF’s High-Risk Jurisdictions subject to a Call for Action – 21 February 2020.
Additional jurisdictions are listed as being under increased monitoring, commonly
known as the “grey list” and include: Albania, Barbados, Botswana, Burkina Faso,
Cambodia, Cayman Islands, Ghana, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua,
Pakistan, Panama, Senegal, Syria, Uganda, Yemen, Zimbabwe. These jurisdictions are
identified by FATF as “Other monitored jurisdictions”, indicating deficient AML / CFT
standards. In addition to that there are other technical features which are of concern
to an institution.
FACTFIND
To access FATFs list of high risk and non cooperative jurisdictions, go to:
http://www.fatf-gafi.org/countries/#high-risk.
The lists also include the names of designated nationals, Politically Exposed Persons
(PEP), designated organisations, and designated countries.
160 | Chapter 5
PEPs
Politically Exposed Persons (PEPs) are individuals who have or have had senior positions
of public trust. These persons include governmental officials, senior executives of gov-
ernments or government corporations, important political party officials, and also their
families or close associates. Further examples of PEPs include heads of state, cabinet
ministers, senior judges, senior political party functionaries, members of royal families,
and other similar persons together with their families and close associates.
Financial institutions must scrutinise transactions that involve PEPs. The concern
with PEPs exists not only while they are in office but even after they have left promi-
nent public positions because of the notoriety attached to them. In addition, there are
companies who have had their export privileges revoked or suspended making it illegal
under some laws for them to sell products internationally. Both PEPs and denied parties
are regularly added to automated services that run automated checks.
FACTFIND
For more information on PEPs, go to:
https://accuity.com/resources/what-is-a-politically-exposed-person-pep/.
In addition, there are Indicators which raise or should raise suspicions. They are
addressed in detail in chapter 6 (Indicators of Trade Based Financial Crimes). The
Indicators would indicate the business with which a customer deals, whether persons
or businesses are “hits” on the various lists or software, goods involved, the activities
undertaken, the structure of the transaction, and other similar issues. If there is a robust
programme of due diligence with respect to customers, there is arguably less need to
focus on specific transactions which fit within the customer’s profile.
Transactions with certain countries identified as being drug producing nations require
further attention. They are characterised as drug producer countries through or related
to which drugs are transhipped, or which have jurisdictions in which there is secrecy
regarding a variety of transactions, or have tax havens, and offer offshore banking
licenses. Furthermore, these countries are identified by FATF as having high money
laundering risk and non cooperative jurisdictions, and countries with a high degree of
public corruption or that are linked to terrorist financing are of concern.
There are also a number of businesses that should raise a financial institution’s con-
cern for scrutiny. These include businesses that sell expensive items such as jewels
or cars, cash intensive businesses, money service businesses that are non traditional
financial services, and other alternatives to traditional banks. Also included are lawyers,
accountants, and notaries. While this information relates to traditional anti money
laundering activity, it can also be relevant with regard to trade based financial crime.
ACTIVITY:
Identify types of businesses and non traditional financial services that your
organisation has encountered in recent years.
Subsection 5.7.2 Stages of Defence
The Wolfsberg Group, Trade Finance Principles (2019) Section 3.2.1 (Escalation
Procedures) refers to what it describes as “the Three Lines of Defence model” and urges
that it be implemented. Generally, they are 1. Business operations, 2. Financial crime
unit scrutiny, and 3. Review.
It is somewhat difficult to follow the terminology employed since the text refers to
“Lines” with subdivisions that are labelled “Levels”. Thus, “the first line” (which is
not given a simple name) consists of two “levels” 1. Detection and 2. Investigation.
Moreover, at most financial institutions there are further nuances than reflected in
the paper or chart.
While the “Model” is really an application of common sense to describe crudely what
banks do, it is useful to foster discussion of escalation of diligence and it is used here
in that sense.
Subsection 5.7.2.1 Operations / Processing Review
While the first “Level” is vaguely described in Trade Finance Principles as referring to
“business operations”, it is conducted in the financial institution at the trade operations
or processing department.
There are two subsets to this line, namely detection and investigation. Trade opera-
tions personnel and automated screening should be trained to spot anomalies in the
activity of a customer in light of its customer profile. Once such an anomaly is detected,
the financial institution should investigate it at the operations level. This process of
investigation may utilise various tools, and units of the financial institution’s team.
For example, a change in product line may have been reported to the relationship
manager who approved it but has not yet modified the customer profile due to delays
in clearance by legal and compliance. An investigation should be noted in the records
together with the decision.
Subsection 5.7.2.2 Financial Crime Unit Scrutiny
If the decision is to escalate the scrutiny, the problem should be referred to the fi-
nancial crime unit, whether in operations or in the financial institution as a whole.
162 | Chapter 5
This procedure could involve a team leader of the operations department or another
designated person. Once again, a variety of tools are available. If concern remains, the
problem should be further escalated to the final decision maker or appropriate committee.
The final decision may result in making a suspicious activity report, in freezing funds,
closing the account, or in deciding that the transaction / situation is not problematic.
Subsection 5.7.2.3 Review
The third line of defence is review by an independent audit function. It is designed

to inform the financial institution of the systemic strengths and weaknesses of its
approach to due diligence.
Subsection 5.7.2.4 Records
Whatever is decided, each stage should be recorded with sufficient detail as to what
was decided and why. Lack of sufficient detail exposes the bank to further unfavourable
scrutiny and deprives the examiner of sufficient detail to understand what happened
and appreciate why.
Subsection 5.7.3 Documenting Due Diligence
At times, banks take steps to exercise due diligence and make reasonable conclusions
which later prove to be incorrect in hindsight. In many cases, however, the banks fail to
document what they have done. This failure is highly problematic because regulators
and examiners can only reach conclusions about the exercise of due diligence based on
documentary evidence. While it is possible to create documents detailing the exercise
of diligence subsequently, this type of documentation is given considerably less weight
than contemporaneous documentation.
The Wolfsberg Group, Trade Finance Principles (2019) Section 1.4.2 (National and Regional
Sanctions, Embargoes and NPWMD) provides that financial institutions “are expected
to have procedures and processes in place which allow staff to record the basis of their
decision in respect of any risk indicators or assessments of transaction risks that arise
at any stage of a transaction. [Financial Institutions] are also expected to ensure that
those comments are kept as part of the transaction audit trail for review as part of the
control effectiveness and quality assurance processes, as well as evidence for audit
and regulatory purposes.”13
2019.pdf.
Section 5.8 Trade Based Products and

Correspondent Relationships
As explained in chapter 2 (Trade), there are a number of banking relationships that

are peculiar to trade and trade products. They include those arising from commercial
(so called “documentary”) letters of credit, standby letters of credit and independent
guarantees, and documentary or bank collections.
Commercial letters of credit can be used to facilitate a variety of financial crimes,

including masking money laundering, terrorism financing, shipment of weapons of
mass destruction, and commercial fraud. They can also violate sanctions and anti
boycott regimes. The primary defence against such misuse is the proper exercise of
due diligence in opening and monitoring the customer relationship. The second line of
defence is to monitor transactions by screening them and monitoring by trained staff.
Of particular difficulty are situations where the applicant and beneficiary are acting
in collusion either to commit fraud or a more violent commercial crime.
Subsection 5.8.2 Commercial (Documentary) Letters of Credit
Compliance issues related to commercial or so called documentary letter of

credit include:
• The issuer / confirmer relationship.
• The relationship between issuers or confirmers and banks nominated to pay
or negotiate documents.
• The issuer or confirmer and the transferring bank.
• Freely available LCs.
• The relationship between issuers or confirmers and banks requested to advise
a letter of credit or amendment.
• The relationship between an issuing bank and a reimbursing bank in a bank
to bank reimbursement and the relationship between the reimbursing bank
and the claiming bank.
• The relationship between an issuer or confirmer and a presenting bank that
is not nominated.
• The relationship between an advising bank and the issuer, beneficiary, and /
or the second advising bank.
The process of due diligence for each of these entities will be explained from the
perspective of the issuer and other banks. The initial question is who, if anyone, is a
customer from the perspective of the particular financial institution being considered.
The second question is how the type of transaction is to be treated in the compliance
164 | Chapter 5
programme of the financial institution. Provided that the programme sets out the
bank’s approach, it is reasonable that the financial institution follows the programme,
and documents its activities. If the bank examiners are unsatisfied with its approach,
they can point it out on an inspection.
Subsection 5.8.3 Due Diligence by the Issuer with Respect

to the Applicant for Commercial LC
Presumably, the issuer has already conducted due diligence before receiving an ap-
plication for issuance of a commercial letter of credit since, as explained, most banks
will not issue LCs for a non customer. If the applicant is not a customer, then issuance
of a commercial letter of credit would constitute a customer relationship under most
systems, and the bank should undertake the process of establishing such a relationship.
It is not always clear whether an entity is an applicant and, if it is, whether the issuer
looks to it for reimbursement. In some situations, the entity listed as “applicant” in the
LC is not the bank’s customer. The customer might be a correspondent bank requesting
issuance for its customer (listed as applicant) or a parent or subsidiary of the entity
listed in the LC as applicant. In still other situations, the promises of the applicant to
reimburse the issuer is supported by a suretyship or accessory promise of a third person.
The issuer would consider the applicant and application to determine whether the
requested letter of credit fits within the applicant’s customer profile, including the
goods, countries involved, the counter parties, and other relevant information. This
process should involve automated screening and, where appropriate, manual scrutiny.
The issuer would also review the transaction at the time of the application, when
amendments are requested, if any, at the time of the receipt of presented documents,
at the time of payment, and at the time of any other material changes. Among the
matters that should be considered are:
• Whether any lists regarding sanctions or terrorists are triggered, including
the countries involved, the name of the entity and other names, and the goods
involved.
• Whether any countries involved are high risk, including the location of the
other bank(s) or the beneficiary or the locations through which the goods are
to be transported.
• Whether the beneficiary is the type of party that is consistent with the
applicant’s business profile.
Whether or not and the extent to which a due diligence exercise is required depends
on the bank, its policies, the customer, and the transaction. If the applicant is a cus-
tomer with a relatively low risk profile and the transaction fits into that profile, many
banks would only screen the transaction automatically and do nothing more if there
were no “hits”.
The Hong Kong Association of Banks (HKAB), in its Guidance Paper on Combating
Trade-Based Money Laundering (1 February 2016), Annex A – Typical L/C Transaction
Structure (p.13-17), offers the opinion about who is typically a “customer” regarding a
commercial letter of credit:
• Issuer: Buyer
• Advising Bank: Seller and / or the Issuer “depending on the facts”
• Confirmer: Seller and / or the Issuer “depending on the facts”
This analysis presumes that the undertaking is a commercial letter of credit in which
there are no guarantors and in which the applicant is also the buyer. Nor does it provide
for a second advising bank or a nominated negotiating or paying bank.
ACTIVITY:
List some of the complications that your organisation has experienced in
identifying who is a “customer” in a trade related activity.
When documents are presented, the issuer must consider them in light of trade based
financial crime risks. It should be recognised that there may be changes or develop-
ments between the time in which the LC was issued and the time of presentation of
documents, warranting additional scrutiny. In this process, all names must be screened
against current lists. The same precautions would apply to making a payment.
Where the party applying for the LC or guaranteeing reimbursement to the issuer is
different than the issuer’s customer, additional questions must be asked regarding this
entity which may be the true applicant or a surety.
ACTIVITY:
What situations have arisen in your experience that have warranted additional
scrutiny when documents were presented under a letter of credit?
Subsection 5.8.4 Due Diligence by the Issuer with Respect

to Other Banks or Situations
Letters of credit often involve other nominated banks, either confirming, paying, or
negotiating banks. If the bank which is nominated is a correspondent bank, a relation-
ship already exists involving due diligence and an ongoing review cycle which should
include trade based risk. In such a situation, the issuer need do nothing further unless
additional information comes to its attention.
166 | Chapter 5
If the nominated bank is not a correspondent bank, the issuer must consider what the
other bank is being asked to do. A request to confirm the letter of credit requires a
correspondent relationship since it is an undertaking to the confirmer. A nomination
to negotiate or pay is more difficult to assess but it would be difficult to operate in such
a capacity without exchanging a SWIFT RMA which many banks only exchange with
correspondents. This topic was covered in detail above in section 5.4 (Correspondent
Banking Relationships).
The reverse questions arise with respect to the nominated bank with regard to the issuer.
In both situations, the practices of banks differ, starting with their internal policy
regarding their RMA agreement. Without an RMA agreement, there is likely to be no
transmittal of the letter of credit. If there is one, a bank must be prepared to exercise
a limited due diligence based on the bank, the customer, and the transaction. Some
banks will act in such a situation where the beneficiary is a customer. Most banks will
not act in such a situation where neither the beneficiary nor the issuer / confirmer is
a customer / correspondent.
Other situations are more problematic. A transferee beneficiary should be treated as if

it was a beneficiary. A freely negotiable credit presents interesting problems for both
the issuer and any bank that acts on it beyond the transactional problems that already
exist. When banks issue such undertakings, the compliance programme should have
considered the relative risks and the situations in which the issuer is prepared to issue
such an undertaking and the bank should follow this policy. From the perspective of a
bank acting under a freely available credit, it should have a customer relationship with
the beneficiary and possibly with the issuer.
FACTFIND
For U.S. regulations about foreign correspondent banks, see:
https://www.sec.gov/about/offices/ocie/aml2007/fincen-factsheet1205.pdf.
Subsection 5.8.5 Due Diligence by Advising Bank
An advising bank that does not add its confirmation acts at the request and, to an
extent, on behalf of the issuer, confirmer, or another advising bank but makes no un-
dertaking itself except to authenticate the LC or amendment and assure the accuracy
of what is forwarded.
As is often the case in this field, the conservative approach would be to treat everyone
involved as a customer and require due diligence be exercised on each party. While the
simple answer is that due diligence should be exercised, the real question is to what
degree. Unless there is an apparent risk (in which case, the bank would probably decline
to act) or something apparent to the advising bank based on the LC, the relative risk
is low. The question to be asked is whether the advising bank must examine the LC it
is requested to advise beyond a machine based check for “hits”.
Subsection 5.8.6 Due Diligence in Standby Letter of Credit

or Independent Guarantee Transaction
Standby letters of credit and independent guarantees are discussed in chapter 2 (Trade).
Standbys and independent guarantees are used in transactions to assure payment
or performance. While significant amounts outstanding relate to so called financial
standbys involving reinsurance obligations or obligations related to the bond market
in London or New York (and not related to trade), there are many outstanding standbys
that relate to trade or services. They include commercial standbys and performance
standbys, or independent guarantees. A commercial standby serves as a backup assur-
ance of payment where the buyer is expected to pay the seller directly. For commercial
standbys and performance related independent undertakings, it is expected that pay-
ment will either not be required, or occur through other means, making a drawing an
exception, unlike commercial letters of credit where the undertaking is the expected
mechanism for payment.
Controls for the issuance of standbys and independent guarantees are similar to those
for commercial LCs. It must be possible to identify the nature of the relationship be-
tween applicant and beneficiary, whether the underlying transaction is appropriate for
the business profile of the applicant and beneficiary, and whether the transactions,
countries, or parties run afoul of any prohibitions or sanctions. In a typical situation,
the issuer issues the undertaking, whether an independent guarantee or a standby
letter of credit in favour of a beneficiary. Issuance may occur directly by the issuer or
through another bank which may advise the undertaking or, in the case of a standby,
confirm or otherwise be nominated to act.
Another situation involves two independent undertakings, one of which is intended

to reimburse a drawing on the other. In this scenario, the applicant requests its bank
to issue a counter undertaking (counter standby or counter guarantee) in favour of a
local bank which issues its local undertaking in favour of the local beneficiary which
is the counter party of the applicant. In this situation, there are two issuers and two
beneficiaries.
The issuer or the bank issuing the counter undertaking must conduct due diligence on
the applicant which will typically be a customer. The ongoing diligence exercised in
establishing this relationship will support the issuance of the undertaking, although
the issuer should screen the transaction for names and sanctions, the nature of the
168 | Chapter 5
underlying transaction, the countries involved, and ensure that the secured transaction
fits the applicant’s business profile.
If another bank is involved, the issuer should exercise due diligence as appropriate to
the bank and relationship. If the bank is a correspondent bank, then the regular review
cycle will support this action. If not, then the issuer must follow the procedures and
standards set forth in its compliance programme.
ACTIVITY:
Explain when your organisation uses or issues standby letters of credit or
independent guarantees.
Where the situation involves a counter undertaking, the same principles would apply
although the screening and checks would involve both the local bank and the local
beneficiary.
Where trade related standbys or independent guarantees differ from commercial let-
ters of credit is primarily with respect to the documents required, and who typically
issues such documents. While commercial LCs will typically require presentation of a
transport document, commercial invoice and other documents related to the transac-
tion, such as a packing list, insurance documents, or inspection certificates, a standby /
independent guarantee may only require presentation of a demand by the beneficiary,
making it easier to mask the underlying transaction. It is better practice to require a
recital of that transaction in the demand.
FACTFIND
See IIBLP ISP98 Model Form 1 and Attached Demand at Endnote 29:
http://iiblp.org/resources/isp-forms/.
Standbys and independent guarantees can be used to launder funds or finance terror-
ism more readily than commercial LCs simply because there is less need to forge or
manufacture documents. The primary defence against such misuse is to ensure that
the underlying transaction is genuine and the parties are not in collusion. They can
also be readily used to commit commercial fraud against the applicant, or the issuer
where the applicant and beneficiary are in collusion. Again, thorough due diligence at
the opening stage is the best defence.
Section 5.9 Due Diligence in Documentary

Collection Transaction
The transactions involving a documentary or bank collection are discussed in chapter

2 (Trade) subsection 2.7.2 (The Financial Products Used in Trade Finance). The role of
a bank in a documentary collection is limited to forwarding documents and making
payments. The various banks in the process make no undertaking with respect to pay-
ment and are only obligated to exercise ordinary care in handling the documents. In
standard international practice, banks do not examine the documents being forwarded
except to assure that their number and titles correspond to the collection letter. In light
of heightened AML concerns, banks will also screen the transaction and documents
for sanctions and other concerns. Because there is no credit risk involved, some banks
do less due diligence on their customer, since there is no risk of non reimbursement.
However, this attitude is short sighted in light of compliance risk.
Most banks engaged in a documentary collection require that there be at least one
customer relationship, either with the drawer, one of the banks, or the drawee. Again,
the bank’s policy should be set forth with clarity in the compliance programme.
Subsection 5.9.1 By the Remitting Bank
The bank of the principal (remitting bank) should conduct due diligence on either the
principal (drawer / seller / exporter) or on the bank to which it forwards the documents
for collection, the collecting / presenting bank, whichever is its customer or correspon-
dent, respectively, and screen the data regarding the transaction in accordance with
its compliance programme.
If the Principal is the remitting bank’s customer, the bank should conduct appropriate
due diligence on the transaction, determining whether it falls within the customer’s
profile and screen it, and, where there is an extension of credit, appropriate KYC scru-
tiny. Screening should also occur with regard to the data regarding the transaction
including the countries involved, the goods, and the parties concerned, including the
drawee. Where there is a customer relationship, this process will be relatively simpli-
fied. Where there is no such relationship, the financial institution should ask why it
is handling the transaction.
Where there is an established correspondent relationship with the collecting bank, the
remitting bank may decide to proceed and conduct the level of diligence indicated in
its compliance programme.
170 | Chapter 5
ACTIVITY:
What should be screened and checked when the prospective remitting bank
receives an application for a collection?
Subsection 5.9.2 By the Collecting / Presenting

Bank in a Bank Collection
The collecting / presenting bank should conduct appropriate due diligence on the party
to whom the collection is directed, the drawee (buyer / importer). It should exercise
due diligence with respect to the remitting bank. Where there is a correspondent
relationship with the remitting bank, this step may be satisfied by the regular review
cycle. It should also conduct due diligence with respect to the drawee. If the drawee is
a customer, the process is relatively simplified and reduced to screening and assuring
itself that the transaction fits within the customer’s business profile. Where the drawee
is not a customer, it should screen the names of the principal and drawee and make
any payment only to the remitting bank, which must have been screened if it decides
to proceed.
Section 5.10 Example of How Ongoing Customer

Due Diligence Unfolds
Bank 1’s customer is the Buyer Company. The Buyer Company is a long standing customer
of the bank and has a profile with the bank. It is based in Hong Kong and is a wholesaler
of products for retail department stores. Historically, its markets have been in the PRC,
Southeast Asia and adjoining countries. It purchases goods from a variety of different
locations throughout Asia, particularly in the PRC and in the Indian subcontinent.
The seller is Seller Inc., based in Bangladesh and a manufacturer of retail department
store goods.
Subsection 5.10.1 Transaction Details
In this transaction, the buyer applies to Bank 1 for a letter of credit for the amount of
USD 250,000.00. The buyer requests that the letter of credit be confirmed by Bank C and
advised by Bank A in favour of Seller Inc. The application also contains a description
of the goods which are 1,000 tea kettles at a unit price of USD 100.00; 2,000 electronic
appliances at a unit price of USD 70.00; and 100 Caterpillar tractors at a unit price of
USD 100.00. The documentation shows that the shipment is destined for the port of
Durban, South Africa.
Subsection 5.10.2 Course of Action for the Bank
In the above example, Bank 1 is dealing with an existing customer with a profile. Bank
1 should take the following course of action:
i. It should access its internal files with respect to this customer to look at the
particular transaction.
ii. Although Bank 1 may determine that the risk profile of this trade transaction
is higher, the risk profile of this customer with respect to the type of goods it
deals in, namely department store items, is relatively low.
iii. From the file Bank 1 can also determine that the customer has received regular
reviews and its transactions have been monitored.
iv. Bank 1 will then conduct its automated review and make appropriate
determinations if the country profile for Bangladesh is raised to be relatively
high.
v. The automated check produces no “hits” with respect to any of the parties or
any of the entities or items with regard to the transaction.
vi. At this stage, Bank 1 then will conduct a manual determination and analysis.
• It must be determined whether the Bangladesh seller is outside the
normal range of suppliers. If not, then this would be adequate. However,
the documentation states that the shipment is for a company in South
Africa. This company is identified as a wholesaler and distributor to
department stores. Geographically, this location is outside the normal
range of transactions for Bank 1. This fact should lead to further inquiry.
• Moreover, it should be noted that while the goods, on the whole, appear
to fall within the profile, one item looks unusual: 100 Caterpillar tractors
for USD 100.00 per tractor. This raises the possibility of obvious under
pricing. Clearly, a Caterpillar tractor could not be purchased for USD 100.00.
vii. The above noted points will therefore result in a heightened examination of
this transaction both with respect to the geographical range in which the goods
are to be shipped (and the possibility of it being shipped to other locations
which are more problematic) and the possibility of under pricing of goods.
viii. The next step would involve various internet and telephonic communications
with the buyer. From these recorded communications, Bank 1’s relationship
manager determines the following:
• The buyer company is attempting to expand its geographical horizons
to South Africa and to a series of department store wholesalers in that
area. This information fits with its relationship manager’s profile of the
buyer’s financial situation.
• The Caterpillar tractors in question are toys and therefore the price range
is entirely appropriate for the type of high quality toy involved.
172 | Chapter 5
ix. The relationship manager determines (and records) that it is not necessary
to file any suspicious activity report in this case.
x. In addition, there will be appropriate diligence necessary on the part of the
confirmer, Bank C, and any advisor, Bank A.
ACTIVITY:
Identify several situations from the above example as to where the bank
exercised further scrutiny during the course of reviewing the transaction.
Subsection 5.11.1 Summary of Exercising Due Diligence
Chapter 5, Exercising Due Diligence, explained how the compliance programme re-
quires the exercise of due diligence and its application to Trade Based Financial Crime
Compliance. The chapter provided an overview of the due diligence measures that a
financial institution must undertake before beginning a relationship with a customer
and the ongoing due diligence required throughout that relationship and how this
assessment relates to trade. It also explained that due diligence should occur when
considering establishing a customer relationship and in the ongoing course of it and
in correspondent bank relationships. The chapter notes however, that a financial
institution must exercise due diligence with respect to trade based financial crime
compliance in all of its actions, whether involving a customer or not, and explains
that a financial institution must monitor trade transactions, assessing their relative
risk. Finally, chapter 5 explains that the level of diligence to be exercised depends on
the risk involved. When it is higher, the scrutiny to be given to a transaction should
increase proportionally.
Review the example problem below, and answer the question that follows.
Bank 1’s customer is the buyer company. The buyer company is a long standing
customer of the bank and has a profile with the bank. Based in Singapore, it is
a wholesaler of products for retail department stores. Historically, its markets
have been in the PRC, Southeast Asia and adjoining countries. It purchases
goods from a variety of different locations throughout Asia, particularly in
the PRC and in the Indian subcontinent.
The seller is Seller Inc., based in Vietnam, and well known as a manufacturer
of retail department store goods.
Transaction details
In this transaction, the buyer applies to Bank 1 for a letter of credit for the
amount of USD 500,000.00. The buyer requests that the letter of credit be
confirmed by Bank C and advised by Bank A in favour of Seller Inc. The ap-
plication also contains a description of the goods which are 1,000 scarves at
a unit price of USD 100.00; 2,000 electronic appliances at a unit price of USD
30.00 and 500 tablets at a unit price of USD 75.00.
• Identify the due diligence that should be taken by the bank.
In section 5.1 (An Introduction to Due Diligence in Trade Based Financial

Crime Compliance) of this chapter, the students were encouraged to reflect
on the extent due diligence is exercised at their organisation.
• What tools and practices does your organisation use to Know Your Customers?
• How does your organisation monitor transactions to ensure due diligence
is ongoing?
• Do you feel due diligence is adequately explained in your organisation’s
compliance programme? What changes and /or additions would you make
based on the information presented in this Book and the referenced materials?
• Furthermore, do you feel that enhanced due diligence is adequately
explained in your organisation’s compliance programme? In regard to
enhanced due diligence, what changes and / or additions would you make
or suggest based on the content of this Book and the referenced materials?
Question 5-1. Compare and contrast due diligence and enhanced due diligence.
Question 5-2. Identify steps involved in “Knowing Your Customer”.
Question 5-3. Identify the objective of ongoing customer due diligence.

174 | Chapter 5
Question 5-4. Correspondent banks enable a bank effectively to reach jurisdictions

in which it is not physically present, establishing valuable trade to the
bank’s customers who deal with entities in such countries. True or false?
Question 5-5. When understanding the customer’s trade transaction to prevent

trade based financial crime, which of the following are important
for the bank to scrutinise? Select all that apply.
a) The price structure of the customer’s products.
b) For whom the customer is producing the products and the uses for
the products by the ultimate buyer.
c) The bank examiner’s restrictions regarding AML regulations.
d) The possibility of the misuse of the products.
e) The customer’s credit standing.
Question 5-6. Compare automated scrutiny (screening) and manual scrutiny.

Chapter 5 (Exercising Due Diligence) provided the student with the details
of how, when, where and to what extent due diligence must be exercised,
particularly with customers and correspondent banks on a risk based analysis
and in accordance with its compliance programme.

Having received An Introduction to Trade Based Financial Crime Compliance
in chapter 1, Trade was discussed in chapter 2, Financial Crime Regulation
in chapter 3, and the structure of The Compliance Programme in chapter 4.
This chapter 5 discussed Exercising Due Diligence.
The student is now prepared to move forward with the balance of Part I,
Trade Based Financial Crime Compliance. The subsequent chapter will dis-
cuss the Indicators of Trade Based Financial Crimes in chapter 6.
After Part I, the student will be prepared to study how to combat the var-
ious specific types of financial crime in Part II, Combating Financial Crime,
covering Anti Money Laundering in chapter 7, Countering the Financing of
6
Chapter 6
INDICATORS OF TRADE BASED

FINANCIAL CRIME
LEARNING OBJECTIVE
After studying this chapter, students should be able to demonstrate an
understanding of the Indicators of Trade Based Financial Crimes and how they
can be used to spot possibly suspicious activities.
CHAPTER OVERVIEW:
This chapter on the Indicators of Trade Based Financial Crimes discusses lists
of indicators of different organisations and compares them, identifies who is
using indicators and the application of indicators to specific crimes. Chapter
6 also gives a detailed discussion of the Indicators of Trade Based Financial
Crimes as well as applicable examples.

products, chapter 3 discussed Financial Crime Regulation, chapter 4 exam-
ined the elements of a Compliance Programme, and chapter 5 discussed the
level of care that a financial institution needs in Exercising Due Diligence in
its actions with respect to financial crime compliance.
After studying Chapter 6, Part II of this Book, entitled Combating Financial
Crimes, identifies and describes the various types of crimes that can be trade
based and the steps necessary for financial institutions to combat them, includ-
ing money laundering, countering the financing of terrorism, and sanctions.
175
176 | Chapter 6

Chapter 6 Indicators of Trade Based Financial Crime
Section 6.1 An Overview of Indicators
Section 6.2 The Name and Source
Subsection 6.2.1 The Name “Indicator”
Subsection 6.2.2 Defined
Subsection 6.2.3 Sources of the Indicators
Section 6.3 Lists of Red Flags of Various Organisations
Section 6.4 Using the Indicators
Subsection 6.4.1 Who is Using the Indicators
Subsection 6.4.2 In Records and Reports
Subsection 6.4.3 The Application of an Indicator to a Specific Crime
Section 6.5 Cautions in Using the Indicators
Subsection 6.5.1 Value
Subsection 6.5.2 Inappropriate Use
Subsection 6.5.3 Applicability to Trade Transactions
Subsection 6.5.4 Linkage to Certain Types of Financial Crime
Section 6.6 Detailed Discussion of the Indicators of Trade Based Financial
Crime
Subsection 6.6.1 Indicator No. 1: Unusual Transaction
Subsection 6.6.2 Indicator No. 2: Significant Deviations in Business Patterns
Subsection 6.6.3 Indicator No. 3: Collusion
Subsection 6.6.4 Indicator No. 4: Apparent Front or Shell Company in Transaction
Subsection 6.6.5 Indicator No. 5: Geographical or Jurisdictional Concerns
Subsection 6.6.6 Indicator No. 6: Transactions in High Risk or High Value Goods
Subsection 6.6.7 Indicator No. 7: Problematic Parties
Subsection 6.6.8 Indicator No. 8: Dual Use Goods
Transaction
Subsection 6.6.10 Indicator No. 10: Trade Structure Concerns
Subsection 6.6.11 Indicator No. 11: Letter of Credit Related Concerns
Subsection 6.6.12 Indicator No. 12: Suspicious Actions
Subsection 6.7.1 Summary of Indicators of Trade Based Financial Crimes
Section 6.1 An Overview of Indicators
This chapter focuses on widely accepted Indicators of financial crime that suggest the
possibility of various types of financial crime. Some Indicators are more commonly
linked to specific financial crimes whereas others relate to virtually all types. The
Indicators identified here are specifically linked to trade and trade finance.
Indicators of Trade Based Financial Crime | 177
So as not to repeat the explanations of the Indicators in each subsequent chapter of

this Book dealing with a specific financial crime nor to discuss them in a piecemeal
fashion, this chapter addresses these Indicators in detail. By this arrangement, the
student will also be better able to compare and distinguish the Indicators. Moreover,
by studying them together here, the student will be given a general acquaintance with
the methodology by which financial criminals operate and be better prepared to ap-
preciate the application of the methods of identifying the Indicators with respect to
the various types of financial crime in subsequent chapters.
The behaviour patterns that are commonly associated with financial crime are potential
signs or signals that indicate that further scrutiny is warranted. While the presence of
an Indicator does not necessarily mean that a financial crime is being committed, it
does signal the possibility and the greater the number of Indicators that are present,
the greater the possibility that there is a financial crime and, in any event, the greater
the need for additional scrutiny.
ACTIVITY:
To what extent does your Compliance Programme take into account the
Indicators or Red Flags signalling financial crimes? To what extent are they
trade based?
Section 6.2 The Name and Source
Subsection 6.2.1 The Name “Indicator”
In the course of discussions, study, and cooperation among those engaged in combat-
ing financial crime, it has been common practice to identify behaviour or activity that
indicates the possibility of financial crime. This process has occurred as those persons
and organisations combating financial crime attempt to understand it, identify it,
compare it, and to prevent this behaviour.
These Indicators are referred to in some areas as “Red Flags”. This name is intended
to indicate a warning or caution. However, red flags have historically been a symbol of
socialism which may have connotations that may make the use of the term offensive
from both sides of the political spectrum.
Therefore, this Book generally refers to the signs of financial crime as “Indicators”,
following the lead of the UN Commission on International Trade Law (UNCITRAL) and
the UN Office on Drugs and Crime (UNODC) in their definitive study.
178 | Chapter 6
Subsection 6.2.2 Defined
An Indicator is a pattern of behaviour that has been associated with financial crime so
regularly as to justify a suspicion that its presence is not a coincidence but an element
or aspect of the crime itself.
Subsection 6.2.3 Sources of the Indicators
The source of the Indicators of trade based financial crime is the experience of prac-
titioners and of others engaged in combating this phenomenon. They have drawn on
their real life experiences to identify behaviour that has typically accompanied types of
financial crime and generalised these experiences. The great value of such Indicators is
that they provide specific instances of behaviour which are concrete and not abstract,
enabling their ready grasp.
Because the origin of the Indicators is experiential, what constitutes an Indicator

depends on the experience and perspective of the person doing the classification.
Moreover, there is no rigorous definition of a particular indictor and, so, there can be
an overlap between various Indicators.
Similar confusion can arise as a result of the names assigned to them. Such names are
descriptive, often assigned without rigor, and, having become attached and associated
with them, are used even though another name might more clearly convey what is
signified. Thus, the Indicator entitled “Letter of Credit Related Concerns” (Indicator
No. 11) in this Book, is an amalgam of several different types of signals that arise in
the context of letter of credit use.
ACTIVITY:
How have the Indicators of financial crime been used in your organisation?
Section 6.3 Lists of Red Flags of Various Organisations
Various organisations have attempted to list Indicators, usually under the name of “Red
Flags”, including the BAFT division of the American Bankers Association, government
regulators, and some experts and authors including the Hong Kong Association of
Banks (HKAB),1 the Monetary Authority of Singapore (MAS),2 the Asia / Pacific Group
on Money Laundering (APG),3 the Federal Financial Institutions Examination Council,
Bank Secrecy Act / Anti Money Laundering Examination Manual (FFIEC),4 and the
United Kingdom’s Financial Conduct Authority.5 These lists contain similarities and
differences.
HKAB. The HKAB organises its list based on whether the Indicator relates to cus-
tomers, documents, specific transactions, or the type of goods or commodity that are
particularly vulnerable to misuse. While there are advantages to this approach, there
is overlap and, with 65 items, it is unwieldy and difficult to handle. Moreover, each
of the items listed require explanations and commentary. The HKAB Indicators also
contain terms that require judgment such as “overly”, “unusually”, “substantial”, and
“significantly”. Not only do these terms require an objective understanding of similarly
situated entities (or are vulnerable to subjective judgment), but also of the history of
the particular entity with respect to similar transactions.
One particular example from the HKAB list is that the customer “is overly keen to waive
discrepancies.”6 Making this judgment is particularly difficult. Some applicants such
as Walmart have such total leverage over suppliers that they have a standard clause
by which virtually all discrepancies are waived since adjustments can be made on lat-
er purchases. Other purchasers are in a rush to obtain seasonal goods and willing to
chance discrepancies in order to obtain the goods in a timely manner. They are “keen”
to waive discrepancies, but are they “overly keen”? What is meant is that the waiver
has no commercial or business justification and occurs regularly. Moreover, it must
be decided when a judgment is being made. For a document processor who is familiar
with the Walmart account, waiving all discrepancies is the norm and would not even
raise a question. Therefore, there would be no record of the exercise of judgment not
to investigate the matter further. On the other hand, someone inexperienced might
2 To view the MAS Guidance Paper, visit https://www.mas.gov.sg and search: Guidance on Anti-
Money Laundering and Countering the Financing of Terrorism Controls in Trade Finance and
Correspondent Banking.
3 http://www.fatf-gafi.org/media/fatf/documents/reports/Trade_Based_ML_APGReport.pdf.
4 https://bsaaml.ffiec.gov/manual/Appendices/07.
5 https://www.fca.org.uk/publication/thematic-reviews/tr-13-03.pdf.
6 This item is Part 3 A. (g) of Annex B of the Hong Kong Association of Bank’s Guidance Paper of
Combatting Trade-based Money Laundering (1 February 2016).
180 | Chapter 6
inquire and then note in the records why the decision not to pursue the matter was
made. Was the first processor being negligent? It might appear so to an examiner.
MAS. The MAS organises its list of “Potential Red Flags” into the following categories:
(1) Transactions with Higher Financial Crime Risk Elements; (2) Inconsistencies and
Transactions Which Do Not Make Economic Sense; (3) Related Party / Third Party
Transactions; (4) Transactions with Unexplained / Frequent Documentary Changes;
and (5) Transactions with Multiple Discrepancies / Missing Information; (6) Use of
Front / Shell Companies and Complex Structures in Transactions; (7) Other Red Flag
Indicators. Many of the same observations about this approach made above would also
apply to the MAS list.
APG. The APG, Typology Report on Trade Based Money Laundering7 groups “red flags
and patterns” based on responses to questionnaires on the following topics: 1) Trade
Finance; 2) Jurisdictions; 3) Goods; 4) Corporate Structures; and 5) Predicate Offenses.
As with the HKAB list, these items can be difficult to assess. For example, ¶ 137(b) cites
an example of the method of payment being inconsistent with the risk, namely that
payment was made in advance of a shipment by buyer to a new seller located in a high
risk jurisdiction. While the high risk compliance character of the jurisdiction may be
problematic, requiring an advance payment in the form of an assurance of performance
and quality that corresponds with payment by the buyer is not particularly surprising
if the risk of payment by the buyer may be equally high or even higher.
FinCEN. In addition, some approaches follow along the lines of a specific type of activity
such as invoice financing and dual use goods.8 A FinCEN advisory (2010), for example,
discusses the particular features that accompany the misuse of free trade zones.9
FCA. The FCA operates independently of the U.K. government and is financed by the
fees it assesses against the institutions the FCA regulates. The FCA Thematic Review,
Banks’ control of financial crime risks in trade finance (July 2013) constitutes a report on
good and poor practices by relevant UK banks. The document establishes its method-
ology, reports its findings and covers each major aspect of trade based financial crime
compliance: risk assessment, due diligence, escalation practices, record keeping, anti
money laundering, sanctions, countering the financing of terrorism, etc. Appendix 1
of the report, Examples of trade based money laundering lists the FCA’s “red flags” or
indicators of financial crime.
7 Adopted on 20 July 2012 at its 15th Annual Meeting.

8 See MAS Guidance (October 2015), supra note 3 ¶¶ 2.14 – 2.19.
9 FinCEN FIN-2010-A001, February 18, 2010, Advisory to Financial Institutions on Filing Suspicious
Activity Reports regarding Trade-Based Money Laundering, available at https://www.fincen.gov/
resources/advisories/fincen-advisory-fin-2010-a001.
FACTFIND
To see the list of Red Flags / Indicators from the sources named above, go to:
APG (Page 33): http://www.fatf-gafi.org/media/fatf/documents/reports/
Trade_Based_ML_APGReport.pdf.
MAS (Page 19): http://www.mas.gov.sg/~/media/MAS/News%20and%20
Publications/Monographs%20and%20Information%20Papers/Guid-
ance%20on%20AML%20CFT%20Controls%20in%20Trade%20Finance%20
and%20Correspondent%20Banking.pdf.
HKAB (Page 24): http://www.hkma.gov.hk/media/eng/doc/key-functions/
banking-stability/aml-cft/Guidance_Paper_on_Combating_Trade-based_
Money_Laundering.pdf.
FFIEC (Appendix 7): https://bsaaml.ffiec.gov/manual/Appendices/07.
FCA (Page 46): https://www.fca.org.uk/publication/thematic-reviews/tr-
13-03.pdf.
The Indicators discussed in this Book represent a combination and selection from these
sources grouped together by common features.
ACTIVITY:
Does your organisation have a list of Indicators? How are they grouped?
Section 6.4 Using the Indicators
It is important to understand how to make effective use of the Indicators, both as a list
and with respect to an individual Indicator. Doing so depends on who is using them and
in what way. There are also some important cautions of which one must be mindful in
using the Indicators and consider that their use is also affected by the particular type
of financial crime.
Subsection 6.4.1 Who is Using the Indicators
How an Indicator or the list of Indicators can be used, and be of use, depends on who
is using it. In a sense, the difference is whether the use is retrospective or prospective.
Prospective use involves using the Indicators as a tool to identify possible problems.
On the whole, the advice given is to identify potential Red Flags early in the process of
exercising due diligence, ideally when considering establishing a customer relationship
or when deciding whether to proceed with a particular transaction.
182 | Chapter 6
Retrospective use typically involves a post mortem exercise attempting to understand

what the bank overlooked in a transaction which was problematic. The question in this
exercise is whether it is initiated by the bank itself, or the bank examiner.
For a banker, the use can be both prospective and retrospective. Prospectively, the
Indicator can warn of a financial crime that will be, or is being, committed. In this sce-
nario, a banker who spots an Indicator in a current ongoing transaction must consider
what weight to give to it and follow through with his or her decision, documenting
it and the reasons behind it. Retrospectively, the Indicator can be used to determine
when a financial crime has been committed.
In such instances, after the transaction is completed and proves to have been problem-
atic, a post mortem may reveal an Indicator that was missed and would have triggered
further consideration. In that situation, the bank will want to understand why it was
missed and how similar situations can be avoided in the future. Was it a result of human
error, machine error, confusion or misunderstanding about the nature of the Indicator,
or miscommunication or lack of it? The answers to those questions will impact how the
compliance staff documents the review and the situation discussed with bank examiners.
For bank management, in addition to the points made above, there is a need to be sure
that the necessary corrections were made, and that the corrections are documented
and communicated to the necessary bank employees.
For a bank examiner, the focus will be almost entirely retrospective. What gave rise to
the problem and was the bank’s response adequate to prevent its reoccurrence?
For a bank trainer, the situation can offer a case study in problems that can occur.
ACTIVITY:
Consider how your organisation uses the Indicators both prospectively and
retrospectively.
Subsection 6.4.2 In Records and Reports
Another important use of the Indicators is as a shorthand form of capturing the basis
for concern. As such, the Indicator can be noted in the financial institution’s records
without a detailed explanation. It can also be used in the report of the suspicious
transaction filed with the regulatory authority.
Subsection 6.4.3 The Application of an Indicator to a Specific Crime
As indicated, the Indicators are general formulations. As applied to a specific financial

crime, they may take on features that are not applicable to other crimes. And they may
well involve different responses. In some cases, a report to regulatory authorities is
appropriate and in others freezing the transaction is necessary. In still others, the bank
may elect to close the account. What the bank can disclose, and to whom, will also vary,
depending on the particular financial crime. All of these matters are addressed in the
discussion of specific financial crimes that follows in Part II of this Book, Combating
Financial Crimes.
Section 6.5 Cautions in Using the Indicators
Certain qualifications and cautions must be given with respect to using the Indicators.
Subsection 6.5.1 Value
The presence of Indicators can alert a bank to the possibility of a financial crime which
requires heightened scrutiny. Used in this sense, they can have value in the context of
a robust trade based financial crime Compliance Programme.
Subsection 6.5.2 Inappropriate Use
The Indicators can be used mechanically as an exclusive list whose mechanical use
satisfies the requirements of due diligence. Used in this sense, the Indicators would
not protect a bank. While it is understandable that banks desire to have a safe harbour
for their actions, the Indicators do not provide one and showing that such a list was
checked off would not excuse a bank from a failure to exercise due diligence. Indeed,
regulators have criticised such uses of Indicators. For example, were a banker to use a
check list, and casually check off items but fail to identify an unusually large shipment,
using a check list would not excuse the failure to exercise due diligence.
ACTIVITY:
Explain why using the Indicators as a simple check list would be inappropriate.
Subsection 6.5.3 Applicability to Trade Transactions
Another difficulty with the use of a list of Indicators is that the items which typically
are listed do not always seem applicable to trade transactions or the type of thing that
document processors or others in the trade department would be able to identify in the
184 | Chapter 6
context of their work. Other Indicators seem inapt – for example, some lists point to
frequent amendments as an Indicator of financial crime. However, in some commercial
LC transactions, requests for amendments are common. The issue should be whether
the requested amendment is unusual or inappropriate within the context of the given
transaction. In addition, some of the Indicators, such as collusion, should be identified
in establishing or updating the customer relationship and not in the context of a given
transaction. Others such as significant deviations are more likely to be identified by the
relationship manager than by trade operations. As with all aspects of trade based financial
compliance, team work between various areas of the financial institution is essential.
The Wolfsberg Group, Trade Finance Principles (2019) section 1.3.1(b)(iv) (Financial Crime
Risks – Risk Assessments) states that “[a]s with their other lines of business, services,
and products, [Financial Institution]s should apply a RBA [Risk Based Approach] to the
assessment and management of risk in relation to Trade Finance.”10”
FACTFIND
For more information regarding the application of Indicators to trade
transactions, go to: https://www.wolfsberg-principles.com/sites/default/
files/wb/pdfs/faqs/18.%20Wolfsberg-Correspondent-Banking-FAQ-2014.
pdf.
Subsection 6.5.4 Linkage to Certain Types of Financial Crime
Moreover, all the Indicators are not necessarily linked to every one of the types of
financial crime. Some relate to specific crimes such as money laundering and possibly
to terrorism financing. On the other hand, many of the Indicators relate to commercial
fraud. In addition, many of the Indicators could relate to various types of financial
crime. Over pricing could indicate an error, attempted money laundering, terrorism
financing, movement of weapons of mass destruction, bribery, or commercial fraud.
Knowing which crime is involved matters because the question of which type of financial
crime is suspected could impact on how a bank responds. The response to suspected
money laundering, namely reporting suspicious conduct, differs significantly from the
response to suspected terrorism financing, namely freezing the funds and reporting
the activity. In addition, some activity that would indicate financial crime could fall
under several of the Indicators.
2019.pdf.
Section 6.6 Detailed Discussion of the Indicators

of Trade Based Financial Crime
The Indicators discussed in this chapter are:
Indicator No. 1: Unusual Transaction

Indicator No. 2: Significant Deviations in Business Patterns
Indicator No. 3: Collusion
Indicator No. 4: Apparent Front or Shell Company in Transaction
Indicator No. 5: Geographical or Jurisdictional Concerns
Indicator No. 6: Transactions in High Risk or High Value Goods
Indicator No. 7: Problematic Parties
Indicator No. 8: Dual Use Goods
Indicator No. 9: Apparent Inconsistencies in Proposed Transaction
Indicator No. 10: Trade Structure Concerns
Indicator No. 11: Letter of Credit Related Concerns
Indicator No. 12: Suspicious Actions
Detailed treatment of the identified Indicators follows. As stated above, the presence of
an Indicator may not necessarily constitute trade based financial crime, but its presence
does raise questions that should be addressed and answers that provide a satisfactory
explanation should be documented, particularly if more than one Indicator is present.
The discussion of each Indicator in this section will

1. define it;
2. explain what it is;
3. give one or more examples of it;
4. identify what it might signify; and
5. discuss what reaction may be appropriate.
Due to this organisational approach, there will be some repetition which is deliberate
since it is expected that some readers may focus on only one of the Indicators.
The Indicators are intentionally generalised and their explanations follow suit. Moreover,
there is some overlap in the examples illustrating each Indicator, since some examples
can apply to more than one Indicator. Where this overlap is present, it is noted and
comparative distinctions are made when applying these illustrations to the day to day
operations at a bank. What is important is not whether a given pattern of behaviour falls
within one category or another, but that the explanation of the suspicious behaviour
is sufficiently clear when it is documented or reported to regulators.
186 | Chapter 6
Defined. A transaction that is notably inconsistent with a customer’s business strategy

or profile.
Explained. The focus in Indicator No. 1 is the particular trade transaction. In the
exercise of due diligence the bank should establish and update a customer profile
which includes the type of transactions in which the customer regularly engages. Any
transaction which departs significantly from this profile should draw scrutiny with a
view towards what, if any, further diligence is required.
Unusual activity would include significant divergence in the type of goods, scale, price,
frequency, and markets. To assess what is a significant divergence, the bank must be
aware of the norm for these matters.
Indicator No. 1 differs from Indicator No. 2 (Significant Deviations in Business Patterns)
in that the focus of the former Indicator is on a specific transaction whereas the focus
of the latter is on the pattern of trade activity. The two Indicators resemble one another
but the unusual transaction will be spotted in the context of an application to facilitate
that transaction (e.g., by issuing an LC or a confirmation, or by a documentary collec-
tion) whereas the deviation in patterns is more likely to be spotted in establishing the
customer relationship or in a regular review of the customer’s profile.
Indicator No. 1 is also similar to Indicator No. 5 (Geographical or Jurisdictional Concerns)

in that a dramatic change in a given transaction such as buying from, or shipping to,
or through a problematic jurisdiction is more likely to be noticed on a transactional
level whereas a regular pattern of dealing with a problematic jurisdiction should be
apparent in establishing the customer relationship or regular updates.
FACTFIND
To find out more about how an unusual transaction is explained, see the
FFIEC, Bank Secrecy Act / Anti-Money Laundering Examination Manual:
https://bsaaml.ffiec.gov/manual/AssessingComplianceWithBSARegulato-
ryRequirements/04.
Example. If a customer that manufactures steel seeks a letter of credit for the purchase
of a quantity of wood pulp products that is beyond its own usage of paper, further
questions should be asked.
The bank should also consider whether wood pulp is subject to dual use or misuse.
Appropriate further scrutiny could involve the bank’s relationship manager seeking
information and explanations from the customer, or seeking information from publicly
accessible data.
What it could signify. If it is determined that the customer merged with a company
containing a paper products division, due diligence should be exercised with respect
to this new activity and the predecessor company. The customer’s profile should be
updated and a record kept of the decision.
On the other hand, if there is no reasonable explanation for this activity, further con-
sideration should be given to reporting the activity as suspicious.
There are several concerns in the transaction described in the example above, including
the location of the customer’s customer, the destination of the goods, and the expansion
to a previously unserved area. Depending on the reason underlying the transaction, it
could be a rational business activity. On the other hand, the potential financial crimes
that could be involved include money laundering, terrorism financing, violations of
sanctions, and commercial fraud.
Reaction. The bank should document the incident, noting that it has spotted the
problem; determine whether investigation is warranted and, if not, why; the results
of any further action; and what, if anything was done and why.
If the transaction was determined to indicate the possibility of a financial crime, the
financial institution should report it unless it indicated terrorism financing or viola-
tion of a sanction, which might well be the case with a weapon or military product, in
which case the financial institution should act as required by the applicable regulation.
If commercial fraud was indicated, the financial institution should consider whether
payment should be delayed or frozen in order to avoid disbursement of the funds in a
manner that was irretrievable. If the suspicious activity was spotted before the trans-
action was undertaken, the financial institution might decline to facilitate it or even
close the account for reputational or similar reasons.
ACTIVITY:
What can banks do to assess what is a significant divergence from a customer’s
typical activity?
188 | Chapter 6
Subsection 6.6.2 Indicator No. 2: Significant Deviations

in Business Patterns
Defined. Significant changes from a customer’s historical pattern of trade activity

or business strategy in terms of markets, monetary value, frequency of transactions,
volume, price, or merchandise type.
The focus in Indicator No. 2 is the overall pattern of business activity. It is most likely
to arise in the context of monitoring or reviewing the customer, or in connection with
a transaction or application for a bank product such as an LC.
This Indicator resembles Indicator No. 1 (Unusual Transaction) which focuses on a

given transaction as opposed to the pattern of a customer’s business. It also overlaps
Indicator No. 5 (Geographical or Jurisdictional Concerns) to a degree where the geo-
graphical pattern of the customer’s business has come to involve a problematic juris-
diction. Where there is such overlap present in a transaction or pattern, the scrutiny
given should be elevated.
Explained. In the course of creating and maintaining the customer profile, a bank
should take notice of any deviations from the customer’s normal business operations
that do not make commercial sense.
Such deviations could include:

• A change in currency transactions.
• Increases or decreases in the purchase of staple products.
• Purchase of products in excess of the customer’s capacity to use or resell.
• Increase or decrease in prices of goods outside the range of market prices.
• Change in the types of product(s) purchased.
• The unusual transfer of funds from accounts with the same or related principals.
• The purchase of goods and services that are inconsistent with the customer’s
stated line of business.
• Payment for goods or services by check, money order, or bank drafts that are
not linked to the account of the purchaser.
The Wolfsberg Group, Trade Finance Principles (2019) section 1.5.4 (Challenges)
states: “Price verification for financial crime control purposes is difficult for [Financial
Institution]s. [Financial Institution]s generally are not in a position to make meaningful
determinations about the legitimacy of unit pricing due to the lack of relevant business
information, such as the terms of a business relationship, volume discounting or the
specific quality of the goods involved. Further, many products are not traded in public
markets and there are no publicly available market prices. Even where goods are publicly
traded, the current prices may not reflect the agreed price used in any contract of sale
or purchase and these details will not usually be available to the [Financial Institution]
s involved due to the competitive sensitivity of such information.”11
As mentioned in section 5.3.7 (Understanding the Customer’s Trade Business), the

International Chamber of Commerce (ICC) published a guidance paper in June 2019,
Financial Crime Compliance Checks on the Price of Goods in Trade Transactions – Are Price
Checking Controls Plausible.12 Generally, the guidance states that “beyond a common
sense check for manifestly unusual pricing, [Price Checking] is extremely challenging
for Financial Institutions to carry out when processing trade documentation.” The paper
also notes that only price checking for commodities could be subject to reliable ranges
based on publicly available information. For other goods, the paper lists fourteen factors
which, at a minimum, would have to be considered before a financial institution could
assess whether a price is unreasonable for a given transaction. Ultimately, the paper
concludes that “it is not plausible for an FI to develop a binary financial crime control
for price checking. Instead, mitigation is more effective to consider a wider control
framework which includes manual escalation and/or post transaction analysis, as well
as sound policies and procedures.”
Example. A customer based in China typically sells tea to a buyer in Australia, financed
by commercial letters of credit that are confirmed by Bank Y, sending two shipments per
month for three years. Then the customer begins to send five shipments per month at a
significantly higher price, despite the market for tea in Australia already being saturated.
Appropriate further scrutiny would be warranted and could involve Bank Y’s relation-
ship manager asking specific questions to the customer. The bank should inquire as to
whether there is a legitimate reason from the increased shipments to Australia and for
the increase in price, despite the market for tea already being saturated. If the customer
can provide legitimate reasons, such as new distributors, or a more expensive type of
tea, then no additional steps are required. Bank Y should document these reasons to
help further build the customer’s profile.
If the customer cannot provide a legitimate business reason for these changes in activ-
ity, Bank Y may be required to report the suspicious activity to the relevant authority.
What it could signify. This example could signify money laundering, terrorism fi-
nancing, violation of sanctions, or commercial fraud.
2019.pdf.
12 https://iccwbo.org/publication/financial-crime-compliance-checks-price-of-goods-trade-
transactions-price-checking-controls-plausible/.
190 | Chapter 6
Reaction. Bank Y should document the incident, noting that it has spotted the deviation
in business pattern; determine whether investigation is warranted and, if not, why; the
results of any further action; and what, if anything was done and why.
If the concern was elevated to a serious suspicion that there was the possibility of a
financial crime, the financial institution should report it unless it indicated terrorism
financing or violation of a sanction, which might well be the case with a weapon or
military product, in which case the financial institution should act as required by the
applicable regulation. If commercial fraud was indicated, the financial institution should
consider whether payment should be delayed or frozen in order to avoid disbursement
of the funds in a manner that was irretrievable. If the suspicious activity was spotted
before the transaction was undertaken, the financial institution might decline to fa-
cilitate it or even close the account for reputational or similar reasons.
ACTIVITY:
Compare and contrast the similarities and differences between Indicator No.
1 (Unusual Transaction) and Indicator No. 2 (Significant Deviations in Business
Patterns).
Defined. Secret or illegal cooperation between entities with a view towards deceiving
another person or persons, including the bank itself.
This Indicator resembles Indicator No. 4 (Apparent Front or Shell Companies in

Transaction). Where there is such overlap present in a transaction, or pattern, the
scrutiny given should be elevated.
Explained. As part of the exercise of due diligence in establishing and maintaining a

customer relationship, it is important to identify the true owner of a company or the
controlling person or entity, particularly where there appears to be a variety of com-
panies with cross ownership or shell companies that are fronting for hidden owners.
Problems related to financial crime can more readily arise where companies are affil-
iated, own other companies, or are controlled by the same entity because there is no
arm’s length transaction in which the counter party serves as an added check on the
actions of the other party.
A matter of concern is the same or a similar address of buyer and seller, or that the same
legal agent serves as front for both companies.
In instances where the true identity of the parties is unknown or obscured, further due
diligence must be undertaken.
Example. Bank’s Customer buys meat products from various Sellers. The prices are in
USD, are large but not unusual, and the goods are of a type in which the Buyer normally
deals and are not susceptible to misuse. Payment is by letter of credit. Discrepancies
in these transactions are not typically waived, except for one particular customer, for
whom they are regularly waived, giving rise to suspicion.
In the course of due diligence initiated by the customer relationship manager who
noted the deviation from the typical pattern, the bank discovers through a search of
the public records that although the Customer and that particular Seller are separate
legal entities established in different countries, both are actually owned by the same
holding company which is privately owned.
As a result of discussions with the Customer it was further discovered that the hidden
company controlling both companies is a multinational corporation and that in order
to pay in the agreed currency, currency control regulations require use of letters of
credit. In such a case, the bank may conclude that there is no reason for further inves-
tigation provided that there are genuine transactions and the prices are in the normal
range for other similar transactions. If the bank cannot identify the true identity of
the controlling parties, then the bank should not facilitate the transaction and should
report the suspicious activity to the appropriate authority.
What it could signify. If the companies are controlled by one entity, the financial
crime issues could be money laundering or commercial fraud. There would need to be
additional Indicators before a concern about terrorism financing would arise. Tax fraud
and evasion of currency regulations are also possible.
Reaction. The bank should document the incident, noting that it has spotted the is-
sue; determine whether investigation is warranted and, if not, why; the results of any
further action; and what, if anything was done and why.
192 | Chapter 6
ACTIVITY:
What steps does your organisation take to identify the true owner of a
company or the controlling person of an entity?
Subsection 6.6.4 Indicator No. 4: Apparent Front or

Shell Company in Transaction
Defined. Entities whose control or ownership is in the hands of unknown persons or

entities.
For example, this Indicator would involve a situation where a previously unknown party
whose identity is not clear or whose references are not convincing is involved, or where
there is evasiveness about the identity or connections of third parties, particularly
where there are changes in payment instructions.
Indicator No. 4 resembles Indicator No. 3 (Collusion). Where there is such overlap
present in a transaction or pattern, the scrutiny given should be elevated. It could also
be masking control by PEPs or politically exposed persons (Indicator No. 7).
Explained. If the transaction appears to involve a shell company that obscures the
true beneficial owner, these unidentified third parties cannot be subjected to due dil-
igence procedures to ensure that they do not pose a higher risk for money laundering
or terrorism financing, that they are not politically exposed persons (PEPs), or they
are not merely a shell company. It is important that a bank understands who is the
ultimate beneficial owner or source of the funds of a transaction. A bank should not
participate in a transaction where a party obscures its true identity through the use
of shell companies.
Example. A long time customer who sells chemical products using commercial LCs,
standbys, and bank guarantees to assure payment and performance informs the bank
that it has been acquired by Company X, based in a Caribbean nation. In conducting
due diligence, it is determined that Company X’s agent is a law firm acting as a Trustee
for a trust whose beneficial owners are not disclosed. The Caribbean bank is not able
to exercise due diligence regarding the new situation of this customer without further
information. When the bank is informed of the change of ownership or discovers it in
its ongoing regular monitoring of the customers, this matter should be given additional
attention. In any event, a series of cross border transactions involving chemicals would
warrant further investigation.
FACTFIND
For an additional example, see Case Study 5 in the APG, Typology Report on
Trade Based Money Laundering, p.60.
http://www.fatf-gafi.org/media/fatf/documents/reports/Trade_Based_ML_
APGReport.pdf.
What it could signify. The involvement of an apparent shell company or front for
the purpose of obscuring the true identity of the beneficial owners could signify mon-
ey laundering, terrorism financing, violations of sanctions, and commercial fraud.
Depending on the nature of the chemicals and their potential uses, it could also involve
misuse of dual use goods.
ACTIVITY:
Explain how the facts in the above example could also fall under Indicator
No. 3 (Collusion).
Subsection 6.6.5 Indicator No. 5: Geographical or

Jurisdictional Concerns
Defined. Conducting business in, with, or through jurisdictions that are at a higher
risk for money laundering, terrorism financing or other financial crimes.
Indicator No. 5 overlaps Indicator No. 1 (Unusual Transaction) and Indicator No. 2
(Significant Deviations in Business Patterns) in that a deviation or unusual patterns
could relate to geographical or jurisdictions concerns. Where there are jurisdictional
concerns present in a transaction or a pattern of activities with such concerns, the
scrutiny given should be elevated.
194 | Chapter 6
Explained. This Indicator would include payments or shipping items to, or from, higher
money laundering risk jurisdictions including countries identified by the Financial
Action Task Force as “non-cooperative jurisdictions” as regards anti money laundering
regulations.
FACTFIND
To see this list of identified high risk countries, go to:
www.fatf-gafi.org/countries/#highrisk.
Banks should regularly check these lists which can change frequently and not rely on
memory. Banks should also be aware of when goods pass through these high risk ju-
risdictions. The bank should investigate to determine if there is a legitimate business
purpose for this.
A customer conducting business in a high risk jurisdiction should immediately trigger

a need for enhanced due diligence.
Example. A customer typically trades in Southeast Asia using letters of credit for pay-
ment as both seller and buyer. Without notice, it starts buying goods from Angola and
paying by letters of credit not calling for transport documents. This change should be
noted and trigger further investigation of the customer because it represents a signif-
icant change and because of the troubles associated with trade to Angola with groups
that might use the Democratic Republic of the Congo as a base.
Appropriate further scrutiny could involve asking specific questions to the bank’s
relationship manager, seeking specific information and explanations from the custom-
er, or seeking information from publicly accessible data. Consideration of applicable
sanctions is also appropriate.
What it could signify. This situation could be, for example, a situation in which the
customer’s customer has expanded its business or acquired a company that trades with
Angola. If what is involved is a change in the address of a regular customer with no
change in the products or quantities and involving products and parties who are not
the subject of sanctions, the profile of the bank’s customer should be updated. In such
a case, a determination that no additional steps are required would be reasonable. This
decision and its reasons should be documented.
On the other hand, if the customer cannot furnish a legitimate business reason for the
change in activity, the bank may be required to report the suspicious activity with the
relevant authority.
Trade in areas of geographical or jurisdiction concern could signify money laundering,

terrorism financing, violation of sanctions, or commercial fraud.
ACTIVITY:
Research your financial institution’s approach to elevating the level of scrutiny
when a customer is conducting business transactions in high risk jurisdictions.
Subsection 6.6.6 Indicator No. 6: Transactions in High

Risk or High Value Goods
Defined. Transactions involving goods that are of high risk or high value. Some goods
such as weapons and certain types of chemicals are inherently high risk goods and need
to be treated accordingly. Other goods are not dangerous but of high value and easily
transferable, heightening the risk of masking payments and the illicit movement of funds.
This Indicator overlaps with Indicator No. 1 (Unusual Transaction) and Indicator No. 2
(Significant Deviations in Business Patterns) since the deviation or unusual feature may
be a high risk or high value good. Where there is such overlap present in a transaction
or pattern, the scrutiny given should be elevated.
Explained. Activities / goods that potentially involve a higher risk of money launder-
ing and other financial crimes include activities / goods that may be subject to import
/ export restrictions. Examples of high risk goods include transactions with military
and defence agencies, weapons and ammunition, certain chemicals, sensitive technical
data and equipment, military goods, war materiel such as arms, ammunition, bombs,
missiles, sensor integration equipment, armoured vehicles, electronic equipment,
196 | Chapter 6
laser systems, flying objects, other irritants, software for the use of these goods, and
components for them.
High value goods also pose a risk of financial crime, particularly where such goods can
be readily liquidated. Such goods include gems, jewellery, cigarettes and other tobacco
products, consumer electronics, telephone cards, other stored value cards, petroleum,
precious metals, and luxury automobiles.
When undertaking due diligence where high value / risk goods or activities are involved,
the bank should check to see if the transaction fits within the business plan of the cus-
tomer. If not, then further investigation into the transaction is required to determine
if the transaction has a legitimate business purpose. The bank should also conduct due
diligence on the buyer. Enhanced due diligence would be required if the buyer does not
normally conduct business with the customer or if they are in a high risk jurisdiction.
Examples. (1) High Value. A customer in Canada sells diamonds to a company in

Lebanon, with payment assured by a standby letter of credit advised through a bank.
The bank should determine whether the sale of diamonds fits the customer’s profile
and whether the customer routinely sells diamonds in Lebanon. If not, further due
diligence is required to determine if this sale has a legitimate business purpose.
The bank should also ensure that sanctions are not being violated and that the customer
has obtained the proper export licenses.
(2) High Risk. Customer produces and sells tear gas. Buyer is a company in Eastern
Ukraine. Payment is by LC confirmed by a bank. This product could fall within sanctions
and / or in addition, its buyers need to be checked carefully to ensure that the product
does not fall into the hands of sanctioned parties or government.
What it could signify. The trade of high risk goods could signify money laundering
or terrorism financing. It could also signify a violation of sanctions or export controls.
Reaction. The bank should document the incident, noting that it has spotted issues;
determine whether investigation is warranted and, if not, why; the results of any further
action; and what, if anything was done and why.
ACTIVITY:
Why are high risks or high value goods likely to indicate a financial crime?
Defined. Involvement by politically connected persons, that is persons with influence

on governments. This Indicator focuses on Politically Exposed Persons (PEPs) or oth-
er persons who are on lists or who have been denied permission to import or export
certain types of goods.
FACTFIND
To see a comprehensive list of PEPs, go to: https://www.cia.gov/the-world-fact-
book/field/political-parties-and-leaders/.
Explained. There is no definitive international list of PEPs. Most financial institutions

rely on lists issued by governmental entities and software programmed to spot such
persons.
In setting up an account, a financial institution must do its due diligence to determine

if a party is to be considered a PEP. Certain factors to look for are whether the person is
a senior foreign political official, which could include a government or military position
or a position in a political party or state owned corporation; the immediate family of a
political official; or a close associate of that official. If a person is identified as a senior
foreign political official, the financial institution should look at what that person’s
official duties are, the nature of their position, the level and authority of the official,
whether they have access to government funds, and the geographic location of the
official. This category also includes close family members of PEPs. Checks should also
be done in the regular reviews of an account since new PEPs may exist or the business
of the customer may have come to include them.
When dealing with PEPs, a risk based approach must be used when analysing all the
factors to determine the level of risk of trade based financial crime. For example, a
senior political official from Sweden whose position is mostly administrative would
be handled differently than a senior military official from Uganda, a nation that is
monitored by FATF at the time of publication of this Book, depending on the goods
involved. While there are lists of sanctioned PEPs, a financial institution should not
rely solely on lists where there are other Indicators of a problematic party.
198 | Chapter 6
Other sources of concern can include:

• Same address for buyer and seller.
• Parties elusive about their identity.
• Proceeds sent to third party with no apparent relationship to transaction.
Example. Company B, located in Japan is selling computers to Company D in Guyana

with a performance guarantee to be provided by a Local Bank. Company B approaches
Bank A, requesting it to issue its Counter Guarantee in favour of Local Bank. Company
B’s CEO is the daughter of a senior Japanese government official. The bank should look
into the father’s situation and determine if there is a possibility that the transaction
may be used for political purposes.
If it is determined that there is a legitimate business purpose for the transactions and
the CEO’s father is not involved, the bank should allow the transaction unless other
due diligence checks raise concerns.
What it could signify. Business dealing with problematic parties could signify money
laundering, terrorism financing, or violation of sanctions.
ACTIVITY:
Explain why some PEPs cause more concern than others.
Defined. Dual use goods are goods with both a civil and military purpose, suggesting
the possibility that goods may be utilised for illegitimate ends.
Explained. Dual use goods can range from computer software, technology, or other
goods that have both a civil and military purpose. In addition to the trade based fi-
nancial crime compliance concerns, many jurisdictions also impose import and export
controls on dual use goods.
There are extensive lists of dual use goods and banks should look to its governing au-
thority for guidance on what constitutes dual use goods. For example, in Hong Kong,
they are listed under the Import and Export (Strategic Commodities) Regulations under
the Import and Export Ordinance (Cap. 60).
The Wolfsberg Group, Trade Finance Principles (2019) section 1.5.5 (Challenges) states
that “[d]ual use items are goods, software, technology, documents and diagrams, which
may have both civil and military applications. Identification of dual use goods in a
trade transaction is challenging given their possible complex and technical nature.
While [Financial Institution]s may be in a position to identify obvious dual use goods;
corporates, customers, Customs and export licensing agencies are better able to make
this determination.
A [Financial Institution]’s [Risk Based Approach] should give guidance and provide
regular training to staff involved in relationship management, transaction processing
and any others who are involved in transactions on a regular basis (this should include
Front Office and Middle Office staff involved in the transactions). Guidance and regu-
lar training may include how to perform an analysis of pricing for those goods where
reliable and up-to-date pricing information can be obtained, how to identify where a
unit price would be seen as obviously unusual and the escalation process that should
be followed. The same applies to dual use goods. Staff should be aware of dual use
goods issues, as well as the common types of goods which have a dual use and should
attempt to identify dual use goods in transactions wherever possible.”13
The Wolfsberg Group, Trade Finance Principles (2019) section 1.6.1(b) (Recommendations)
adds that governments are needed to assist banks in dealing with dual use goods. It
states that governments should provide “details… in a manner that can be understood by
non-experts, in respect of products and materials that relate to ‘Dual Use’ goods. These
details should ideally be capable of being integrated into electronic processing systems.”
2019.pdf.
200 | Chapter 6
Intended to supplement the Wolfsberg Group, Trade Finance Principles (2019), the
International Chamber of Commerce (ICC) issued a June 2019 guidance paper, How
Does Global Trade and Receivables Finance Mitigate against Proliferation Financing?14 The
paper explores the challenges financial institutions face in detecting risks of prolifer-
ation finance (i.e. funding or servicing the manufacture, movement or development of
WMDs; or, relatedly, financing technology or dual use goods transactions that are used
for illegitimate purposes). While the documentation supporting traditional trade products
offers some insight on the relevant goods, open account terms rarely provide any detailed
information about the underlying goods. Moreover, banks are often unaware of the end
user of the goods or even their ultimate destination. Specifically, the paper notes the
difficulty in identifying proliferation dual use goods “even when detailed information on
a particular good is available, due to specialist knowledge required for the assessment.”
Trade finance professionals often lack the requisite knowledge of high risk proliferation
goods and technology, and the guidance even mentions the confusion of the role of
regulators in this aspect of trade based financial crime compliance as customs organ-
isations and officials are much better equipped and positioned to detect and track the
movement of proliferation goods in and out of their respective jurisdictions. Currently,
there is no standard list against which banks may screen for high risk proliferation
goods, and prior attempts at such screening have resulted in unwieldy numbers of
false positive hits. The guidance concludes that the most effective option for managing
proliferation financing rests on information sharing arrangements and cooperation
between law enforcement / intelligence and the finance sector.
FACTFIND
In the European Union dual use goods are listed under Council Regulation (EC)
No 428/2009 at: http://trade.ec.europa.eu/doclib/docs/2016/january/tra-
doc_154129.2015-2420.pdf.
In the United States, the Bureau of Industry and Security, an agency of the De-
partment of Commerce, lists dual use goods under the Commerce Control List
at: https://www.bis.doc.gov/index.php/regulations/commerce-control-list-ccl.
Formally established in 1996, the Wassenaar Arrangement on Export Controls for

Conventional Arms and Dual Use Goods and Technologies (the Wassenaar Arrangement),
is a multilateral, voluntary export control regime that strives to promote international
security through transparency in transfers of conventional arms and dual use goods.
The Wassenaar Arrangement has 42 member states and is the successor to the Cold
War era Coordinating Committee for Multilateral Export Controls (COCOM). Generally,
member countries report on their transfers of relevant conventional arms to non
14 https://iccwbo.org/publication/global-trade-receivables-finance-mitigate-proliferation-
financing/.
Wassenaar members every six months. The Wassenaar Arrangement is not a legally
binding treaty and members do not have veto powers over proposed exports of other
members. The Secretariat for the Arrangement is located in Vienna, Austria. To learn
more visit: https://www.wassenaar.org/.
When a transaction involves dual use goods, the financial institution should make
sure it knows who the other party to the transaction is. It should engage in enhanced
due diligence and conduct further reviews if the other party is a PEP, from a high risk
jurisdiction, or another Indicator is identified. Financial institutions should develop a
system of controls to help its staff identify dual use goods.
Where a dual use good is involved, many governments require exporters to obtain a
license to export such goods. The financial institution may wish to ask for a copy of,
or information regarding, the export license.
Example. Bank’s customer produces and sells fertiliser. Fertiliser can be used for
agriculture and for weapons. Its customers are agricultural enterprises in Southern
Europe. Customer receives a large order for fertiliser from a new buyer in Algeria. Bank
is asked to confirm a commercial LC in Customer’s favour. Diligent examination of the
customer, the buyers, its location, and the route and mode of shipment are warranted.
What it could signify. Dual use goods are typically candidates for support of terrorism
and could involve violations of sanctions. The degree of scrutiny should be magnified
where there are other Indicators present.
ACTIVITY:
Identify an example of dual use goods encountered by your financial institution.
202 | Chapter 6
Subsection 6.6.9 Indicator No. 9: Apparent Inconsistencies

in Proposed Transaction
Defined. An apparent inconsistency is a significant difference between two representa-

tions of a transaction, whether in the terms of an undertaking such as a letter of credit,
and some other document. Apparent inconsistencies include 1) obvious over or under
pricing of goods; 2) obvious misrepresentation of quantity of goods shipped; and 3)
payment tenor or terms are inconsistent with the type of goods. The term “apparent”
goes to the written character of the representations and not the actual state of the
goods, which would not be known to a financial institution.
FACTFIND
For more information on inconsistencies of goods, including over and under
pricing of goods, go to: http://www.pwc.com/us/en/risk-assurance-services/
publications/assets/pwc-trade-finance-aml.pdf.
Where there is an inconsistency present in a transaction or pattern, the scrutiny given

should be elevated.
This category is artificial in that the elements noted could readily fall into Indicator No.
1 (Unusual Transaction), No. 2 (Significant Deviations in Business Patterns), or No. 12
(Suspicious Actions). It is set off as a separate category because virtually every list of
Indicators treats these items separately. In addition, some of these matters are treated
in connection with Indicator No. 11 (Letter of Credit Related Concerns). In writing this
chapter, letter of credit transactions were relegated to Indicator No. 11 (Letter of Credit
Related Concerns), so that the transactions discussed under Indicator No. 9 are either
collection matters or invoice or acceptance finance. This subsection could as readily
have been combined with Indicator No. 11.
Explained. Financial institutions should check for inconsistencies in the trade docu-
mentation.15 Further inquiry would be required if, for example, the quantity listed on
the invoice was different from the quantity listed on the bill of lading.
Financial institutions should also look at the price of the goods to determine if it is
consistent with the fair market value of the goods. For certain goods, such as commod-
ities, ascertaining the fair market value may be relatively straight forward. If the price
of the goods does not seem to be in line with the market value, further investigation
15 Students should be aware that the term “inconsistency” has a different connotation in standard
international letter of credit practice. It signifies that data in one document required under the
LC is not consistent with data in another document.
may be required. For other goods where there is no market, banks should look for in-
consistencies and abnormalities that signal an obvious instance of overpricing.
The Wolfsberg Group, Trade Finance Principles (2019) section 1.5.5 (Challenges) states
that “[a] [Financial institution]’s RBA [Risk Based Approach] should give guidance and
provide regular training to staff involved in relationship management, transaction
processing and any others who are involved in transactions on a regular basis (this
should include Front Office and Middle Office staff involved in the transactions).”16
The Wolfsberg Group, Trade Finance Principles (2019) further states in section 1.3.1(a)
(v) (Financial Crime Risks/Risks): “Determining whether cases of over-invoicing or
under-invoicing exist (or any other circumstances where there is misrepresentation of
value) cannot easily be identified based on the trade documents alone. Furthermore, it
is not feasible to make such determinations on the basis of external data sources; most
products are not traded in public markets and therefore there are no publicly available
market prices. Even in transactions involving regularly traded commodities, which are
subject to publicly available market prices, [Financial Institutions] generally are not
in a position to make meaningful determinations about the legitimacy of unit pricing
due to the lack of relevant business information, such as the terms of a business rela-
tionship, volume discounting or the specific quality of the goods involved. However,
there may be situations where unit pricing appears manifestly unusual, which may
prompt appropriate enquiries to be made based on the [Financial Institution]’s RBA.”17
The example involving the sale of toy Caterpillar tractors to a department store supplier
in chapter 5 (Exercising Due Diligence) was an example of a bank examining the trade
documents, finding a figure that raised a Red Flag, and conducting further due diligence.
Financial institutions should ensure that the method of payment is consistent with the
nature of the transaction. This process involves considering the market price of the goods,
the business of the buyer, the term of the financing compared to the shelf life of the goods.
Examples. Your customer sells high quality coal at a rate typically above the market
price due to the quality of the product which burns more efficiently. Your bank is
nominated in the LC as a paying bank.
1. A given shipment reflects a 50% reduction in price.
2. The usual price is charged for a much lower quantity of coal.
3. The goods are sold at market price with one year repayment terms.
2019.pdf.
17 Id.
204 | Chapter 6
The data in an invoice differs from that in a bill of lading with respect to shipment, the
type of goods as well as the quality, description, or weight of the goods. The Applicant
instructs the Issuer to waive the discrepancies.
Other examples:
• The goods are over priced or under priced compared to the fair market price.
• Documents amended frequently or significantly, especially if unauthorised.
(See HKAB, Guidance Paper on Combating Trade-Based Money Laundering (1
February 2016), Annex B – Suggested Typologies, Best Practices and Red
Flags, p.24-25).18
• Documents have non standard clauses.
• High and unexplained charges.
While there may be reasonable explanations for these inconsistencies, each example
warrants scrutiny.
What it could signify. The lower price could reflect adjustment for overcharge, breach
of warranty, or overpayment. They could also reflect disguise of the transfer of funds.
The potential difficulties are money laundering, terrorism financing, or commercial
fraud. The presence of this Indicator could signify that funds are being moved from
the country in violation of currency exchange regulations.
ACTIVITY:
Describe the next step the bank should take upon discovering that goods in
a customer’s transaction do not match fair market value.
Defined. Transaction structure, financing, or shipment terms which appear unnecessarily

complex or unusual for the type of transaction or otherwise appear to be designed to
obscure the true nature of the transaction.
This Indicator overlaps Indicator No. 1 (Unusual Transaction), No. 2 (Significant

Deviations in Business Patterns), and No. 12 (Suspicious Actions). It is treated sepa-
rately because this Indicator typically appears in all lists. Where there is such overlap
present in a transaction or pattern, the scrutiny given should be elevated.
Explained. Financial institutions should be familiar with their customers’ transactions,

including the types of goods, financing, shipment, routing, use of intermediaries, and the
business rationale for the transaction. This information should be part of the customer
profile. Any material departure from these patterns should result in additional scrutiny.
Questions should be asked if:

• The type of goods involved does not make practical or economic sense given
the destination or buyer.
• The routing of the shipment is odd or unnecessarily indirect, particularly if
the jurisdictions through which they are to pass are problematic or do not
appear to make any transactional or logistical sense.
• There is an unusual intermediary or multiple intermediaries if such a structure
is unusual for the type of goods or transaction or if the intermediaries are
located in problematic or unusual jurisdictions.
• The financing arrangement does not seem consistent with the type of goods
or is unnecessarily complex.
In such circumstances, further investigation is required to determine if there is a le-

gitimate business purpose for structuring the transaction in that way.
While this Indicator would arise in the monitoring of an ongoing customer relation-
ship, any odd features that are apparent when establishing the relationship should be
explored as well.
As indicated, there is considerable overlap between this Indicator and some of the
other Indicators.
Example. A buyer in Saudi Arabia requests an advance payment guarantee to assure

delivery of petroleum products to Saudi Arabia. Such a transaction is unusual and
should result in greater scrutiny because Saudi Arabia is a net exporter of petroleum.
On inquiry, the financial institution may be informed that the petroleum product is
206 | Chapter 6
a special compound necessary for lubrication of oil extraction equipment and one
that is only refined in Germany. If there is no plausible explanation, however, further
enhanced scrutiny is warranted.
What it Could Signify. This Indicator could signify money laundering, terrorism
financing, or commercial fraud.
Reaction. The financial institution should document the incident, noting that it has
spotted the problem; determine whether investigation is warranted and, if not, why;
the results of any further action; and what, if anything was done and why.
ACTIVITY:
Identify the factors in the example above that have resulted in the financial
institution giving the transaction greater scrutiny.
Subsection 6.6.11 Indicator No. 11: Letter of

Credit Related Concerns
Defined. LC concerns arise where there are significant departures from what would be
expected in a similar transaction in the terms of the letter of credit or the documents
required.
It exists where the terms of a letter of credit signal odd or unusual activity. Indicator
No. 11 is listed distinctly here because of its ties to letter of credit practice and certain
things that are unique to letters of credits.
Such activity also overlaps with Indicator No. 1 (Unusual Transaction), Indicator No. 2
(Significant Deviations in Business Patterns), Indicator No. 9 (Apparent Inconsistencies
in Proposed Transaction), Indicator No. 10 (Trade Structure Concerns), and Indicator
No. 12 (Suspicious Actions). The data in the letter of credit or documents presented
also may involve Indicators No. 3 (Collusion), Indicator No. 4 (Apparent Front or Shell
Company in Transaction), Indicator No. 5 (Geographical or Jurisdiction Concerns),

Indicator No. 6 (Transactions in High Risk or High Value Goods), Indicator No. 7
(Problematic Parties), and No. 8 (Dual Use Goods). As will be apparent from this list,
every other Indicator is touched upon.
Explained. (1) The LC contains non standard clauses or phrases or has unusual char-
acteristics (such as an incorrect use of seal); (2) LCs frequently and / or significantly
amended for extensions, changes to the beneficiary and / or changes to payment lo-
cation that make no apparent commercial sense; or (3) trade related documentation
under an LC or documentary collection appears illogical, altered, fraudulent, or certain
documentation is absent that would be expected given the nature of the transaction
(such as a missing application for an LC).
The use of odd or nonsensical non standard phrases in LCs is a signal that the trans-
action may not be legitimate. Examples of non standard clauses and phrases are: “LC
is unconditional, divisible, and assignable”; the request for a “ready, willing and able”
message; and “good, clean and cleared of non-criminal origin”. Other non standard
phrases that should trigger enhanced due diligence are requests to pay a third party,
transactions that call for payment before delivery and without the presentation of
documents, and place of payment in a location where the beneficiary does not operate.
Frequently amended LCs may also alert banks that a transaction may not be legitimate.
Banks should consider issuing a new LC as a reminder to conduct the proper due dil-
igence. In any event, an amendment should be treated with the same seriousness for
compliance purposes as the issuance of an LC. It is also recommended that a change
in the person to whom payment be directed should be handled through transfer as
opposed to assignment. Changes in the beneficiary’s name should be noted and due
diligence should be conducted before the bank agrees to amend or transfer the LC or
to allow an assignment of proceeds.
Other LC related matters of concern include:

• Changes in the quality of the goods shipped without a corresponding adjustment
of the price.
• No documents to prove shipment of goods and refusal to provide them.
• Discrepancy of excessive over (or under) shipment waived.
• Documents appear fraudulent or altered.
• Documents appear to have been improperly modified, illogical, or fraudulent.
Banks should also be alert for forged, fraudulent, illogical, or missing trade documen-
tation. While these documents will undoubtedly be examined for compliance with
the terms of the LC, they should also be examined for signals of illegitimate activity.
Indicators of illegitimate activity that would require due diligence include placement of
208 | Chapter 6
the transport documents that is inconsistent with their typical and expected location;
documents that show shipped goods inconsistent with the expected goods; and prices
and quantities that differ from those stated before the LC was issued.
The standard lists of Indicators which are LC related also contain items that are dif-
ficult to understand. For example, the Hong Kong Association of Banks’ list includes
“documentary credit if overdrawn by more than an unreasonably high percentage of
the original value” in Annex B, part 3 (Suggested Red Flags), (B) (Documentary Red
Flags), (t). Presumably, the issuer or any nominated bank would dishonour a presenta-
tion that overdrew the amount of the LC, whether “unreasonably high” or not. Possibly,
the point is that the applicant undertakes to pay the additional amount, which would
automatically trigger another credit check and possibly other scrutiny.
Another item in the HKAB, Guidance Paper on Combating Trade-Based Money Laundering
documentary red flags list (Annex B, Part 3B(v)) is that the letter of credit is “dated
later than its date of presentation.”19 Since a letter of credit is not “presented”, but
rather the documents called for in its terms and conditions, it is difficult to understand
what is meant. It might mean that the documents presented are dated later than the
date of the LC, but this is normal and, indeed, is not a basis for refusal if they are dated
prior to the LC (except for a draft, if called for). On the other hand, it may mean that
the stated issuance date of the LC is earlier than the date that it is actually issued and
delivered to the beneficiary. Some LCs can provide that a drawing cannot be made
prior to a fixed date but the LC, which is issued earlier, is irrevocable when issued. It is
difficult to understand how the HKAB provision may indicate financial crime. Indeed,
if a financial criminal were designing a letter of credit transaction, one would assume
that they would avoid such features so as to avoid calling attention to themselves.
Example. A letter of credit is received via SWIFT MT999 requiring specific dates and
modes of transport and a detailed quantity description contains a provision in SWIFT
Field 47A to the effect that “ALL DISCREPANCIES INCLUDING DESRIPTION OF GOODS
TO BE WAIVED”.
Terms that are essential to the transaction such as descriptions of the goods, locations
of the goods, or shipping terms are inconsistent between the LC and the documents
presented.
What it could signify. These issues could signify money laundering, terrorism financ-
ing, or commercial fraud. It could also be a sign of the leverage that the buyer has over
the seller, with the power to make adjustments outside the LC. It overlaps many of
the other Indicators, the difference being that the problem is apparent from LC terms
or documents presented under an LC. Moreover, an MT999 message raises questions
about the authenticity of the communication.
ACTIVITY:
Have you encountered non standard phrases in an LC which may not have
been a part of a legitimate transaction?
Defined. Actions or conduct by the customer or another person related to a transaction

or the account that should be given further attention.
This Indicator serves as a “catch all”. It overlaps with Indicator No. 1 (Unusual
Transaction), No. 2 (Significant Deviations in Business Patterns), and No. 9 (Apparent
Inconsistencies in Proposed Transaction). Where there is such overlap present in a
transaction or pattern, the scrutiny given should be elevated.
Explained. In addition to the matters mentioned above, there are matters that appear
suspicious and that should trigger further scrutiny.
There are also matters related to certain actions related to international trade. A par-
ticular type of activity that is of concern relates to the misuse of Free Trade Zones or
Special Economic Zones. Such zones operate with a minimum of regulation and often
have separate systems for registering companies than the rest of the jurisdiction with
minimal information required.
210 | Chapter 6
FACTFIND
For more information regarding Free Trade Zones or Special Economic Zones, go
to: https://gfintegrity.org/free-trade-zones-a-pandoras-box-for-illicit-money/.
Examples. Among the examples of such conduct are:

• Addresses give rise to questions such as transaction of different businesses
from the same address or only operating from the address of a registered agent.
• The customer reacts with hostility to questions or concerns, or refuses to
speak with bank personnel.
• Unable or unwilling to provide clear answers to bank.
• The customer seeks to have the bank take short cuts in its procedures.
• Circular transactions.
• Divergence between risk and payment method.
• Vessel inappropriate for type or volume of goods.
• Quantity of goods exceeds capacity of tanker or shipping container.
• Prices always in round numbers.
• Involves sanctioned entities.
• Commodity is high risk.
• Overvaluation of goods.
• Transaction does not make economic sense.
• Goods inconsistent with country of export (e.g. bananas from Mongolia).
• Transhipment through countries with no apparent economic reason (e.g.
goods routed from South East Asia to east coast of Africa via Panama Canal).
• Bill of lading dated with future date.
• Tenor inconsistent with duration of goods.
• Purchase of real estate or expensive items (luxury cars, jewellery) with payment
in cash
• Use of unauthenticated messaging systems.
• The customer offers to pay higher fees for “faster” service.
• Coded or disguised descriptions of the goods.
• Documents appear to have been reused.
• Container numbers are sequential or containers used without indication of
container numbers.
What it could signify. The presence of suspicious actions could signify a phantom
transaction, double invoicing, commercial fraud, money laundering or terrorism financing.
Recently, various and often complex financial crimes and other illicit behaviours
have gained serious attention by banks, largely because of cooperation requests and
educational outreach by law enforcement and financial intelligence agencies across
the globe. What follows is intended as a brief introduction to indicators that may be
interrelated with trade based financial crime.
Human Trafficking. According to the International Labour Organisation, approximately

24.9 million people were subject to or affected by human trafficking in 2017; this illicit
industry’s annual value constitutes approximately USD 150 billion. The enormous scope
of this issue cannot be meaningfully addressed without cooperation between financial
institutions and law enforcement / intelligence. Some financial institutions have estab-
lished human trafficking divisions both as a matter of inherent public good but also for
reputational justifications. As with other financial crime typologies, banks often initiate
monitoring / data mining in response to negative news regarding human trafficking,
but as the seriousness of the issue has garnered more attention, law enforcement and
other organisations have developed preventative typologies for banks. Among others,
the Polaris Project has been a leader in bringing the issue of human trafficking to the
forefront, and has issued a thorough report, A Roadmap for Systems and Industries to
Prevent and Disrupt Human Trafficking,20 which provided recommendations for banks
to help combat the issue.
Additionally, on 15 October 2020, the U.S. Financial Crimes Enforcement Network

(FinCEN) issued a supplement to its influential 2014 advisory, Guidance on Recognizing
Activity that May Be Associated with Human Smuggling and Human Trafficking.21 The
2020 supplement builds on the information and indicators of trafficking by including
20 more behavioural and financial “red flags” of possible human trafficking as well as
four more typologies. While behavioural patterns are often derived from experiences
of frontline bank personnel, financial indicators may appear under trade transactions,
20 https://polarisproject.org/human-trafficking-and-the-financial-services-industry/.
21 https://www.fincen.gov/sites/default/files/advisory/2020-10-15/Advisory%20Human%20Traf-
ficking%20508%20FINAL_0.pdf.
212 | Chapter 6
such as deviations from normal business patterns, transactions to and from high risk
trafficking regions and customers avoiding transactions that trigger reporting require-
ments. FinCEN concludes the document by stressing that any Suspicious Activity Report
(SAR) which alleges possible human trafficking expressly reference the 2020 advisory
and to do so in SARs field 2.
Wildlife Crime. Each year, illegal wildlife trade impacts endangered species around the
world, and threatens many with extinction. Now believed to be one of the globe’s largest
illicit industries, the U.N. estimates that wildlife crimes generate between USD 7 and
23 billion in value each year. This broad estimation is due in part to the complexities
of these crimes, as they often occur alongside legitimate businesses, but also because
wildlife crime broadly refers to illicit trading of endangered animals, animal products,
plants and trees (discussed further below). In partnership with the U.N. Office on Drugs
and Crime, the Asia / Pacific Group on Money Laundering (APG) issued a research re-
port, Enhancing the Detection, Investigation and Disruption of Illicit Financial Flows
from Wildlife Crime (2017),22 which introduces and defines the issue and explains how
wildlife crimes affect almost all jurisdictions, whether as a source, place of transit or
destination. Strikingly, the APG survey found that 71% of the responding jurisdictions
did not view wildlife crimes as a significant source of money laundering; however, the
issue has gained considerably more attention in recent years and the level of concern by
banks likely stemmed from a lack of priority, resources and international cooperation
of law enforcement and financial intelligence.
From the perspective of trade finance compliance, the report acknowledges that there
have been few financial investigations regarding wildlife crimes, but it offers some
baseline indicators in Appendix 2, particularly that banks “doing business with indi-
viduals or legal entities operating in environmental/natural resource fields, antique
trade, or transport logistics providers should apply additional due diligence and KYC
measures.” The report notes that shell companies often appear in wildlife crime in-
quiries and banks should be aware that wildlife trafficking schemes often “maintain
multi-country accounts and conduct financial transfers across geographic boundaries.”
Generally, banks ought to escalate internal inquiries where:
1. transactions deviate from normal business patterns;
2. seem to make little economic sense;
3. where there exists some presence of third party payments that otherwise have
no relation to the transaction; and,
4. where available, transaction documentation varies from the actual goods
shipped.
Another thorough, and more recent report directed at financial institutions was issued
by FATF, Money Laundering and the Illegal Wildlife Trade (June 2020); the report offers
22 http://www.apgml.org/methods-and-trends/news/details.aspx?pcPage=1&n=1105.
further background on the issue, provides real world examples of investigations and
offers “red flags” or indicators of laundering proceeds of wildlife crime in Annex A.23
Illegal Logging. Falling under the broad umbrella of environmental crimes, but to be
distinguished from wildlife crimes, illegal logging is the most lucrative illicit resource
industry, generating approximately USD 51 to 152 billion in annual value. Along with
the other realities which make it difficult for banks to detect trade based financial
crime, the U.S. Government Accountability Office (GAO) has noted that detecting
money laundering in the timber industry can be particularly difficult as illegal sources
are often concealed through the “co mingling” of such timber with lawfully sourced
timber. A valuable resource for financial institutions is the APG’s Typologies Report,
Illegal Logging and Money Laundering Issues (July 2008).24 The APG report provides
some “red flags” or indicators of money laundering of proceeds from illegal logging
such as, inexplicable wealth of forestry officials, trade transactions in high risk regions
or regions where no current logging concessions are in place, and transactions involv-
ing relevant PEPs (i.e. timber brokers, forestry officials, wood processing companies,
shippers, exporters and custom officials). To read more on this issue and the much
broader concept of environmental crimes, see the FATF report, Money Laundering from
Environmental Crime (July 2021).25
ACTIVITY:
Have you encountered any of the matters listed in Indicator No. 12?
Subsection 6.7.1 Summary of Indicators of Trade

Based Financial Crimes
Chapter 6 (Indicators of Trade Based Financial Crime), identified and discussed the Red
Flags of Trade Based Financial Crime. The Indicators are: 1) Unusual Transactions; 2)
Significant Deviations in Business Patterns; 3) Collusion; 4) Apparent Front or Shell
Company in Transactions; 5) Geographical or Jurisdictional Concerns; 6) Transactions
in High Risk Goods or High Value Goods; 7) Problematic Parties; 8) Dual Use Goods;
9) Apparent Inconsistencies in Proposed Transaction; 10) Trade Structure Concerns;
23 https://www.fatf-gafi.org/media/fatf/documents/Money-laundering-and-illegal-wildlife-trade.
pdf.
24 http://www.apgml.org/includes/handlers/get-document.ashx?d=321518eb-47fc-4665-8d3f-
f0e2cd070a56.
25 https://www.fatf-gafi.org/publications/methodsandtrends/documents/money-laundering-
from-environmental-crime.html.
214 | Chapter 6
11) Letter of Credit Related Concerns; and 12) Suspicious Actions. These Indicators or
Red Flags should signal to bankers the possibility of trade based financial crimes and
should initiate the process of taking the proper precautions.
Visit one set of Indicators from the following lists located in Appendix B (Sources of
Red Flags / Indicators):
• Monetary Authority of Singapore (MAS) Guidance Paper26
• FFIEC, Bank Secrecy Act / Anti-Money Laundering Examination Manual,
Appendix F.27
• U.K. Financial Conduct Authority (FCA)28
Compare them to the twelve Indicators listed in this chapter.

• What similarities do you find between the Red Flags and Indicators?
• What differences do you find between the Red Flags and Indicators?
At the beginning of this chapter, the student was encouraged to reflect on the
Indicators or Red Flags within the Compliance Programme at their bank and
consider to what extent they are trade based.
• In the course of your daily work, what tools or devices do you use to remain
aware of potential Indicators?
• In your opinion, do you feel that the tools are adequate to help you
identify Indicators?
Question 6-1. Which Indicator or Indicators relate to transactions that are conducted
in high risk jurisdictions?
26 http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Monographs%20and%20
Information%20Papers/Guidance%20on%20AML%20CFT%20Controls%20in%20Trade%20
Finance%20and%20Correspondent%20Banking.pdf.
27 https://bsaaml.ffiec.gov/manual/Appendices/07.
Question 6-2. The presence of an Indicator in a transaction requires issuance of a

suspicious activity report. True or false?
Question 6-3. Identify some challenges that employees of financial institutions

may have in applying lists of Indicators to trade transactions.
Question 6-4. For a transaction to be suspicious, there should only be one distinct
Indicator found. Any overlap of Indicators is unusual. True or false?
Question 6-5. Compare how Indicators could be used prospectively and retrospec-
tively.
Question 6-6. Goods that are over priced or under priced are an example of Collu-
sion. True or False?

In connection with Part I, Introduction to Trade Based Financial Crime, chap-
ter 6 (Indicators of Trade Based Financial Crimes) identified globally accepted
trade based “Red Flags” and discussed them in specific detail, giving exam-
ples and showing how they can be used in exercising due diligence in com-
bating financial crime, and additionally for purposes of training.

in chapter 1 and discussed Trade in chapter 2, Financial Crime Regulation in
chapter 3, the structure of a Compliance Programme in chapter 4, the Exer-
cise of Due Diligence in chapter 5, studying the Indicators of Trade Based
Financial Crimes in chapter 6 completes Part I.
The student will now move forward to Part II, Combating Financial Crimes,
which will cover Anti Money Laundering in chapter 7, Countering the Fi-
nancing of Terrorism in chapter 8, Sanctions in chapter 9, Weapons of Mass
Destruction in chapter 10, Anti Bribery and Anti Corruption in chapter 11,
Commercial Fraud in chapter 12, and Anti Boycott in chapter 13.
Part 2
Combating
Financial Crimes
7
Chapter 7
ANTI MONEY LAUNDERING
LEARNING OBJECTIVE
of what money laundering is, its characteristics, and how to combat it.
CHAPTER OVERVIEW:
This chapter on Anti Money Laundering discusses the stages of money laun-
dering, the effects of money laundering on business, what is a trade based
money laundering regime, common techniques used in trade based money
laundering and banks responses to trade based money laundering.

Part I of this Book, Trade Based Financial Crime Compliance, discussed trade
and financial crime regulation, elements of a compliance programme, due dil-
igence and indicators of financial crimes.
scribes the various types of crimes that can be trade based and the steps
necessary for financial institutions to combat them.
After treating Anti Money Laundering in this chapter, it examines Countering
the Financing of Terrorism in chapter 8, Sanctions in chapter 9, Weapons of
Mass Destruction in chapter 10, Anti Bribery and Anti Corruption in chapter
11, Commercial Fraud in chapter 12, and Anti Boycott in chapter 13.
219
220 | Chapter 7

Chapter 7 Anti Money Laundering
Section 7.1 An Introduction to Money Laundering
Section 7.2 Stages of Money Laundering
Subsection 7.2.1 Placement Stage
Subsection 7.2.2 Layering Stage
Subsection 7.2.3 Integration Stage
Section 7.3 Effects of Money Laundering on Business
Section 7.4 Trade Based Money Laundering Defined
Section 7.5 An Introduction to Anti Money Laundering
Subsection 7.5.1 Existing Non Trade Related AML Regime
Subsection 7.5.2 Trade Based AML Regime
Subsection 7.5.3 Institutional Aspects of a Trade Based AML Regime
Subsection 7.5.4 Substantive Aspects of a Trade Based AML Regime
Section 7.6 Combating Trade Based Money Laundering
Subsection 7.6.1 Unusual Transactions
Subsection 7.6.2 Significant Deviations in Business Patterns
Subsection 7.6.3 Collusion
Subsection 7.6.4 Apparent Front or Shell Company in Transaction
Subsection 7.6.5 Geographical or Jurisdictional Concerns
Subsection 7.6.6 Transactions in High Risk or High Value Goods
Subsection 7.6.7 Apparent Inconsistencies in Proposed Transaction
Subsection 7.6.8 Trade Structure Concerns
Subsection 7.6.9 Letter of Credit Related Concerns
Subsection 7.6.10 Suspicious Actions
Section 7.7 Common Techniques Used in Trade Based Money Laundering
Subsection 7.7.1 Over and Under Invoicing
Subsection 7.7.2 Multiple Invoicing
Subsection 7.7.3 Over and Under Shipment
Subsection 7.7.4 Phantom Shipments
Subsection 7.7.5 False Description of Goods or Services
Subsection 7.7.6 A Note of Caution
Section 7.8 Bank Responses to Potential Trade Based Money Laundering
Subsection 7.9.1 Summary of Anti Money Laundering
Section 7.1 An Introduction to Money Laundering
Money laundering is the criminal practice of processing illegally obtained money by

placing it into the legitimate financial system in order to make it appear as though
the funds were derived from legitimate activities or sources. The purpose of money
laundering is to channel ill gotten gains into the financial system so the money laun-
derer can use legitimate financial devices and tools such as bank accounts, securities,
checks, etc. Since money laundering involves illegally obtained money, it follows that
Anti Money Laundering | 221
money laundering requires a predicate crime that is the genesis of the illegitimate
funds. Examples of predicate crimes are drug trafficking, racketeering, extortion, illegal
arms dealing, bribery and corruption, white collar crimes, and the proceeds of illegal
gambling to name just a few.
An example of money laundering would be the payment of ill gotten cash, through
a collusive arrangement, to a company that deals extensively in cash such as a retail
store, a parking operation, or an ice cream store. This company would then enter the
cash on its books as income from its operations, report it to tax authorities, and deposit
the cash in its bank account as if it were the proceeds of its legitimate business. These
funds can then be invested in other companies, used to pay nominal employees of the
company who legitimately work for the criminal syndicate, or use the funds to engage
in other commercial activities.
Integration of the illegal funds into the economy helps money launderers hide the
original source of the funds. As it becomes difficult to track / trace the source of the
money, money launderers are able to enjoy the profits obtained through various criminal
activities as if they were legitimate.
The money being transferred in these schemes not only represents the ill gotten gains
of criminal activities; it is also used to promote and facilitate further criminal activities
or anti social behaviour, be it drug smuggling, organised crime, terrorism, bribing or
otherwise corrupting governments, courts, and law enforcement. Money laundering
and trade based money laundering, later defined in this chapter, undermines the social
order. Regulators have devoted serious attention to combating these activities within
the financial sector.
ACTIVITY:
Consider steps your bank takes to counter money laundering.
Section 7.2 Stages of Money Laundering
The underlying goal of money laundering is to ‘clean’ ‘dirty’ money (illegally obtained
funds) so that the funds appear to be legitimate. In order to do this, the launderer must:
1. Introduce the illegitimate funds into the legitimate economy.
2. Distance itself from the funds (i.e. the criminal proceeds) by obscuring the
money trail.
3. Re introduce the seemingly legitimate funds into the financial system.
These three stages of money laundering are commonly described as the placement,
layering, and integration stages, respectively. Each stage will be considered in detail.
222 | Chapter 7
FACTFIND
For more information on the stages of money laundering, go to:
https://www.stpaulschambers.com/stages-of-money-laundering-explained/.
Subsection 7.2.1 Placement Stage
Placement is the first stage in the money laundering process by which the illegal money
enters into the financial system. The money launderer who is holding large amounts of
cash from criminal activities will break it into smaller sums and introduce it into the
economy by means of a legitimate enterprise. This process is achieved through what is
known as “structuring”. “Structuring” involves depositing money into financial institu-
tions in amounts that are below the mandatory reporting requirement for the purpose
of evading the reporting requirement. Under the U.S. Bank Secrecy Act, for example, any
cash transaction greater than USD 10,000 must be reported using a Currency Transaction
Report (CTR). Often, a money launderer uses multiple individuals, known as “smurfs”, to
make a series of transactions that are under the mandatory reporting threshold.
In many ways, placement is the most important stage of money laundering. At the
same time, placement is the most difficult step to achieve for the money launderer,
and it is the stage where law enforcement has the greatest opportunity to detect and
prevent money laundering.
Some of the methods by which launderers place the ‘dirty’ money into the economy are:
• Cash smuggling: The illegal currency or monetary instrument is physically
moved out of one country and into another country with more relaxed controls,
making it easier to convert the cash into bank accounts, financial paper, or
other items of value.
• Blending funds: Hiding cash with other cash, setting up front companies,
commingling currency deposits of legal and illegal enterprises.
• Currency exchanges: Liberalisation of foreign currency markets allows more
room for currency movements.
• Purchasing assets: Purchase of expensive items such precious metals, jewellery,
or art that can be readily liquidated.
• Structuring: Large amounts of cash is broken into smaller amounts and, over
time, deposited into different branches of a financial institution, with each
deposit under the mandatory reporting limit of the jurisdiction.
• Purchase of financial instruments: In an effort to further disguise the origin of
the money, the launderer will purchase money orders, bank cheques, travellers
cheque and other financial instruments.
ACTIVITY:
Explain why Placement is the most important stage of money laundering.
Subsection 7.2.2 Layering Stage
With the cash now in the legitimate financial system (through / in a bank or financial
institution), the launderer moves the illicit money around by investing it in various
financial instruments or products. This stage of money laundering is referred to as
layering. Layering enables the launderer to cut off the link between the crime and its
proceeds.
Layering consists of a series of transactions for the purpose of creating a complex and
confusing paper trail for the purpose of hiding the origin of the money. Often, layering
will involve the use of accounts of multiple “shell” companies, multiple financial in-
stitutions, and the use of foreign financial institutions, particularly those in countries
with weak anti money laundering laws.
Some of the methods used by launderers in this stage are:

• Investment instruments (purchase and sale of investment instruments).
• Wire transfer (wire funds through a series of accounts at various banks across
the globe).
• Disguising transfers (disguising transfers as payments for goods or services).
• Splitting funds (moving funds by splitting them into different denominations
or form).
• Prepaid cards (global access to cash via automated teller machines and goods
at point of sale).
• Material assets (purchasing assets with cash such as metals, jewellery, or art
for example) which is then resold locally or abroad.
ACTIVITY:
Describe some of the methods used by launderers in the layering stage that
have been encountered in your organisation.
Subsection 7.2.3 Integration Stage
At the integration stage, the launderer aims to reconnect with the illicit funds that were
introduced into the financial system at the placement stage of the money laundering
process. With the appearance of legitimacy due to layering and placement, the funds
can now be utilised by the launderer to purchase financial instruments and large items,
such as automobiles, electronics, houses, etc. These new funds, far removed from their
224 | Chapter 7
illicit source both in terms of geographic location and the manner from which they
were obtained, and now in the form of physical goods or financial instruments, are
integrated into the legal economy. Once integrated they can be used for any purpose.
Section 7.3 Effects of Money Laundering on Business
Beyond the criminal dimension, money laundering has a negative effect on business.
Some of the ways that money laundering negatively affects business include:
• Undermining financial systems (their integrity questioned).
• Expanding crime.
• Financial institutions can become a part of the criminal network itself.
• “Criminalises” society and undermines democracy and the rule of the law.
• Reduces revenue and control of the government.
• Causes unexpected changes in money demand.
• Causes prudential risks to the soundness of banks.
• Contaminates legal financial transactions.
• Increases volatility of international capital flows and exchange rates (due to
unanticipated cross border asset transfers).
• Rewards corruption and crime.
FACTFIND
For more information on the stages of money laundering, see p.3 of the
following Bank of England quarterly bulletin
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/1992/
countering-money-laundering.pdf.
ACTIVITY:
Identify three negative effects money laundering has on businesses.
Section 7.4 Trade Based Money Laundering Defined
FATF defines trade based money laundering as “the process of disguising the proceeds
of crime and moving value through the use of trade transactions in an attempt to le-
gitimise their illicit origin.” As indicated, trade based money laundering schemes can
rely on the complexity of global trade as a means of obscuring the true origin of the
funds. Proceeds of trade based money laundering can move through financial systems
as straight “buyer to seller payments” (open account), or possibly through bank trade
services such as letters of credit, documentary collections, etc. It is estimated that
more than 80% of trade settlements occur on an open account basis with the remainder
scattered through bank trade based service transactions. Bank trade based services
undergo a great deal more scrutiny of the underlying transaction and documentation,
making money laundering less attractive through trade services.
FACTFIND
To read more on TBML, see FATF’s Best Practices for Trade Based Money Laun-
dering (June 2008) https://www.fatf-gafi.org/publications/fatfrecommenda-
tions/documents/bestpracticesontradebasedmoneylaundering.html.
Section 7.5 An Introduction to Anti Money Laundering
Subsection 7.5.1 Existing Non Trade Related AML Regime
As indicated, there already exists an extensive anti money laundering regime with which
banks are familiar. It is embodied in a number of statutes and regulations that vary in
specifics from country to country. In many cases, these statutes and regulations are
designed to deal with more primitive money laundering techniques that use strategic
deposits through funnel accounts or other non trade related methods.
Funnel Account. Where a business or individual, in collusion with a criminal organisa-

tion, opens a bank account that can receive deposits from different geographic areas
through various branches. Multiple individuals will make deposits into the account at
various bank branches, with each deposit below the mandatory reporting requirement
for that area. Funds are then withdrawn from accounts within a short time after being
deposited. For more information on funnel accounts, view the following May 2014 Fin-
CEN Advisory: https://www.fincen.gov/sites/default/files/shared/FIN-2014-A005.pdf.
Very few of the statutes and regulation specifically focus on trade as such, but rather
on money laundering in general. Attention to trade based money laundering is largely
given through the directives issued by the regulators to the banks that are designed
to update and enhance banks’ existing anti money laundering programmes, and the
process of bank examinations by regulatory agencies. Their goal is to encourage banks
to identify those aspects of trade finance that can be misused to launder illicit money.
As a result, trade based anti money laundering builds on the existent anti money laun-
dering regime as implemented by banks, which is in turn, supplemented by focusing
attention to the misuse of trade finance products.
ACTIVITY:
What regulations at your financial institution focus specifically on trade based
money laundering?
226 | Chapter 7
Subsection 7.5.2 Trade Based AML Regime
Although trade based anti money laundering supplements existing programmes, it is

in some respects unique and separate. It is addressed in this chapter in two phases: 1)
its institutional aspects and 2) its substantive aspects.
Subsection 7.5.3 Institutional Aspects of a Trade

Based AML Regime
A trade based money anti laundering regime in a financial institution consists of a

programme, the institutional apparatus to assure that it is carried out, and the imple-
mentation of that programme, record keeping, and training. The programme consists
of a plan that identifies the risks of trade based financial crime faced by the institution
and outlines a systematic approach to it. The institutional apparatus typically centres
on an officer in the bank (here entitled “Compliance Officer”), whose responsibilities
are expanded to encompass trade, and who is charged with institutional responsibility
for compliance, and the staff and resources (here “Compliance Department”) assigned.
The Compliance Officer is delegated with implementation of the plan, although ul-
timately the responsibility falls to the directors of the financial institution; the plan
and its implementation is also audited independently and reviewed by governmental
bank examiners. The compliance programme was discussed in detail previously in this
Book in chapter 4 (The Compliance Programme).
ACTIVITY:
Identify risks of trade based financial crime that your financial institution faces.
Subsection 7.5.4 Substantive Aspects of a Trade Based AML Regime
The trade based AML system involves assessing the trade based money laundering risks
of current customers, having a system to vet new customers for trade based laundering
risks in addition to other money laundering risks, incorporating a trade based analysis
into periodic customer reviews, monitoring transactions and reviewing customers, and
responding to concerns. It also involves monitoring the correspondent bank network
with respect to trade related risks.
Section 7.6 Combating Trade Based Money Laundering
There is no “one size fits all” approach to preventing and stopping trade based money
laundering. Indicators or Red Flags, which will be discussed below, are effective in
helping identify potential instances of money laundering. However, Indicators alone are
not a sufficient defence against trade based money laundering. A financial institution
must have a sound compliance programme that instructs its employees on the proper
procedures. Financial institutions also must know their customer. Beyond learning the
customer’s identity, a financial institution should also be familiar with the customers’
business so that it will be aware of any changes or alterations in business patterns.
Financial institutions must communicate with their customers and ask questions when
the information is unclear. Financial institutions must also conduct due diligence,
utilising manual and automated checks, and it must have in place a system for when
and how to conduct enhanced due diligence.
Risk Based Approach. As with all aspects of trade based financial crime compliance,
financial institutions should employ a risk based approach to combating money laun-
dering. A risk based approach entails conducting due diligence based on the unique
circumstances of an individual customer or an individual transaction. If a customer or
transaction is determined to be high risk, then, as discussed in chapter 5 (Exercising
Due Diligence), enhanced due diligence measures should be undertaken.
When dealing with anti money laundering, common risk criteria factored into a risk
based approach are customer risk, country risk, and services risk. How much weight is
applied to each type of risk depends on the unique circumstances of each case.
Financial institutions should use a risk based approach for all facets of its anti money
laundering programme. When beginning a customer relationship, a financial institution
should take a risk based approach when evaluating that customer and determining
whether they want to enter into such a relationship. A financial institution should
also use a risk based approach when determining whether it should facilitate certain
transactions on behalf of the customers. When evaluating the risk of money laundering,
financial institutions must determine how much risk they are willing to take, and then
design their anti money laundering programmes accordingly.
Indicators. In any effective compliance programme, it is crucial that bankers be able

to identify when instances of money laundering are being attempted or occurring. As
with other types of trade based financial crime, Indicators or Red Flags are useful tools
in identifying and preventing instances of money laundering. The indicators of trade
based financial crimes were discussed in greater detail earlier in chapter 6 (Indicators
of Trade Based Financial Crimes). However, because of the importance and usefulness
of the Indicators, particularly when dealing with money laundering and anti money
laundering efforts, this chapter will briefly review the Indicators below, specifically
highlighting how they apply to money laundering.
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FACTFIND
For further information on combating trade based money laundering, go to:
http://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/
aml-cft/Guidance_Paper_on_Combating_Trade-based_Money_Laundering.pdf.
ACTIVITY:
Identify effective tools to combat trade based money laundering.
Subsection 7.6.1 Unusual Transactions
Transactions that are inconsistent with customer’s business strategy or profile (e.g., a
construction company that starts purchasing large quantities of luxury cars) or trans-
actions which do not make economic sense.
The goal of a business is, generally speaking, to generate the greatest profit possible.
Therefore, businesses have an incentive to conduct their trade transactions in the simplest
and most efficient economic way possible to minimise the costs of the transaction, in
terms of both time and money, while maximising the benefits. It therefore follows that a
transaction designed in an inefficient manner or that makes little economic sense should
face further scrutiny to determine the cause for the transaction’s structure, if there has
been an error, or more importantly, whether the transaction is serving as a vehicle to
mask money laundering. When a customer attempts to make a transaction using bank
trade services that, based on the documents presented, is unusual or does not make
economic sense, a bank should follow up that request with further questions designed to
ascertain a legitimate business reason for the transaction. Perhaps the transaction, when
looking at the entire picture, does serve a legitimate purpose. Alternatively, perhaps the
transaction is part of a well planned, new venture that the customer has been planning.
Example. A customer who designs and manufactures computer processors applies for
a bank guarantee for the purchase of seagoing vessels.
The bank should note the request and determine what further scrutiny is appropriate.
Potential action could include the relationship manager making further inquiries to
the customer. The bank should also determine if this particular situation necessitates
reporting the transaction to the relevant authorities.
FACTFIND
For more information on suspicious transactions, review the following guid-
ance from Canada’s Financial Transactions and Reports Analysis Centre
(FINTRAC): https://www.fintrac-canafe.gc.ca/guidance-directives/transac-
tion-operation/Guide3/str-eng.
ACTIVITY:
Explain how a financial institution should respond when a transaction seems
unusual or does not make economic sense.
Subsection 7.6.2 Significant Deviations in Business Patterns
The customer deviates significantly from its historical pattern of trade activity (in
terms of markets, monetary value, frequency of transactions, volume or merchandise
type) without prior indication or notice.
A deviation in business patterns can be a sign of money laundering but it can also occur
for legitimate reasons as well: an expansion of the business; a shift in the nature of the
business; necessity due to changing economic conditions, and more.
Such deviations could include:

• A sudden change in the currency of transactions.
• Increases or decreases in the purchase of staple products.
• Purchase of products in excess of the customer’s capacity to use or resell.
• Increase or decrease in prices of goods outside the range of market prices.
• Change in the types of product(s) purchased.
• The unusual purchase / sale of goods between related principals.
• The purchase of goods and services that are inconsistent with the customer’s
stated line of business.
• Payment for goods or services by check, money order, or bank drafts that are
not linked to the account of the purchaser.
Example. A customer based in Japan typically sells replacement automobile parts to a

buyer in Turkey, financed by commercial letters of credit that are issued by your bank,
sending one shipment per month valued at USD 2.5 million for five years. Then the
customer begins to send three shipments per month at a significantly higher price,
USD 4.8 million per shipment, despite the market for automobile parts in Turkey being
in decline.
The bank should document the incident, noting that it has spotted the problem; de-
termine whether investigation is warranted and, if not, why; the results of any further
action; and what, if anything, was done and why. This may include alerting the cus-
tomer’s relationship manager and having them contact the customer with follow up
questions as to whether there is a legitimate reason for the increased value and amount
of shipments to Turkey despite the overall state of the market. If the customer can
provide legitimate reasons, such as new distributors, or different and more expensive
automobile parts, then no additional steps are required. The bank should document
230 | Chapter 7
these reasons to help further build the customer’s profile. If the customer cannot provide
a legitimate business reason for these changes in activity, the bank may be required to
report the suspicious activity to the relevant authority.
ACTIVITY:
What are some deviations in business patterns that you have seen at your
organisation?
Subsection 7.6.3 Collusion
Collusion occurs where the transacting parties appear to be affiliated, conducting

business out of a residential address, or providing only a registered agent’s address.
Alternatively, the transaction appears to involve the use of front or shell companies
for the purpose of hiding the true parties involved. Sometimes it will be obvious that
further due diligence is required, for example, when the buyer and seller have the
same address or when each party has the same registered legal agent. This can point
towards collusion.
Collusion between a buyer or seller, a scenario either where the same person controls
the buyer and seller, or entity, or where they are separate entities but are working
together, can be a sign that the transaction is illegitimate. If the parties are working
together for non business reasons, then the transaction may be designed as a means
of disguising the transfer of funds rather than for legitimate purposes of selling goods.
Collusion between the parties to a transaction can manifest itself through over and
under invoicing, over and under shipping, phantom shipments, and multiple invoicing.
Example. Bank’s Customer buys electronic audio visual equipment for resale from
various wholesale Sellers. The goods are consistent with the Customer’s normal busi-
ness practices. Payment is by commercial letter of credit. Typically, discrepancies in
the description of goods are not waived in this market and Buyer generally follows this
business practice, except, Buyer does waive discrepancies for three specific Sellers.
In the course of due diligence, the bank discovers through a search of the public records
that although the Customer and the Sellers are separate legal entities, all three Sellers
have the same legal agent and several of the Officers of the Customer previously were
employed by the Sellers.
The bank should document the incident, noting that it has spotted a potential problem;
determine whether an investigation is warranted and, if not, why; the results of any
further action; and what, if anything, was done and why. In this instance, it is likely that
an investigation is warranted to determine whether goods are actually being shipped

and paid for, or if the transactions are designed for the express purpose of disguising
the source of funds to provide them with the appearance of legitimacy.
If the suspicious activity is spotted before the transaction is undertaken, the bank might
decline to facilitate it or even close the Customer’s account. Regardless of whether the
bank either spots the suspicious activity before the transaction occurs or only deter-
mines that money laundering likely did occur after the transaction is completed, the
bank should report the transaction to the appropriate authority.
ACTIVITY:
In which schemes are you most likely to encounter collusion?
Subsection 7.6.4 Apparent Front or Shell Company in Transaction
The involvement of an unknown party whose identity is purposely hidden or whose

references are not convincing, or evasiveness about the identity or connections of
third parties, particularly where this involves changes in payment instructions, can
be indicators of suspicious transactions.
It is crucial that a bank knows the identity of the parties to a transaction so it can run
manual and automatic checks to determine if any PEPs or sanctioned individuals or
companies are involved. Any indication that the customer or another party to a trans-
action is purposely attempting to conceal the identity of a party to the transaction
should trigger further due diligence.
Example. A customer sells navigational equipment using commercial letters of credit

and standbys to assure payment and performance. Customer’s products are purchased
by Company F, based in an Oceania nation. In conducting due diligence, bank deter-
mines that Company F is owned by Company S, who appears to be a holding company.
The bank is not able to exercise due diligence because of the new information obtained
about Customer F’s parent company without further inquiry. When the bank is informed
or finds out about the change of ownership or in its ongoing regular monitoring of
customers, this matter should be given additional attention.
The bank should document the incident, noting that it has spotted a potential problem;
determine whether investigation is warranted and, if not, why; the results of any further
action; and what, if anything, was done and why. If the transaction was determined to
be a potential instance of money laundering, the bank should report it to the relevant
authorities. If the suspicious activity was noted before the transaction was undertaken,
the bank might decline to facilitate it or even close the account.
232 | Chapter 7
ACTIVITY:
Why is it necessary that banks know the true identity of their customers?
Subsection 7.6.5 Geographical or Jurisdictional Concerns
A customer conducts business in jurisdictions that are at a higher risk for money laun-
dering, terrorism financing, or other financial crimes. This indicator would include
payments or shipping items to, through, or from higher money laundering risk juris-
dictions such as countries identified by the FATF as “non-cooperative jurisdictions”
in respect of anti money laundering regulations, or countries identified as higher risk
by another authoritative body.
Transactions involving high risk jurisdictions can indicate money laundering, partic-
ularly if there are not apparent legitimate business reasons for transactions to involve
those jurisdictions. When reviewing transactions in high risk geographical areas, bank
personnel should exercise enhanced due diligence. The bank should consider whether
the customer typically conducts business in that jurisdiction and determine if the
customer has a legitimate business reason for doing so now. There are many legiti-
mate reasons for this, including an attempt to reach new markets or a new source of
products. Banks must therefore maintain up to date lists of high risk jurisdictions, and
ensure that during transaction due diligence, this Indicator is spotted and sent on for
additional analysis.
Example. A customer typically trades in agricultural goods with companies in Argentina

and Chile using letters of credit as the means of payment when acting as both seller
and buyer. Without notice, and without any noticeable changes to its ordinary business
practices, the customer begins purchasing goods from Yemen and paying by letters
of credit without calling for bills of lading. This change should be noted and trigger
further investigation of the customer as it represents significant deviation, and since
Yemen is identified by FATF as a high risk jurisdiction.
Appropriate further scrutiny could involve asking specific questions to the bank’s
relationship manager, seeking specific information and explanations from the custom-
er, or seeking information from publicly accessible data. Consideration of applicable
sanctions is also appropriate.
This situation could be, for example, a situation in which the customer’s customer has
expanded its business, or acquired a company that trades with Yemen, or the customer
has changed its business model and decided that trading with Yemen is more lucrative
than trading with Argentina and Chile. If what is involved is a change of customer’s
customer or trading partner with no change in the products or quantities and involving
products and parties who are not the subject of sanctions, the profile of the bank’s
customer should be updated. In such a case, a determination that no additional steps
are required would be reasonable. This decision and its reasons should be documented.
However, if the customer cannot provide a legitimate business reason for the change in
activity, the bank should document the incident, noting that it has spotted a potential
of any further action; and what, if anything, was done and why. If the transaction was
determined to be a potential instance of money laundering, the bank should report it.
If the suspicious activity was noted before the transaction was undertaken, the bank
might decline to facilitate it or even close the account.
ACTIVITY:
What systems are in place at your financial institution to monitor transactions
passing through high risk jurisdictions?
Subsection 7.6.6 Transactions in High Risk or High Value Goods
Transactions involving high risk or high value activities / goods potentially pose a
higher risk of money laundering and other financial crimes. These include activities /
goods that may be subject to export / import restrictions.
Transactions involving goods that are difficult to value accurately or goods, such as dia-
monds or precious metals, where the origin is difficult to identify, and where the goods
can easily be liquidated, present a great risk for money laundering activity. Examples of
such goods include gems, jewellery, cigarettes and other tobacco products, consumer
electronics, telephone or other stored value cards, petroleum, precious metals, and
luxury automobiles. In these instances, banks should closely examine other aspects
of the transaction to determine whether the transaction is suspicious and warrants
further scrutiny.
Example. High Value Goods. A customer in Zambia mines and sells emeralds to
companies in Belgium, with payment assured by a commercial letter of credit con-
firmed by the bank. The bank should determine whether the purchase of emeralds fits
its customer’s profile and whether the customer routinely buys and sells emeralds in
Belgium. If not, further due diligence is required to determine if this sale has a legit-
imate business purpose.
Example. High Risk Goods. Customer produces and sells equipment and materials
involving explosives for use in construction demolition. The buyer is a company in
Honduras. Payment is by a commercial letter of credit advised through a bank. The bank
234 | Chapter 7
should determine whether the sale of such equipment and materials fits the customer’s
profile and whether the customer routinely sells these goods in Honduras. If not, further
due diligence is required to determine if this sale has a legitimate business purpose
In both of the examples given above, the bank should document the incident, noting
that it has spotted a possible problem; determine whether investigation is warranted
and, if not, why; the results of any further action; and what, if anything, was done and
why. If the transaction was determined to be a potential instance of money launder-
ing, the bank should report it to the relevant authorities. If the suspicious activity was
spotted before the transaction was undertaken, the bank might decline to facilitate it
or even close the account.
ACTIVITY:
What high risk / high value goods has your organisation encountered in
trade finance?
Subsection 7.6.7 Apparent Inconsistencies in Proposed Transaction
Apparent inconsistencies can point towards money laundering activities. Such inconsis-
tencies typically fall into the following categories: (1) Obvious over or under invoicing
of goods; (2) obvious misrepresentation of quantity or quality of goods shipped; (3)
payment tenor or terms are inconsistent with the type of goods.
Over or under invoicing and misrepresenting the quantity of goods are common schemes
through which money laundering is attempted. If the price of goods appears to be obvi-
ously different from a legitimate market price for the goods, then further investigation
will be required. A toilet seat for USD 60,000 would appear to be obviously over priced.
However, if upon further investigation, it is revealed that the toilet seat is designed for
a space shuttle, USD 60,000 may not be an obvious over pricing.
Furthermore, for most goods it is difficult to determine what the market price is, and
thus, how to determine what is and is not over or under pricing. While banks can take
steps to understand the market in which their customers operate, in certain instances,
financial institutions will simply have to rely on other tools at their disposal and the
experience of the employees scrutinising the transaction to determine if the price is
in line with the fair market value.
FACTFIND
Several price checking tools are available where the data is obtained from
the pricing on electronic bills of lading in those jurisdictions where eB/Ls are
available. Global Financial Integrity and IHS Markit are two of the providers,
as are others. While these tools will never be able to tell you for certain the
price of the goods in your transaction, you can obtain a range of likely prices.
For example, the price checking tools may show that Blue Mountain Coffee
from Jamaica is between USD 13 and USD 15 per pound. If your transaction
involves Jamaican Blue Mountain Coffee and is closer to USD 10 or USD 20,
this will warrant further investigation. Another example is that the Ethiopian
Coffee and Tea Authority (ECTA) has set a minimum coffee price published
on the ECTA website, with historical records available, so if the trade calls
for Ethiopian coffee, trade bankers can quickly determine if there is over or
under invoicing occurring.
Example. Your customer sells computers and computer equipment at a rate typically
above the market price for computers. This is due to the high quality of the product,
and the fact that the computers are specifically designed for the customer’s needs
and have the necessary software pre loaded. These transactions commonly utilise
commercial letters of credit to effect payment. Documents are presented to your bank
for payment under one of the letters of credit. The transport documents and invoice
reveal that in one shipment, there was a 60% reduction in price. Additionally, the data
in one invoice regarding the quantity of the equipment differs from that in the bill of
lading. The buyer instructs the issuer to waive the discrepancies, despite the fact that
such discrepancies are not normally waived in such transactions.
Other examples of apparent inconsistencies are:

• The goods are over priced or under priced compared to the fair market price.
• Documents are amended frequently or significantly.
• Documents presented contain nonstandard clauses.
• High and unexplained charges.
While there may be reasonable explanations for these inconsistencies, each example
warrants scrutiny.
The bank should document the incident, noting that it is aware of a potential prob-
lem; determine whether investigation is warranted and, if not, why; the results of any
further action; and what, if anything, further was done and why. If the transaction was
determined to be a potential instance of money laundering, the bank should report it
to the relevant authorities. If the suspicious activity was spotted before the transaction
was undertaken, the bank might decline to facilitate it or even close the account.
ACTIVITY:
What steps does your bank take to ensure that goods in transactions are
listed at fair market value?
236 | Chapter 7
Subsection 7.6.8 Trade Structure Concerns
The transaction structure and / or shipment terms appear unnecessarily complex or

unusual for the type of transaction, and appear to be designed to obscure the true
nature of the transaction.
A common method utilised by money launderers, including those who do not use trade
instruments, is to create confusion by conducting numerous and complex transactions
that have no purpose other than to obscure the source of the funds being laundered.
Banks should take notice and make inquiries if they observe transactions that are
unnecessarily complex or structured in ways that do not make sound business sense,
to determine whether the structure of the transactions are hiding the actual purpose.
Financial institutions should also take note of any transaction that seems unusual for
that customer. If inquires do not yield enough information to determine how to proceed,
further enhanced due diligence measures should be utilised. It is therefore important
that financial institutions become familiarised with their customers’ profiles and that
the profiles are updated regularly.
Example. A customer who is an international automobile wholesaler requests a standby

letter of credit to assure delivery of automobiles from India to Australia. Upon further
scrutiny of the transaction, it is revealed that the ship transporting the automobiles is
scheduled to stop at ports in Yemen and Somalia prior to unloading the automobiles at
the Port of Melbourne. Such a transaction route is unusual and should result in greater
scrutiny. Perhaps the transaction has been specifically designed to be unnecessarily
complex to obscure the transaction.
The bank should document the incident, noting that it has spotted a potential prob-
lem; determine whether investigation is warranted and, if not, why; the results of any
further action; and what, if anything, further was done and why. If the transaction was
determined to be a potential instance of money laundering, the bank should report it
to the relevant authorities. If the suspicious activity was spotted before the transaction
was undertaken, the bank might decline to facilitate it or even close the account.
ACTIVITY:
Identify a common method utilised by money launderers to obscure the source
of the funds being laundered that you have encountered.
Subsection 7.6.9 Letter of Credit Related Concerns
Concerns relating to letters of credit may indicate instances of money laundering.

Typically, the following features of a letter of credit should give rise to additional
scrutiny. (1) The LC contains non standard clauses or phrases, or has unusual charac-
teristics (such as an incorrect use of a seal); (2) the LC is frequently and / or signifi-
cantly amended for extensions, changes to the beneficiary and / or changes to payment
location that make no apparent commercial sense; or (3) trade related documentation
under a LC or documentary collection appears illogical, altered, fraudulent, or certain
documentation is absent that would be expected given the nature of the transaction
(such as a missing inspection certificate).
The inclusion of unusual terminology in trade instruments, particularly wording that does
not make economic sense, may indicate that the parties to the transaction are attempting
to obscure or hide the true nature of the transaction. Furthermore, discrepancies with
documentation, such as documents that appear altered or failure to produce documents
that are typically required in a transaction may be indicative that the transaction is de-
signed for hiding illicit funds and thus, no legitimate business purpose exists.
Letter of credit related concerns might include the following:

• A change in the quality of the goods shipped without a corresponding adjustment
of the price of the goods.
• Odd or unusual clauses that have no functional or practical meaning or value
(e.g. “LC unconditional, divisible, and assignable” in LC).
• An absence of documents to demonstrate shipment of goods and a refusal to
provide such document.
• Waiver of a discrepancy for an excessive over or under shipment of goods.
• Documents appear to have been improperly modified, are illogical for the
transaction, or appear to be fraudulent.
Example. A bank receives an application from a customer in England to issue a com-

mercial letter of credit for the purchase of coffee from a Colombian company. The
application only requires that the Beneficiary present a commercial invoice for the
coffee, and does not require the presentation of quality or quantity certificates, cus-
toms certificates or transport documents such as a bill of lading despite the facts that
transactions of this sort usually require such documentation.
The bank should document this request and conduct further due diligence on the cus-
tomer and perhaps the beneficiary to determine if there is a legitimate reason for such
an unusual request, or if this transaction is being used to disguise money laundering
or some other illicit financial activity. If a satisfactory reason for the transaction is not
ascertained, the bank may have to report the transaction to the relevant authorities.
238 | Chapter 7
ACTIVITY:
What unusual terminology have you encountered in letters of credit related
to trade instruments?
Subsection 7.6.10 Suspicious Actions
This Indicator serves as a “catch all” for certain actions by customers or characteristics
of a transaction that do not fit neatly into any of the above listed indicators, but seem
suspicious or unusual enough to warrant further investigation.
The purpose of the indicators is to serve as one of many tools that banks can use to
identify trade based money laundering and other financial crimes. However, no one
tool or tools can replace experience and institutional knowledge that banks and its
employees gain from years of experience and past incidents.
Therefore, if portions of a transaction, such as documents, geographical locations,

goods, and persons, for instance, seem suspicious or suspect, the bank should conduct
enhanced due diligence and investigation.
Examples. Among the examples of such suspicious conduct are:

• Addresses give rise to questions such as transaction of different businesses
from the same address or only operating from the address of a registered agent.
• The customer reacts with hostility to questions or concerns or refuses to speak
with bank personnel.
• Quantity of goods exceeds capacity of tanker or shipping container.
• The customer seeks to have the bank take short cuts in its procedures.
• Circular transactions.
• Divergence between risk and payment method.
• Vessel inappropriate for type or volume of goods.
• Prices always in round numbers.
• Over valuation of goods.
• Transaction does not make economic sense.
• Goods inconsistent with country of export (e.g. pineapple from Latvia).
• Transport documents inconsistent.
• Customer is unable or unwilling to provide clear answers to bank.
• Tenor inconsistent with duration of sale cycle of the goods.
• Use of unauthenticated messaging systems.
• The customer offers to pay higher fees for “faster” service.
• Coded or disguised descriptions of the goods.
• Documents appear to have been reused.

• Container numbers are sequential or containers mentioned in the bill of lading
without indication of container numbers.
Section 7.7 Common Techniques Used in Trade

Based Money Laundering
There are numerous trade based methods utilised by money launderers to achieve their
goals while attempting to avoid detection: over and under invoicing, multiple invoicing,
over and under shipment, phantom shipments, and falsely described goods and services.
FACTFIND
To read more about common techniques used in trade based money laundering,
review PwC’s August 2016 document, Trade Finance: Understanding the
Financial Crime Risks.
https://www.pwc.co.uk/forensic-services/assets/pwc-and-polestar-financial-
crime-risks-and-trade-finance-July-2016.pdf.
Subsection 7.7.1 Over and Under Invoicing
Over and under invoicing for goods and services is an old method of money laundering
that is commonly utilised. In order for this scheme to work, the buyer and the seller
must collude with one another. Often the buyer and seller will both be subsidiaries of the
same parent company or related in some other manner. In instances of over invoicing,
the seller will invoice the buyer for a price that is above the fair market value of the
goods being sold. This action will result in increased value for the seller. Conversely,
under invoicing relies on a seller invoicing a buyer for goods at a price that is below
market value. The buyer then can resell the goods and receive an additional profit for
the difference between fair market value and the purchase price paid. Over and under
invoicing can be particularly difficult to detect in complex transactions or transactions
involving rare goods, as it will be difficult for government officials to determine whether
the selling price is at or near fair market value.
Example. Over Invoicing. Exporter sells Importer 100 televisions valued at USD
500.00 per television. Exporter invoices Importer USD 100,000 and Importer pays USD
1000.00 per television. In this instance, instead of Importer paying USD 50,000.00 for
USD 50,000.00 worth of merchandise, Importer has paid USD 100,000.00, resulting in
a USD 50,000.00 windfall for the Exporter.
Example. Under Invoicing. Now, same parties and merchandise as above; however, in
this instance the Exporter invoices the Importer only USD 20,000.00 for 100 televisions.
240 | Chapter 7
In this example, Importer has received USD 50,000.00 worth of merchandise for only
USD 20,000.00, resulting in a windfall of USD 30,000.00. Importer can then sell the
televisions to third parties at market price and will make a much larger profit than if
they had paid the fair market wholesale value for the televisions. This is an example
of under invoicing.
ACTIVITY:
Explain measures your organisation takes to identify over and under invoicing
in transactions.
Subsection 7.7.2 Multiple Invoicing
Another tactic utilised by trade based money launderers is multiple invoicing. In this
scheme, a seller will invoice the buyer multiple times for the same transaction. The
payments made under the additional invoices will allow the exchange of money between
the buyer and seller under the guise that the buyer is paying for goods. Since there is
no exchange of goods in relation to the subsequent invoices, the subsequent invoices
only serve to give it the appearance of legitimacy.
Example. Buyer / Applicant purchases GBP 500,000.00 worth of cotton from Seller /
Beneficiary. Buyer / Applicant applies for a standby letter of credit in favour of Seller /
Beneficiary to cover risk of non payment for the cotton. Seller / Beneficiary ships the
cotton and when Buyer / Applicant does not make payment on the invoice, it makes
a complying presentation and receives payment. One month later, Buyer / Applicant
applies for a second standby letter of credit with Seller / Beneficiary as the beneficiary
once again. Seller / Beneficiary once again invoices Buyer / Applicant for GBP 500,000.00
of cotton, except in this instance there was no shipment and again the Buyer does not
pay. Nevertheless, Seller / Beneficiary makes a demand on the standby and receives
payment.
ACTIVITY:
What tools does your compliance programme
contain to address multiple invoicing.
Subsection 7.7.3 Over and Under Shipment
Over and under shipment operates in a similar fashion to over and under invoicing. In
these schemes, the buyer or importer and the seller or exporter will collude to create
falsified shipping documents. If the invoice states a quantity greater than the actual
quantity shipped, then the transaction will result in a gain for the seller who receives
payment for a quantity greater than the goods sent. If the invoice is for a quantity less
than the actual shipment, the buyer will receive a greater quantity of goods than it paid
for. The importer and exporter will act to ensure that the documents appear authentic so
they are processed by the financial institution in the usual manner to avoid detection.
The purpose of this scheme is to make it appear as though money is being exchanged
between two parties through a legitimate trade transaction.
Example. Buyer purchases 100 pre owned automobiles for CAD 225,000.00. Seller sends
only forty vehicles, valued at CAD 96,000.00 but invoices Buyer for 100 vehicles valued
at CAD 225,000.00. Buyer pays the full price of the invoice. Seller has thus received
CAD 129,000.00 in value for goods it did not sell. This is an example of under shipment.
For an example of over shipment, using the same basic scenario as discussed above, Seller
sends Buyer 150 pre owned automobiles valued at CAD 366,000.00. However, Seller only
invoices the Buyer for 100 vehicles valued at CAD 200,000.00. Buyer pays the invoice
price and at the time of resale of the vehicles receives an extra CAD 166,000.00 in value.
ACTIVITY:
How does your organisation address over and under shipment?
Subsection 7.7.4 Phantom Shipments
Phantom shipments occur when the exporter invoices the buyer for goods that are not
sent. The buyer, working in collusion with the exporter, will make payment on the goods
as if they had been shipped and received. Phantom shipments can be achieved through
creating and sending false transport documents and invoices which further enhance
the illusion that goods were actually shipped. This allows money to be exchanged as
though a legitimate trade transaction had occurred.
Subsection 7.7.5 False Description of Goods or Services
Another common scheme utilised in trade based money laundering is to falsely describe
goods or services. In this case, inexpensive goods can be invoiced as expensive goods,
causing more money to be transferred than would occur in a legitimate transaction.
False descriptions can also be utilised for services since a service is not a tangible object
and the price of services can vary greatly based on numerous factors such as the provider
of the service, specific case by case requirements, and other factors that cannot easily
be detected or monitored by government officials or employees in the financial sector.
242 | Chapter 7
Example. An exporter invoices an importer for steel bars at a price of EURO 10,000.
However, the exporter actually sends gold bars to the importer worth ten times that
amount. The result is the importer has received an undetected profit of EURO 90,000.
ACTIVITY:
Identify transactions where goods or services were falsely described.
Subsection 7.7.6 A Note of Caution
It should be noted that it is extremely difficult to determine whether a specific transac-

tion is part of a money laundering scheme, and such a determination cannot be made
solely based on trade documentation as most goods are not traded on the public market
and thus do not have standardised prices available. Furthermore, financial institutions
often lack access to specific business details to make an accurate determination of the
fair market value of a good. However, financial institutions may gain enough knowledge
to be able to note when a transaction appears unusual, if only in specific situations,
and to make further inquiries when necessary.
Section 7.8 Bank Responses to Potential Trade

Based Money Laundering
Financial institutions should have in place a response plan to deal with suspected in-
stances of money laundering. This is a crucial component of the compliance programme.
For a detailed analysis of the steps a bank should implement to properly investigate
and escalate suspicious activity, refer back to chapter 4 (The Compliance Programme).
Furthermore, it should be noted that, in addition to financial institutions such as banks,

other persons and professionals may be expected by law to act decisively in case of
suspected or actual instances of money laundering. This will depend on the applicable
jurisdiction, but could comprise attorneys, conveyancers, notaries public, and similar
groups of professionals. If and where such regulatory and legislative expectations exist,
it is because these particular professional groups are regularly in close personal contact
with clients and the wider public, have in depth insight into commercial transactions
(such as real estate transactions, trade finance requests etc.), and are often involved
in commercial transactions that are conducted in cash. Therefore, these professionals
are ideally situated to notice and, if necessary, report suspicious transactions and ac-
tivities, especially regarding cash transactions which typically avoid banks’ scrutiny.
On the other hand, burdening members of these professions puts them occasionally in
awkward situations since reporting duties could conflict with rules on confidentiality,
and certainly the professional’s inherent interest in retaining customers and their
transactions. This, and a worrisome lack of awareness for the negative societal impact
of money laundering has arguably contributed to comparatively low reporting activities
from members of such professions. For example, in 2019 notaries public in Germany
reported less than ten cases of suspected money laundering activities for the entire
year, despite the fact that a significant portion of real estate transactions involve cash
payments and every real estate transaction must be certified by a notary public to be
valid. This suggests that some of the relevant professional groups, even though required
by law to notify authorities of suspicious activities, choose not to comply.
FACTFIND
To learn more about a banks’ role and response in potential trade based money
laundering, go to page 9:
https://www.occ.treas.gov/topics/bank-operations/financial-crime/money-
laundering/money-laundering-2002.pdf.
Subsection 7.9.1 Summary of Anti Money Laundering
Chapter 7, Anti Money Laundering, explained the stages of money laundering and the
underlying motive of introducing illegitimate funds or illegally obtained funds into the
economy for the purpose of using them legitimately. Chapter 7 examined the effects
of money laundering on business and provided a detailed explanation of the tools
banks must use to combat money laundering, including the need for a comprehensive
compliance programme, and the exercise of due diligence and enhanced due diligence
when the bank identifies Red Flag warnings. This chapter also addressed common
techniques money launderers use, which may require additional scrutiny to be given
to the customer and the transaction.
Review the following case summary and answer the questions that follow.
Customer located in Mexico exports vegetables to distributors in the US.

Customer has been shipping the same amount of vegetables each month for
the past six months. This month, Customer adds an additional vegetable type,
green bell peppers. Bank takes note of the change. However, after enhanced
due diligence, it is discovered from the transport document that the number
244 | Chapter 7
and size of the shipping containers used to transport the goods has not been
changed from the previous shipments despite the increase in vegetables.
1. Explain what money laundering technique the customer could be using
in the example above.
2. Identify the steps that the bank should take accordingly.
In section 7.1 (An Introduction to Money Laundering) of this chapter, the

student was encouraged to reflect on steps taken by a financial institution to
counter money laundering.
• What tools are in place at your organisation to help combat money
laundering?
• How does your organisation monitor transactions and ensure appropriate
due diligence is exercised?
• Do you feel that enhanced due diligence is adequately addressed in your
organisation’s compliance programme?
Question 7-1. The Integration stage consists of a series of transactions for the
purpose of creating a complex and confusing paper trail in order to
hide the origin of the money. True or false?
Question 7-2. Identify why Buyer and Seller may use collusion in money laundering
schemes.
Question 7-3. Which of the following are common techniques used in Trade Based
Money Laundering? Select all that apply.
a) A scheme where Seller invoices Buyer for goods that are not sent.
b) A scheme where Beneficiary pays Bank an additional profit over the
invoice amount indicated.
c) A scheme where the invoice states an amount greater than the actual
amount shipped.
d) A scheme where inexpensive goods can be invoiced as expensive goods.

Question 7-4. Money laundering is the criminal practice of processing illegally ob-
tained money by placing it into legitimate finance in order to make
it appear as though it were derived from legitimate activities. True
or false?
Question 7-5. What examples would be included as Suspicious Actions? Select all
that apply.
a) Clauses such as “LC unconditional, divisible, assignable” in a LC.
b) Quantity of goods exceeds capacity of taker or shipping container.
c) Transactions involving goods such as diamonds, precious metals,
store valued cards and other easily liquidated goods.
d) Transaction makes economic sense.
e) Change in the type of products customer typically purchases.
Question 7-6. Compare over and under shipment with over and under invoicing.

In connection with Part II, Combating Financial Crimes, which addresses spe-
cific types of financial crimes, chapter 7 (Anti Money Laundering) provides
the student with information about how money is being laundered, how
money laundering is being combated, and the important role played by finan-
cial institutions.

in chapter 1 and discussed Trade in chapter 2, Financial Crime Regulation in
chapter 3, the structure of The Compliance Programme in chapter 4, Exercis-
ing of Due Diligence in chapter 5, and the Indicators of Trade Based Financial
Crimes in chapter 6, the student moved to Part II.
In Part II, Combating Financial Crime, the student covered Anti Money Laun-
dering here in chapter 7, and will go on to study Countering the Financing of
8
Chapter 8
COUNTERING THE FINANCING

OF TERRORISM
LEARNING OBJECTIVE
of what is terrorism financing, the various types of terrorism financing and the
tools used to combat it.
CHAPTER OVERVIEW:
This chapter on Countering the Financing of Terrorism discusses the financ-
ing of terrorism, its goals and methods and the organisations that combat
terrorism. Chapter 8 also explains the relevant indicators banks need to be
aware of when processing transactions that are potentially masking terrorism
financing and describes the role and actions banks need to take when they
encounter terrorism financing.

necessary for financial institutions to combat them. It examined Anti Money
Laundering in chapter 7. Following this chapter, the Book will consider Sanc-
tions in chapter 9, Weapons of Mass Destruction in chapter 10, Anti Bribery
and Anti Corruption in chapter 11, Commercial Fraud in chapter 12, and Anti
Boycott in chapter 13.
247
248 | Chapter 8

Chapter 8 Countering the Financing of Terrorism
Section 8.1 An Overview of Terrorism: What Constitutes Terrorism
Section 8.2 Terrorism Explained
Subsection 8.2.1 Terrorism
Subsection 8.2.2 Motives
Subsection 8.2.3 Terrorist Acts
Subsection 8.2.4 Terrorist / Terrorists
Subsection 8.2.5 Terrorist Organisations
Section 8.3 Terrorism Financing
Subsection 8.3.1 Financing of Terrorist Acts and Terrorist Organisations
Subsection 8.3.2 Sources of Terrorism Financing
Subsection 8.3.3 Terrorism Financing Compared with Money Laundering
Section 8.4 Countering the Financing of Terrorism
Subsection 8.4.1 Goals
Subsection 8.4.2 Methods
Subsection 8.4.3 Criminalisation of Financing Terrorist Activity
Subsection 8.4.4 Other Methods
Subsection 8.4.5 Organisations Combating Terrorism Financing
Subsection 8.4.6 Designation as a Terrorist or Terrorist Organisation
Section 8.5 Responses of Financial Institutions to Counter Terrorism
Financing
Subsection 8.5.1 Identifying Terrorism Financing Risks for Financial Institutions
Subsection 8.5.2 The Role of Financial Institutions
Subsection 8.5.3 Actions by Financial Institutions
Section 8.6 Relevant Indicators of Financial Crime
Transaction
Subsection 8.7.1 Summary of Countering the Financing of Terrorism
Countering the Financing of Terrorism | 249
Section 8.1 An Overview of Terrorism: What

Constitutes Terrorism
Although concerns had been expressed about the financing of terrorism before 11
September 2001, since that date increasing attention has been given to the role of
finance. This development reflects the realisation that terrorist organisations require
capital in order to function. Law enforcement agencies are aware that funding is a critical
and potentially vulnerable feature of terrorism. Detecting and intercepting financial
flows to terrorists and terrorist organisations can impede terrorist organisations and
their activities, including terrorist acts. It should be noted, however, that terrorism as
a concept, term, or label is subject to interpretation and political considerations. Due
to political differences and governmental policies, there is no global consensus as to
who is a terrorist or which organisation is a terrorist organisation in every instance.
This Book does not take part in this particular discussion, but rather provides the nec-
essary knowledge regarding the financing of terrorism, its goals and methods, and the
domestic and international organisations that combat terrorism.
ACTIVITY:
What measures does your organisation use to identify terrorism financing?
Section 8.2 Terrorism Explained
Subsection 8.2.1 Terrorism
Terrorism is the intimidation or compulsion of a population, organisation, or government

to force it to act or abstain from acting in a manner desired by the terrorist in which
it would not otherwise do. Terrorists typically act in connection with other terrorists
in an organised manner.
Subsection 8.2.2 Motives
The motives of terrorists can be political, religious, or ideological, although these

motives can blend with one another. While these motives are not necessarily evil in
themselves, forcing them on others against their will and that of their government(s)
by means of violence represents a significant threat to society and the social order.
While some terrorists are pure anarchists, seeking to destroy organised society, most of
them seek to replace it with what they regard as an ideal social order structured along
desired lines of thought and behaviour. Even so called “lone wolf” terrorists tend to
indicate support for some cause. Typically, terrorist organisations tend to be a move-
ment with social and political goals and require an organisation to provide support,
both morally and financially
250 | Chapter 8
ACTIVITY:
Identify some motives behind terrorism.
Subsection 8.2.3 Terrorist Acts
Terrorist acts are the principal means by which terrorists intimidate or compel peoples
and governments to act or refrain from acting in the manner desired by terrorists. In
a sense, it is such acts or the threat of them that makes them terrorists. Typically,
terrorist acts involve violence. For purposes of this chapter, a terrorist act includes
not only the violent act but the planning involved to carry out an attack, such as sur-
veillance, obtaining weapons and explosives or other dangerous means, transportation
and obtaining identities.
Subsection 8.2.4 Terrorist / Terrorists
Terrorists are the perpetrators of terrorism. They are natural persons who intentionally
use violence to attempt or to accomplish acts of terrorism or contribute to the com-
mission of such acts by others. In this chapter, the words “terrorist”, “terrorists” and
“terrorist organisations” are used as appropriate to signify the perpetrators of terrorist
acts and “terrorist” is used in preference to “terrorism” (as in “terrorism financing”).
Terrorists can act singularly (a so called “lone wolf” - i.e., not operating as part of an
organisation), in small isolated groups, or as parts of a large organisation which is
highly centralised or operates in a loose configuration.
Subsection 8.2.5 Terrorist Organisations
A terrorist organisation is an association of terrorists for the purpose of carrying out

acts of terror in order to achieve the goals of the organisation. There are a wide variety
of terrorist organisations. Some are large, while others are small. Some are centralised
and others are highly diversified and localised. The nature of these organisations af-
fects their funding requirements for organisational costs in addition to costs directly
related to terrorist acts.
Sometimes it can be difficult to determine whether a terrorist is a member of an or-

ganisation. Some terrorist actions are inspired by an organisation, or its propaganda,
or online training materials, without the terrorist having ever made any actual contact
with the organisation. For purposes of combating trade based financial crime, these
distinctions have little significance. Stopping the finances of the organisation will de-
feat the process just as readily as denying finance to the lone wolf in the commission
of their act.
ACTIVITY:
How do “terrorist”, “terrorists”, and “terrorist organisations” differ?
FACTFIND
To learn more about terrorists, terrorist organisations and their financing, go
to: https://www.un.org/sites/www.un.org.securitycouncil.ctc/files/ctc_cted_
factsheet_cft_february_2021.pdf.
Section 8.3 Terrorism Financing
Terrorism financing refers to the financing of terrorist organisations, terrorists, terror-

ist acts, and terrorist causes. It includes raising funds, managing them, moving them,
and using them. Understanding terrorism financing is critical to disrupting terrorism.
Subsection 8.3.1 Financing of Terrorist Acts and

Terrorist Organisations
The costs of supporting terrorist acts include funds for travel, lodging, meals, weapons,
obtaining bogus identity cards, and matters directly related to the act. While terrorist
acts require financing, the amounts are relatively low. In its October 2015 paper on
Emerging Terrorist Financing Risks,1 FATF estimated that 75% of more than forty terrorist
plots cost less than USD 10,000.
On the other hand, some terrorist organisations may require considerable funds. While
terrorist organisations are interested in perpetrating terrorist acts, they typically have
a broader agenda than the acts alone. Indeed, there is considerably more to terrorism
and terrorism financing than a terrorist act. Terrorism also involves organisational
support including the spread of an ideology, travel, training, recruiting, communication
systems and devices, salaries, support for families, compensation for expenses, and
stipends to the families of those members who have died maintaining a network. These
actions require an infrastructure and involve structuring legitimate activities behind
which the violent dimension can hide. Terrorist organisations also maintain networks
of social services for the general public in areas where they have a significant presence.
Such activities include health, education, and social services which reinforce sympathy
and loyalty to the organisation and undermine the credibility of the national and / or
local government. Terrorist organisations also own land directly or indirectly in order
to provide for training camps, facilities for manufacturing and storage of weapons and
explosives, and safe houses for members and their relatives.
1 http://www.fatf-gafi.org/media/fatf/documents/reports/Emerging-Terrorist-Financing-Risks.pdf.
252 | Chapter 8
A significant expense for terrorist organisations has been the apparatus related to
propaganda. Some organisations maintain magazines, newspapers, and a wide variety
of internet domain names, websites, social media accounts, television channels, and
radio outlets. They are used not only to promote the terrorist cause, but to spread sus-
picion and dissention, raise funds, and recruit. These activities require a stable source
of funds, particularly when compared with lone actors or small cells.
Terrorist organisations also require relative financial sophistication to raise, move or

transfer, and use funds, including planning, bookkeeping, and accounting.
ACTIVITY:
Identify expenses for terrorist organisations related to propaganda.
Subsection 8.3.2 Sources of Terrorism Financing
Terrorism financing can come from legitimate and illegitimate sources. The term
legitimate source in this context denotes the fact that the generation, collection, or
transfer of the financial means is, viewed in isolation, no immediate violent or openly
criminal act. Legitimate sources can be sympathetic persons, organisations, charities,
and even governments. They can be legitimate businesses and investments made by
the terrorist organisation. Legitimate sources of terrorism financing can also include
grants or payments from governments that are solicited without the use of violence.
The methods used by terrorist organisations to obtain funds have evolved as the size
of the organisations has grown. To the frustration of those combating terrorism, these
organisations have proven quite flexible and adaptive in obtaining and transferring funds.
In some situations, terrorists engage in self funding through the use of legitimate
sources of income through wages, social welfare payments, or savings from the ter-
rorists themselves, their families, or friends. An example would be asking friends or
family members to finance travel of foreign terrorist fighters to a conflict area or region.
Discovering these activities has proven to be difficult because of the small amounts
involved, and the outward appearance of the financial support as legitimate.
Charities or non profit organisations have been of special interest to terrorists, in part
because of certain advantages enjoyed by such organisations under national taxation
systems and in part because of less rigorous regulatory requirements that are generally
applied to them. The FATF has described charities as a “crucial weak point” in efforts to
control terrorism financing. Funds have been diverted from charities through fraudulent
misrepresentation of the purpose of the fund raising, the use of sham organisations that
pretend to be legitimate charities, or exploiting the charities to act through terrorist
organisations that combine genuine charitable activities and terrorist related activities.
Funding can also come from failed states or states that have little or no control over
the solicitation of funds.
Subsection 8.3.3 Terrorism Financing Compared

with Money Laundering
Insofar as the sources are legitimate, terrorism financing differs from money launder-
ing but when the sources are from criminal and illegal sources, it strongly resembles
money laundering. Illegitimate sources consist of other terrorist organisations, illegal
actions such as kidnapping, robbery, sale of illegal substances, extortion, smuggling,
fraud, theft, and narcotics trafficking, such as the sale of opiates and other drugs. Where
the funds are illegal, there is little or no difference between terrorism financing and
money laundering. The scope and nature of the criminal activities vary in scale and
sophistication depending on the organisation.
Terrorism financing does resemble money laundering in some aspects with regard to
the movement of funds. Funds can be physically moved, for example through the use
of couriers; moved through the financial system or alternative remittance systems
or more informal funds transfer systems such as Hawala (an informal funds transfer
system used outside the established banking community), or moved through trade
with the purchase and sale of goods, real or fictitious. Some of this movement of funds
involves the use of entities such as charities or businesses to disguise the purpose of
the transfer and its intended recipient.
Arising dangers in the terrorism finance system include the use of social media to raise
funds, the use of emerging payment systems to receive funds, move and use them, and
the exploitation of natural resources. Due to its relative anonymity and wide reach
across national borders, social media has proven to be a growing source of reaching
sympathisers, recruiting new members, and tapping funds, particularly given its wider
access and easy access to ePayment methods. Emerging payments systems offer terror-
ists a wider variety of tools that are less rigorously scrutinised than traditional forms
of funds transfer and that make it relatively easy to hide the end user and beneficiary
of the funds. In some areas, terrorist organisations have resorted to exploiting natural
resources, for example stealing and selling oil, mining of diamonds or precious metals,
or “taxing” producers of natural resources. Such conduct is easier near areas of conflict
because of the breakdown of governmental structures. It may also blend with other
criminal activities.
The focus of this chapter is explaining the use of trade to move legitimate or illegitimate
funds into the hands of terrorists or to support their activities, and identifying means
for financial institutions to counter the financing of terrorism.
254 | Chapter 8
ACTIVITY:
Explain why charities can be used / abused by terrorists and terrorist
organisations.
FACTFIND
To learn more about the sources of terrorist funding, go to: https://www.
un.org/securitycouncil/ctc/content/countering-financing-terrorism.
To learn more about Hawala, go to: http://www.economist.com/blogs/econ-
omist-explains/2015/10/economist-explains-12.
Section 8.4 Countering the Financing of Terrorism
Countering the Financing of Terrorism (CFT) is a term used to describe the efforts to
discover and stop financing of terrorism and terrorist organisations. The intention is
to starve terrorists and their organisations financially.
Subsection 8.4.1 Goals
The goal of CFT is to identify entities that promote terrorism and punish terrorist and
terrorist organisations by blocking their flow of funds and access to financial markets..
CFT is said to deter, detect and disrupt terrorism. These ends are accomplished through
1) systemic safeguards and 2) sanctions that target terrorists and terrorist organisations.
In these actions, the role of governments and authorities is primary. They are in the best
position to investigate and detect terrorists and their organisations. Financial institu-
tions, however, can be of considerable assistance in this effort, especially with a view
to trade based financial crime. Financial institutions constitute an indispensable part
due to their transactional insight and knowledge of bank customers, finance, and trade.
ACTIVITY:
In your opinion, are the goals of countering the financing of terrorism
achievable? Why?
Subsection 8.4.2 Methods
There are a variety of methods of combating terrorism financing. They range from the
criminalisation of terrorist acts and organisations and of financing them, to targeted
sanctions, the use of lists, economic penalties, and the freezing of funds intended to
support terrorism.
Subsection 8.4.3 Criminalisation of Financing Terrorist Activity
Terrorism financing is a crime in most jurisdictions. Generally, it is the intentional col-

lecting of funds or providing them to support a terrorist act or terrorist organisation. In
most jurisdictions, supporting a terrorist organisation need not necessarily be related
to a terrorist act. While violation of these laws is generally a serious crime, only 33 of
the 194 jurisdictions reporting to FATF in 2015 reported a conviction under these laws.
While some jurisdictions criminalise supporting a terrorist for purposes unrelated

to committing a terrorist act or terrorist training as described in subsection 8.3.1
(Financing of Terrorist Acts and Terrorist Organisations), many jurisdictions do not do
so. Even fewer jurisdictions criminalise travel for the purpose of committing a terrorist
act or terrorist training despite the UN Security Council resolution of September 2014
requiring them to do so.
FACTFIND
To see the UN Security Council Resolution of September 2014, go to:
https://undocs.org/S/RES/2178%20(2014).
Subsection 8.4.4 Other Methods
Targeted Financial Sanctions. Sanctions in the context of terrorism financing focus

on groups or persons responsible for terrorism. Anti terrorist sanctions target the
delivery of funds or assets directly or indirectly for the benefit of persons or entities
that are designated as terrorists or terrorist organisations. One of the considerations
leading to such targeted sanctions as opposed to general sanctions is the minimisation
the effect of such measures on the general civilian population.
Targeted Financial Sanctions include:

• Fines. In the context of combating terrorism financing, the term “fine” or
“fines” as used in this Book generally refers to the imposition of monetary
penalties on institutions or organisations charged with failure to give effect
to various steps involved in combating financing terrorism. Governments have
the ability to assess application of targeted financial sanctions and are able
to apply administrative penalties for lapses in doing so.
• Freezing or Blocking Financial Assets or Services. In the context of
combating terrorism financing, the term “freeze” as used in this Book refers
to the prohibition of the transfer, conversion, disposition, or movement of any
affected funds or instruments owned or controlled by a designated person or
entity as a result of an order of a competent authority and for the duration
of that order or until a determination regarding the affected funds is made.
256 | Chapter 8
• Targeted sanctions are given effect through the use of governmental authority
and through organisations and reporting requirements designed to share and
record information about potential terrorist activity. These include:
• Financial Intelligence Units. Many countries have established financial
intelligence units charged with tracking data on terrorism financing. They
are given access to data, reported information, and sharing of information.
• Suspicious Transaction Reports (STRs). In the context of combating
terrorism financing, banks and other financial institutions are required to
notify appropriate authorities of suspicious financial activity under applicable
domestic laws. They do so by filing reports which have various titles under
the applicable domestic and regulatory regime but are most commonly titled
“Suspicious Transaction Reports” or “STRs” or under US influence “Suspicious
Activity Reports” or “SARs”. The FATF guidance paper, Terrorist Financing (29
February 2008), contains a case study illustrating how a Suspicious Transaction
Report led government investigators to request further information from a
number of banks regarding mortgage fraud, identity fraud, and credit card
fraud which uncovered an intended high profile terrorist attack.
ACTIVITY:
Identify methods that your financial institution uses to combat terrorism
financing.
FACTFIND
To learn more about the FATF study, Terrorist Financing, and the aforemen-
tioned case study, go to p.29: http://www.fatf-gafi.org/media/fatf/documents/
reports/FATF%20Terrorist%20Financing%20Typologies%20Report.pdf.
Subsection 8.4.5 Organisations Combating Terrorism Financing
A number of international organisations have issued pronouncements, papers, and

texts related to combating terrorism, including the UN Security Council, various in-
ternational conventions, and FATF.
UN Security Council Resolutions. The UN Security Council has adopted various

resolutions regarding terrorism financing and weapons proliferation that are binding
on all members pursuant to its powers under Chapter VII of the UN Charter. It acts
through the 1267 Sanctions Committee regarding terrorism financing of the UN Security
Council to identify targeted sanctions.
International Conventions. The UN General Assembly adopted the International

Convention for the Suppression of the Financing of Terrorism on 9 December 1999.
It entered into force on 10 April 2002 and has been ratified by 187 nations as of July
2015. This multinational treaty embodied and agreed to criminalise financing acts of
terrorism, and promote police and judicial cooperation in combating such financing.
Article 2.1 defines the crime of terrorism financing in the following manner:
“Any person commits an offence within the meaning of this Convention if that
person by any means, directly or indirectly, unlawfully and wilfully, provides or
collects funds with the intention that they should be used or in the knowledge
that they are to be used, in full or in part, in order to carry out:
a) An act which constitutes an offence within the scope of and as defined
in one of the treaties listed in the annex; or
b) Any other act intended to cause death or serious bodily injury to a civilian,
or to any other person not taking an active part in the hostilities in a
situation of armed conflict, when the purpose of such act, by its nature
or context, is to intimidate a population, or to compel a government or
an international organisation to do or to abstain from doing any act.
Signatories are obligated to seize and freeze funds intended for terrorist ac-
tivities and not to use bank secrecy as an excuse for refusal to cooperate in
combating terrorism financing.”
There are a variety of other UN Conventions that touch on elements of terrorism in-
cluding actions regarding aircrafts, crimes against diplomatic agents, hostages, nuclear
materials, safety of maritime navigation, and plastic explosives, in addition to the 1977
European Convention on the Suppression of Terrorism (January 1977) and the 2005
Council of Europe Convention on the Prevention of Terrorism.
ACTIVITY:
To what extent has your financial institution taken into account UN
recommendations on combating terrorism financing in drafting its
compliance programme?
FACTFIND
To read about the UN International Convention on the Suppression of the
Financing of Terrorism, go to: http://www.un.org/law/cod/finterr.htm.
FATF. The Financial Action Task Force revised its Recommendations in October 2001
to identify 8 and later 9 Special Recommendations on Terrorism Financing. After an-
other revision in 2003, the document was revised in February 2012 (and updated in
October 2016) to integrate the Special Recommendations on Terrorism Financing, to
emphasise a risk based approach, and to contain interpretative Notes, and a Glossary.
The Recommendations specifically related to terrorism financing are contained in
258 | Chapter 8
Section C (Terrorism Financing and Financing of Proliferation), Recommendation 5

(Terrorism financing offense), Recommendation 6 (Targeted financial sanctions related
to terrorism & terrorism financing), and Recommendation 8 (Non–profit organisations).
Each of these Recommendations is accompanied by an interpretative Note. The FATF
Recommendations were most recently updated in June 2021.
FACTFIND
To see the Financial Action Task Force revised Recommendations, go to
Section C (Terrorist Financing and Financing of Proliferation):
http://www.fatf-gafi.org/publications/fatfrecommendations/documents/
fatf-recommendations.html.
Subsection 8.4.6 Designation as a Terrorist or

Terrorist Organisation
Various countries and international organisations have designated certain organisa-

tions as terrorists. There are numerous additional designations of what constitutes a
terrorist organisation. Because terrorism is largely a violent political exercise, there
are, as explained above, some differences of opinion as to who is a terrorist. Only in
limited instances is there a general agreement throughout the international community
about organisations and person or persons.
The UN has designated organisations as terrorist organisations through its Sanctions

Committee. Because the UN is not a government, these designations must be given effect
by its member nation states. According to the Financial Action Task Force, in November
2015, twenty five member states implement UN sanctions automatically, but 78% of
the members require further legal action by the nation state for implementation.2 The
EU and the West African Economic and Monetary Union3 also provide supranational
means of imposing and enforcing anti terrorism financial sanctions.
In addition, approximately forty nations have also made designations of individuals

and organisation as terrorists or terrorist organisations. These actions can result from
an action by the country itself or, occasionally, at the request of another country.
Terrorist organisations vary widely from state supported large organisations to small
diverse ones, and from highly centralised ones to organisations with a loose organisa-
tional structure that are mainly self directed.
2 FATF, Terrorist Financing FATF Report to G20 Leaders (November 2015), p.5.
3 https://ecfr.eu/special/african-cooperation/waemu/.
Consolidated Lists. The UN harmonised and standardised its lists of sanctions in

October 2014, which would include designated terrorists and terrorist organisations.
This list and that of various other organisations and countries are embodied in auto-
matic compliance software used by major banks to screen transactions. These lists are
updated in real time, making the delays by governments in acting on the recommen-
dations irrelevant insofar as the banking sector is concerned.
ACTIVITY:
Who determines whether an organisation is a terrorist organisation?
FACTFIND
To see the list of UN designated terrorists and terrorist organisations, go to:
https://www.un.org/securitycouncil/content/un-sc-consolidated-list.
Section 8.5 Responses of Financial Institutions

to Counter Terrorism Financing
Subsection 8.5.1 Identifying Terrorism Financing

Risks for Financial Institutions
In exercising due diligence in combating terrorism financing, financial institutions are

required to undertake a programme of due diligence which is based on relative risks
given their situation and circumstances. In doing so, they must follow steps discussed
prior in chapter 5 (Exercising Due Diligence) in establishing a financial crime based
financial crime compliance programme as discussed in chapter 4 (The Compliance
Programme) and in implementing it. In this process, many of the measures related to
preventing money laundering are also applicable to terrorism financing.
Since the efforts to stop money laundering by terrorist organisations have been
relatively effective with respect to the use of traditional methods of moving money,
terrorist organisations have been forced to adapt new methods. Considerable efforts
have been made to study how terrorists and terrorist organisations raise, move, and
implement funds.
The Wolfsberg Group, Trade Finance Principles (2019) section 1.3.1(c)(iv) (Financial
Crime Risks / Application of Controls) states that “[t]he most effective method of iden-
tifying terrorist involvement in Trade Finance transactions is for competent authorities
to identify individuals and organisations connected to terrorist activities and provide
such information to [Financial Institution]s in a timely manner. Accordingly, Trade
Finance controls, consisting of screening relevant transaction information against lists
of known or suspected terrorists (designated parties) issued by competent authorities
260 | Chapter 8
having jurisdiction over the relevant [Financial Institution], are relevant in the context
of CFT efforts.”4
ACTIVITY:
What steps do you take at your bank to stop terrorism financing?
Subsection 8.5.2 The Role of Financial Institutions
The role of financial institutions in countering the financing of terrorism is to:

• Prevent the misuse of the financial institution to support terrorism.
• Assist governments in detecting terrorism financing.
• Share information where there are suspicions of terrorism financing. This role
is fulfilled in two ways: 1) by assuring that there are no account relationships
with or payments to designated entities; and 2) by exercising due diligence in
determining the true identity of its customers and monitoring their activities.
Subsection 8.5.3 Actions by Financial Institutions
In setting up accounts, financial institutions must use automated and human resources
to assure themselves that the entities they are vetting as customers are who they claim
to be and that their activities are consistent with the type of organisation that they
represent themselves to be. These steps involve scrutiny of activity and the sectors in
which the customers operate. Where there are enhanced risks, such as geographical
areas where terrorists operate or the wide spread use of alternative remittance systems,
enhanced monitoring is appropriate. It is also appropriate for banks to scrutinise un-
usual or suspicious transactions. The cooperation of financial institutions is important
in identifying such suspicious activities, domestically and internationally, and has led
to documented interventions that have been prosecuted successfully.
In monitoring transactions by customers, to a considerable extent, what banks must do

is to check the names of entities involved in transactions against the lists of designated
persons. Most of these checks are automated.
With respect to countering the financing of terrorism, banks are required to utilise
current lists of designated organisations and persons, and check for prohibited material
related to weapons using comprehensive software. In addition to automated checks,
the bank must exercise appropriate due diligence to identify transactions that are odd,
do not fit customer profiles, or otherwise stand out, and take appropriate measures,
2019.pdf.
always documenting what is done and decided. As already mentioned, bank secrecy laws
are not an excuse for actions (or inactions) by financial institutions, as provided in the
UN Convention on Terrorism Financing and as noted in the FATF Recommendations.
Where a financial institution suspects that there is terrorism financing activity after
exercising due diligence, it must report the activity. The reason for filing such a report
is to enable government agencies to conduct investigations and to determine the scope
of the illicit activity. When money laundering is suspected, banks are encouraged to
allow the transaction to proceed but to report it to authorities. With respect to terror-
ist activities, however, mere reporting is not enough. Financial institutions are also
required to freeze the transaction and hold the funds. The reason for this difference
will be evident on reflection; governments do not want the funds to reach terrorists
or to be used in support of terrorist activities.
In carrying out these activities, financial institutions must be careful not to alert the
customer of its suspicion. Such activity is called “tipping off” in AML / CFT parlance
and is addressed in FATF Recommendation No. 21 (Tipping off and confidentiality).
ACTIVITY:
Identify three appropriate actions for financial institutions to take when
terrorism financing is suspected.
Section 8.6 Relevant Indicators of Financial Crime
In implementing an effective CFT regime, as well as in combating the proliferation of

weapons of mass destruction, financial institutions are urged to follow a risk based
approach. In assessing applicable risks, the Indicators of financial crime discussed in
this Book in chapter 6 (Indicators of Trade Based Financial Crimes) are useful. Despite
some success in stopping money laundering by terrorists and their supporters, there
has been limited success in identification of unique indicators of terrorism financing
in part due to the inventiveness and flexibility of terrorists and their organisations.
In addition, in many cases, the movement of funds is indistinguishable from everyday
financial activity.
The relevant Indicators in a financial institution’s CFT regime include:
An unusual transaction could indicate terrorism financing or facilitating the prolifer-

ation of weapons of mass destruction. The transaction could be used to channel funds
262 | Chapter 8
to a terrorist or terrorist organisation or to deliver goods to them which could be resold

or otherwise used in support of terrorist acts of terrorism.

A deviation in shipment could direct goods to a terrorist organisation, particularly if

the goods are redirected to a geographically vulnerable area. Deviations in volume,
cost, or size of the transactions could also mask terrorism financing.
If it appears as a result of the exercise of due diligence that the customer is acting in
collusion with an organisation that is designated as a terrorist organisation, the bank
must act immediately.

If, as a result of due diligence, it appears that a shell company or front is being used
and the bank is unable to determine the beneficial owner of that company, one pos-
sibility is that the beneficial owner or the entity for whose benefit the transaction is
being conducted is a terrorist organisation, and enhanced due diligence is required to
determine the true identity of the beneficial owner.

If the goods or funds are being sent to areas where there is significant terrorist activity
or is susceptible of being diverted to such a nation, there is a possibility of terrorism
financing, especially if the country has been identified by FATF as a high risk country.

High value goods are easily diverted and readily used to support terrorist activities.
Such transactions should be scrutinised carefully. Likewise, goods which have a high
risk of misuse as weapons or for violent purposes should be the subject of enhanced
due diligence.
A person or entity whose name appears on a list of targeted terrorism financing sanc-
tions, including PEPs, is by its nature highly suspicious and the transaction should be
reported and frozen.
Such goods are susceptible of being used by terrorists or terrorist organisations as

weapons. Any transaction involving them must receive heightened due diligence.

Any sign that the transaction does not make economic sense should signal that the
transaction is being used to mask other activity which could include terrorism financing,
and must receive heightened due diligence.
As is the case where the transaction makes no economic sense, the presence of terms
in the structure of a trade could be a sign that the transaction is being used to mask
financial crime including terrorism financing.

Like apparent inconsistencies and trade structure concerns, unusual provisions and
terms in a letter of credit or confirmation could signal that the transaction is being
used to mask terrorism financing.
Any signs of inconsistencies in invoicing, geographical concerns, inconsistent documents

including letters of credits and standbys, unverifiable customers, documents that change
during the transaction, and / or high risk / high value goods used in transactions are
among the many Indicators that can fall in this category of “catch all” that financial
institutions need to scrutinise that could signal possible terrorism financing.
The Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act / Anti
Money Laundering Examination Manual discusses suspicious activity that may indicate
264 | Chapter 8
terrorism financing in Appendix E.5 Apart from transactions that significantly differ
from the customer’s normal business, frequent funds transfers to and from business
accounts which do not appear to be relevant to the business, especially from high risk
jurisdictions, ought to raise internal review. Further examples of unusual behaviour
are foreign currency exchanges shortly followed by funds transfers to high risk juris-
dictions and “[i]nsurance policy loans or policy surrender values that are subject to a
substantial surrender charge.”
Moreover, in the UK Financial Conduct Authority’s (FCA) Thematic Review, Banks’

control of financial crime risk in trade finance, section 3.7.5 Counter terrorist financing
(CTF) controls, several helpful examples of good banking practices regarding dual use
goods are identified in the FCA review. Of particular note are examples where banks
escalated review of transactions with common dual use goods but where additional
red flags were present, such as:
• “military or government buyers
• shipping to a known transshipment destination or the shipping route is unusual
for the product and destination
• the customer or purchasing agent is reluctant to offer information about the
end use of the item
• the product’s capabilities do not fit the buyer’s line of business
• the packaging is inconsistent with the stated method of shipment or destination,
and
• the item ordered is incompatible with the technical level of the country to
which it is being shipped, such as semi-conductor manufacturing equipment
being shipped to a country that has no electronics industry.”6
Subsection 8.7.1 Summary of Countering the

Financing of Terrorism
Chapter 8, Countering the Financing of Terrorism, explained the meaning and signif-
icance of terrorists, terrorist organisations and terrorism, what constitutes terrorism
financing, measures in countering the financing of terrorism including tools and
methods, organisations involved, and targeted sanctions, combating proliferation of
weapons of mass destruction, and the implications of countering the financing of ter-
rorism. This chapter also discussed the Indicators related to terrorism financing and
the roles financial institutions play in combating terrorism financing.
5 https://bsaaml.ffiec.gov/docs/manual/10_Appendices/07.pdf (F9 - F10).

The FATF guidance paper, Emerging Terrorist Financing Risks (October 2015),7
contains an example of the misuse of trade by a terrorist organisation. A com-
pany that was designated as an unlawful association was unable to import
goods through that country’s ports. It cooperated with another company
that was able to import goods and a third company, an accomplice, caused
the release of the goods from the ports. This third company transferred the
goods to the first company for use in connection with terrorist activities. To
pay for the goods, the first company transferred funds to the second company.
Review the example of the misuse of trade and answer the following question:
• What steps could your organisation have taken to identify and report this
transaction if it had issued a LC to the company able to import goods?
In the activity in section 8.1 of this chapter, the student was encouraged to
consider what measures are used at your organisation to help counter the
financing of terrorism. In light of your study of this chapter:
• Identify procedures used in your bank’s compliance programme to help
counter the financing of terrorism.
• What lists does your organisation use to check problematic parties when
exercising due diligence?
Question 8-1. What is the role of financial institutions in countering the financing
of terrorism?
Question 8-2. In countering the financing of terrorism, which of the following

actions are proper for financial institutions? Select all that apply.
a) Use automated and human resources to vet customers.
b) Allow suspicious transactions to proceed but report the suspicion.
c) Utilise current lists of designated organisations and person to check
customers against terrorist designation.
7 http://www.fatf-gafi.org/media/fatf/documents/reports/Emerging-Terrorist-Financing-Risks.pdf.
266 | Chapter 8
d) Inform the customer of the suspicion in order to give it an opportu-

nity to explain its actions.
Question 8-3. What is a terrorist act?
Question 8-4. What are the goals of countering the financing of terrorism?
Question 8-5. Does terrorism financing include financing for terrorist training?
Question 8-6. How are the goals of countering the financing of terrorism accom-
plished?
Question 8-7. Financial institutions are important in the battle against terrorism
because of their ability to do what? Select all that apply.
a) Investigate terrorist organisations.
b) Punish terrorists.
c) Stop the flow of money to terrorists.
d) Determine who are terrorist organisations.
e) None of the above.

cific types of financial crimes, chapter 7 (Anti Money Laundering) provides the
student with information about how money is being laundered, how money
laundering is being combated, and the important role played by financial insti-
tutions.

Having received an Introduction to Trade Based Financial Crime Compliance in
chapter 1 and discussed Trade in chapter 2, Financial Crime Regulation in chap-
ter 3, the structure of The Compliance Programme in chapter 4, Exercising of
Due Diligence in chapter 5, and the Indicators of Trade Based Financial Crimes
in chapter 6, the student moved to Part II.
dering here in chapter 7, Countering the Financing of Terrorism in chapter 8,
and will go on to study Sanctions in chapter 9, Weapons of Mass Destruction in
chapter 10, Anti Bribery and Anti Corruption in chapter 11, Commercial Fraud
in chapter 12, and Anti Boycott in chapter 13.
9
Chapter 9
SANCTIONS
LEARNING OBJECTIVE
of economic sanctions and sanction regimes.
CHAPTER OVERVIEW:
This chapter on Sanctions discusses what economic sanctions are, the types of
economic sanctions and their purpose, and explains the specific sanctions re-
gimes. Chapter 9 explains how to detect sanctions violations and the appropri-
ate responses as well what consequences await banks that are non compliant.

and financial crime regulation.
necessary for financial institutions to combat them. Chapter 7 treated Anti
Money Laundering, chapter 8 considered Countering the Financing of Terror-
ism. After studying Sanctions in this chapter, chapter 10 will take up prolifer-
ation of Weapons of Mass Destruction, chapter 11 will consider Anti Bribery
and Anti Corruption, chapter 12 will cover Commercial Fraud, and chapter 13
will address Anti Boycott regimes.
267
268 | Chapter 9

Chapter 9 Sanctions
Section 9.1 What is an Economic Sanction?
Section 9.2 Types of Economic Sanctions
Section 9.3 Purpose of Economic Sanctions
Section 9.4 Specific Sanctions Regimes
Subsection 9.4.1 UN Sanctions
Subsection 9.4.2 U.S. Sanctions
Subsection 9.4.2.1 U.S. OFAC Terminology
Subsection 9.4.2.2 U.S. Country Based Sanctions
Subsection 9.4.2.3 U.S. Targeted Sanctions
Subsection 9.4.3 Non U.S. Sanctions Regimes
Subsection 9.4.3.1 European Union
Subsection 9.4.3.2 United Kingdom
Subsection 9.4.3.3 Hong Kong
Subsection 9.4.3.4 Singapore
Subsection 9.4.3.5 People’s Republic of China
Subsection 9.4.3.6 Other Jurisdictions
Section 9.5 How to Detect Sanctions Violations
Subsection 9.5.1 Trade Finance Guidance to Address Illicit Shipping and Sanctions
Evasion Practices
Subsection 9.5.2 Disabling or Manipulating the Automatic Identification System
(AIS) on Vessels
Subsection 9.5.3 Physically Altering Vessel Identification
Subsection 9.5.4 Falsifying Cargo and Vessel Documents
Subsection 9.5.5 Ship-to-Ship (STS) Transfers
Subsection 9.5.6 Voyage Irregularities
Subsection 9.5.7 False Flags and Flag Hopping
Subsection 9.5.8 Complex Ownership or Management
Section 9.6 Sanctions Responses
Subsection 9.6.1 Compliance with a Sanctions Programme
Subsection 9.6.2 Export Licenses
Subsection 9.6.3 Consequences of Sanctions Violations
Subsection 9.7.1 Summary of Sanctions
Sanctions | 269
Section 9.1 What is an Economic Sanction?
An Economic Sanction is the deliberate limitation or cessation of trade and financial

intercourse by a nation or intergovernmental body with a specified nation, region,
government, industry, group, or person as a response to, or in an effort to, alter social,
political, economic, or military policy.
Economic sanctions are designed to accomplish national or international policies by

restricting certain activities of persons, organisations, or nation states and their citi-
zens short of war. In a sense, they involve waging war by economic rather than military
means. They are employed when there is a perceived risk to national and global peace
and security or in instances of human rights violation. While each nation can create
its own system of implementing and enforcing its own sanctions regime, there are also
internationally cooperative efforts. In many instances, sanctions are legal measures
and their enforceability is a matter that is overseen by each nation state authority
and adjudicated by its courts. Sanctions exert pressure on persons, organisations,
or political regimes to comply with the law or policy of the state or the organisation
imposing the sanctions.
It should be noted that the word “sanctions” is also used in a broader sense to refer
to penalties and fines that are imposed on a person or institution that violates a law
or restriction. International sanctions can also refer to diplomatic, military, sport, or
environmental sanctions as well. However, for the purposes of this Book, references to
sanctions signify economic sanctions in the sense used above.
ACTIVITY:
What measures are in place in your organisation in order to comply with
sanctions regulations?
Section 9.2 Types of Economic Sanctions
Economic sanctions can be divided into two subsets: financial or commercial / trade
based restrictions.
Financial sanctions restrict the availability of funds flowing in and out of specified
jurisdictions or to specified people through the financial system.
Trade based restrictions can also be described as embargos. They place embargoes on
certain goods, services, and travel. Sanctions are sometimes treated together with anti
boycott efforts either because they use economic tools, impact trade, or are enforced
270 | Chapter 9
through a fine or a penalty. In this Book, however, anti boycott measures are considered
separately in chapter 13 (Anti Boycott).
The Wolfsberg Group, Trade Finance Principles (2019) section 1.4.1 (National and Re-
gional Sanctions, Embargoes and NPWMD) provides:
“Embargoes: An embargo restricts commerce of exchange with a specified country. An

embargo is usually created as a result of unfavourable political or economic circumstances
between nations. The restriction looks to isolate the country and create difficulties for
its governing body, forcing it to act on the underlying issue.”
ACTIVITY:
What articles are trade based restrictions placed on?
Section 9.3 Purpose of Economic Sanctions
The goal of economic sanctions is to affect the behaviour of the person, group, region,
or nation at which the sanctions are directed. In the past, sanctions have targeted the
purchase or sale of oil, arms and technology, air traffic, diplomatic relations, and the
movement of persons. They can result in freezing bank deposits or property.
Examples of multilateral sanctions regimes, sanctions imposed by multiple nations,

are the sanctions currently imposed by most of the world community against North
Korea for its militancy, or past sanctions against South Africa for its apartheid poli-
cies. Other sanctions are unilateral, that is, imposed individually by one nation. An
example of unilateral economic sanctions are the U.S. sanctions against Cuba. Nations
and intergovernmental bodies can also issue sectoral sanctions. Sectoral sanctions are
sanctions applicable to specific sectors of a targeted nation’s economy. An example
of sectoral sanctions would be the U.S. sanctions against specific Russian entities in
specific industries, namely energy, finance and defence, in response to Russia’s actions
in Crimea. The U.S. Department of Treasury maintains information on such sanctions
through its Sectoral Sanctions Identifications List (SSI).
Sanctions are political acts and thus, they change from time to time in conjunction
with the international political climate. Sanctions are also directed towards sponsors
of terrorism and international narcotics traffickers, among others, in addition to des-
ignated countries.
Violation of economic sanctions can carry both civil and criminal fines and possibly
lead to imprisonment, depending on the sanctions regime.
Sanctions | 271
ACTIVITY:
What consequences can violations of economic sanctions carry?
Section 9.4 Specific Sanctions Regimes
Subsection 9.4.1 UN Sanctions
The United Nations, through the Security Council, has the power to implement sanc-
tions through Article 41 of the United Nations Charter. Article 41 states: “The Security
Council may decide what measures not involving the use of armed force are to be em-
ployed to give effect to its decisions, and it may call upon the Members of the United
Nations to apply such measures. These may include complete or partial interruption
of economic relations and of rail, sea, air, postal, telegraphic, radio, and other means
of communication, and the severance of diplomatic relations.”
The UN can issue sanctions but it lacks a true mechanism to enforce them. Short of
imposing mandatory sanctions, the UN has the power to request, but not require, that
the member states act in a certain way that gives effect and enforcement to its sanctions.
UN sanctions have ranged from targeting and preventing the import and export of
specific items to and from a nation, such as arms or diamonds, to preventing the trade
of nearly all products into or from a specified nation. UN sanctions also vary as to
the target. UN sanctions have been directed at nations, rebel organisations, terrorist
organisations, and individuals.
In October 2020, FATF updated its Recommendations, International Standards on

Combatting Money Laundering and the Financing of Terrorism & Proliferation, particularly
its Recommendation 1.1 To clarify and further elaborate on the 2020 updates, FATF
published its Guidance on Proliferation Financing Risk Assessment and Mitigation (June
2021). The 2020 update relevant to this guidance regards FATF Recommendation 1 and
its accompanying Interpretive Note (i.e. R.1 and INR.1). The revised Recommendation
1 requires countries and private sector organisations to, as part of their risk based AML
compliance programmes, “identify, assess, understand and mitigate their proliferation
financing risks.”2 As this Book refers to this concept in different terms, it is worth
mentioning that FATF defines proliferation financing risk as “refer[ing] strictly and
only to the potential breach, non-implementation or evasion of the targeted financial
1 To view the FATF Recommendations, visit https://www.fatf-gafi.org/media/fatf/documents/

recommendations/pdfs/FATF%20Recommendations%202012.pdf.
2 https://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-Proliferation-Financing-Risk-
Assessment-Mitigation.pdf.
272 | Chapter 9
sanctions (TFS) obligations” as articulated in FATF Recommendation 7. Recommendation

7 is aimed at countries and encourages the “implement[ation] [of] targeted financial
sanctions to comply with United Nations Security Council resolutions” relating to
WMDs and relevant financing risks around WMDs. The FATF guidance was produced in
response to the public comment phase following the 2020 revisions, and is undoubtedly
indicative of the complexities and resources necessary in establishing and maintaining
an effective sanctions compliance programme.
FACTFIND
A current list of UN sanctions can be found at:
https://scsanctions.un.org/consolidated/.
Examples of UN Sanctions include sanctions against organisations such as Al-Qaida

and ISIL and against nations including the Democratic People’s Republic of Korea
(North Korea) and Libya.
ACTIVITY:
How does your organisation assure itself that it is aware of changes in
sanctions or newly imposed ones?
Subsection 9.4.2 U.S. Sanctions
The United States employs economic sanctions more often than any other country. It
does so through both country based sanctions and targeted sanctions; that is, sanctions
directed at a specific individual or organisation as opposed to an entire nation. Both
types of sanctions are administered by the United States Department of the Treasury’s
Office of Foreign Assets Control (OFAC). OFAC administers numerous distinct sanctions
programmes, with varying degrees of comprehensiveness. Because each programme is
intended to support varying policy goals, the sort of activity prohibited will vary greatly.
FACTFIND
For more information on the OFAC Sanctions Program visit:
https://www.treasury.gov/resource-center/sanctions/Pages/default.aspx.
OFACs sanctions programs are designed to prevent trade between U.S. persons or or-
ganisations and the sanctioned nation, region, government, group, entity, or person;
to prevent U.S. persons or organisations from dealing with goods from a sanctioned
country; and to prohibit U.S. persons or organisations from any involvement in a
transaction that violates a U.S. sanction.
Sanctions | 273
The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) also admin-
isters and enforces sanctions compliance, by limiting the prohibited export of certain
goods, pursuant to the Export Administration Act. While this overlaps with sanctions
compliance, it focuses more on the proper execution of export licenses. Therefore, for
the purposes of this chapter, this Book will focus on OFAC enforced sanctions when
referencing the U.S. sanctions regime.
ACTIVITY:
Compare country based and targeted sanctions.
Subsection 9.4.2.1 U.S. OFAC Terminology
In seeking to comply with the sanctions administered by OFAC, a number of specific

terms are typically used. In order to comply with these sanctions, banking practitioners
would do well to familiarise themselves with these terms and concepts. The list be-
low is by no means comprehensive, but these are the ones we will most often refer to
throughout the chapter. It includes:
“Blocked Account” is an account from to and from which transfers, payments, with-
drawals and other transactions are prohibited without OFAC approval.
“Blocking” or “Freezing” refers to a method of controlling assets in a U.S. jurisdiction,

under which the exercise of privileges associated with ownership is prohibited without
permission from OFAC. Blocking or freezing prohibits transactions of any kind with
respect to the blocked or frozen assets.
“Census” is OFACs comprehensive statistical survey of blocked assets; U.S. law man-
dates response to this survey.
“General License” refers to an exception stated in a regulation to a broader require-

ment or prohibition.
“Offset” refers to the practice of netting out mutual debt between parties. Offset qual-
ifies as a transaction prohibited with respect to blocked accounts.
“Person subject to the jurisdiction of the United States” includes all those subject
to OFAC regulations, such as U.S. citizens, permanent resident aliens, individuals or
entities located in the U.S., corporations organised under U.S. law, or foreign or domestic
entities owned by any of the above.
“Property” means any item of value; whether tangible, intangible, or mixed.

274 | Chapter 9
“Property Interest” is defined as any interest in property, direct or indirect.
“Specially Designated Nationals (SDNs)” or “Blocked Persons” are individuals

owned or controlled by, or acting on behalf of the governments of targeted countries,
or engaged in terrorism or narcotics trafficking.
“Specific License” can be issued to an individual or entity by OFAC on a case by case

basis, permitting them to engage in an activity that would otherwise be prohibited
under an embargo or sanctions.
The reference to licenses in this list of terms merits further attention. Companies af-
fected by sanctions can request a licence to proceed by applying to OFAC and setting
forth the reasons for the application.
ACTIVITY:
What terms are used by your organisation with regard to economic sanctions?
Subsection 9.4.2.2 U.S. Country Based Sanctions
U.S. country based economic sanctions generally apply to “United States persons”,
which have been defined for a specific sanctions programme in the Code of Federal
Regulations as “any United States citizen, permanent resident alien, entity organized
under the laws of the United States (including foreign branches), or any person in the
United States”.3 This is a deliberately broad definition meant to cover a large group
of people.
FACTFIND
For an up to date list of OFACs country based sanctions, visit their website at:
https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-pro-
grams-and-country-information.
There are also Secondary Sanctions, which prohibit non U.S. persons from engaging
in certain activities as well. These secondary sanctions are relatively rare, but have
been used against non U.S. financial institutions to limit their dealings with Iran.
Many foreign jurisdictions refuse to recognise secondary sanctions. With the help
of the State of New York, the United States leverages the ability to restrict the access
of foreign financial institutions to United States capital markets in order to enforce
extraterritorial secondary sanctions.
3 31 C.F.R. 560.314.
Sanctions | 275
Targets of OFACs country based sanctions change frequently and the most up to date
list can be found on OFACs website. These programmes vary in terms of prohibited
activities and comprehensiveness based on the particular sanctions programme. It is
also important to note that these programmes are dynamic, and various prohibitions
and restrictions change with current political events. Many of the programmes de-
scribed there were once broad in scope but are now limited to specific individuals and
organisations.
FACTFIND
The BAFT / TCH Sanctions Working Group offers a detailed look at OFAC Sanctions
through the lens of the U.S. sanctions on Iran. To view the Guiding Principles for
Sanctions Issues Related to Shipping and Financial Products, visit: https://www.
baft.org/wp-content/uploads/2021/03/baft-tch-guiding-principles-sanctions-
issues-related-to-shipping-and-financial-products-vf-2-3-17.pdf
Subsection 9.4.2.3 U.S. Targeted Sanctions
With the increase in threats from non state actors, and the growing consensus that
broad country based sanctions cause collateral damage to innocent citizens of target-
ed countries, targeted sanctions have become more favoured. In that vein, the United
States imposes sanctions programmes that are targeted, rather than country based. In
addition, some of the country based sanctions programmes are targeted in practice.
As with country based sanctions, targeted sanctions are designed to use the financial
system to deter or enforce a particular type of behaviour. In addition to influencing the
activities of foreign belligerent nations and persons, targeted sanctions are intended to
disrupt the financial infrastructure supporting terrorists, international criminals, and
rogue actors. The mere threat of adding a person or organisation to the list of SDNs can
have a serious personal or economic impact, as potential business partners and financial
institutions may decide, as a precautionary measure, to reduce their interaction with
the concerned person or organisation, or even to completely sever ties. This, in turn,
may apply sufficient pressure on the threatened person or organisation to change its
interaction pattern, commercial activities, or overall behaviour. For example, SWIFT, the
international telecommunications network used by most banks to exchange messages,
has previously decided to disconnect certain banks and financial institutions from its
network based on the threatened imposition of sanctions against those institutions.
OFAC retains a list of thousands of individuals, business entities, or other organisa-

tions qualifying as SDNs, which is posted at https://www.treasury.gov/resource-center/
sanctions/SDN-List/Pages/default.aspx. U.S. persons are generally prohibited from
participating in trade or dealing with SDNs. Banks are also generally required to block
the assets of SDNs. The SDN list categorises SDNs according to the reason for their
276 | Chapter 9
listing. The list can be read, downloaded, or searched using a search function on the
website. The search function accounts for variations in name spelling, using a “Name
Score” search logical algorithm that considers the phonetic and visual accuracy of
the spelling. Users of the search function can adjust the degree of confidence in the
spelling they use. The search logic also lists known “weak aliases” or “AKAs” for each
individual SDN.
Changes and additions to the SDN list are frequent, and the scope of the list is broad.
SDNs may be on the list for engaging in prohibited activities, but they may also be
facilitators of prohibited activities. SDNs who wish to appeal their status as SDNs may
do so by contacting OFAC.
Despite the size and dynamic nature of the SDN list, compliance with Targeted Sanctions
is considered relatively easy. Client and counterparty lists need only be checked against
the list on the OFAC website, which can identify an SDN given allowances for spelling
variation and weak aliases, as pointed out earlier. Banks often download the list into
their own software that uses the same sort of fuzzy logic to identify possible matches.
Other nations have similar lists that should be consulted when the entity, person or
trade activity is potentially subject to their sanctions and that can be downloaded into
user systems.
However, one major challenge arises from the rule that prohibits transactions with
Entities Owned by Persons Whose Property or Interest in Property are Blocked, the so
called “fifty percent rule”. OFAC, a division of the U.S. Department of Treasury, states
that “the property and interests in property of entities directly or indirectly owned fifty
percent or more in the aggregate by one or more blocked persons are considered blocked
regardless of whether such entities appear on [the SDN list]”. . If such an entity qualifies
under this rule, then that entity is treated as though it itself is a sanctioned entity.
FACTFIND
For more information on the “fifty percent rule” see the U.S. Department of
Treasury’s, Revised Guidance on Entities Owned by Persons Whose Property and
Interests in Property are Blocked (13 August 2014), found at:
https://home.treasury.gov/policy-issues/office-of-foreign-assets-control-sanc-
tions-programs-and-information.
ACTIVITY:
Why does the U.S. now favour targeted sanctions over country based
sanctions?
Sanctions | 277
Subsection 9.4.3 Non U.S. Sanctions Regimes
While the United States uses economic sanctions more than any other country, there are
a number of other sanctions regimes imposed by other political entities or countries.
Subsection 9.4.3.1 European Union
The European Union’s lack of a joint military force led many European leaders to view
what they call “Restrictive Measures” as one of the primary foreign policy tools of the EU.
Before 2012, the strategy of the European Union focused on restrictive measures targeted
against individuals and companies. Additionally, the EU levies sanctions as mandated
by the United Nations. The EU’s 2012 restrictive measures against Iran represent their
first blanket restrictive measure.
The most important distinction, however, is that the European Union member states
may impose harsh autonomous sanctions within their own national jurisdictions. Any
importer, exporter, or service provider looking to execute a transaction in the jurisdic-
tion of an EU member state would be best advised to inquire into the local, additional
restrictions on trade.
The European Union regards restrictive measures as “an essential foreign policy tool”
in order “to pursue objectives in accordance with the principles of the Common Foreign
and Security Policy.” The legal basis for restrictive measures arises out of article 215
of the Treaty on the Functioning of the European Union (TFEU).
Pursuant to these rules, the European Union has numerous targeted sanctions, pro-
mulgated according to thirty-five programmes; in addition, it has a policy or protection
against the enforcement of certain extra territorial sanctions imposed by the United
States. In addition to the restrictions targeted towards individuals and organisations,
there remain some limited blanket restrictions with respect to Iran. The EU provides an
online consolidated list of targeted persons and organisations. Their website, however,
lacks the search algorithm that the OFAC website offers for the United States SDN lists,
making it less user friendly and effective.
In addition to the sanctions enacted pursuant to TFEU, and sanctions adopted by the
EU in support of the United Nations, the EU member states are permitted to take action
according to UN Security Council resolution.
In the European Union, financial restrictive measures manifest as either the freezing of
funds, or prohibiting the availability of funds, and freezing the provision of economic
resources to targeted persons or entities.
278 | Chapter 9
“Freezing of Funds” is defined much as it is in the United States. The language of the
EU guidelines describes the freezing of funds as “preventing any move, transfer, alter-
ation, use of, access to, or dealing with funds in any way that would result in any change
in their volume, amount, location, ownership, possession, character, destination or
other change that would enable the use of the funds, including portfolio management.”
“Economic Resources” refers to “assets of every kind, whether tangible or intangible,

movable or immovable, that are not funds but can be used to obtain funds, goods or
services.”
Thus, “Freezing of Economic Resources” refers to “means preventing their use to

obtain funds, goods or services in any way, including, but not limited to, by selling,
hiring or mortgaging them.” The freeze covers all funds and economic resources owned
by targeted individuals or entities, or by those “held or controlled” by targeted indi-
viduals or designated entities.
“Held or controlled” refers to “all situations where, without having a title of owner-
ship, a designated person or entity is able lawfully to dispose of or transfer funds or
economic resources he, she or it does not own, without any need for prior approval by
the legal owner.”
The enforcement of these restrictive measures is delegated to the various EU mem-

ber states. These states are also permitted to issue exemptions consistent with the
Guidelines made available by the European Council as document number 15579/2003.
Compliance strategies mostly mirror those suggested by the United States, but addi-
tional guidance may be made available by each of the EU member states. Compliance
departments at financial institutions would be well served to contact the relevant
regulators in the individual member states under the jurisdiction of which they operate.
ACTIVITY:
Identify what rights member states have to impose
sanctions independently of the EU.
Subsection 9.4.3.2 United Kingdom
The nomenclature of sanctions policies in the United Kingdom (UK) is particularly

similar to that in the United States. The UK refers to these restrictions on trade and
finance as Sanction Regimes. The UK Foreign Office negotiates all international sanc-
tions in the UK, while the UK Department of Business Innovation and Skills implements
trade sanctions and embargoes within the UK, and the Home Office implements Travel
Sanctions | 279
Bans. The Office of Financial Sanctions Implementation (OFSI), within Her Majesty’s
Treasury, handles Financial Sanctions Regimes in the UK; while the Financial Conduct
Authority (FCA) supervises business entities to make sure there are procedures in place
to ensure compliance with the UK’s Financial Sanctions Regime. Additionally, the UK
Foreign, Commonwealth & Development Office (FCDO) has a Sanctions Unit which
maintains the UK Sanctions List containing all individuals, entities and ships targeted
by immigration, trade, or transport sanctions, not only financial sanctions.
In the United Kingdom, Financial Sanctions are restrictions put in place by either the
UK Government or a multilateral organisation. These restrictions are intended to limit
access to certain financial services or restrict access to “financial markets, funds, and
economic resources” to achieve a specific policy objective.
The nature of the policy objectives pursued by these sanctions regimes is similar to
those objectives of both the United States and the European Union. Her Majesty’s
Treasury phrases these policies in terms of an “offending behaviour.” This offending
behaviour is some activity or aspects of some activity that the UK Government seeks
to change or end. The sanctions policies often seek to coerce a regime or individuals
within a regime to end or change their offending behaviour. Alternatively, it can be
used to deny a target access to resources needed to continue an offending behaviour.
Sometimes Financial Sanctions are employed in order to stigmatise or isolate a target
politically. Finally, Financial Sanctions are used to protect the value of assets that have
been misappropriated from a country until it is safe to repatriate the assets.
UK Financial Sanctions may arise by virtue of the UK’s membership in the United
Nations. Prior to the referendum discussed below, EU sanctions still had direct legal
effect in the UK, and the UK Government employed statutes pursuant to EU sanctions,
which were enforced by OFSI.
Following a June 2016 referendum on whether to leave the EU, the UK officially withdrew
on 31 January 2020 but continued to apply EU rules through 2020 as a transition phase
during which the UK and EU negotiated an agreement regarding future relations. On
24 December 2020, the parties announced a Trade and Cooperation Agreement (TCA).
While the TCA is viewed more favourably than a “no deal exit” or “hard exit”, its scope is
relatively narrow, indicating that there will be further negotiations on unresolved issues.
The UK may now develop an independent sanctions regime, although both parties have
expressed support for coordinating sanctions policies. The main vehicle for UK sanctions
is the Sanctions and Anti Money Laundering Act (2018) which entered into full force on
31 December 2020. In addition to the OFSI, which primarily handles financial sanctions
lists, the UK Foreign, Commonwealth & Development Office’s (FCDO) Sanctions Unit
280 | Chapter 9
has issued several guidance papers regarding each UK sanctions regime and maintains
lists of each type of enacted sanctions.
Similar to the United States, the United Kingdom does impose sanctions against indi-
viduals, countries, and organisations. These Sanctions take three forms. These include
targeted asset freezes, restrictions on financial markets and services, and directions
to cease all business.
As OFAC maintains a function on its website for searching its list of SDNs, OFSI and
FCDO also host searchable lists of sanctions targets. They include consolidated lists of
all targets as well as lists of individuals and entities subject to specific capital market
restrictions. The databases are updated within one to three working days of new listings.
Using the search function is very similar to using the one on the OFAC website; however,
it should be noted that the list does not include the entities controlled by listed targets.
Finally, it should be noted that just because a counterparty’s name appears on the list,
it does not by itself mean that this person is the target of a UK Financial Sanction. OFSI
guidance reminds practitioners that a so called “Name Match” does not necessarily indicate
a “Target Match”. Additional information like date of birth,4 passport details, address,
and nationality must also be scrutinised to ensure that it is not a mere coincidence of an
identical name being matched. If a practitioner is unsure if he or she has a proper Target
Match, despite the additional scrutiny, instructions are to contact OFSI for assistance.
Targeted asset freezes are generally applied to individuals, entities and organisations,
much as they are in the US. When an asset freeze is in place, there are three prohi-
bitions. First, it is prohibited to deal with funds or economic resources “belonging to
or owned, held or controlled, by a designated person”. Second, it is illegal to “[m]ake
funds or economic resources available, directly or indirectly, to, or for the benefit of, a
designated person”. Finally, it is a violation of the law to do anything that directly or
indirectly circumvents the financial sanctions prohibitions.
As with the US and the EU, there is a specific vocabulary used in the UK when describ-
ing an asset freeze.
“Funds” is the most exhaustively defined term encountered; referring to all manner
of payment method from physical cash and checks, to deposit accounts and balances,
to publicly and privately tradable securities, to interest and dividends, to credit and
financial commitments, to letters of credit and bills of lading and sale.
4 While a date of birth (DOB) may be helpful in differentiating a targeted individual from a similarly
named person not targeted by sanctions, obtaining accurate / reliable DOBs may be an issue for
those born in developing countries.
Sanctions | 281
“Economic Resources” once again refer to any assets of any kind that can be used to
obtain funds, goods, or services.
“Goods” refers generally to “items, materials, and equipment”.
“Dealing with Funds” refers to any interaction with funds that may change their “vol-
ume, amount, location, ownership, possession, character, destination or other change
that would enable the funds to be used, including portfolio management”.
“Dealing with Economic Resources” relates generally to any use of economic resources
in order to procure funds, goods, or services. This expressly excludes the everyday use
of one’s own economic resources.
“Making available funds or economic resources directly or indirectly to or for

the benefit of a designated person” is not defined in the legislation, so that these
words carry their ordinary meaning.
If a financial institution finds itself in physical possession of a designated person’s

funds or economic resources, they are to immediately freeze the assets, and refrain
from dealing in the assets or making the assets available to the designated person.
Additionally, if the funds are being frozen pursuant to EU sanctions or the Terrorist
Asset Freezing Act of 2010, specific information must be provided to OFSI.
Similar to the OFAC sanctions of the United States, OFSI in the United Kingdom does
provide licenses that permit a firm to be engaged in conduct that would otherwise be
prohibited. The licenses can only be issued pursuant to specific licensing grounds,
and cannot be issued retrospectively. Further, OFSI can attach what it determines are
appropriate conditions to the use of any license.
Grounds for obtaining an OFSI license are specifically enumerated, and include:
• Basic needs of the designated person and his or her dependent family.
• Payment of reasonable legal fees and disbursements.
To view the full OFSI consolidated financial sanctions list, visit https://www.gov.
uk/government/publications/financial-sanctions-consolidated-list-of-targets/
consolidated-list-of-targets.
To view the OFSI financial sanctions guidance, visit https://www.gov.uk/government/

publications/financial-sanctions-faqs.
To view the FCDO UK Sanctions List, visit https://www.gov.uk/government/publications/

the-uk-sanctions-list.
282 | Chapter 9
ACTIVITY:
Explain how “Name Match” differs from “Target Match”.
Subsection 9.4.3.3 Hong Kong
Hong Kong follows the UN sanctions programme through the “United Nations Sanctions
Ordinance” with the exclusion of any sanctions against the People’s Republic of
China. The Commerce, Industry and Tourism Branch of the Commerce and Economic
Development Bureau maintains lists of nations and persons subject to UN sanctions.
In addition, the Hong Kong Monetary Authority, as part of its guidelines on anti money
laundering and counter terrorism financing, mandates that its authorised institutions
maintain certain lists, including “individuals and entities designated under the United
Nations (Anti-Terrorism Measures) Ordinance, United Nations Sanctions Ordinance
and US Executive Order 13224 for client and transaction screening purposes.”
FACTFIND
For more information on the Hong Kong’s Commerce, Industry and Tourism
Branch of the Commerce and Economic Development Bureau website, and list
of sanctioned people and nations, visit: https://ezine.eversheds-sutherland.
com/global-sanctions-guide/hong-kong/.
For more information on the Hong Kong Monetary Authority’s (HKMA)
sanctions guidelines for authorised institutions, visit: https://www.hkma.
gov.hk/eng/key-functions/banking/anti-money-laundering-and-counter-
financing-of-terrorism/sanctions-related-notices-updates.
Subsection 9.4.3.4 Singapore
Singapore implements UN sanctions. The Monetary Authority of Singapore (MAS)

has the authority to impose targeted financial sanctions against persons and nations
identified by the UN. MAS regulations require that banks: freeze the funds of sanc-
tioned entities, refrain from entering into transactions where one or more parties is a
sanctioned entity, and give MAS information related to funds of a sanctioned entity.
FACTFIND
For more information the Monetary Authority of Singapore and their sanctions
regulations that apply to banks, visit: https://www.mas.gov.sg/regulation/an-
ti-money-laundering/targeted-financial-sanctions.
Sanctions | 283
Subsection 9.4.3.5 People’s Republic of China
For much of the previous century and the early 2000s, the People’s Republic of China
(PRC) generally declined to utilize economic sanctions against foreign states and in-
stead focused on its internal development as well as matters much closer to its own
sphere of influence. The PRC’s reluctance to utilise sanctions was largely due to its
interest in developing global economic relations to bolster China’s own prosperity and
modern development. In fact, during the early 2000s neither the United States or China
viewed the other’s economic development as strategically worrisome. More recently,
however, China’s appetite for developing and employing a unilateral sanctions regime
has grown in tandem with its own global economic strength, all amidst escalating trade
and national security tensions with the United States.
On 19 September 2020, the PRC Ministry of Commerce issued its Provisions on the
Unreliable Entity List (the Provisions). The Provisions designate foreign entities which
the PRC considers objectionable to the economic development of its own businesses and
individuals. Subsequently, on 9 January 2021, the PRC Ministry of Commerce enacted
Rules on Counteracting Unjustified Extra territorial Application of Foreign Legislation
and Other Measures (the Blocking Rules). These Blocking Rules were designed to counter
“unjustified” foreign sanctions targeting Chinese businesses and individuals and they
generated significant concerns for multinational firms, including Chinese affiliates of
non Chinese businesses. These Provisions and Rules indicated the PRC’s development
of a national sanctions policy. While these Provisions and Blocking Rules did not carry
the force of law in China, they left the PRC Ministry of Commerce with considerable
discretion in interpreting and implementing these regulations.
As of 10 June 2021, however, the PRC National People’s Congress passed the Foreign Anti
Sanctions Law (PRC Sanctions Law), which became effective immediately. Comprised of
16 Articles, the primary purpose of the PRC Sanctions Law is to counter “discriminatory
restrictive measures”, i.e. foreign sanctions, whether multi or unilateral, targeting Chinese
individuals or businesses. It vests the PRC Ministry of Foreign Affairs, a department of the
PRC State Council, with powers of “determination, suspension, modification, or cancellation
of countermeasures.” (Article 9). These “countermeasures” will aim to oppose perceived
foreign violations of “international law and basic norms of international relations”, i.e.
“discriminatory” measures against China originating from “persons or organizations that
directly or indirectly participate in the drafting, decision making, or implementation of the
discriminatory restrictive measures.” (Article 4). That the PRC Sanctions Law is worded so
broadly suggests that any unilateral sanctions the State Council deems “discriminatory”
and undermining of its sovereignty could be subject to countermeasures.
Importantly, Article 6 of the PRC Sanctions Law states available penalties for individuals
or firms in breach of the countermeasures, namely denying visas or entry into China or
284 | Chapter 9
deportation therefrom; freezing or seizure of assets; prohibiting transactions or relevant

cooperation within mainland China; and “other necessary measures.” The PRC Sanctions
Law also codifies a private right of action whereby parties may petition Chinese courts
for redress and damages where their interests are undermined by opposing parties vi-
olating relevant countermeasures. Article 5 of the Law grants the State Council broad
authority to levy distinct countermeasures against persons or entities of specific relation
to those on the “countermeasure list” such as “spouses” or “immediate relatives”; “senior
managers”; organisations where individuals already on the countermeasure list serve as
“senior management” or that participate in operations. Ultimately, the enactment of the
PRC Sanctions Law poses significant, global conflict of law issues, and it remains to be
seen how the PRC State Council, as well as Chinese courts, will interpret and implement
the Sanctions Law and if any particular guidance will be forthcoming.
To view an unofficial translation of the new PRC Anti Foreign Sanctions Law, visit
https://www.chinalawtranslate.com/en/counteringforeignsanctions/.
Subsection 9.4.3.6 Other Jurisdictions
To access information regarding sanctions regimes not listed above, a first step is to search
on the internet for the relevant governmental department that administers sanctions
in that jurisdiction. Most nations make their sanctions easily accessible so they can be
noted, observed, and followed. Banks may also contact export / import organisations
and licensing agencies for information. Additionally, banks can utilise the services of
third party vendors that collect, compile, and disseminate sanctions lists against which
persons, organisations, and names can be checked. Such vendors also offer automated
solutions for checking names in transactions and databases against these lists.
Section 9.5 How to Detect Sanctions Violations
Economic sanctions can be difficult to manage, particularly at a multinational financial

institution that can find itself subject to numerous, sometimes contradictory, sanctions
regimes. Any sophisticated and international financial institution needs a comprehensive
system in place to ensure it does not find itself in violation of a sanction. This includes
training its staff and updating the staff on changes to the regulatory landscape.
As part of standard compliance measures, a financial institution should utilise auto-

mated screening software to check names, companies, and nations against all of the
applicable sanctions lists. These software systems screen every incoming payment
order for names or aliases on the SDN list, or association with target countries. Some
systems refer flagged transactions to a reviewer, while others even automate the re-
viewing process. Often banks will rely on third party vendors to provide such services.
Sanctions | 285
The use of an automated system will not serve as an absolute defence in criminal or
civil proceedings based on sanctions violations. However, it does work in favour of a
defendant bank when determining possible mitigation, in particular if such an auto-
mated system is employed along with a good faith manual and electronic compliance
efforts throughout the institution and its operations.
The Wolfsberg Group, Trade Finance Principles (2019) sections 1.4.1(b)(i) & (ii) (National
and Regional Sanctions, Embargoes and NPWMD / Application of Controls) state:
i. The controls to be applied in relation to complying with Sanctions, Embar-

goes and [Non Proliferation of Weapons of Mass Destructions] include cus-
tomer screening (both new and existing customers), transaction screening,
payment screening and document screening.
ii. The application of certain existing and appropriate financial crime controls
may be considered relevant for the purpose of complying with national and
regional sanctions and embargoes and [Non Proliferation of Weapons of
Mass Destructions]. More specific guidance with regard to the nature and
extent of controls that should be applied together with a description of the
limitations faced by [Financial Institution]s, are set out in Section 2 of the
Core Principles Paper: Control Mechanisms.”
Additionally, sections 2.4.1 and 2.4.5 (Control Mechanisms / Activity Based Financial
Sanctions) state:
“Where the target of the relevant sanctions is indicated by industry, activity,
geographical location (not country specific) or related to a sanctioned entity
and not specifically identified by name, it makes any effective screening of
a transaction by [Financial Institution]s exceptionally difficult, regardless of
whether automated or manual processes are used.”
“[Financial Institution]s should have robust list management processes and

procedures in place to assist in reducing the numbers of repeat ‘False Positive’
hits. This is to help reduce the possibility of too many false positives obscuring
true positive hits and causing reviewers to miss actual issues.”5
It is imperative that financial institutions screen new customers against sanctions

lists before a customer relationship is to be initiated. Financial institutions must also
periodically screen existing customers against such lists to ensure that they comply
with the various applicable sanctions regimes, especially to determine whether any
changes in the sanctions regulations or the customer and its operations need reaction
2019.pdf.
286 | Chapter 9
by the bank. Financial institutions should also conduct a sanctions screening of the
parties to every trade transaction that it is helping to facilitate. A financial institution’s
compliance programme should also set forth proper guidelines for how much time can
pass between a sanctions check and a transaction’s occurrence before another sanc-
tions check is required. It is important to limit the amount of time passing between
checks as the SDN lists are constantly changing, necessitating regular screening by
the financial institution. The key point at which a check needs to be performed is the
point at which money or other assets are being transferred into or out of the bank or
between accounts on the financial institution’s books.
While using databases and searching for SDNs is an effective tool, it is only effective
if the proper lists are consulted. So, which lists should be used when conducting auto-
mated checks? Unfortunately, there is not one answer. When dealing with sanctions,
their scope and applicability depends on the governing law.
For a financial institution that is incorporated in the United States, U.S. sanctions
must be observed regardless of where the transaction is taking place. Additionally, a
financial institution must check against the sanctions lists of any nation that is party
to a trade agreement with the U.S. that requires U.S. entities to observe that nation’s
sanctions, for example, through the North American Free Trade Agreement (NAFTA)
or the World Trade Organization (WTO). In addition, if the transaction is booked at a
branch of a U.S. bank outside the U.S., then the sanctions lists of the nation where the
transaction is booked should be checked, as well as sanctions lists of the other nation(s)
involved in the transaction.
For a financial institution that is incorporated outside the U.S. but operates in the
U.S., matters are even less clear. The list that should always be consulted is that list of
a nation where the transaction is booked, and the list of the nation(s) involved in the
transaction. Whether a non U.S. financial institution must follow the sanctions list of
its home nation when the financial institution is located outside that nation depends on
the home nation and its approach and legislation. Besides the U.S., it is rather unclear
which, and to what extent, nations will attempt to exercise extraterritorial jurisdiction.
Financial institutions should also note that, besides the nations involved in a transaction,
the currency involved can affect sanctions by itself. The U.S. has taken action against
financial institutions for violation of U.S. sanctions merely for having conducted, outside
the United States territory, a transaction in U.S. dollars. Given the frequency with which
international transactions are regularly completed in U.S. dollars, the potential applica-
tion of U.S. sanctions to international trade is almost omnipresent. Similarly, the U.S. has
exercised jurisdiction when the only connection to the U.S. was that information passed
through computer servers located in the U.S. The lesson is that financial institutions
Sanctions | 287
should be alert and aware to the fact that they can be subject to a nation’s sanctions
regime despite not dealing in that nation, or directly with a party from that nation.
The Wolfsberg Group, Trade Finance Principles (2019) section 1.6.1(a) (Recommenda-
tions) provides:
“The provision and maintenance, by relevant government authorities, of up to

date suitably standardised lists of sanctioned entities and individuals, including
appropriate identification data points and other relevant information to facilitate
(i) effective screening and searching against customer databases and (ii) efficient
and effective screening of transactions and relevant parties and information by
[Financial Institution]s and other relevant stakeholders involved in the detection
and prevention of Financial Crime.”6
While sanctions can seem unwieldly and compliance with them difficult at times, unlike
other trade based financial crimes, there is less subjectivity and fewer judgment decisions
to be made by the compliance officers when dealing with sanctions as opposed to money
laundering, bribery, commercial fraud, or even terrorism financing. A party to a transac-
tion is either sanctioned, be it the fact that a party is listed as an SDN, or a party is from
a sanctioned nation, or they are not. If the party is sanctioned, financial institutions are
able to classify the party as such in connection with establishing an account, monitoring
a transaction, or in examining a required document under a letter of credit, and through
automated checking. If a party to a transaction is on a sanctions list or, when the bank’s
due diligence procedures determine that the true beneficial owner of a company (non
sanctioned company) is a sanctioned company or individual, or that the identify of parties
to a transaction are unknown, the bank should take the appropriate action.
Furthermore, financial institutions must be cognisant of situations were neither party

is an SDN or from a sanctioned nation but the transaction interacts with a sanctioned
nation in some way, such as either the goods originated from a sanctioned nation or
they passed through a port of a sanctioned nation. Financial institutions should look to
transactional documents for this information, and a bank may reasonably rely on such
documents to determine if the goods were procured in a way that violates sanctions or
not. Financial institutions should refer to specific sanctions programmes to determine
what is allowed and what is not. Goods that pass through a sanctioned nation’s territorial
waters, or merely stop at a port in a sanctioned nation, are not likely to be considered
goods originating in that nation, and not to be seen as goods that can be classified as
transhipment, and not as having transited through that nation. Therefore, those goods
will probably not be subject to sanctions. However, if there is actual transhipment, that
2019.pdf.
288 | Chapter 9
is the goods are transferred from one vessel to another in a sanctioned port, then it is
more likely that those goods will be subject to sanctions. In such a case, the financial
institution must take appropriate steps.
Banks must also consider the amount of risk they are willing to undertake. Some
banks may, as a general rule of precaution, stay aware from any transactions that may
even hint at a sanctions violation. Other banks may employ extra measures, such as
maintaining lists of vessels subject to sanctions or tracking the movement history
of a vessel. Additional banks may simply rely on their compliance staff to determine
whether they should participate in a particular transaction on a case by case basis. In
a sense, sanctions compliance, similar to all trade based financial crime compliance,
comes down to a risk based analysis of how much risk the bank is willing to undertake
versus the amount of precautions it requires.
Subsection 9.5.1 Trade Finance Guidance to Address Illicit

Shipping and Sanctions Evasion Practices
In May and July of 2020, multiple U.S. Departments7 and the U.K. OFSI,8 respectively,
released shipping guidance to address illicit shipping and sanctions evasion practices
for banks engaging in transactions that are potentially at risk of violating their various
sanctions regimes. The U.S. guidelines identify four steps that financial institutions
should take with regards to the risk assessment related to maritime customers and
sanctions evasions. These include: (a) identifying commodities and trade corridors
susceptible to transhipment and ship-to-ship transfers and the extent of their use by an
institution’s maritime industry customer; (b) Results from an assessment of the nature
of each client’s business, including the type of service(s) offered and geographical pres-
ence; (c) Client activity for transactions inconsistent with the client’s typical business
practices, to include when clients acquire new vessels; and (d) Client acquisition or
sale of vessels to determine that the client’s assets do not include blocked property.
The U.S. advisory updates banks on what they should be monitoring in the transactions
they finance, including deceptive shipping practices such as disabling or manipulating
the Automatic Identification System (AIS) on vessels, physically altering vessel identi-
fication by painting over an IMO number, falsifying cargo and vessel documents, ship to
ship transfers, voyage irregularities, false flags, and complex ownership or management.
7 To address and “counter current and emerging trends” the U.S. Department of Treasury,
Department of State and U.S. Coast Guard jointly published a Guidance to Address Illicit Shipping
and Sanctions Evasion Practices (14 May 2020). The U.S. guidance notes that about 90% of global
trade involves maritime transport. It is intended to update and bolster prior advisories on
shipping issues, particular to Iran, North Korea and Syria. To view the U.S. advisory, visit https://
home.treasury.gov/system/files/126/05142020_global_advisory_v1.pdf.
8 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/948299/OFSI_Guidance_-_Maritime_.pdf.
Sanctions | 289
Subsection 9.5.2 Disabling or Manipulating the Automatic

Identification System (AIS) on Vessels
All cargo ships over a certain gross tonnage are required to have an AIS for maritime
safety and location tracking. Disabling or manipulating the AIS is the practice of
changing the signal or disabling it altogether while performing an illicit or sanctioned
activity, such as disabling a ship’s AIS while in the harbour near the Port of Fujairah
and making the 22 hour round trip to the Iranian port of Bandar Abbas to deliver goods
to a sanctioned country. Although less commonly utilized, one could also change the
AIS location signal in an attempt to make a particular ship appear lawfully positioned
while it is in fact at or near a sanctioned port.
Subsection 9.5.3 Physically Altering Vessel Identification
This is the much more analogue practice of painting over the IMO (International
Maritime Organisation) number on a ship so that physical identification is impossi-
ble, much as covering a vehicle’s license plate in some countries would make vehicle
identification impossible.
Subsection 9.5.4 Falsifying Cargo and Vessel Documents
A practice as old as shipping itself, falsifying shipping documents such as bills of lading
or certificates of origin, or even the vessels used in the transaction are often tools used
by sanction evaders to hide anything from the list of last ports of call to chemicals or
dual use goods on board vessels.
Subsection 9.5.5 Ship-to-Ship (STS) Transfers
A common part of legitimate shipping practices, transhipment ensures goods can go

from major global ports to the more minor ports in a timely and economic manner. The
practice of ship-to-ship transfers (STS), while not necessarily illegitimate, but often
dangerous (as transfers occur between ships at sea, either in anchor or underway and
often at night), allows for ships to move goods from their vessel to another that will
deliver the goods to a sanctioned country. The goods transferred are typically bulk
cargo, liquid petroleum or coal. STS may also conceal the origins of goods as well.
Subsection 9.5.6 Voyage Irregularities
Often working hand in hand with disabling AIS, voyage irregularities are attempts to
hide transport of goods to sanctioned jurisdictions by using complicated routes, or
making stops at ports such as Fujairah, UAE, so as to make a fast run to Iran and back
without raising eyebrows. These irregularities are spotted by reviewing the historical
290 | Chapter 9
travel of said ship, historical shipping routes used by your customers (and monitoring
for any changes), and comparing the most common route from port A to port B to the
route to be used in the transaction.
Subsection 9.5.7 False Flags and Flag Hopping
The flag state of a merchant vessel identifies the jurisdiction under whose laws the
vessel is registered or licensed, and is commonly deemed the nationality of the ves-
sel. “Flags of convenience” is the legal but contentious practice of registering a ship
in a state other than that of the ship’s owner, e.g., a merchant vessel owner based in
the U.S. may register their vessel in Panama to potentially reduce operating costs, or
perhaps avoid U.S. regulations, inspections, and scrutiny, as the “flag” of the vessel
determines the taxing jurisdiction. “False flags” are when bad actors falsify the flag of
their vessel to mask illicit trade. This is often combined with “flag hopping”, whereby
the ship may register with new flag states quite often to avoid detection. Using IMO
and flag historical data,9 one can determine the frequency of flag changes, and this is
often an indicator of potential fraud or sanctions violations.
Subsection 9.5.8 Complex Ownership or Management
As the Suez Canal blockage by the Ever Given in March and April of 2021 demonstrated,
even in a legitimate instance, identifying ship ownership is a complex and complicated
process. Bad actors will attempt to use this complex relationship between owner, builder
and operator to hide ownership through complex business structures, often involving
multiple shell companies, many levels of ownership, and complicated ship management
arrangements “to disguise the ultimate beneficial owner of cargo or commodities in
order to avoid sanction or other enforcement action”.10 Banks and financial institutions
must review ownership of goods and vessels as part of due diligence, and identifica-
tion of these complex ownership and management structures should cause a bank to
perform enhanced due diligence, even up to and including declining the transaction
and reporting it to the proper authorities.
ACTIVITY:
How does your organisation identify sanctioned regimes and violations?
9 A number of free and paid vessel search services exist and should be utilized; a freely available
source is the U.S. Coast Guard Maritime Information Exchange, https://cgmix.uscg.mil/psix/
psixsearch.aspx.
10 https://home.treasury.gov/system/files/126/05142020_global_advisory_v1.pdf.
Sanctions | 291
Image 1: Al Basra Oil Terminal and Sanctions Evasions Concerns

Image courtesy of S&P Global
The port of Basra does not have the physical capacity to accept ultra large crude carriers
(ULCC) due to narrow inland waterways and lack of facilities. To facilitate the export of Basra
heavy crude oil, there exists in the Persian Gulf, about 60nm south of the port of Basra,
the Al Basra Oil Terminal (ABOT). This terminal is a deep-sea offshore facility designed to
extract oil from the Iraqi oilfield overland to Al Faw and then continue subsea to ABOT.
From the ABOT facility, tankers are able to conduct terminal visits and STS engagements
for the shipment of crude oil.
Risks: East of the ABOT facility is Iran. Iranian flagged vessels travel near ABOT constantly,
and due to geography, AIS can go dark. The risk is that since legitimate STS are happening all
the time at ABOT, and Iranian flag vessels are passing near, and there are frequent instances
of AIS outages, could something illicit be happening. These scenarios all pose a challenge
to FIs when deciding an action is suspicious or normal in the context of global compliance
recommendations. See related section 9.5.5.
292 | Chapter 9
Image 2: Vessel Sea Cliff and AIS Manipulation

The suspected Liberian vessel named Calliop in the illustration above was seen during its voyage
to Venezuela using a fraudulent AIS signal and changing names under the Palau (an island nation
in the western Pacific Ocean) and Iranian flags. The vessel vessel Calliop was seen via AIS first
sailing in proximity to the Bonny Offshore Terminal in Nigeria, and at the same date/time in De-
cember, another vessel appears on the same voyage track (vessel NDROS, with Palau flag), with
the same draught and speed. Vessel NDROS later separated from that path, going in a different
directions with a new destinations. The suspect Liberian vessel Caliop kept its original destina-
tion to the Bonny Offshore Terminal, and eventually arrived on December 1, 2020, remaining
there for 15 days. Then, the Palau vessel NDROS vessel appeared with a destination of Trinidad.
At this point it is suspected that the Liberian flagged vessel Calliop took the place of the Palau
flagged vessel, and a separate ship ventured towards Nigeria covering the Liberian flagged
vessel’s tracks.
When the Palau flagged vessel approached Venezuela on December 17, 2020 its speed dropped
to 0 just 56nm away from the Jose Terminal, Venezuela and at this point another vessel is seen,
the Iranian flagged vessel, with the same draught as the previous two vessels and with the
destination of Trinidad. In proximity to Venezuela all AIS signals for the ships involved are lost
and there is no visibility for three days.
Clearly, AIS spoofing is compliacated to track and monitor manually. There are free and paid
vessel tracking resources that can assist FIs with this. See related sections 9.5.2 and 9.5.7.
Sanctions | 293
Image 3: A Vessel’s AIS Going Dark near Venezuela

Beginning mid-December 2020, the vessel in the illustration above went dark for a total of
almost 28 days, only to reappear off the coast of Brazil in mid-January 2021. At the time
of going dark, the vessel had a draught of 8.3m (ballast), with its destination indicated as
Barranquilla, Colombia. Considering the heading, speed, and proximity at the time to the
port of Barranquilla (30nm out), this seems somewhat suspect.
The vessel is then seen again 30nm from Fortaleza, Brazil where its destination changed to
Malaysia, and its draught updated to 13.8m (laden), suggesting a potential loading of cargo
while not seen on AIS. While passing through the Strait of Malacca on January 20, 2021, the
destination changed to Shanghai, North China suggesting it was the discharge destination.
The overall behaviour of this vessel is highly suspicious and in line with evasion techniques
previously seen for vessels operating in this area. The likelihood of this vessel loading cargo
at a Venezuelan port was high. See related section 9.5.2.
294 | Chapter 9
Image 4: Vessel Yaz, Evading Sanctions with Dark AIS

Example of deceptive practices in international maritime trade

An example of deceptive practices has been witnessed in a recent Danish court case involving
a bunkering firm and Russian oil tankers allegedly violating sanctions by delivering jet fuel
to Syria and resulting in fines and penalties of almost DKK 50 million ($7.5 million) plus a
four-month suspended prison sentence for the CEO.8
A Russian oil tanker, Yaz (IMO: 9735323), was confirmed to have loaded oil cargoes from
Greece, Turkey, Russia and Cyprus and delivered the commodity to the port of Banias in
Syria. The vessel did not have a port call for the cargo but its route through the Aegean
Sea, coupled with a nearly six-day AIS outage suggested to investigators that a port call in
Syria could have occurred. The prosecution presented records via the port inspection and
authority team at Banias, Syria that the Yaz had indeed visited. Indeed, these ‘sanctioned
runs’ allegedly occurred 33 times. Such action underlines the commitment by U.S. authorities
and others to counter sanctions evasion in shipping. In this respect, the OFAC guidelines
highlight specific checks for port authorities, commodity brokers, flag states, ship owners,
vessel crews and FIs. See related sections 9.5.2 and 9.5.6.
Sanctions | 295
Section 9.6 Sanctions Responses
It is difficult for a financial institution to set up a comprehensive compliance programme

to deal with all sanctions programmes. Each sanctions regime may have unique features
and a sanctions programme within a regime may be unique from other programmes
in the same regime, which means each programme must be individually analysed to
ensure compliance. While many sanctions programmes will share common elements,
particularly sanctions programmes issued by the same regime, there may be discrete
differences that could have drastic effects on how a financial institution must act or
react. Therefore, a financial institution must develop a sanctions compliance programme
that is able to be adapted to meet the ever changing needs of newly issued sanctions
as well as a compliance programme designed to incorporate changes to existing sanc-
tions programmes. Given the extent of penalties for sanctions violations as well as the
immeasurable reputational costs and loss of business, it is imperative that a financial
institution’s compliance programme stay current, and that it have internal audit pro-
cedures in place to ensure it sufficiently does so.
The Wolfsberg Group, Trade Finance Principles (2019) section 1.5.3 (Challenges) provides:
“Differences in the scope and application of sanctions by various jurisdictions,

which may create disparate or conflicting compliance or legal obligations, may
present challenges for [Financial Institution]s relating to specific transactions and
the assessments of a Customer or Non-Customer Relationship Bank in relation to
FCC systems and controls.”11
Subsection 9.6.1 Compliance with a Sanctions Programme
How should a financial institution respond if it appears that a transaction involves a

sanctioned country, individual or organisation? The first step is to look at the specific
sanctions programme that is involved. It may contain specific or unique instructions
for banks to follow.
Next, the financial institution should inform the relevant regulator or regulatory
authority that they have encountered a sanctions violation. Financial institutions are
then required to block any assets involved in transactions to or from a sanctioned party,
unless such a transaction is allowed under a license.
A common misconception is that a financial institution cannot allow a transaction to

proceed when a sanctioned party is involved. For example, under a letter of credit or
2019.pdf.
296 | Chapter 9
independent guarantee transaction, a bank will make payment upon a complying pre-
sentation of documents. However, the payment will be made into a blocked account and
not into the beneficiary’s account. This process allows the bank to honour the letter of
credit or guarantee without violation of the sanctions programme. The purpose of this
system is to set aside the funds for when the sanctions are lifted and the funds can be
legally paid, and note that the account must be interest bearing. Finally, it is important
that the banks consult the specific sanctions programme for guidance as to what infor-
mation they can disclose, and to whom, regarding the blocking and freezing of funds.
It should also be noted that under most, but not all, sanctions programmes, financial
institutions are in fact allowed to participate in a transaction that involves a sanctioned
party. Note that there are some exceptions to that rule, as certain sanctions programmes
prohibit dealing with a sanctioned party entirely. However, as previously stated, any
funds meant for a sanctioned party must go into blocked accounts and the transaction
must be subsequently reported to the relevant governing body for that jurisdiction.
As above, the purpose is to set aside the funds for when the sanctions are lifted and
the funds can be legally paid, and note that the account must be interest bearing. In
addition, under certain sanctions programmes, any documents received must also be
retained and not returned to the sanctioned party. These measures help with the effort
of freezing and blocking of assets belonging to, or destined for, sanctioned parties.
There is an exception to the rule of blocking funds, namely, that funds need not be
blocked if the non sanctioned party to the transaction has a license, or some other
form of waiver, that allows them to deal with a sanctioned party. Under the U.S. OFAC
regime, there are two types of license, general and specific. A general license is broad
and allows for anyone to deal with a sanctioned party for a particular reason that is
specified under the general license. For example, a U.S. company could deal with North
Korea for the purpose of providing medical supplies. A specific license is applied for
by a party for the purpose of dealing with a sanctioned party, and is only granted on
a case by case basis.
Another problem occurs when two sanctions programmes issued by two distinct sanc-
tions regimes overlap or in some cases conflict with each other. In some situations,
compliance with a sanctions regime can cause a bank to run afoul of a nation’s anti
boycott polices. For example, a sanction by one country can be deemed to be a boycott
by another country that is not sympathetic with it. In response, those countries may
prohibit its nationals from enforcing it. It may, therefore, be a violation of an anti boy-
cott provision to give effect to that sanction. A case in point is the European Union’s
Blocking Statute that prohibits compliance with certain sanctions against Cuba and
Iran that were imposed by the US government. [Suggestion: Insert reference to article
by Karl that will appear in DCW 2021, July-August] These situations can be difficult for
a bank to manage. Banks should rely on their in house counsel and perhaps external
Sanctions | 297
counsel to develop a strategy for how to respond. Banks will have to analyse the con-
flicting sanctions programmes and determine the proper method for them to proceed.
To aid compliance personnel in developing efficient and effective sanctions compliance

programmes, the U.S. OFAC published A Framework for OFAC Compliance Commitments
(May 2019). While noting that risk based sanctions programmes vary across different
organisations and banks, the document states that “each program should be predicated
on and incorporate at least five essential components of compliance: (1) management
commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and
(5) training.” The perspective of this OFAC guidance stems from the decision making
processes that OFAC makes when assessing whether or not a civil monetary penalty
is appropriate and grading the degree of the suspected sanctions violation(s) at issue.
Often a bank’s compliance programme is either entirely missing or lacking in one or
more of the above essential elements. This framework also includes examples of miti-
gating factors where, although a sanctions violation(s) occurred, OFAC, in applying its
Economic Sanctions Enforcement Guidelines, will consider the effectiveness and quality
of the target sanctions compliance programme in weighing OFAC’s response.
As “one of the most important factors” in establishing an effective sanctions compli-

ance programme, the framework offers insight on what OFAC considers management
commitment. Appropriate management commitment involves (1) senior management
review and approval of the sanctions programme; (2) that the sanctions compliance team
is “delegated sufficient authority and autonomy to deploy its policies and procedures
in a manner that effectively controls the organization’s OFAC risk”; and (3) that senior
management provides adequate recourses to its sanctions compliance personnel so as
to properly establish and maintain an effective programme. A particular indication to
OFAC of management commitment is the appointment of a sanctions compliance officer
(the framework notes that this individual may assume roles beyond such, depending
on the size and resources available to the organisation).
The framework continues by offering insight on each of the aforementioned essential

elements of an effective sanctions compliance programme; however, perhaps the most
helpful section of the framework is the second part of the document which addresses
“root causes” of sanctions compliance violations as based on previous OFAC investi-
gations and administrative actions. Perhaps unsurprisingly, OFAC often encounters
organisations that have failed to formally adopt a sanctions compliance programme,
thereby rendering adequate compliance practically impossible. OFAC notes that this
issue is “frequently” identified as an “aggravating factor” in assessing civil penalties.
Another root cause of failures regards the screening or filtering systems that banks
employ to detect sanctions issues. OFAC often encounters organisations that have
failed to (1) regularly update SDN or SSI lists; (2) incorporate important identifiers such
as the “SWIFT Business Identifier Codes”; or (3) utilize systems or processes which
298 | Chapter 9
can account for slight spelling variations among sanctioned individuals, countries or
organisations. Another notable root cause of failure involves organisations where, if
a sanctions programme is adopted at all, the programme is decentralised such that
“personnel and decision-makers [are] scattered in various offices or business units.”
Such decentralisation can lead to improper understanding and application of OFAC
regulations, miscommunications, and, perhaps most critically, no formal “escalation
process” for handling high risk transactions.
To view the Framework for OFAC Compliance Commitments (May 2019), visit:
https://home.treasury.gov/system/files/126/framework_ofac_cc.pdf.
ACTIVITY:
What is a common misconception in transactions when a sanctioned party
is involved?
Subsection 9.6.2 Export Licenses
Financial institutions are generally not required to check for an export license when
facilitating transactions for their customers. However, many banks choose to do so as
part of their general procedures for reputational reasons. The negative news and the
public outcry against a bank that allowed for weapons or other potentially dangerous
goods to fall into the wrong hands is incentive enough to take precautions beyond
what is actually required by law.
Subsection 9.6.3 Consequences of Sanctions Violations
Failure to obey a sanctions regime can have serious consequences for a bank. First, it
can have severe legal consequences. In the past, financial institutions have been fined
billions of U.S. dollars for violating sanctions. In one instance, a bank was fined over
USD 8 billion for, among other things, violation of a sanctions programme. However,
while billions of dollars in fines can be harmful to banks, sanctions violations could
lead to the catastrophic penalty of losing the license to conduct banking operations
in a major world banking centre, such as New York, London, Hong Kong, or Singapore.
The loss of such a license could potentially devastate even the largest banks.
Second, beyond criminal or civil penalties, violations of sanctions can be devastating

to a financial institution’s reputation. A financial institution may lose business if it
became public that they helped deal with terrorist organisation or hostile nations.
It may seriously harm the bank’s ability to initiate and keep correspondent banking
relationships with other banks, which in turn would limit its ability to conduct inter-
national transactions and services for its own customers.
Sanctions | 299
FACTFIND
For a sample of penalties of sanctions violations, read the Office of Foreign
Assets Control, Economic Sanctions Enforcement Guidelines, available at:
https://home.treasury.gov/system/files/126/fr74_57593.pdf.
Subsection 9.7.1 Summary of Sanctions
Chapter 9, Sanctions, identified what sanctions are, the purpose of sanctions, types
of sanctions, including financial or trade based, the governing bodies who implement
sanctions, and how those sanctions are implemented. This chapter also discussed the
role that financial institutions play in complying with sanctions programmes.
Go to the following URL, read the post entitled “US fines Deutsche Bank $258m
for sanctions violations”, and then answer the questions below.
https://sanctionsassociation.org/deutsche-bank-settles-ofac-violations-
with-258-million-payment-monitor-and-termination-of-employees/.
• What sanctions did Deutsche Bank violate?
• Identify at least two processes the New York State Department of Financial
Services (NYDFS) indicates were used by Deutsche Bank (DB) to conduct
the transactions.
In the course of this chapter, the student studied the concept of sanctions within
the context of trade based financial crime. Consider the following questions:
• What tools and practices does your bank use to comply with sanctions
programme?
• How does your bank monitor transactions to ensure sanctions are not
being violated?
FACTFIND
As the breadth and complexity of sanctions only intensifies, it has become
commonplace for banks to add disclaimers in their letters of credit absolving
banks from the effect of application of sanctions despite attempts by the
Banking Commission of the International Chamber of Commerce (ICC) to
300 | Chapter 9
dissuade use of such clauses. Even if well drafted, which is often not the
case, such clauses undermine the LC obligation and appear to be arbitrary.
For more on sanctions clauses, review the Guidance Paper on the Use of
Sanctions Clauses in Trade Finance-Related Instruments Subject to ICC Rules
(2014), available at https://iccwbo.org/publication/guidance-paper-on-the-
use-of-sanctions-clauses-2014/. The ICC issued an addendum to the 2014
guidance in May 2020. That guidance noted the “resurgence” of sanctions
clauses in trade products, describing many “witnessed in practice” rendering
those “trade finance instruments unworkable.”
To view the full 2020 addendum, visit https://iccwbo.org/publication/adden-
dum-to-guidance-paper-on-the-use-of-sanctions-clauses-2014/.
To view the IIBLP position visit, https://iiblp.org/sanctions-clause/.
What stance, if any, regarding the inclusion of sanction clauses in trade products
has your financial institution taken?
Question 9-1. What is the goal of economic sanctions?
Question 9-2. Under most sanctions programmes, what should be done with the
interdicted funds meant for a sanctioned party?
Question 9-3. Goods that pass through a sanctioned nation’s territorial waters,
or merely stop at a port in a sanctioned nation without being tran-
shipped, are subject to sanctions.
a) True, or
b) false?
Question 9-4. Identify the consequences of a violation of sanctions by a financial

institution.
Question 9-5. Which of the following are goals of the United Kingdom’s sanctions
policy? Select all that apply.
a) The policies seek to stigmatise or isolate a target politically.
b) The policies are used to protect the value of assets that have been
misappropriated from a country.
c) Sanctions are used to grant a target access to resources they would
need to enable them to continue offending behaviour.

Sanctions | 301
d) Sanctions policies seek to coerce a regime or individuals within a

regime to end or change their offending behaviour.
Question 9-6. Describe how sanctions issued by the UN vary with respect to goods
and targets.

Chapter 9 (Sanctions) discussed what economic sanctions are, the types of
economic sanctions and their purpose, and explains the specific sanctions
regimes. This Chapter explains how to detect sanctions violations and the
appropriate responses as well what consequences await banks that are non
compliant.

Part I introduced the student to Trade Based Financial Crime Compliance in
chapter 1, discussed Trade in chapter 2, Financial Crime Regulation in chapter
3, the structure of a Compliance Programme in chapter 4, the Exercise of Due
Diligence in chapter 5, and chapter 6 concluded with the Indicators of Trade
Based Financial Crimes.
Part II, Combating Financial Crimes, covered Anti Money Laundering in chap-
ter 7, Countering the Financing of Terrorism in chapter 8. This chapter dis-
cussed Sanctions. In chapter 10, the book will discuss Weapons of Mass De-
struction, Anti Bribery and Anti Corruption in chapter 11, Commercial Fraud
in chapter 12, and concludes with Anti Boycott in chapter 13.
10
Chapter 10
WEAPONS OF MASS DESTRUCTION
LEARNING OBJECTIVE
After studying this chapter, students should be able to demonstrate an
understanding of the perils of financing or facilitating the movement of weapons
of mass destruction and how financial institutions can assist in prevention.
CHAPTER OVERVIEW:
This chapter on Weapons of Mass Destruction discusses the various types
of weapons of mass destruction, explains the efforts of various inter gov-
ernmental and non governmental organisations and the financing necessary.
Finally, chapter 10 explains the role of banks in combating the proliferation
of weapons of mass destruction.

necessary for financial institutions to combat them. Chapter 7 discussed Anti
Money Laundering, chapter 8 treated Countering the Financing of Terrorism,
and chapter 9 addressed Sanctions. After this chapter on Weapons of Mass
Destruction, the Book will consider Bribery and Anti Corruption in chapter
303
304 | Chapter 10

Chapter 10 Weapons of Mass Destruction
Section 10.1 Importance
Subsection 10.1.1 Weapons of Mass Destruction Explained
Section 10.2 Types of Weapons of Mass Destruction
Subsection 10.2.1 Chemical Weapons
Subsection 10.2.2 Biological Weapons
Subsection 10.2.3 Nuclear and Radiological Weapons
Section 10.3 Efforts by the International Community and NGOs
Subsection 10.3.1 The United Nations
Subsection 10.3.2 Inter Governmental and Non Governmental Organisations
Section 10.4 Proliferation and Proliferation Financing
Subsection 10.4.1 Who
Subsection 10.4.2 What
Subsection 10.4.3 How
Section 10.5 The Role of Financial Institutions
Subsection 10.5.2 Setting Up the Account
Subsection 10.5.3 Transaction Monitoring
Subsection 10.5.4 Heightened Due Diligence
Subsection 10.5.5 Correspondent Banks
Subsection 10.6.1 Summary of Weapons of Mass Destruction
Section 10.1 Importance
From the perspective of a financial institution, action or inaction through either

inadvertence or negligence that contributed to production, movement, financing or
facilitating a Weapon of Mass Destruction (WMD), would result in penalties. An attack
with such a WMD that resulted in casualties and / or large scale devastation would have
even greater reputational consequences, far beyond any fines. As a result, financial
institutions have a serious interest in assisting in the prevention of WMD proliferation
and an even greater interest in making sure that they have not inadvertently assisted
in this process.
Subsection 10.1.1 Weapons of Mass Destruction Explained
Weapons of mass destruction are devices that can cause death or injury to a significant
number of people. Since such weapons exist and many of them are possessed by various
governments, the focus of concern in recent years has been on stemming their prolifer-
ation and, in particular, keeping them away from terrorists or rogue governments. The
principal means of limiting their proliferation is sanctions imposed by governments
Weapons of Mass Destruction | 305
and, to an extent with respect to the financial system, implemented by financial insti-
tutions. This topic was discussed generally in chapter 9 (Sanctions).
While the proliferation of weapons of mass destruction differs from terrorism financ-
ing which was discussed in chapter 8 (Countering the Financing of Terrorism), it is
related to that chapter in that terrorists and terrorist organisations are interested in
such weapons as a tool of terror. Because financing is needed to obtain weapons of
mass destruction, the financial system can be used to combat their proliferation and
minimise potential risks of a large scale disaster.
ACTIVITY:
What measures are in place at your financial institution to combat the prolif-
eration of weapons of mass destruction and the financing behind it?
The Financial Action Task Force (FATF), in its Proliferation Financing Report (18 June
2008) (hereinafter referred to as FATF PFR) warns that “[t]he threat of proliferation is
significant and the consequences are severe.” (FATF PFR § 4).1
Section 10.2 Types of Weapons of Mass Destruction
Weapons of mass destruction are generally understood as including biological, chemical,

or nuclear and radiological weapons, and related delivery systems. In recent decades,
the use of chemical, biological, and nuclear weapons has been a relatively small fac-
tor in the total amount of fatalities caused by wars, terrorism, or repressive regimes.
However, as the term “mass destruction” implies, just one attack could potentially
inflict catastrophic damage, making the proliferation of weapons of mass destruction
a significant security concern.
Subsection 10.2.1 Chemical Weapons
Chemical weapons are devices designed to cause death or serious harm to humans
through the use of chemicals and their toxic properties. While their use in warfare has
been traced back centuries, their prohibition is more recent. Early efforts date back to
1675 when France and some of the German states agreed to the prohibition of poison
bullets. Following the widespread use of chemicals in World War I, causing much horror
with relatively minor results in the general war effort, chemical warfare was outlawed
under the 1925 Geneva Protocol. One feature of chemical weapons which makes them
1 https://www.fatf-gafi.org/publications/methodsandtrends/documents/typologiesreporton
proliferationfinancing.html.
306 | Chapter 10
inefficient is that their propensity for wide dispersal as a gas or liquid makes it difficult
to apply them to strike specific targets, a factor which may explain the failure to use
such weapons to a significant extent in World War II.
In recent years, the global community has taken several steps towards preventing the
illicit sale and transport of chemical weapons. The Organization for the Prohibition
of Chemical Weapons (OPCW) is an international organisation that seeks to ensure
implementation of the Chemical Weapons Convention (CWC). Its membership is global;
only Egypt, Israel (has signed but not ratified the Convention), North Korea, and South
Sudan are not members as of March 2021. The goal of the CWC is to prohibit chemi-
cal weapons of mass destruction. It focuses on the creation, manufacture, retention,
transfer, storage, and use by nation states who are adherents of the Convention. The
OPCW has conducted more than 6,000 inspections according to its website.
The Chemical Weapons Convention (CWC) (1993) (Article 2 – Definitions and Criteria)
provides that “‘Chemical Weapons’ means the following, together or separately:
a) Toxic chemicals and their precursors, except where intended for purposes
not prohibited under this Convention, as long as the types and quantities are
consistent with such purposes;
b) Munitions and devices, specifically designed to cause death or other harm
through the toxic properties of those toxic chemicals specified in subparagraph
(a), which would be released as a result of the employment of such munitions
and devices;
c) Any equipment specifically designed for use directly in connection with the
employment of munitions and devices specified in subparagraph (b).”
FACTFIND
For the full text of the Chemical Weapons Convention, visit:
https://www.opcw.org/chemical-weapons-convention/.
To find out more about the Organisation for the Prohibition of Chemical
Weapons (OPCW), go to: https://www.opcw.org.
Challenges for Financial Institutions. If a financial institution is involved in the

financing of manufacturers, suppliers, or purchasers of chemical shipments, it is
important to understand the nature of the customer’s business and have available
resources which reference the chemical classifications under the CWC.
The Convention has three schedules of chemicals. The criteria and details of the
chemicals can be obtained at https://www.opcw.org/chemical-weapons-convention/
annexes/annex-on-chemicals/.
• chedule 1 chemicals have virtually no practical use other than as a weapon.

As a result, the presence of these chemicals in a transaction is a serious
matter and financial institutions should take necessary steps to interdict the
transaction and to report it.
• Schedule 2 contains chemicals that may have non prohibited uses but the
chemicals are not available commercially in any quantity for such civilian
uses. These chemicals are to receive the same treatment and attention as
those in Schedule 1.
• Schedule 3 includes chemicals that have a dual use for proper commercial uses,
and as a weapon of mass destruction. They include Phosgene (Carbonyl dichloride),
Cyanogen chloride, Hydrogen cyanide, Chloropicrin (Trichloronitromethane)
and their derivatives.
Schedule 3 chemicals present difficulties for banks and financial institutions facili-
tating international trade. The key question is whether the chemical is being used for
legitimate commercial or educational purposes. Since these uses tend to be specific, the
task is much easier. If the party involved is a proper regulator, accredited organisation,
educational organisation, or member of a specific industry, there is lessened concern.
For example,
any legitimate producer of Phosgene, which is an ingredient in the synthesis
of polyurethanes, will be a member of the International Isocyanate Institute.
Moreover, any other use of the chemical is highly suspicious.
FACTFIND
The members of the International Isocyanate Institute can be viewed at:
http://www.diisocyanates.org.
• The commercial use of Cyanogen chloride is related to organic chemistry and

found only used, legitimately, in sophisticated chemical processing facilities or
similar labs. Shipping it to any other destination or entity is highly suspicious.
Moreover, its production is reported to the Organisation for the Prohibition
of Chemical Weapons (OPCW).
• Hydrogen cyanide (a /k /a prussic acid) is especially challenging because of its
widespread legitimate use in multiple industries, including as in pharmaceuticals
via chemical synthesis, pesticide, in mining, in the production of synthetic
rubber and plastic, and in electroplating. Significant production is required
to be reported to the OPCW. The optimal tool for control of this dangerous
chemical is to interrupt shipment of large quantities.
• Chloropicrin is a widely used pesticide and a broad-spectrum antimicrobial.
It is reported that the chemical is produced by ASHTA Chemicals and Trinity
308 | Chapter 10
Manufacturing in the United States, and Dalian in China. Its shipment for non
agricultural purposes or to a sanctioned country is suspicious.
ACTIVITY:
What challenges do financial institutions face with transactions involving
schedule 3 chemicals?
Subsection 10.2.2 Biological Weapons
The Convention on the Prohibition of the Development, Production and Stockpiling of

Bacteriological and Toxin Weapons, and on their Destruction (the Biological Weapons
Convention) defines biological weapons as:
1. “microbial or other biological agents, or toxins whatever their origin or
method of production, of types and in quantities that have no justification
for prophylactic, protective or other peaceful purposes;
2. weapons, equipment or means of delivery designed to use such agents or
toxins for hostile purposes or in armed conflict.” (Article 1)
FACTFIND
For the text of the Biological Weapons Convention, see: https://www.un.org/
disarmament/biological-weapons/.
Such biological weapons include viruses, bacteria, and fungi used with the intent to
harm humans, plants, or animals. The Report of the U.S. Commission, WORLD AT RISK,
The Report of the Commission on the Prevention of WMD Proliferation and Terrorism
(December 2008), expressed its belief that “terrorists are more likely to be able to obtain
and use a biological weapon than a nuclear weapon.”2
The 1972 Biological Weapons Convention (BWC) prohibits the development, production,
and acquisition of biological and toxin weapons, and the delivery systems specifically
designed for their dispersal. It prohibits the roughly 160 member states from assisting
others to obtain biological weapons. However, there is not universal adherence and
there are no reliable verification mechanisms. Moreover, there have been documented
violations of the BWC in the past.
Since there is no commercial use for dangerous biological agents, their shipment
would never be legitimate. Nor is lab equipment for the production of vaccines to
these biological agents likely to be legitimate, other than to well recognised academic
2 http://a.abcnews.go.com/images/TheLaw/WMD-report.pdf.
and biological research organisations or governmental supported programmes. As a

result, apart from basic due diligence regarding such products including determining
their Biosafety Level (BSL) via the U.S. Centers for Disease Control and Prevention
(CDC) website, there is little that financial institutions are able to do. Such diligence
would involve automated and manual searches for prohibited products and scrutiny
of customers and their customers.
A customer that attempts to finance or ship goods related to a biological programme

should be a member of an accrediting body. Similarly, it is important for financial
institutions to know its customers who are involved in biotech, and understand their
business model, transaction patterns and regular counterparties with whom they trade.
A careful review of the biological agents and their level on the U.S. CDC BSL program
should be a part of this due diligence.
ACTIVITY:
What are the provisions in your Compliance Plan for the exercise of due dili-
gence with regard to biological weapons?
Subsection 10.2.3 Nuclear and Radiological Weapons
A nuclear weapon is a device whose explosive power results from the energy released
by the splitting or combining of the nuclei of an atom. Nuclear weapons include atom,
hydrogen, fission, and fusion bombs. The potential for mass destruction by such weapons
is as apparent as is the need to contain the spread of such weapons.
This subsection also includes radiological weapons although it is not, strictly speaking,
a nuclear weapon. Rather than using the explosive power from the atom, a radiological
device, also known as a “dirty bomb”, spreads radiation through an ordinary, non nu-
clear, explosive device. Because, technically viewed, such a bomb is less sophisticated
and far easier to manufacture than a nuclear weapon, provided that the perpetrators
obtain radiological material, it poses a serious risk. The link between the two weapons
(nuclear and radiological bomb) is the radioactive material.
There has been a long string of efforts to contain the spread of nuclear weapons and to
disarm those nations possessing them. The Treaty on the Non-Proliferation of Nuclear
Weapons was drafted to prevent the spread of such weapons beyond the so called
“Nuclear Weapon States”, namely the U.S., the UK, France, the former Soviet Union
(now Russia), and the People’s Republic of China. In addition, India, Pakistan, and North
Korea are presumed to have acquired nuclear weapons, and two other countries, Iran
and Israel are suspected of being on the verge of such an acquisition or as in the case
of Israel, may already possess them.
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The challenge to the proliferation of nuclear weapons that are relevant to financial
institutions is that nuclear power has peaceful uses. Most materials and technologies
involved in a nuclear power programme are also able to be used for legitimate, civilian
purposes. As is apparent from the experience with Iran, such possible legitimate uses
can complicate political negotiations preventing the development of nuclear weapons.
The potential dual use of nuclear technology, the ready availability of black market
sources of nuclear materials, and the sale of equipment that could be used to assist
the creation of such weapons complicates matters.
Global terrorism has given rise to increased concerns about nuclear proliferation.
Information about the creation of nuclear weapons is readily available and can even
be found on the internet. Despite the relatively free availability of such information,
the chief difficulty for terrorist organisations is obtaining the actual fissile materials
of weapons grade.
While terrorists will probably seek to acquire fissile materials in a single transaction
from a broker who has obtained them illegally, state actors, or terrorist state hybrids
may decide to develop their own programmes. However, such a programme has its own
costs and technical and logistical difficulties, including the acquisition of uranium and
the enrichment of such on a large scale.
Some companies that are major players in the mining of uranium are listed in the
FACTFIND below. Heightened scrutiny of these companies and the financial transactions
involving these companies, is the most important role that financial institutions can
play. Enhanced due diligence for any of these companies during on boarding coupled
with regular updates would be advisable to keep the financial institution up to date
with their customer’s business.
Major Producers of Uranium: Kazatomprom, Cameco, Areva, ARMZ-Uranium One,

Marubeni, Tepco, Toshiba, Chubu, Tohoku, Kyushu, Sumitomo, China National Nuclear
Corporation (CNNC), China Nuclear Energy Industry Corporation (CNEIC), China Gen-
eral Nuclear Power Corporation (CGN), DRD Gold, Sibanye Gold, BHP Billiton, Paladin
Energy, Boss Resources, Energy Fuels, Denison Mines, Ur-Energy, UEC, EFRC (Uranerz).
The acquisition of uranium is only the beginning step in the development of a nuclear
weapon. The major difficulty begins after uranium is obtained. Apparently only a very
small amount of all uranium that is mined is suitable for enrichment and this uranium
then must be enriched by sophisticated methods under the supervision and control of
trained engineers and technical personnel.
Weapons grade plutonium is virtually unavailable. It must be produced in special re-

actors that differ from ordinary reactors, which are typically used for the commercial
production of electric energy. It is reported by the World Nuclear Association, that
approximately 30 megawatt-years of reactor operation is required, with frequent repro-
cessing of 10 kilograms of nearly pure Pu-239, to produce sufficient nuclear material
of the necessary quality to manufacture a nuclear bomb.
FACTFIND
To learn more about this topic, visit the World Nuclear Association website
and consider their plutonium information sheet:
http://www.world-nuclear.org/information-library/nuclear-fuel-cycle/fuel-
recycling/plutonium.aspx.
Obtaining actual bomb components is more or less impossible in any meaningful way.
However, the following goods could relate to the development of a long term nuclear
weapons programme.
• Electrical components for nuclear radiation detection are an obvious indicator
and are also unlikely to see large commercial shipments.
• Insulating substrates, silicon on insulator (SOI),3 sapphire,4 and silicon on
sapphire (SOS),5 are essential to a long term illicit nuclear programme, but
are also commonly used in a number of legitimate civilian applications.
• Industrial or heavy duty gas turbines in which an especially large mega
wattage is produced should command greater scrutiny by banks and financial
institutions involved in the financing, trade, and shipment.
As of the beginning of 2017, only nine nations have facilities to produce plutonium or
enriched uranium. They include Russia, USA, France, China, United Kingdom, Pakistan,
India, Israel, and North Korea. South Africa voluntarily relinquished their capabilities
and stockpiles after the fall of the apartheid regime. Of those countries Russia, France,
UK, India, and China have ‘civilian controlled stockpiles’ subject to the UN International
Atomic Energy Agency’s reporting, but not specifically controlled as military assets.
Civilian stockpiles of fissile material and nuclear facilities are administered by the UN
International Atomic Energy Agency (IAEA) based in Vienna, Austria. The IAEA main-
tains teams of sophisticated inspectors trained and equipped to detect the diversion
of plutonium. In nations subject to safeguards programmes, the IAEA has access to
all nuclear power plants, reprocessing plants, and other facilities involved in handling
3 https://en.wikipedia.org/wiki/Silicon_on_insulator.
4 https://en.wikipedia.org/wiki/Sapphire.
5 https://en.wikipedia.org/wiki/Silicon_on_sapphire.
312 | Chapter 10
plutonium such as breeder reactors. IAEA technological and procedural controls make
it very implausible for plutonium to be exposed to vulnerability in the chain of custody.
Basic adherence to FATF and governmental lists of restricted individuals and organisa-
tions is the most obvious contribution financial institutions can make to prevent these
acquisitions of dangerous material. Two nations, Iran and North Korea, are specifically
known for continued efforts to obtain nuclear WMDs or materials relating thereto.
There are clear trade restrictions involving these two countries, and any transactions
involving these countries should always be the subject of Enhanced Due Diligence
efforts by banks.
ACTIVITY:
Identify the challenges to the non proliferation of nuclear weapons that are
relevant to financial institutions.
Section 10.3 Efforts by the International

Community and NGOs
There have been numerous efforts on a multilateral basis to deter the proliferation of
weapons of mass destruction and to detect its occurrence.
Subsection 10.3.1 The United Nations
The UN Security Council has passed several resolutions calling on nations to address
the financing of weapons of mass destruction.
S/RES/1540 (2004) mandatory Chapter VII obligations, Paragraphs 2 and 3(d), provide
that the Security Council:
“2. Decides also that all States, in accordance with their national procedures,
shall adopt and enforce appropriate effective laws which prohibit any non-
State actor to manufacture, acquire, possess, develop, transport, transfer or
use nuclear, chemical or biological weapons and their means of delivery, in
particular for terrorist purposes, as well as attempts to engage in any of the
foregoing activities, participate in them as an accomplice, assist or finance them;
3. Decides also that all States shall take and enforce effective measures to
establish domestic controls to prevent the proliferation of nuclear, chemical,
or biological weapons and their means of delivery, including by establishing
appropriate controls over related materials and to this end shall:
(d) Establish, develop, review and maintain appropriate effective national

export and trans-shipment controls over such items, including appropriate
laws and regulations to control export, transit, trans-shipment and re-ex-
port and controls on providing funds and services relate to such export and
trans-shipment such as financing, and transporting that would contribute to
proliferation, as well as establishing end-user controls; and establishing and
enforcing appropriate criminal or civil penalties for violations of such export
control laws and regulations”;
S/RES/1673 (2006) reiterates the requirements of S/RES/1540 (2004) and emphasises the
importance for all jurisdictions to implement fully that resolution, including provisions
regarding the financing of WMD proliferation in stating that the Security Council:
“Decides also that all States, in accordance with their national procedures, shall
adopt and enforce appropriate effective laws which prohibit any non-State actor
to manufacture, acquire, possess, develop, transport, transfer or use nuclear,
chemical or biological weapons and their means of delivery, in particular for
terrorist purposes, as well as attempts to engage in any of the foregoing activ-
ities, participate in them as an accomplice, assist or finance them”;
S/RES/1540 (2004) further provides:
“Means of delivery: missiles, rockets and other unmanned systems capable of

delivering nuclear, chemical, or biological weapons that are specially designed
for such use.
Related materials: materials, equipment and technology covered by relevant

multilateral treaties and arrangements, or included on national control lists,
which could be used for the design, development, production or use of nuclear,
chemical and biological weapons and their means of delivery.
Proliferation financing is providing financial services for the transfer and ex-
port of nuclear, chemical or biological weapons; their means of delivery and
related materials.
It involves, in particular, the financing of trade in proliferation sensitive

goods, but could also include other financial support to individuals or entities
engaged in proliferation.”
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A detailed list of UN Resolutions regarding nuclear proliferation can be found at FATF

Implementation of UN Resolutions re Proliferation (June 2013) § 1 and full text in the
FATF implementation guidance, Annex B.6
The UN Office for Disarmament Affairs (UNODA) “provides substantive and organizational
support for norm-setting in the area of disarmament through the work of the General
Assembly and its First Committee, the Disarmament Commission, the Conference on
Disarmament and other bodies. It fosters disarmament measures through dialogue,
transparency and confidence-building on military matters, and encourages regional
disarmament efforts; these include the United Nations Register of Conventional Arms
and regional forums.”
FACTFIND
Information about the UNODA is available at:
https://www.un.org/disarmament/about/.
ACTIVITY:
Determine what actions by the country in which your organisation is located
to implement the UN resolutions affect your organisation regarding the non
proliferation of weapons of mass destruction.
Subsection 10.3.2 Inter Governmental and Non

Governmental Organisations
There are a number of non governmental organisations that work to restrict weapons of
mass destruction. Some of them were indicated above in discussing the various weapons.
Financial institutions should acquaint themselves with these organisations that operate
in countries where they do business. Such organisations may be a valuable source and
partner on which banks could rely in their efforts to screen and assess transactions.
FACTFIND
For a list of organisations working for the disarmament of weapons of mass
destruction, go to: http://gsinstitute.org/ngo-links.
With respect to financing the weapons of mass destruction and the role of the financial
institutions, the most significant inter governmental organisation is the Financial Action
Task Force. The scope of its work was expanded in 2008 to include dealing with the
6 http://www.fatf-gafi.org/media/fatf/documents/recommendations/Guidance-UNSCRS-Prolif-
WMD.pdf.
proliferation of WMDs. FATF has undertaken studies of the dangers of proliferation and
weapons of mass destruction, circulated questionnaires, and issued an important report,
the Proliferation Financing Report (FATF PFR) (18 June 2008), and The Implementation
of Financial Provisions of the United Nations Security Council Resolutions to Counter
the Proliferation of Weapons of Mass Destruction (June 2013).
FACTFIND
To view the FATF PFR Report, visit
https://www.fatf-gafi.org/publications/methodsandtrends/documents/ty-
pologiesreportonproliferationfinancing.html.
FATF’s principal recommendation regarding weapons of mass destruction is contained

in FATF, International Standards on Combating Money Laundering and the Financing of
Terrorism & Proliferation.7
Recommendation No. 7 states “Countries should implement targeted financial sanctions

to comply with United Nations Security Council resolutions relating to the prevention,
suppression and disruption of proliferation of weapons of mass destruction and its
financing. These resolutions require countries to freeze without delay the funds or
other assets of, and to ensure that no funds and other assets are made available, directly
or indirectly, to or for the benefit of, any person or entity designated by, or under the
authority of, the United Nations Security Council under Chapter VII of the Charter of
the United Nations”.8
FATF Recommendation No. 7 (Targeted financial sanctions related to proliferation),

seeks to encourage implementation of targeted financial sanctions regarding weapons
of mass destruction that are required to be implemented by the UN Security Council
resolutions. As indicated above, these resolutions require countries to freeze funds or
other assets that could directly or indirectly benefit any person or entity designated
by the UN 1718 Sanctions Committee. Sanctions were dealt with in detail in chapter 9.
The studies and recommendations of the Wolfsberg Group are also particularly helpful
regarding dual use goods, and are discussed below and elsewhere in this Book, partic-
ularly in chapter 6 (Indicators of Trade Based Financial Crimes).
7 https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.
html.
8 The FATF Recommendations were updated in 2021, particularly Recommendation 1 and its
Interpretive Note, to provide guidance on “proliferation financing risk”, which refers strictly
to the potential breach, non-implementation or evasion of the targeted financial sanctions
obligations referred to in Recommendation 7.
316 | Chapter 10
ACTIVITY:
How might non governmental organisations assist financial institutions in
combating weapons of mass destruction?
Section 10.4 Proliferation and Proliferation Financing
The FATF Proliferation Financing Report (FATF PFR) uses the following working defi-
nition of proliferation: “Proliferation is the transfer and export of nuclear, chemical or
biological weapons; their means of delivery and related materials.” (FATF PFR §7). Related
materials could include, inter alia, technology, goods, software, services or expertise.
“Proliferation has many guises but ultimately involves the transfer and export of tech-
nology, goods, software, services or expertise that could be used in nuclear, chemical or
biological weapon-related programmes, including delivery systems; it poses a significant
threat to global security” (FATF PFR § 4).
To view the FATF PFR, go to: https://www.fatf-gafi.org/publications/methodsandtrends/

documents/typologiesreportonproliferationfinancing.html.
Subsection 10.4.1 Who
Various entities seek to proliferate weapons of mass destruction including state and
non state actors.
State Actors. The most prominent state actor at the time of writing this Book is the
Democratic People’s Republic of Korea (North Korea) but other countries have been the
object of concern in the past such as Libya and Iraq. The situation of Iran has changed
recently although it is difficult to predict the outcome of current negotiations and
political developments.
Non State Actors. There are also non state actors. UN Security Council Resolution S/
RES/1540 (2004) defines a non state actor as an “individual or entity, not acting under
the lawful authority of any State in conducting activities which come within the scope
of this resolution.” Non state actors include terrorist organisations, and brokers who
seek to profit by the sale of such weapons and the materials and instruments related
to their creation and use.
Witting and Unwitting Actors. FATF refers to “Witting” and “Unwitting Actors” in
regards to proliferation. Proliferation networks rely on the complex structures typical
of international trade involving extensive intermediation. A “witting” actor is one
who “knowingly engaged in proliferation”. Such persons are typically also involved in
legitimate business. A related category is those actors who are wilfully blind to what
is happening. On the other hand, there are actors who are really unwitting and from
whom the illegal, intended end use has been concealed. (FATF PFR § 42).
The literature regularly refers to proliferation networks which consist of persons,

entities, and countries who are seriously seeking opportunities to obtain WMDs and,
coincidently to find weaknesses in existing control systems. Proliferation networks
are typically complex and deliberately designed to be so. They break the product into
subcomponents which tend to be innocuous in themselves, and use a wide variety of
parties and companies, some of whom may believe that the transaction is for legitimate
civil purposes. Above all, these networks seek to hide the end users, and end uses, in
order to avoid suspicion and additional scrutiny by banks or financial institutions who
may otherwise alert authorities to the transaction.
ACTIVITY:
Identify various entities who seek to obtain weapons of mass destruction.
Subsection 10.4.2 What
The prevention of proliferation does not focus so much on weapons, as such, but on the
purchase and movement of the materials, technology, services, and expertise needed
to create and operate such weapons. The relevant materials were discussed above in
section 10.2 (Types of Weapons of Mass Destruction).
Subsection 10.4.3 How
Proliferation networks use front companies, intermediaries, illicit brokers, and illegal
means of operating to mask their activities so as to appear as if it was legitimate trade.
In addition, proliferation networks utilise forged or false documents such as end use
certificates, export and re-export certificates to appear legitimate. They also use free
trade zones and operate from, or through, countries or cities with high volumes of
international trade. The members of such networks seek to disguise their particular
illegal transactions, or hope to be overlooked among the many other (legitimate)
trade activities. To achieve their illicit goals, in addition to forged documents relating
to contracts of carriage and transport, these organisations use storage facilities and
warehouse receipts and certificates.
The International Standards Organisation’s (ISO) 28000 standard contains internationally

accepted standards for supply chain security. It addresses the transport of dangerous
chemicals, agents or components that are susceptible to misuse as weapons of mass
destruction. There are also other reputable sources of certification such as BSI Group,
318 | Chapter 10
Bureau Veritas, and SGS among others. Proof of a recent ISO 28000 audit is a likely,
though not definitive, indication that the broker is legitimate.
The tools by which proliferation can be combated include export controls, licensing,
the requirement of pre approval for export or the manufacture of designated goods.
Freezing of funds is also a widely used remedy, if the transactions or parties involved
in fact produce a “hit” during automated screening or manual checks.
ACTIVITY:
Identify tools which financial institutions can and should use to combat
proliferation of WMDs or materials and goods relating thereto.
Section 10.5 The Role of Financial Institutions
Because the prevention of improper transfers of dangerous chemicals could save many
lives, financial institutions should and can play a significant role in such prevention
strategies.
Proliferation networks require funds to operate which is a significant weak point. In

this respect, financial institutions can play an important role in reducing their access
to fund and thus, their ability to operate effectively.
Subsection 10.5.2 Setting Up the Account
The first line of defence for financial institutions with respect to weapons of mass
destruction occurs in establishing the customer account relationship. Ordinary con-
trols for setting up accounts and for transferring funds have a seriously limiting effect
on organisations seeking to proliferate WMDs. Particular attention should be paid to
identifying who exercises effective control of the entity.
ACTIVITY:
What first line defences does your organisation have to combat the proliferation
of weapons of mass destruction?
Subsection 10.5.3 Transaction Monitoring
Transaction monitoring is the second line of defence. Due diligence regarding transac-
tions can have a significant impact. The transactions involving companies that deal in
the products related, or potentially related, to WMDs should be subject to heightened

scrutiny. When assessing the nature of the potential customer’s business, the product
lines and countries involved should be carefully scrutinised, typically by automated
means (screening). Automated scrutiny should reveal any issues with names, countries,
equipment, or materials with which the potential new customer may be dealing with
in the course of its business. Regular monitoring should also assess whether there
have been changes in any respect, and what the appropriate measures are should
relevant changes become apparent. Documents should be carefully examined for any
indications of problems or anomalies. Indeed, especially with respect to transactions,
financial institutions should pay careful attention to the Indicators of Financial Crime
as discussed in chapter 6 previously.
The King’s College London published an extensive report on the financing of prolif-
eration: Study of Typologies of Financing of WMD Proliferation (13 October 2017).9 The
report builds on the FATF PFR and explores data from North Korea, Iran, Syria, Pakistan
and India and compiles the analyses into 60 detailed case studies so financial insti-
tutions may improve their risk based approaches for sanctions and WMD compliance
programmes. The report stresses that effective disruption of proliferation financing
can most successfully be achieved through cooperation and information sharing be-
tween governments and the private sector. The need for public private partnerships, as
the report notes, arises from the difficulty in detecting proliferation financing as the
“goods and materials involved are often industrial items that, if not clearly identified
as subject to some sort of controls, may appear innocuous to those involved in the
supply chains and working in [Financial Institution]s.”
The approach of the report is particularly helpful as it adopts the 20 indicators of

proliferation financing provided in the FATF PFR (2008), and first compares the indi-
cators against the detailed case studies and then divides them into 3 “trade-related”
categories: (1) potentially highly indicative; (2) moderately indicative; and (3) only
poorly indicative of proliferation financing. Occasionally the report amends, modifies
or adds details to the original FATF PFR indicators, and indicates, where applicable,
the presence of indicators in each case study and how such indicators could still be
present in legitimate trade.
A new indicator that the report provides in category (1), potentially highly indicative,
is the presence of “items controlled under WMD export control regimes or national
control regimes” (the report notes that the relevant WMD export control regimes are
the Nuclear Supplies Group, the Missile Technology Control Regime and the Australia
Group). The presence of such items, however, could represent legitimate trade if the
counterparties are appropriately licensed. Another new high risk indicator provided is
9 https://www.kcl.ac.uk/csss/assets/study-of-typologies-of-financing-of-wmd-proliferation-2017.pdf.
320 | Chapter 10
the involvement of an individual(s) with connection to a country of proliferation risk

(possibly dual nationals), who establishes a company dealing in high technology goods
for which the individual has little or no experience in handling.
All of the indicators covered are listed and briefly explained in Table 2. The report en-
courages financial institutions to use them as a broader part of their risk assessments
and for training; to enhance already existing due diligence processes in their trade
departments; and for basing their identification of proliferation financing “on patterns
of financial transactions that match more than one indicator, or a number of indicators
perhaps variously weighted” so as to limit the number of false positive alters.
Subsection 10.5.4 Heightened Due Diligence
The third line of defence is exercising heightened or enhanced due diligence should there
be a “hit” on a given transaction with respect to countries, parties, or goods involved or
other reason for concern about the transaction. In the exercise of heightened diligence
regarding transactions, three points deserve attention: import / export documentation,
transport documents, and dual use goods.
Import / Export Documentation. Since one of the primary controls of WMDs is the
requirement of licenses for the production or import / export of certain related mate-
rials, financial institutions should consider whether to seek assurance that a customer
is operating under such a license. In addition, custom related documents should be
consistent with goods descriptions. Lists and / or characteristics of persons who have
been granted, or denied, export licenses and associated transactional details (e.g. type
of goods involved, export routes, methods of financing, and the rationale for denial)
are also relevant.
This is in line with the Wolfsberg Group, Trade Finance Principles (2019) section 1.6.1(d)
(Recommendations) which recommends that “[t]he publication by the relevant author-
ities of the names of individuals and entities that have been denied export licenses
with the reasons for denial or who have been involved in criminal activities (including
corruption) involving Trade Finance.”
Transport Documents. Transport documents should be consistent with other doc-

uments and with what is disclosed while applying for financing. Unexpected ports of
call or variations in destinations should lead to further scrutiny. The designation of
the consignor, consignee, and forwarder or broker should also be given scrutiny for
consistency and checked against automated lists. Of particular interest in this respect
is transhipment or diversion of goods that does not fall within normal patterns for this
customer, or this type of goods.
Dual Use Goods. The Wolfsberg Group, Trade Finance Principles (2019) section 1.5.5
(Challenges) states that “[d]ual use items are goods, software, technology, documents
and diagrams, which may have both civil and military applications. Identification of
dual use goods in a trade transaction is challenging given their possible complex and
technical nature.”
Other organisations such as corporates, customers, customs agencies, and export li-
censing agencies are typically better placed to identify such things than are financial
institutions.
Whether a financial institution should require customers to state whether they have
necessary export or import licenses is in some jurisdictions, to a degree, a policy
decision for each financial institution which rests largely on reputational concerns.
A financial institution must decide what degree of assurance, and what proof of the
necessary export / import licence will give it sufficient comfort. To a considerable
extent, a proper KYC programme, coupled with a sophisticated screening programme,
will allay such concerns. As pointed out, however, in many cases it is a policy decision
to be taken by the financial institution, and relates to the level of risk the institution
is prepared to take.
Increased scrutiny of the materials and products potentially connected with WMD, has
led criminals to focus on basic components. This development has two consequenc-
es. One is that the components are regularly used in civilian applications, making it
difficult to differentiate and identify them as problematic. In this respect, a financial
institution can only ensure that the goods that are the subject of financial transactions
are consistent with the regular, legitimate business of its customer. The other conse-
quence is that the reduction to basic components requires a high level of expertise in
order to assemble a WMD. While financial institutions would have little to contribute
on this front, such specialised expertise also requires specialised equipment in some
circumstances which is an aspect that can come to the attention of financial institutions.
As mentioned in subsection 6.6.8 (Indicator No. 8 Dual Use Goods), the International
Chamber of Commerce (ICC) issued a June 2019 guidance paper, How Does Global Trade
and Receivables Finance Mitigate against Proliferation Financing?10 The paper supple-
ments the Wolfsberg Group, Trade Finance Principles (2019) and explores the challenges
financial institutions face in detecting risks of proliferation finance (i.e. funding or
servicing the manufacture, movement or development of WMDs; or, relatedly, trade
financing of technology or dual use goods for illegitimate purposes).
10 https://iccwbo.org/publication/global-trade-receivables-finance-mitigate-proliferation-
financing/.
322 | Chapter 10
While the documentation supporting traditional trade products offers some insight
of the goods under the transaction, open account terms rarely provide any detailed
information about the underlying goods. Specifically, the paper notes the difficulty in
identifying proliferation dual use goods “even when detailed information on a particular
good is available, due to specialist knowledge required for the assessment.”
Trade finance professionals often lack expertise in dual use goods and the guidance
even mentions the confusion of the role of regulators in this aspect of financial crime
compliance as customs organisations and officials are much better equipped and po-
sitioned to detect and track the movement of such goods. Currently, there is no stan-
dard list against which banks may screen for high risk proliferation goods, and prior
attempts at such screening have resulted in unwieldy numbers of false positive hits.
The ICC guidance concludes that the most effective option for managing proliferation
financing rests on information sharing arrangements and cooperation between law
enforcement / intelligence and the finance sector.
Financial institutions should ensure that their relationship managers, those experts
who process and analyse documents, and compliance departments are aware of the
dangers involved where it appears that end users are being hidden, such as multiple
transfers of ownership and multiple parties.
Table 1. Section 27 of FATF PFR identifies examples of general dual use items:
Missile and
Nuclear: Chemical: Biological:
Delivery:
Centrifuges Scrubbers Bacterial strains Accelerometers
High speed Mixing Vessels Fermenters Aluminium alloys
cameras
Composites Centrifuges Filters Aluminium
powders
Maraging steel Elevators Mills Gyroscopes
Mass Condensers Presses Isostatic presses
spectrometers
Pulse generators Connectors Pumps Composites
X-ray flash Coolers Spray Dryers Maraging steel
apparatus
Pressure gauges Precursors Growth media Homing devices
Ignition Pumps Oxidants
Vacuum pumps Reactors Machine tools
Heat Exchanges
Actions by Financial Institutions. Most of the regulatory provisions regarding

weapons of mass destruction fall within sanctions regimes. As such, the appropriate
action where there is suspicion is to 1) freeze any funds; 2) not facilitate any transac-
tion or movement of goods; 3) file a report with the appropriate authority. A financial
institution should, of course, check the applicable regulatory scheme regarding what
additional or different responses are appropriate.
ACTIVITY:
What are the internal steps mandated by your organisation’s Compliance
Programme where there is suspicion that a transaction is involved in the
proliferation of weapons of mass destruction?
Subsection 10.5.5 Correspondent Banks
The fourth line of defence is the exercise of similar scrutiny of correspondent banks.
It is also essential to ensure that their due diligence is compliant and proper, and up
to the same standards as your institution is required with respect to WMDs. In fact, it
has been suggested that a correspondent bank may be better placed to appreciate the
full scope of the transaction, and the actors, than a local bank.
Subsection 10.6.1 Summary of Weapons of Mass Destruction
Chapter 10 (Weapons of Mass Destruction) provided the student with details of the
proliferation of weapons of mass destruction, and in particular, discussed the types of
weapons of mass destruction, the different governmental bodies involved in the effort
to halt the proliferation of weapons of mass destruction, and identified the role of fi-
nancial institutions in the effort to prevent terrorists and terrorist organisations from
acquiring nuclear weapons to curtail the proliferation of weapons of mass destruction.
Consider the facts below and answer the following question.

Customer that intends to produce mattress covers in Country A requests a letter
of credit for USD 50,000 for import of chemical dimethyl methylphosphonate
(dimethyl methylphosphonate, a schedule 2 chemical, may only be exported or
imported to / from other states that are parties to the CWC; it is used directly
324 | Chapter 10
as a flame retardant for fabrics (e.g. seat covers, curtains, clothes, etc.)). It is
an important ingredient for the preparation of formulations (mixtures) such
as automotive specialty lubricants and oils. It is also a raw material for the
production of agricultural chemicals including pesticides. Bank checks cus-
tomer and determines that customer is a long standing bank customer, that
has exported items in the past but not mattress covers.
• What steps should the bank take to exercise due diligence?
In the activity in subsection 10.1.1 of this chapter, the student was encouraged
to consider what measures are in place at his or her financial institution to
combat the proliferation of weapons of mass destruction and the financing
behind it.
Answer the following questions:

• What steps does your financial institution take to prevent financing of
weapons of mass destruction? In light of the material in this chapter, are
they sufficient?
• What training is in place at your financial institution to keep up to date
on exercising enhanced due diligence to ensure chemicals, biological
components, and other dangerous materials are only sold and purchased
by appropriate parties?
Question 10-1. Compare terrorism financing and proliferation of weapons of mass

destruction.
Question 10-2. Explain why Schedule 3 chemicals present difficulties for banks.
Question 10-3. The steps that financial institutions should take in preventing the
transfer of improper chemicals and financing of weapons of mass
destruction includes which of the following:
a) Assessing the nature of the customer’s business and countries in-
volved in the transaction.
b) Regular monitoring of customer’s account to update any changes
in information.

c) Giving transactions with companies that deal in products related to

WMDs heightened due diligence.
d) Ensuring that transport documents are consistent with nature of
customer’s business.
Question 10-4. One feature of biological weapons which makes them inefficient is
that their propensity for wide dispersal as a gas or liquid makes it
difficult to apply them to specific targets. True or False?
Question 10-5. Identify the means through which proliferation networks use to make
their activities appear legitimate.
Question 10-6. What are the steps that a financial institution should take when it
is suspicious that a transaction involves WMD?

cific types of financial crimes, chapter 10 (Weapons of Mass Destruction)
provided the student with information about types of weapons of mass de-
struction, how they are being financed by terrorists and terrorist organisa-
tions and how financial institutions can best combat the financing of weap-
ons of mass destruction.

in chapter 1, the Book discussed Trade in chapter 2, Financial Crime Reg-
ulation in chapter 3, the structure of a Compliance Programme in chapter
4, Exercising Due Diligence in chapter 5, and the Indicators of Trade Based
Financial Crimes in chapter 6.
dering in chapter 7, Countering the Financing of Terrorism in chapter 8, and
Sanctions in chapter 9. Having studied Weapons of Mass Destruction in
chapter 10, the Book will move on to Bribery and Anti Corruption in chapter
11
Chapter 11
ANTI BRIBERY AND ANTI CORRUPTION
LEARNING OBJECTIVE
of what bribery is, distinguish the various forms of bribery and identify the tools
used to combat it.
CHAPTER OVERVIEW:
This chapter on Anti Bribery and Anti Corruption distinguishes public and
private misconduct, explains the effect of bribery and explains the roles of
banks in combating bribery.

Part I of this Book, Trade Based Financial Crime Compliance, discussed the
interaction between Trade and Financial Crime. After an introduction to the
products, chapter 3 discussed Financial Crime Regulation, chapter 4 examined
the elements of a Compliance Programme, chapter 5 discussed the level of
care that a financial institution needs to exercise in its actions with respect to
financial crime compliance, and chapter 6 considered the Indicators of Trade
Based Financial Crimes that should be utilised to identify instances of finan-
cial crime.
necessary for financial institutions to combat them. It addressed Anti Money
Laundering in chapter 7, Countering the Financing of Terrorism in chapter 8,
Sanctions in chapter 9, and Weapons of Mass Destruction in chapter 10.
The remainder of Part II examines Commercial Fraud in chapter 12, and Anti
Boycott in chapter 13.
327
328 | Chapter 11

Chapter 11 Anti Bribery and Anti Corruption
Section 11.1 An Overview of Bribery and Corruption
Section 11.2 Public and Private Misconduct Distinguished
Section 11.3 Effects of Bribery
Section 11.4 Combating Bribery
Subsection 11.4.1 Anti Bribery Laws and Conventions
Subsection 11.4.2 Implications for Banks
Subsection 11.5.1 Summary of Bribery and Corruption
Section 11.1 An Overview of Bribery and Corruption
Corruption is improper, illegal, or unethical conduct in breach of trust by a person in

authority. Corruption can be induced by bribery which is giving, offering, accepting,
receiving, or soliciting money or items of value. Inducements can take the form of
gifts, loans, fees, rewards or other advantages (taxes, services, donations, favours etc.).
Corruption can also consist of embezzlement. Bribery and corruption are similar and
often confused. Where they are addressed by a statute, the statutory definition may
differ from common usage.
ACTIVITY:
What measures to combat bribery does your organisation’s Compliance
Programme contain?
Section 11.2 Public and Private Misconduct Distinguished
Corruption or bribery is typically divided into two broad categories, namely public
bribery and private (or commercial) bribery.
Public bribery involves bribery for the purpose of influencing a public official either to
act in a fashion contrary to their duty, such as influencing a prosecutor to not pursue
a criminal case against an organised crime organisation, or to omit an action required
by their duty, such as paying a customs official to sign a document without inspecting
the goods. It can also include paying a public official or requesting payment to perform
duties the official otherwise should perform.
Anti Bribery and Anti Corruption | 329
Public bribery takes many forms, including a corporation or private individual paying a
domestic or foreign politician to vote in favour of or against legislation, as well as the
solicitation of such a payment by the politician, or a government contractor providing
money or something of value to a government official for the purpose of obtaining or
retaining a contract. Another example is a multinational corporation offering financial
or other incentives for the purpose of obtaining a military or defence contract that they
would not otherwise obtain (or potentially retain).
Private, also known as commercial bribery, refers to bribery unrelated to the perfor-
mance of an official duty. Its purpose could be to secure a favourable contract or other
business advantage, to engage in action or inaction for the benefit of another person
outside the scope of the person’s duties or obligations. An example of this would be
Company B offering unreported kickbacks to the purchasing manager of Company A
if Company A agrees to purchase its goods. Commercial bribery could also involve bid
rigging for non governmental contracts, and match fixing in sports.
In some legal systems, a legal action based on “bribery” can only apply to the public
form and would not encompass misconduct between private entities.
ACTIVITY:
Into what two categories is bribery divided?
What is the difference between them?
Section 11.3 Effects of Bribery
Bribery undermines the public and private order by creating a system of decision making
and conduct that is not transparent. This lack of transparency affects the organisation
or person who is benefited, those who are disadvantaged, and members of the public
who are impacted by higher prices or inadequate services or goods.
When it is pervasive and common, bribery becomes a serious disincentive to act in a

manner faithful to one’s duties, weakening the ability of an organisation or government
to operate effectively. In the case of private (commercial) bribery, it often circumvents
free competition in the marketplace, thereby undermining trade or commerce on fair
terms. Additionally, widespread bribery and corruption can undermine a government’s
ability to generate public income and maintain a sustainable public budget through
taxation and similar charges and levies; developing nations can be particularly im-
pacted, which can contribute to insufficient spending power for public services and
infrastructure projects. Therefore, endemic bribery and corruption hurt governments
and the wider public. A governmental system in developing nations that allows public
bribery or corruption more often than not benefits one or a few leaders financially while
330 | Chapter 11
giving natural resources to outside countries, but harming the economic growth and
equality for the majority of its citizens.
Section 11.4 Combating Bribery
One method of combating bribery is to outlaw it by means of legislation. Public bribery

is made illegal by domestic laws in many countries and also international conventions.
However, in many countries, commercial bribery is not expressly prohibited by law.
Another method of combating bribery is through self regulation by businesses and

governments. Self regulation occurs through codes of conduct for employees, customers,
and third parties. Self regulated organisations also often establish systems to detect
corrupt actions. The consequences of the discovery of bribery include removal of the
person from a position.
It is also important that financial institutions conduct due diligence before entering
into relationships with other businesses to ensure that the entity with whom they deal
does not have relationships or commit acts that may impact the company’s integrity
and good reputation.
Ethics and compliance programmes also emphasise the need consistently to vet, train,
monitor, and audit employees to ensure that the organisations’ policies and procedures
are followed. These ethics and compliance programmes are helpful, but to avoid the
negative impact of bribery and corruption, companies need to remain vigilant and well
informed. The International Standards Organisation’s ISO37001:2016, Anti bribery
management systems—Requirements with guidance for use, can serve as a model for fi-
nancial institutions in implementing their own anti bribery policies, allowing them to
standardise their training and certification, and ensuring consistency in the financial
institutions’ compliance rules.
FACTFIND:
To see the ISO37001:2016, Anti Bribery management systems—Requirements
with guidance for use, go to:
https://www.iso.org/standard/65034.html.
Subsection 11.4.1 Anti Bribery Laws and Conventions
Anti bribery laws generally work by prohibiting the solicitation, offering, giving, or
acceptance of bribes.
These laws operate to make either an offer, solicitation, or acceptance of a bribe an

action that could lead to prosecution if such action is brought to the attention of the
authorities. Anti bribery laws typically carry penalties of monetary fines and, in severe
instances, potential imprisonment for violation of the laws.
Bribery, by its nature, is motivated by a desire for more, whether it is the money the
bribed party receives or the benefits the bribing party endeavours to bring about through
the bribe. Consequently, a significant monetary fine functions as a disincentive against
bribery, because it may be a relatively small gain for a successful bribe as opposed to
a potentially devastating financial fine if caught.
Many countries have domestic laws against bribery, and some, including the U.S.
Foreign Corrupt Practices Act, provide for domestic penalties and enforcement against
companies operating in the US if a supplier or business partner of the US Company
commits public or commercial bribery in another jurisdiction. Another example of
a domestic anti bribery law is the UK Bribery Act 2010. There are also a number of
international conventions, such as the OECD Anti-Bribery Convention, the Criminal
Law Convention on Corruption, and the African Union Convention on Preventing and
Combatting Corruption.
FACTFIND:
To read about differences between the UK Bribery Act 2010 and the US FCPA,
go to: https://www.acc.com/sites/default/files/resources/vl/membersonly/In-
foPAK/1245470_6.pdf.
These conventions encourage signatory nations to put in place domestic laws that
implement the conventions and supplement them. The conventions also encourage
greater cooperation between member states in the investigation and prosecution of
bribery and corruption to ensure that violators cannot simply flee with their money,
or operate outside of the victim nation to avoid prosecution.
Anti bribery laws and conventions, both domestic and international, addresses both
the incentive to bribe and to be bribed. They also ensure that the perpetrators are
prosecuted and cannot enjoy their ill gotten gains.
ACTIVITY:
What penalties are in place in your organisation for individuals found to have
given or received bribes?
332 | Chapter 11
Subsection 11.4.2 Implications for Banks
Banks must themselves have policies and procedures in place to prevent and detect
bribery and corruption. They must also report conduct that signals suspicion of the
use of funds to commit bribery.
With respect to trade, suspicious transactions can be tagged by means of automat-

ed screening for names and indicators, and manual scrutiny. Automated checks are
chiefly based on names of persons and entities that are on lists of Politically Exposed
Persons (PEPs) or their families. Payments to such entities or persons should result in
enhanced due diligence. The potential risk of bribery or corruption should be noted
when establishing a bank customer relationship, or any similar activities.
Virtually any trade transaction could be used to mask a bribe or corruption. The Indicators
of trade based financial crime discussed in chapter 6 could signal bribery or corruption.
When there is a possibility of bribery or corruption, a financial institution must enhance

its investigation. If it concludes that there is suspicion warranting further action, it
should report the transaction to the appropriate authority. Whether it should permit
the transaction to proceed, or freeze the funds or documents, depends on the appli-
cable legal regime.
ACTIVITY:
Have you encountered the use of trade transactions used to mask bribery?
Subsection 11.5.1 Summary of Bribery and Corruption
Chapter 11 (Anti Bribery and Anti Corruption) provided the student with an introduction
to bribery, explaining the relationship between bribery and corruption, distinguished
between public bribery and private (commercial) bribery, discussed the effects of
bribery, and described the laws and conventions designed to combat bribery. Finally,
this chapter discussed the steps to be taken by a financial institution when it suspects
that bribery is a possibility.
In Subsection 11.1, the student was encouraged to consider what measures

are in your institution’s Compliance Programme to combat bribery. Answer
the following question:
• What policies are in place within your organisation to address and monitor
bribery?
• What improvements would or could you suggest?
In order to obtain a construction permit, Developer causes a significant amount

of building materials to be diverted from shipment to the construction site to
a rural location, so that it can be used to build a cottage for the responsible
government official. When documents are presented under a commercial letter
of credit for these shipments, they indicate shipment to the rural address, as
opposed to other shipments to a location in a municipality. When questions
are asked, the bank determines that the Developer has no project in this area
and that there are only private residences there.
Case Summary Questions:

• What steps could have been made in the investigation to make this
determination?
• What should the financial institution do?
Question 11-1. Explain how anti bribery laws operate.
Question 11-2. Identify effects of bribery.
Question 11-3. Corruption or Bribery is typically divided into two broad categories,
namely private or commercial bribery. True or false?

334 | Chapter 11

Chapter 11 (Anti Bribery and Anti Corruption) compared public and private
bribery, discussed the effects of bribery, identified anti bribery laws, and impli-
cations for banks regarding bribery.

Part I introduced the student to Trade Based Financial Crime Compliance in
chapter 1, discussed Trade in chapter 2, Financial Crime Regulation in chapter
3, the structure of a Compliance Programme in chapter 4, the Exercise of Due
Diligence in chapter 5, and chapter 6 concluded with the Indicators of Trade
Based Financial Crimes.
Part II, Combating Financial Crimes, covered Anti Money Laundering in chap-
ter 7, Countering the Financing of Terrorism in chapter 8, Sanctions in chap-
ter 9, and Weapons of Mass Destruction in chapter 10. This chapter dis-
cussed Anti Bribery and Anti Corruption. In chapter 12, the Book will discuss
Commercial Fraud, and Anti Boycott in chapter 13.
12
Chapter 12
COMMERCIAL FRAUD
LEARNING OBJECTIVE
of what constitutes commercial fraud, the various types of commercial fraud,
and the tools used to combat it.
CHAPTER OVERVIEW:
This chapter on commercial fraud discusses what is commercial fraud, the
various types of commercial fraud, and the allocation of the risk of loss. Also
discussed is the impact of commercial fraud and its effect on commerce.
Chapter 12 goes on to explain the various types of trade related commercial
fraud and considers possible responses by financial institutions to suspicion
of trade based commercial fraud. Several summaries of reported court deci-
sions mentioned are contained at the end of the chapter.

necessary for financial institutions to combat them. It addressed Anti Money
Laundering in chapter 7, Countering the Financing of Terrorism in chapter 8,
Sanctions in chapter 9, Weapons of Mass Destruction in chapter 10, and Anti
Bribery and Anti Corruption in chapter 11.
The remainder of Part II examines Anti Boycott in chapter 13.
335
336 | Chapter 12

Chapter 12 Commercial Fraud
Section 12.1 Overview of Commercial Fraud
Subsection 12.1.1 What is Commercial Fraud
Subsection 12.1.2 Financial Crime
Subsection 12.1.3 “Fraud”
Subsection 12.1.4 Types of Commercial Fraud
Subsection 12.1.5 Commercial Fraud Explained
Subsection 12.1.6 Losses and Risk Allocation
Section 12.2 Impact of Commercial Fraud
Subsection 12.2.1 Effect on Commerce
Subsection 12.2.2 Types and Examples of Trade Related Commercial Fraud
Subsection 12.2.3 Methods of Perpetrating a Commercial Fraud
Section 12.3 Responses to Commercial Fraud
Subsection 12.3.1 Combating Commercial Fraud
Subsection 12.3.2 Distractors: A Warning
Section 12.4 Bank Responses to Trade Based Commercial Fraud
Subsection 12.4.1 Indicator No. 1: Unusual Transactions
Transaction
Subsection 12.5.1 Summary of Commercial Fraud
Section 12.6 Cases
Subsection 12.6.1 Impala Warehousing & Logistics Co. v.
Wanxiang Resources Pte. Ltd.
Subsection 12.6.2 Komercni Banka A.S. v. Stone & Rolls Ltd.
Subsection 12.6.3 Mercuria Energy Trading PTE Ltd. v. Citibank, N.A.
Subsection 12.6.4 Dorchester Financial Holdings Corp. v. Banco BRJ. S.A.
Subsection 12.6.5 DCD Factors Plc v. Ramada Trading Ltd.
Commercial Fraud | 337
Section 12.1 Overview of Commercial Fraud
Subsection 12.1.1 What is Commercial Fraud
Commercial fraud is a phenomenon in which legitimate commercial activities are misused

to perpetrate or mask unintended and improper activities that produce a result that
seriously departs from the commercial relationship involved. As noted in Recognizing
and Preventing Commercial Fraud: Indicators of Commercial Fraud (2013), a paper pre-
pared by the Secretariat of the UN Commission on International Trade Law (UNCITRAL)
(referred to in this Book as “UN Commercial Fraud Indicators”), commercial fraud uses
“legitimate commercial forms illegitimately.” While there are often deviations from
what is agreed between commercial parties and serious disagreements about what is
actually delivered or produced (as opposed to promised), a breach of contract would not
necessarily or usually rise (or descend) to the level of commercial fraud. Commercial
fraud signals an entirely different level of conduct, namely extraordinary conduct that
seriously deviates from the range of acceptable commercial activities.
As indicated in chapter 1, commercial fraud is one area of financial crime where there
is clear historical record in the reported cases and the press of the abuse of traditional
trade products such as letters of credit and documentary collections.
FACTFIND:
To view the UN Commercial Fraud Indicators, go to:
https://uncitral.un.org/en/texts/payments/explanatorytexts/commercial_
fraud.
Subsection 12.1.2 Financial Crime
Commercial fraud is a type of financial fraud or financial crime. Classifications in this

area are not precise and there is much overlap between financial crimes. For example,
bribery can hide or supplement commercial fraud.
This chapter is titled “Commercial Fraud” in part because the name “Financial Crime”
is not a particularly useful title since the word “crime” is too limiting in one sense
and too expansive in another. While commercial fraud may be criminal, namely the
subject of criminal statutes and prosecution by public authorities, commercial fraud
can also be a civil matter addressed by the private sector. There is, however, typically
an element of deceit in commercial fraud (which is a common element in the criminal
action) although some types of fraud, such as securities fraud, are defined by statute
and can be actionable without intent to deceive. Normally, commercial fraud would
not encompass negligent conduct but at a certain level of gross or wilful negligence,
338 | Chapter 12
namely where there is a wilful and deliberate refusal to face the obvious, it is difficult
to distinguish the two. What matters in identifying commercial fraud is activity that
deliberately twists the intentions and expectations on which a transaction is based to
the unilateral and undeserved gain of one of the parties.
There are also other types of financial crime besides commercial fraud. They include
money laundering, theft, and other illegal means of obtaining funds.
Therefore, the term “commercial fraud” used in this Book, provides a more useful name
by which this type of behaviour can be identified and discussed.
Subsection 12.1.3 “Fraud”
In using the term “commercial fraud”, however, it must be recognised that the word
“fraud” raises difficulties of its own since it has different meanings in different legal
systems. In some, it signifies only a criminal act. In other systems, it can also be a
matter for the private sector or for private litigation based on the law of obligations or
tort and not criminal law. In another sense, it is a general term for unsavoury conduct
that is improper and is not used with precision. Nonetheless, it is used in this Book
because “fraud” is the term that is commonly used by regulators to describe this cate-
gory of suspicious activities that banks are asked to report. Many of the Indicators or
Red Flags discussed in chapter 6 (Indicators of Trade Based Financial Crimes) could
signal commercial fraud as readily as another type of financial crime. One example is
the close affiliation between parties who would be expected to deal with each other
at arm’s length. Collusion between a buyer and seller could be intended to defraud
a financial institution as readily (and possibly more often) than it could be a sign of
terrorism financing or money laundering.
ACTIVITY:
Review your organisation’s Compliance Plan to determine how commercial
fraud is addressed.
Subsection 12.1.4 Types of Commercial Fraud
The types of conduct (or misconduct) that are typically included under the heading
“commercial fraud” include:
• Fraud in the purchase and sale of goods.
• Maritime fraud (including bill of lading frauds).
• Electronic payments fraud.
• Forgery or falsification of commercial documents.
• Fraud involving financial instruments or negotiable instruments.
• Bank fraud.
• Warehouse fraud.
• Letter of credit fraud.
• Identity theft.
• Misuse of shell companies.
• Prime bank or high yield scams.
• Employee fraud.
• Collusion between customers.
There are other activities that are typically categorised as types of financial crime that
overlap with commercial fraud; for example, tax evasion, copyright and trademark vio-
lation, money laundering, and corruption or bribery. Some of these crimes are discussed
in this Book expressly, such as bribery, while others are discussed indirectly, such as
corruption. Other crimes are discussed incidentally, such as tax or currency control
evasion, which might involve use of the same mechanisms as commercial fraud but
which are country specific and beyond this Book’s scope. Other types of commercial
fraud, such as securities fraud or the fraudulent abuse of insolvency proceedings are
not discussed at all. These activities may also constitute commercial fraud but typically
fall within unique legal and regulatory regimes that are beyond the ambit of this Book
and that of most trade bankers.
The term “commercial” is used in order to distinguish such frauds from so called con-
sumer frauds. Many frauds are directed against consumers. They often have a harsh
impact on the quality of life of many of the most vulnerable members of society such
as the ill or elderly. However, they do not constitute commercial fraud in the sense the
term is used in this Book. In this Book, “fraud” used in connection with trade (“com-
mercial fraud”) tends to involve wholesale commercial activity as opposed to personal,
household, or family matters and is more likely to involve organisations than individuals
and is more likely to be international. Moreover, consumer fraud is often addressed by
different laws and governmental agencies than is commercial fraud.
It should be noted that commercial fraud does not necessarily involve trade. To the
extent possible, the references and examples in this chapter are based on trade but
sometimes use non trade related examples in order to illustrate commercial fraud fully
where a trade based example is not available.
ACTIVITY:
What types of commercial fraud have you encountered at your organisation?
340 | Chapter 12
Subsection 12.1.5 Commercial Fraud Explained
As explained, commercial fraud is the misuse of legitimate commercial activities to

perpetrate or mask non commercial or anti commercial activities. It signals a type of
conduct that seriously deviates from the range of acceptable commercial activities.
According to the UN Commercial Fraud Indicators, commercial fraud involves five

elements:
• Deceit or providing inaccurate or misleading information.
• Based on this deceit, the target of the fraud is induced to part with some
valuable thing (such as money or goods) or surrender a legal right.
• The economic dimension and scale of commercial fraud are huge.
• Commercial systems and their legitimate instruments are misused.
• Loss of value is the end result of fraud.
In its study of commercial frauds, certain facts that pertain to commercial fraud were
also noted in the UN Commercial Fraud Indicators:
• Many fraudulent practices were international in character or had an international
appearance.
• The fraudulent practices had a significant adverse economic impact on world
trade, and also had a negative effect on the legitimate instruments of world
trade.
• The advent of the internet offered new opportunities for commercial fraud,
resulting in an increase in it.
• Commercial fraud represented a serious drain on international commerce and
brought harm to banking and financial systems and markets.
• Commercial fraud has particularly affected small and developing countries,
and led to instability.
• Commercial fraud in some situations was linked to organised crime and
possible connections could be drawn to terrorist activities.
ACTIVITY:
Identify some of the effects and impacts commercial fraud has on trade,
markets and countries according to the UN study.
Subsection 12.1.6 Losses and Risk Allocation
Typically, the discovery of commercial fraud signals a loss by innocent parties. Often the
question is which innocent party must bear the loss since the fraudster either cannot
be located or has dissipated the proceeds of the fraud. Many commercial agreements
or undertakings contain or reflect allocation of the risk of losses due to fraud. This
factor must be taken into account in determining who must bear these losses but does
not affect the need for diligence in examining trade transactions for commercial fraud.
Section 12.2 Impact of Commercial Fraud
It has proven impossible to gather accurate figures or statistics on the extent of com-
mercial fraud due to the absence of uniform systems of classification and reporting
and the observed reluctance of victims to report that they have been defrauded. One
is left to surveys or estimates. However, all knowledgeable authorities agree that the
amounts are very large and amount to several percentage points of the annual gross
national product of most nations.
FACTFIND
For a survey on the impact of economic loss due to financial crime, see the
PwC, Global Economic Crime and Fraud Survey (2020): https://www.pwc.com/
gx/en/services/forensics/economic-crime-survey.html.
The true cost of economic crime to the global economy is difficult to estimate in part
because the actual financial loss is often only a small component of the fallout from a
serious incident. Entities consistently suffer wider collateral damage including busi-
ness disruptions, remedial measures, investigative and preventative interventions,
regulatory fines, and legal fees. Furthermore, the damage to morale and reputation
has a significant impact on long term business performance.
Subsection 12.2.1 Effect on Commerce
Commercial fraud can have a serious or even devastating impact on legitimate com-
merce. It can undermine the willingness or ability of legitimate businesses to produce
or compete.
A particularly poignant example of commercial fraud is described in the reported legal

decisions regarding the grain industry near the Black Sea which has been said to be
totally affected by fraud in the 1990s. Even if a field of business is not taken over, it can
be constantly under attack. In Komercni Banka A.S v. Stone and Rolls Ltd., [2002] EWHC
2263 (Comm) at ¶ 46 [England], an expert testified that “[t]he Russian grain trade is
conducted with a rip-off mentality. Traders exploit producers wherever possible. It is
difficult for producers to gain access to reliable price information. Contracts are treated
with cursory regard. A warehouse warrant is a dubious document.”1
1 A Case Summary is located in Subsection 12.6.2 of this chapter.

342 | Chapter 12
The fraud against Komercni Banka resulted in the sale of this Czech bank with the con-
sequent loss to the local economy of important jobs and financial services. Financial
services have traditionally proven to be the industry most threatened by commercial
crime, as it serves the financial needs of all other industries.
With the market evolving toward integrated business solutions, many organisations
outside financial services are taking on activities traditionally undertaken by banks.
Numerous non traditional financial services businesses in the automotive, retail and
consumer and communications sectors, to name just a few, are either in joint arrange-
ments with financial services companies or are in possession of banking licences of
their own. Such a broadening of the possibility of being or taking control of a financial
service industry increases the possibility of commercial fraud. It has been observed that
the ultimate goal of every ambitious fraudster is to control a bank. Fraudsters seeking
to “follow the cash” now have many more avenues to fulfil their objectives. While the
financial services industry, by virtue of its highly regulated environment, has over the
decades built up sophisticated control mechanisms, detection methodologies and risk
management tools, the financial hybrids which have emerged afford opportunities for
fraud. The ability to regulate them has yet to come into its own in managing either the
risks or the fast evolving compliance landscape in which they now find themselves as
was amply demonstrated by the Great Recession of 2008-09.
For a fascinating study of a massive commercial fraud operated from the Bank of Sark
in the English Channel Islands, see The Fountain Pen Conspiracy by Jonathan Kwitny
(Alfred A. Knopf, 1973).
ACTIVITY:
Explain why commercial fraud can have a serious or even devastating
impact on legitimate commerce.
Subsection 12.2.2 Types and Examples of Trade

Related Commercial Fraud
There is a wide variety of commercial fraud that affects trade. Some of the more prom-
inent examples are given below:
a) Commodities Fraud: Because trade in commodities is highly volatile, it is a
prime candidate for fraudsters. It is usually easy to identify a commodity that
can yield extraordinary returns for the fraudster by offering buyers a “great
deal” or a chance to make a “killing”. Typically, it does not matter whether
the price is going up or down. In the past 50 years, there has been a long list
of commodities that have been the subject of fraudsters including cement,
sugar, steel, oil, gold, copper, and silver.
b) Transport / Warehouse Fraud: Transportation is critical to modern commerce

and, so, it is a prime candidate for fraudsters. Transportation frauds vary from
issuing false or duplicate bills of lading, intentional misdelivery of cargo, or
faking its loss and making insurance claims while selling the goods to another
party. In addition, documents reflecting transport or warehousing can be
falsified or forged, giving the impression that the goods are in the warehouse
when, in fact, there are no actual goods or less goods than indicated on such
documents, or, the goods represented by the warehouse receipts are the
property of another entity or the same goods have been sold to several persons.
c) Insurance Fraud: Insurance is one of the oldest means of risk allocation,

making insurance fraud one of the oldest forms of commercial fraud. Insurance
fraud involves a wide variety of activities which result in false insurance claims
either through false claims of loss or losses that were deliberately engineered,
for example, burning down a failing business.
d) Tax Fraud: It is not uncommon to use commercial and trade activities to mask
tax obligations. Often, there is an international dimension to such activities in
which entities in different countries structure their transactions to evade their
tax obligations. The victim is the taxing government or authority but the loss
of revenue affects all citizens who may pay proportionately more themselves.
e) Financial Instrument Fraud: It is common for fraudsters either to construct

frauds around financial instruments such as letters of credit, bills of exchange,
or promissory notes or to use these financial devices in their schemes to add
the appearance of credibility. Since these devices are not well understood, it
is easy to manipulate victims and third party advisers regarding them.
f) Cyber and Internet Fraud: Since computers have become ubiquitous,

sophisticated fraudsters are targeting them to gain access to computer systems
for fraudulent purposes. The internet has also become a fertile ground for
commercial fraud. It has been used to provide the appearance of legitimacy to a
fraudulent scheme or enterprise, to solicit investors, or facilitate communication
between fraudsters and victims over distances.
g) Procurement Fraud: Procurement involving government or non government

organisations is a highly significant part of the modern economy. Fraudsters
commonly target procurement systems or officers to commit fraud by over
billing, under billing, or theft.
h) Initial Coin Offerings (ICOs): For more information on this subject, review
the FATF report, Virtual Assets Red Flag Indicators (Sept. 2020), available at:
344 | Chapter 12
https://www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-
Assets-Red-Flag-Indicators.pdf.
ACTIVITY:
Go online and insert “standby letter of credit” into a search engine. How
many of the results offer an opportunity to purchase or procure a standby?
Such offers are almost invariably fraudulent.
Subsection 12.2.3 Methods of Perpetrating a Commercial Fraud
There are a variety of structures used to facilitate commercial frauds:

a) Ponzi / Pyramid Method: A Ponzi scheme is one whereby the fraudsters
return funds from the same or other victims as if they were the proceeds of the
touted investment. It offers a very effective inducement to sceptical victims
since it appears that promised returns are being realised, encouraging them
to reinvest or to promote the scheme to others.
A Pyramid scheme is one under which investors / victims (who may have
“earned” money in a Ponzi scheme or lost it in the fraud and are trying to
recoup their losses) are encouraged to promote a scheme in order to earn
proportions of the funds invested by subsequent investors. It is not uncommon
for those victimised by a fraudulent scheme to be encouraged to recoup their
“regrettable” loss by promoting the scheme (which will “work” this time) to
others for a percentage of the earnings. The extent to which those persons
selling the investment are aware of its fraudulent character is not always clear
but at some point, they should recognise that there is no real investment.
b) Forged and Fraudulent Documents: Documents play a vital role in modern

commerce, and are highly vulnerable to being misused by fraudsters. Every
document used in commerce can be forged or be subject to fraud, including
bills of lading, warehouse receipts, letters of credit, bills of exchange, insurance
documents, inspection certificates, and the like. This principle applies whether
the documents are in paper or electronic form.
FACTFIND
Impala Warehousing & Logistics Co. v. Wanxiang Resources Pte. Ltd., [2015]
EWHC 25 (Comm)
[England] (scheme using forged and fraudulent warehouse receipts not
representing goods).2

c) Kiting Method: In this method, a fraudster takes advantage of time and distance
to generate credit which it abuses. It does so by seeking to create greater and
greater credit on the basis of book entries which are not immediately settled.
Kiting often involves drafts or cheques but can also involve commodities.
There have been a number of large and impressive commodities kites in the
past four decades, including the schemes giving rise to the Andina, Solo , and
Komercni Banka cases.
FACTFIND
For more on the Adina commodity scam, see:
Chemical Bank v. Affiliated FM Ins. Co., 970 F. Supp. 306 (S.D.N.Y. 1997) [USA],
summarised in 1998 Annual Survey of Letter of Credit Law and Practice at
425; Chemical Bank v. Affiliated FM Ins. Co., 196 F.3d 373 (2nd Cir. 1999)
[USA], summarised in 1998 Annual Survey of Letter of Credit Law and
Practice at 298; Chase Manhattan Bank v. Affiliated FM Ins. Co., 343 F.3d 120
(2nd Cir. 2003) [USA].
For more on the Solo Industries scam, see:
First Union National Bank v. Paribas, 135 F. Supp. 443 (S.D.N.Y. 2001) [USA],
summarised in 2002 Annual Survey of Letter of Credit Law and Practice at
240; First Union National Bank v. Arab African International Bank, 48 F. App’x
801 (2d Cir. 2002), summarised in 2003 Annual Survey of Letter of Credit
Law and Practice at 186; Gulf International Bank B.S.C. v. Albaraka Islamic Bank
B.S.C, [2003] All ER (D) 460 (Jul), (Approved judgment) [England], summarised
in 2004 Annual Survey of Letter of Credit Law and Practice at 276; Gulf
International Bank B.S.C. v. Albaraka Islamic Bank B.S.C., [2004] EWCA Civ 416
(Feb) (Approved judgment) [England], summarised in 2005 Annual Survey of
Letter of Credit Law and Practice at 291; Emirates Bank Int’l PJSC v. Credit
Lyonnais (Suisse) S.A., Swiss Supreme Court Reporter, Volume 130 Part III p.
462 ff [Switzerland], summarised in 2006 Annual Survey of Letter of Credit
Law and Practice at 302; First Gulf Bank v. Wachovia Bank N.A., [2005] EWHC
2827 (Q.B. Comm.) [England], summarised in 2006 Annual Survey of Letter of
Credit Law and Practice at 319.
d) Collusion between Parties Normally Operating as Entities with Differing

Interests: Commercial transactions tend to be structured on the assumption
that parties with differing interests will act as a check on one another. For
example, the interest of the buyer is that the seller delivers proper goods. The
interest of the seller is that the buyer pays when it is obligated to do so. It
follows then that, if there is no delivery of goods or other fraudulent behaviour,
a letter of credit issuer assumes that the buyer will alert it.
346 | Chapter 12
When counter parties act in collusion, this protection is not only removed but the
possibility of fraud increases. Such a situation can occur when the two entities are
controlled by the same person or organisation or when they collaborate in defrauding
a third party.
In the Komercni Banka case, the applicant / buyer and beneficiary / seller acted in
collusion and the beneficiary / seller recycled the proceeds of the LC to the applicant
/ buyer to repay the issuing bank after deducting a “commission”.
FACTFIND
DCD Factors Plc. v. Ramada Trading Ltd., [2014] EWHC 1872 (QB) [England]
(officer of food importer set up account for fictitious buyer to which LC
proceeds were credited).3
e) Abuse by Professionals: Modern commerce relies heavily on professionals

such as attorneys, accountants, engineers, inspectors, etc. for assurances of
quality and good faith. Where professionals allow themselves to be suborned
(bribed or induced) or lend their support to fraudulent schemes, there is a much
greater possibility of fraud. This is because the professional’s involvement and
assurance would have assured the victims of the integrity of the scheme. For
example, the use of a licensed attorney in a transaction and the holding of
funds in the attorney’s trust account lends a sense of security and legitimacy
to the person surrendering their funds.
ACTIVITY:
Read one of the case summaries listed above and identify the different types
of documents that were used.
Section 12.3 Responses to Commercial Fraud
One of the benefits of trade based financial crime compliance is that it encourages
financial institutions to identify signs of commercial fraud and seek to prevent it.
Such frauds typically impact the reputation of a financial institution, as well as its
finances. There are a variety of tools by which commercial fraud can be combated. They
include investigation, criminal actions, civil legal actions, prevention and monitoring,
international cooperation and sharing of information, encouraging so called “Whistle
Blowers”, and having systems of recovery in place.

Subsection 12.3.1 Combating Commercial Fraud
The ability to investigate commercial frauds is essential for both the private and public
sectors. It is essential to discover, preserve, and analyse data in paper and digitalised form
in order to determine the activity of deception, copies of important documents, profiles
of the fraud and fraudster, and patterns of activity. Investigation involves computerised
accounting, and manual skills including interviewing persons and other techniques.
Preservation of data is very important for evidentiary reasons. Financial institutions
are not well equipped to conduct extensive investigations and doing so runs contrary
to the foundational principle of letters of credit and documentary collections, which
is that banks are concerned about documents and not the realities that they represent.
For documentary collections, the only documents of real concern to bankers are the
draft and collection letter. Otherwise, the only concern is that the type and number of
documents identified are present.
a) By Criminal Law (penalties). Commercial fraud can be the subject of

criminal law although which crimes it entails may vary from legal system to
legal system. In some nations, commercial fraud is treated as theft while in
other nations prosecutions are often conducted under wire fraud statutes. The
difficulty with combating commercial fraud as a crime is that such prosecutions
require the investment of considerable law enforcement resources and are
often difficult to prosecute. As a result, relatively few commercial frauds are
investigated and even fewer are prosecuted. Even when there is a conviction,
prison sentences tend to be much lighter than for violent crimes. In any event,
criminal prosecutions are outside the scope of financial institutions other than
making a report to competent authorities except where they themselves are
victims in which case they may want to be more pro active.
b) By Civil Actions; Remedies. In most legal systems, victims are able to sue
fraudsters under civil law for fraud or similar civil charges. Such a course
of action not only requires considerable resources and patience on the part
of the victim, but success does not guarantee that the victim will be able to
collect any judgement rendered since the fraudster often dissipates or hides
the proceeds of the fraud. Where a financial institution is the victim of a fraud,
it may decide to bring a civil action against the fraudster in order to recover
funds lost. Doing so, however, has its problems. The funds are often dissipated
and frequently moved to other jurisdictions which make legal action more
complicated. In such a situation, prompt action is vital.
c) By Self Help. While punishment of fraudsters is important, it is also important

to recover the proceeds of fraud before they are hidden or dissipated. Recovery
is a different exercise than prosecution. It involves forensic accounting and
348 | Chapter 12
investigation to trace funds. Speed is critical. In addition, the possibility

of legal action against solvent entities that may have facilitated the fraud
should be promptly pursued as well as potential insurance claims. Financial
institutions and especially banks have certain advantages in this respect
in that they can often trace the funds which frequently are moved to other
financial institutions. Prompt action and cooperation with the institution to
which the funds are sent, often with indemnities regarding repayment and
costs to the cooperating institutions will cause the funds to be informally
frozen or returned.
d) By Prevention and Monitoring. Since it is difficult to recover funds after

they are taken, the best strategy is one of prevention. Prevention entails a
wide variety of actions, including having in place institutional policies that
are designed to discourage commercial fraud and limit opportunities to
commit it, regular audits, adequate education and training, and publicity. It
is also affected by whether the threat is internal (that is, from employees or
agents), external (that is, from persons or companies that are not employees
of the organisation), or a combination (that is, where employees collude with
outsiders). Tools for prevention and monitoring include:
1) Policies. Organisations should have clear polices in place that provide
constraints and checks on the activities of its employees that can result
in fraud.
2) Audits. There should be regular audits of the organisation by an
independent auditor for signs of fraud.
3) Education and training. Employees should receive regular training
regarding fraud and fraud awareness. While this training will not prevent
fraud by a person deliberately intending to commit fraud, it will prevent
some employees who merely are tempted to seize an opportunity without
having planned to do so. Training will also alert employees to the cost of
fraud and the need for vigilance.
4) Publicity. There are at least two facets of public relations (PR) related
to commercial fraud. One is publicity regarding its effects attempting to
alert companies and persons to the problem. The other facet is publicising
instances of commercial fraud, losses, and any punishment or litigation.
Wide spread publicity can help warn potential targets of dangers.
e) Cooperation and Sharing of Information. It is common for organisations

to seek to hide the fact that they have been defrauded. There are also risks in
revealing the names of the parties involved including legal action for slander.
Governments also have restrictions on their ability to share information about
commercial fraud with other governments and, even more so, with the private
sector. It is important that channels for cooperation be explored and, where

possible, opened.
f) “Whistle Blowers”. A “whistle blower” is a person who informs on fraudsters,

often to the higher management. Such persons can play a vital role in the
discovery of fraud. However, there are a number of factors to discourage whistle
blowers such as retaliation by superiors or other employees. Organisations
should consider steps to protect and encourage whistle blowing. Whistle
blowers may enjoy special legal protections in some jurisdictions.
As part of the Anti Money Laundering Act 2020 (the AML Act), the US Congress
promulgated new provisions aimed at bolstering whistle blower protections
regarding anti money laundering cases. One section of the AML Act replaces
prior protections under the Bank Secrecy Act (BSA) to prevent retaliation by
employers when a whistle blower reports original information to the govern-
ment or to even to the whistle blower’s own employer. The AML Act, however,
curiously exempts employer institutions insured by the Federal Deposit In-
surance Corporation (FDIC) or through the Federal Credit Union Act (FCUA).
Additionally, the AML Act removed the prior cap on whistle blower rewards for
original information leading to regulatory enforcement and instead provides
for a reward ceiling constituting 30% of the government collection where the
monetary sanctions exceed USD 1 million (forfeitures are exempt from this
provision). Oddly, however, the AML Act does not provide a floor regarding
whistle blower rewards, suggesting that the US Treasury could decide to award
a nominal amount, and such a decision could not be appealed. Ultimately, it
remains to be seen whether these provisions will be effective in discovering
internal money laundering schemes or AML/BSA violations that would have
previously gone undetected.
FACTFIND
To learn more about the new whistleblower provisions of the AML Act, as
well as how they compare to prior law, visit: https://www.natlawreview.com/
article/enhanced-whistleblower-provision-amla-2020-understanding-and-
meeting-two-fold-risk.
g) Insurance. Companies often insure themselves against fraud by employees and

outsiders. The former is often contained in blanket bond policies (sometimes
described as banker’s blanket bonds). Such policies typically have high
deductibles but can offset the consequences of a serious loss due to fraud. Care
must be taken by the legal or risk management department to understand the
conditions of the policy and notification requirements.
350 | Chapter 12
ACTIVITY:
Identify pro active steps that financial institutions can take to help prevent
commercial fraud.
Subsection 12.3.2 Distractors: A Warning
In assessing the effectiveness of an anti fraud programme, a financial institution

should take into account the psychological tools employed by fraudsters. As noted
in the UN Commercial Fraud Indicators, the psychological dimension of commercial
fraud is often underappreciated. Fraudsters are gifted practical psychologists and well
able to manipulate victims into doing things that they would never do in the cold light
of reason. For example, a branch manager of a financial institution who believes that
she or he is about to “add” a large new account is more prone to disregard reasonable
doubts and do things that he or she would not do in other circumstances. The pressures
of meeting account opening quotas and the incentives derived from success can easily
blind the manager to signs that would otherwise be warnings. Little gifts such as donuts,
cookies, or wine can create a warm relationship that also facilitates fraud. The private
banking unit is a prime source of frauds. Its employees are trained to accommodate
the demands of wealthy clients without question. Driving an expensive car, wearing
tailored suits, and displaying an expensive watch are tools for the fraudster that open
minds and doors.
In the Komercni Banka case, mentioned above, there was evidence that account and
relationship managers dismissed warnings from the letter of credit department in part
because of the large commissions that they earned from continual extensions of credit
to the fraudsters. The fraudsters repaid loans regularly (with the bank’s own money
which was recycled again and again and granted longer extension of time until the
entire scheme collapsed).
The employees of financial institutions need to be trained to spot such distractors and
guard against them.
ACTIVITY:
Find examples of how fraudsters can manipulate victims into disregarding
their good judgment in the cases listed above, or in your own organisation’s
experience.
Section 12.4 Bank Responses to Trade Based

Commercial Fraud
Financial institution should respond to trade based commercial fraud by taking a risk
based approach. This approach includes identifying the presence of Indicators of com-
mercial fraud which were addressed thoroughly in chapter 6 (Indicators of Trade Based
Financial Crimes). The potential for trade based fraud in these Indicators should be
given attention in a financial institution’s compliance programme. While the Indicators
described in chapter 6 are listed below, the examples given relate to commercial fraud.
In taking this approach, it is recognised that there is some repetition. That possibility
is accepted both as a review of the material covered in chapter 6 and for ease of ref-
erence, making it unnecessary for the student to refer back to chapter 6 for a detailed
explanation of the Indicator.
ACTIVITY:
Identify the training that your organisation provides for employees that will
enable them to spot the Indicators of commercial fraud.
Subsection 12.4.1 Indicator No. 1: Unusual Transactions
Transactions inconsistent with customer’s business strategy or profile (e.g., a steel

company that starts dealing in paper products) or which make no economic sense.
Transactions that do not make economic sense may in fact be attempts to perpetrate
or mask commercial fraud. Commercial fraud relies on the appearance of legitimacy to
attract victims and profit from their loss. However, commercial frauds often consist of
unusual but important deviations from legitimate commercial transactions that allow
for the fraudster to profit. Transactions that seem unusual, either in terms of being
inconsistent with the customer’s business or transactions that do not make economic
sense, should trigger further questions and scrutiny from the financial institution to
determine whether the transaction is an attempt to mask commercial fraud or if there
is a legitimate reason for the unusual nature of the transaction.
Example: A customer whose business involves manufacturing and selling helicopters

applies for a letter of credit for an underlying purchase of construction equipment such
as bulldozers and tractors that are not required to manufacture and assemble helicopters.
In such a case, the customer could be colluding with the seller against the financial
institution or the customer could be buying and reselling tractors as a new business
venture. Moreover, the company could have recently acquired a construction company.
352 | Chapter 12
The financial institution should flag the request and determine what further scrutiny
is appropriate. Potential action could include the relationship manager making fur-
ther inquiries to the customer. The financial institution should also determine if this
particular situation necessitates reporting the transaction to the relevant authorities.
ACTIVITY:
Consider how the financial institution should react to the request for an LC
to purchase construction equipment.

The customer deviates significantly from its historical pattern of trade activity (in terms
of markets, monetary value, frequency of transactions, volume or merchandise type).
A change in business patterns can be a sign of commercial fraud but it can occur for
several legitimate reasons: an expansion of the business; a shift in the nature of the
business; necessity due to changing economic conditions; and more. Therefore, when
a customer conducts a transaction, it is necessary to undertake due diligence to deter-
mine if fraud is taking place or if the transaction has legitimate basis.
Example: Bank’s customer has a volume of three trade transactions a month for several
years. Without warning, the volume has increased to six per month with no apparent
increase in capacity. The customer is sending documents to buyers under a letter of
credit. The bills of lading contain sequential container numbers. The deviation is an
Indicator and the sequential container numbers may come to light if the scrutiny is
escalated. This pattern raises the possibility that some of the transactions are part of
a fraudulent scheme.
ACTIVITY:
Identify a legitimate reason a customer could have a change in their business
pattern that may also appear to be a sign of commercial fraud.
The parties to a transaction are affiliated when they pretend to be and would be ex-
pected to be acting at arm’s length. For example, they are conducting business out of
a residential address, or providing only a registered agent’s address. Alternatively, the
transaction appears to involve the use of front or shell companies for the purpose of
hiding the true parties involved.
Collusion between a buyer and seller can be utilised to facilitate commercial fraud
when the victim is a third party, such as a lender or financier, investor, or some other
third party that puts their money in the hands of the fraudsters.
Example: Bank 1 extends trade finance facilities to Buyer A for whom it issues an
acceptance letter of credit with a 180 day after sight term which means that payment
will occur 180 days after the draft presented under it has been accepted by the issuer.
Seller presents documents indicating shipment of goods to its Bank, Bank 2 which is
nominated to negotiate. When Bank 1 accepts the 180 day sight draft, Bank 2 discounts
it and advances the proceeds to Seller. In connection with another transaction, Bank 1
employee incidentally discovers that Seller has been charged with fraud in a different
transaction not involving Bank 1. Employee raises questions which lead to greater
scrutiny and Bank 1 discovers that the address given by Seller is an empty store front.
It turns out that no goods were shipped and that Buyer and Seller were acting in col-
lusion to defraud Seller’s Bank, the discounting bank and Bank 1, the accepting bank.
Bank 1 should file a report on the activity and inform risk management and legal to
determine what additional steps should be taken. One such step would be for Bank
1 to communicate with Bank 2 which holds its acceptance to warn it and urge it to
recapture funds and take other measures that are appropriate. It should be noted that
in this scenario Bank 1 will be liable on its acceptance to Bank 2, provided that Bank 2
acted in good faith and without notice. However, prompt action by Bank 1 may enable
Bank 2 to trace the funds or place a hold on them. Such informal action may be more
expeditious than filling legal proceedings which can come later if necessary. Another
step would be to inform the insurer who issued its banker’s blanket bond insurance
and to set aside the deductible as a loss reserve.

A company may be a front or shell without any substantial existence. In that case, the
question is what it is hiding. It could be collusion, as in the previous Indicator, or it
could be a sanctioned entity or a PEP, or other unacceptable entity. The involvement
of an unknown party whose identity is purposely hidden, whose references are not
convincing, or is evasive about the identity or connections of third parties, particularly
where there are changes in payment instructions, should warrant further diligence.
Identification of the parties to a transaction and those entities or persons controlling

them is critical to preventing commercial fraud. Without first ascertaining the identity
of the parties to a transaction, a bank cannot run manual and automatic checks that
may reveal whether the transaction is legitimate or whether it is an act of commercial
fraud. Any indication that the customer or another party to a transaction is purposely
354 | Chapter 12
attempting to conceal the identity of a party to the transaction should trigger further
due diligence.
Example: At the request of Subcontractor B, Bank A issues its independent guarantee in

favour of Beneficiary, Contractor C in connection with a subcontract to install elevators.
Subcontractor B is a customer of Bank A. In issuing the independent guarantee, Bank
A assured itself that the construction project was an actual project and the indepen-
dent guarantee was consistent with Subcontractor B’s business. Although the project
was completed and accepted by Contractor C, Contractor C drew on the independent
guarantee, claiming that it was entitled to the proceeds for breach of the underlying
contract and presenting complying documents. However, Bank A’s customer approached
it, insisting that no funds were due and providing a signed release from Contractor C.
While banks try to avoid becoming involved in such commercial disputes, Bank A’s re-
lationship manager discovers that Contractor C has a reputation for making unfounded
claims and a long record of lawsuits involving similar claims. The manager also dis-
covered that Contractor C is controlled by a notorious crime family. After obtaining an
indemnity from Subcontractor B, Bank A refuses the presentation on the basis that it is
fraudulent. If sued, it must be prepared to prove that there was no basis for the drawing.
ACTIVITY:
What steps does your organisation take to identify the real parties within
transactions?

A customer conducting business in jurisdictions that are at a higher risk for money
laundering, terrorism financing, or other financial crimes is an indicator of financial
crime which could be commercial fraud. This Indicator would include payments or
shipping items to, through or from higher money laundering risk jurisdictions includ-
ing countries identified by the Financial Action Task Force (FATF) as “non-cooperative
jurisdictions” regarding commercial fraud regulations.
Transactions involving high risk jurisdictions can be a sign of commercial fraud, par-
ticularly if there does not appear to be a legitimate business reason for the transaction
to involve that jurisdiction. Banks should be cognizant of any transaction that involves
a high risk jurisdiction, particularly when conducting business in such a jurisdiction
does not fit the customer’s usual business profile.
Example: Bank B in country B issues a transferable commercial letter of credit to

Beneficiary 1 in Country X. It also nominates Bank X in Country X as a negotiating
bank. Bank B has not restricted the ability to effect a transfer to itself which means that
Bank X can effect transfer. The transaction meets all tests for due diligence including
correspondent and country tests. After the LC is issued, however, the beneficiary ap-
plies to Bank X for the LC to be transferred to a second beneficiary, Beneficiary Y, in
Country Y. As a result, the 90% of the value of the LC is transferred to Beneficiary Y
who fraudulently draws on it, shipping garbage instead of the intended goods. While
Country X is not named on any country lists, Country Y is a troubled state with inef-
fective controls over criminal elements. The applicant is unable to recover its funds in
the courts of Country Y.
ACTIVITY:
Identify when financial institutions should further scrutinise transactions
involving some jurisdictions and geographical locations.

Transactions in high risk or high end goods appear in the lists of indicators of financial
crime because they are readily moveable or dangerous. However, they are no more liable
to indicate commercial fraud than any other goods. Indeed, because they are more likely
to attract attention, they are less apt as a vehicle for commercial fraud than ordinary
goods. Therefore, this subsection does not otherwise address them.
Involvement by Politically Exposed Persons (PEPs) or other persons who are on des-
ignated lists or who have been denied permission to import or export certain types of
goods is another indicator.
A bank must perform its due diligence to determine if a party is to be considered a PEP.
Certain factors to look for are whether the person is a senior foreign political official,
which could include a government or military position or a position in a political party
or state owned corporation; the immediate family of a political official; or a close as-
sociate of that official. If a person is identified as a senior foreign political official, the
bank should look at what that person’s official duties are, the nature of their position,
the level and authority of the official, whether they have access to government funds,
and the geographic location of the official. This category also includes close family
members of PEPs. Checks should also be done in the regular reviews of an account since
new PEPs may exist or the business of the customer may have come to include them.
356 | Chapter 12
When dealing with PEPs, a risk based approach must be used when analysing all the
factors to determine the level of risk of trade based financial crime.
Example: A trading company is indirectly controlled by a holding company that is, in

turn, controlled by the family of the president of a country in which it is located. The
political official uses his influence to obtain government backed loans for the company
which defaults on them. When the regime changes, the government repudiates the
obligations and the financial institution becomes the victim of fraud.
In such a situation, the bank should have clear policies about dealing with politically
influential figures and investigate business dealings with their companies before ex-
tending credit. Even if it does so, however, it must be aware of the link between the
political official and the trading company.
ACTIVITY:
What should financial institutions do when they discover that PEPs are
involved in transactions? How can they discover such involvement?
A transaction that involves dual use goods, namely, goods with both a civil and military
purpose raises the possibility that the goods may be utilised for illegitimate ends. This
Indicator typically signals a concern about terrorism financing or weapons of mass
destruction.
However, such goods could also be the object of a fraudulent scheme and might be of
particular interest to fraudsters because of their potential value to unsavoury buyers
on the black market. Financial institutions can be so concerned about the misuse of
the goods that they might overlook the possibility that either the buyer or seller is
being defrauded.
Then again, the goods could be intended for a legitimate civilian purpose or sold le-
gitimately for a military purpose.
The Wolfsberg Group, Trade Finance Principles (2019) Section 1.6.1(b) (Recommendations)
encourages:
“The provision of details, by relevant government authorities, in a manner that can be

understood by non-experts, in respect of products and materials that relate to ‘Dual
Use’ goods. These details should ideally be capable of being integrated into electronic
processing systems.”4
Example: Seller A supplies sophisticated laser technology. It receives a standby letter

of credit purportedly from a major bank in Germany directly from the Buyer assuring
payment in the event that Buyer fails to pay within 30 days of delivery. The form fol-
lows the standard format of this bank’s LCs. Relying on the LC, Seller A ships the goods
and presents complying documents. The Seller gives careful attention to the ability
of Buyer to import the goods and its licenses to do so and the reputation and credit
standing of the issuing bank.
When Buyer fails to pay, Seller draws on the standby, sending the documents to the
German bank which returns them, stating that it did not issue such a standby credit.
When Seller seeks to locate the goods, it discovers that the shipment has disappeared.
Seller is the victim of commercial fraud. If the bank has financed Seller, it may also be
affected by Seller’s inability to repay the loan.
In this situation, Seller’s bank could have signalled a problem by requesting a copy of
the LC and inquiring why it was not advised. Such a step might have permitted Seller
A to stop the shipment in a timely manner.
Helping customers understand the value of an advice would be a pre-emptive step that
could prevent such a problem.
It should be noted that the problem is compounded if the laser technology fell into the
hands of a terrorist organisation. In such a case, a financial institution probably should
file a report, alerting the authorities to what it knows of the transaction.
ACTIVITY:
What concerns could a transaction involving dual use goods signify for a
financial institution?

(1) Obviously over or under invoicing of goods; (2) obvious misrepresentation of quan-
tity or quality of goods shipped; (3) payment tenor or terms are inconsistent with the
type of goods.
2019.pdf.
358 | Chapter 12
Over invoicing and misrepresenting the quantity of goods is an avenue through which
commercial fraud is attempted. If the price of goods appears to be obviously different
than a legitimate market price for the goods, then further investigation will be required.
For example, a customer receives financing from its bank to purchase 10,000 pounds of
medical grade honey from New Zealand through a documentary collection. The med-
ical grade honey sells for USD 30.00 per pound. The customer is working in collusion
with the seller. The customer receives an invoice for the honey and a forged inspection
certificate. In reality, the seller sends the customer adulterated Chinese honey that
is worth only USD 2.00 per pound and, if the true properties were known, could not
be imported into customer’s country. The customer defaults and the bank seizes the
goods that are relatively worthless. In this instance of commercial fraud, the customer
and the seller used over invoicing to defraud a third party, in this instance the bank.
It should be noted that under invoicing does not lend itself to commercial fraud when
used in isolation.
However, it should be noted that it can be difficult to determine whether a good has
been over or under priced. Using the example above, while medical grade honey may be
priced at market value at USD 30.00 per pound, regular edible honey would be severely
over priced at the price point. While market price for certain goods is easily identifiable,
such as commodities, for certain goods it may be hard to determine what the market
price is and thus, what is and is not over or under pricing. While banks can take steps
to understand the market their customers operate in, in certain instance banks will
simply have to rely on the other tools at their disposal to evaluate the transaction.
Example: Buyer B obtains a commercial letter of credit to pay for high grade ginseng
from Mainland China. The amount of the LC is USD 2 million and the ginseng is priced on
a per kilo basis. The Seller’s certificate of inspection gives the price in imperial pounds
but the calculation of the sale price is as if it were kilos denominated in Hong Kong
dollars, although the invoice is denominated in USD. There are other features of the
LC, the documents, and the transaction that are deliberately designed to be confusing
and to mislead a document examiner.
In fact, the goods are under priced. The buyer and seller are cooperating to move cur-
rency into Mainland China in violation of currency controls. They are also cooperating
to defraud the bank that issued the LC since the buyer will claim that the documents
are discrepant on their face and refuse reimbursement.
ACTIVITY:
Explain how a fraudster can use over pricing to defraud a financial institution.
The transaction structure and / or shipment terms appear unnecessarily complex or

unusual and designed to obscure the true nature of the transaction.
Fraudsters often rely on confusion and complexity, or the appearance of complexity, to

disguise their illicit conduct. In many instances, a fraudster will create an elaborately
complex transaction designed to confuse victims, law enforcement, and banks in order
to assist in perpetrating the fraud. Financial institutions should take notice and make
inquiries if they encounter a transaction that appears to be unnecessarily complex or
is structured in a way that does not make sound business sense in order to determine
whether the actual purpose of the transaction is being hidden.
Example: In the example above in subsection 12.4.3 (Collusion), the goods are not the
type that require 180 days to resell. Therefore, a 180 day acceptance does not make
commercial sense for the transaction and suggests that some other transaction is
being undertaken with the funds or that something is out of place. If the relationship
manager was aware of the turnaround time for the goods, questions should have been
raised before the acceptance LC was issued.
ACTIVITY:
Explain why banks should take notice of complex transactions and make
inquiries when they encounter them.

(1) The LC contains non standard clauses or phrases or has unusual characteristics
(such as an incorrect use of seal); (2) LC frequently significantly amended for exten-
sions, changes to the beneficiary and / or changes to payment location that make no
apparent commercial sense; or (3) trade related documentation under an LC or docu-
mentary collection appears illogical, altered, fraudulent, or certain documentation is
absent that would be expected given the nature of the transaction (such as a missing
application for a LC).
The inclusion of unusual terminology in trade instruments, particularly wording that

does not make economic sense may indicate that the parties to the transaction are
attempting to obscure or hide the true nature of the transaction. In the commercial
fraud context, non standard letter of credit language may indicate that the parties are
inexperienced at trade and that legitimate commerce is not their actual intention. Issues
360 | Chapter 12
with documentation, such as documents that appear altered or falsified may indicate
that the transaction does not have a legitimate business reason.
Example: It is common for forged letters of credit to contain words and phrases that
are inappropriate for letters of credit. While no LC banker would take such a document
seriously, other bankers would not spot the difficulties. Because some of these phrases
appear in poorly drafted independent guarantees, it is difficult to determine whether
the undertaking is genuine. For an example of such factors, see an excerpt from the
opinion in Dorchester Financial Holdings Corp. v. Banco BRJ. S.A.5
ACTIVITY:
What could the inclusion of unusual terminology in trade instruments,
particularly wording that does not make economic sense, indicate?
Actions or conduct by the customer or another person related to a transaction should

be given further attention. This Indicator serves as a “catch all”.
The purpose of the indicators is to serve as one of many tools that banks can use to
identify trade based commercial fraud and other financial crimes. However, no one
tool or tools can replace experience and institutional knowledge that banks and its
employees gain from years of experience and past incidents. Therefore, if something
in a transaction seems suspicious or not right, the bank should conduct further due
diligence and investigation.
ACTIVITY:
Try to design a commercial fraud on a financial institution as an experiment.
Think about the elements this chapter has discussed such as the psychological
manipulations a fraudster uses to gain the trust of the financial institution,
the different schemes fraudsters use such as Pyramid and Ponzi schemes,
and professionals that a fraudster may incorporate into the scheme to make
the scheme appear more legitimate.

Subsection 12.5.1 Summary of Commercial Fraud
Chapter 12, Commercial Fraud, explained how commercial fraud applies to Trade
Based Financial Crimes Compliance and provided an overview of the various types of
common commercial fraud and the methods by which they are committed. Chapter 12
also discussed various means to combat commercial fraud, measures which are both
preventative and retroactive, which range from encouraging whistle blowers to insti-
tuting organisational policies designed to adequately train and raise awareness for red
flags of commercial fraud. As indicated, summaries of several of the court decisions
referred to in this chapter are contained at the end.
Read the following case summary, and answer the questions that follow.
English Court Rules against Citi in Metals Financing Case:
Mercuria Energy Trading Pte Ltd. v. Citibank N.A.

[2015] EWHC 1481 (Comm) [England]6
The decision in Mercuria Energy Trading Pte Ltd. v. Citibank NA is another case
that stems from the Qingdao port scandal (see also ANZ Bank (China) v. Ningbo
Haitian Int’l Trade, covered in Documentary Credit World, p.24 (October 2014).
In that case, the underlying contract was for a repo transaction between Citi
and Mercuria whereby Mercuria would initially sell Citi metals, aluminium
and copper, and Citi would then sell the metals, or equivalent metals, back
to Mercuria. The metals were located in bonded warehouses in China at the
ports of Qingdao, Penglai, and Shanghai.
In May 2014, Mercuria informed Citi that there were reports of fraud emerging
that a Chinese trader had colluded with a port company in Qingdao to issue
fraudulent port receipts to warehouse operators, including the operators that
had issued the warehouse receipts to Citi. It soon became apparent that there
was only between 60,000 to 70,000 tonnes of aluminium held at the entire
Qingdao port when Citi alone was supposed to have 73,000 tonnes stored
there. Subsequently, similar problems were also discovered at Penglai.

362 | Chapter 12
In response, Citi, acting pursuant to a Master Agreement, served Mercuria

with a Bring Forward Event Notice (BFE) which made the next banking day
after the receipt of the notice the sale date. Mercuria challenged this action,
claiming that the alleged fraud constituted Termination Events. Citi did not
contest whether the fraud marked a termination event, but asserted that
the BFE notices were validly delivered and Mercuria’s payments obligations
remained. Citi then delivered all of the warehouse receipts to Mercuria along
with invoices totalling over USD 270 million.7
The High Court of Justice, Queen’s Bench Division, Commercial Court, Phillips,
J., concluded that Citi’s tender of the endorsed warehouse receipts did not
constitute a good delivery of metal to Mercuria under the Master Agreements.
The Judge determined that attornment by the warehouse operator was a nec-
essary element in the transfer of constructive possession. Since that did not
occur, Citi did not affect delivery of the metals to Mercuria. Therefore, the
Judge ruled that Citi was not entitled to a judgment for the unpaid metal nor
was Citi entitled to make delivery by assigning Mercuria its rights to the metal.
The Judge also concluded that the BFE notices delivered by Citi were valid and
the payment obligations of Mercuria were not suspended when they claimed
a termination event had occurred. The Judge agreed with Citi’s argument that
all that was necessary to validate the BFE notices was a genuine and reason-
able belief by Citi that they could no longer safely store the metal. The Judge
determined that the facts, which included reports by Citi officials highlighting
concerns and reports of the fraud at the Chinese ports, demonstrated Citi’s
belief that it could no longer store the metal safely at the ports were both
genuine and reasonable. Therefore, Mercuria’s failure to make payment placed
it in breach of its obligation.8
Case Summary Questions:

1) Consider what could have been done to prevent this fraud.
2) What Indicators were apparent in hindsight?
7 See also, Impala Warehousing & Logistics Co. v. Wanxiang Resources Pte. Ltd., [2015] EWHC 25
(Comm) [England], summarised in 2016 Annual Review of International Banking Law & Practice
at 382.
8 See Institute of International Banking Law & Practice, 2016 Annual Review of International
Banking Law & Practice at 416.
In Subsection 12.1.1, you were encouraged to reflect on the extent that com-
mercial fraud is addressed in your organisation’s compliance programme.
• What policies are in place within your organisation to address and monitor
commercial fraud?
• What types of commercial fraud named in the chapter have you come
across in your experience?
Question 12-1. All of the following are examples of commercial fraud except which?
a) a. Securities Fraud.
b) b. Consumer Fraud.
c) c. Procurement Fraud.
d) d. Transport Fraud.
Question 12-2. Since prevention is of limited effect in combating commercial fraud,

the best prevention strategy is legal action. True or false?
Question 12-3. A ____________________________________________ scheme is one in which

the fraudster returns funds from the same victim or other victims
as if they were the proceeds of the touted investment, encouraging
the victim to reinvest or promote the scheme to others.
Question 12-4. Explain why whistle blowers may be hesitant to identify fraudsters.
Question 12-5. Explain how a professional such as an attorney, accountant, inspector

or banker who lends support to a fraudulent scheme increases the
likelihood to the success of the scheme.

364 | Chapter 12
Section 12.6 Cases
Subsection 12.6.1 Impala Warehousing & Logistics Co.

v. Wanxiang Resources Pte. Ltd.
Impala Warehousing & Logistics Co. v. Wanxiang Resources Pte. Ltd.

Topics: Commercial Fraud; Tsingtao Fraud
Note: Wanxiang Resources (Singapore) PTE Limited (Buyer) contracted with

Impala Warehousing and Logistics (Shanghai) Co. Limited (Seller) to pur-
chase aluminium. Payment was assured by a standby letter of credit issued by
Rabobank International (Issuer) under a Collateral Management Agreement
(CMA). The CMA provided that it was governed by Singapore law and that the
courts of Singapore had non-exclusive jurisdiction. The contract provided that
Seller was to deliver the goods by providing warehouse certificates to Buyer.
The warehouse certificates were given by Seller to Issuer to whom the alumin-
ium had been pledged. The warehouse certificates referred to a website for
their terms and conditions, one of which provided “at clause 10 an agreement
to English law as the governing law and an exclusive jurisdiction clause in
favour of England.” The Judge concluded that there was sufficient notice and
that these terms applied to the certificates. Buyer claimed that Issuer’s claims
had been satisfied and that the certificates had been endorsed in favour of
Buyer. However, Seller failed to deliver the aluminium.
Buyer sued Seller in China in August 2014 based on the warehouse certificates.
In September 2014, Seller obtained an interim anti-suit injunction from the
English High Court restraining Buyer from continuing proceedings in China.
The High Court of Justice, Queen’s Bench Division, Teare, J., dismissed Seller’s
application for a final mandatory injunction and for an interim mandatory
injunction.
Buyer introduced evidence to show that despite the exclusive jurisdiction

clause, which the court determined was integrated into the warehouse cer-
tificates agreement, the Collateral Management Agreement, which governed
the underlying transaction, would allow jurisdiction in Shanghai. The Judge
rejected this argument on the grounds that the Seller was not a party to the
10 Summarised in Institute of International Banking Law & Practice, 2016 Annual Review of
International Banking Law & Practice at 382.
Collateral Management Agreement. However, the Judge also noted that Seller
had acknowledged that Buyer was the owner of the aluminium, and thus the
claim against the Seller was legitimate and would be straightforward in show-
ing the liability of the Seller. The question remained as to whether the court
would enforce the exclusive jurisdiction clause in the warehouse certificates
so as to force Buyer to litigate the claim in England.
The Judge dismissed Buyer’s application for an injunction against the pro-
ceedings in China, not because the court acknowledged that the collateral
agreement had effect over the warehousing agreement, but rather on grounds
that it would significantly prejudice the Buyer’s claim because a judgment
rendered in England in its favour would not have force in China, where the
goods and parties were located.
Subsection 12.6.2 Komercni Banka A.S. v. Stone & Rolls Ltd.
Komercni Banka A.S. v. Stone & Rolls Ltd.

Abstract: Komercni Banka, a Czech bank, agreed to finance the import/export

business of BCL Trading GmbH. It issued deferred payment LCs with maturity
dates varying from 180 to 360 days for the account of BCL as Applicant in favor
of Stone and Rolls, Ltd., a UK company, for the purchase of large quantities
of agricultural products from Russia and the Ukraine. The scheme involved
51 LCs issued between 1997 and 1999.
As a condition to issuing the LCs, Issuer required that the LC would not be-
come operative until a prepayment was made into a BCL dollar account with
Issuer; furthermore, on a drawing, Issuer would transfer the funds from the
account with Applicant being liable for any balance. The prepayment varied
from 100% to 25%.
The 30 LCs involved in this action required the presentation of a commercial

invoice, confirmation of insurance, and a warehouse “warrant list”. Typical
terms were:
Commercial invoice in 1 original duly stamped and signed.
11 Abstracted in Institute of International Banking Law & Practice, 2003 Annual Survey of
366 | Chapter 12
Confirmation of Insurance indicating that goods are fully insured and

that insurance is vinculated [sic] in favour of Komercni Banka, a.s. Prague.
Original of Warrant List, duly signed, indicating LC number, total quan-

tity of goods, unit price and total amount, stating that the goods under
consignment of LC are lying in the warehouse and are held only in favour
of Komercni Banka, a.s, indicating that goods will be released to final
consignee only upon authorisation of Komercni Banka, a.s. furthermore
confirming that all charges accrued from storage will not be calculated
to Komercni Banka, a.s.
The grain warrants provided that:
We, as the sellers warehouse holder, herewith confirm and state that
goods under consignment LC number 9822590007003 are lying in our
warehouse and are held only in favour of Komercni Banka, a.s., Prague.
We irrevocably confirm that respective goods will be released to final
consignee only upon authorisation of Komercni Banka, a.s, Prague. We
also confirm that all charges accrued from storage will not be calculated
to Komercni Banka, a.s, Prague.
Beneficiary “[procured] the presentation of documents to the bank, via an

intermediary bank. The documents presented were accepted by [Issuer]. The
LCs were then assigned by [Beneficiary] to a discounting bank or in some cases
forfeited by [Issuer] itself.”
Beneficiary cycled the bulk of the payments back to Applicant, characterising

them as “advance loans”, retaining for itself a “commission”. Portions of these
funds were used to provide the prepayments for further LCs.
When a new manager of Issuer became aware from newspaper reports that
a steel plant which held steel for Applicant in an unrelated transaction was
experiencing financial difficulties, inquiries were made and it was discovered
that there was no steel warehoused for the bank. This revelation led to inqui-
ries about the warehoused grain which, after many delays taking five months,
revealed that there was no grain and that the grain warrants were regarded as
having no binding legal effect and merely indicated a willingness to provide
grain should it be paid.
It was also discovered that “there were no longer sufficient funds both to repay
maturing LCs and to maintain blocked pre-payments for LCs which had not
yet matured.” The reason for this situation was that the branch had used the
same funds as cover for both the LCs and for foreign exchange transactions for
which there was also a blocking of funds. In addition, it was discovered that
of the 30 LCs, the funds for eight did not remain blocked and for the other 22
LCs there was no prepayment whatsoever.
Issuer sued Beneficiary and its principal for deceit in England on 30 LCs which
resulted in a loss of USD 94,720,382.80. It asserted that there were never any
genuine underlying sales of the grain located in Russian warehouses; that the
invoices and warrant lists presented to it were a “sham”; and that Beneficiary
acted as a “puppet” to obtain money by false pretences. The court noted that
there were separate proceedings against Applicant in Austria and the Czech
Republic and that criminal charges had been brought against bank employees.
The High Court of Justice, Queen’s Bench Division, Commercial Court, Toul-
son, J., granted judgment in favour of Issuer against both Beneficiary and its
principal.
The court noted that “[b]ecause the action is brought in deceit, the [Issuer]
has to establish not only that there was misrepresentation on a comparison
between the objective meaning of the documents presented to it and the true
facts, but that the [Beneficiary] either intended to deceive it or were indifferent,
i.e. reckless, whether it was deceived.”
For this purpose, “the focus shifts from the objective meaning of the docu-
ments to what was in the mind of [Beneficiary’s principal].” The court relied
on Spencer Bower, Turner and Hadley on Actionable Misrepresentation, 4th
ed. (2000) where the principle is stated “‘[i]n deciding whether the represen-
tation was fraudulent, the question is not whether the representor honestly
believed it to be true in the sense assigned to it by the court, or on any objective
consideration of its truth or falsity, but whether he honestly believed it to be
true in the sense in which he understood it when it was made.’”
In considering the background of the Russian grain trade, the court gave
credence to the statements of an expert who opined that: “The Russian
grain trade is conducted with a rip-off mentality. Traders exploit producers
wherever possible. It is difficult for producers to gain access to reliable price
information. Contracts are treated with cursory regard. A warehouse warrant
is a dubious document.”
Beneficiary denied any dishonesty. Instead, it blamed its trading partner as being
“unreliable”. It also asserted that the underlying transactions were genuine,
denying any deceit or dishonesty. It claimed that the USD 121,000,000 advanced
368 | Chapter 12
to Applicant constituted loans conducted in the ordinary course of business for

which it had security in the form of its ability to withhold delivery of the goods.
In this regard, the court assessed the evidence of Beneficiary’s principal:
“However, at the same time as it was being represented to the bank that
goods as described in the warrant list were being held only in favour of the
bank, [Beneficiary’s principal] on his own evidence knew that he intended
to pass all or most of the discounted proceeds of the LC to [Applicant], and
that he intended not to permit delivery under the contract of sale between
[Beneficiary] and [Applicant], for which payment was to be by the LC, until
after repayment by [Applicant] of the re-cycled proceeds of the LC. As he
made clear in the passages from his third witness statement set out above, he
regarded the ability of [Beneficiary] to withhold delivery of the goods sold to
[Applicant] as a form of security for [Applicant’s] debt created by [Beneficia-
ry]passing to [Applicant] the proceeds of the LC by which payment for those
goods had been made. How could that be squared honestly with the making
of representations to the bank that the goods were held only in its favour
(assuming for this purpose that [Beneficiary’s principal] believed that the
goods were being held in the warehouse)? At the end of his evidence I asked
[Beneficiary’s principal] about this [reference omitted].”
“[Beneficiary’s principal] gave a lengthy answer containing two parts. The first
part was that he was confident from the prepayments made by [Beneficiary]
to FIG Don [Third Party Company] that [Beneficiary] had the ability to fulfil
its contractual obligation to [Applicant]. Whether true or not, this was not
an answer to the point. The second part involved drawing a chronological
distinction between the presentation of documents to the bank and the sub-
sequent loan of discounted LC proceeds to [Applicant], and treating the two
stages as unconnected. I regard this as disingenuous. The plan to recycle the
proceeds of the LC to [Applicant], and to withhold delivery of goods under
the contract of sale financed by the bank, was in existence at the time of the
presentation of documents to the bank; it was not a later independent idea.
[The signatory of the Warrants] on his own evidence intended all along that
the goods should not be held ‘only’ in favour of the bank, but rather that they
would not be released to the supposed buyer, [Applicant], until it had repaid
the re-cycled proceeds of the discounted LC.”
“I reject also [Beneficiary’s principal’s] suggestion that he believed that the

statement in the first sentence of the warrant list that the goods ‘are being held
only in favour of’ the bank was narrowed by the irrevocable confirmation in
the next sentence that the goods would be released to the final consignee only
upon the bank’s authorisation. On that argument it would not have mattered
what rights anybody else might have to prevent delivery of the goods. That
would make no commercial sense from the bank’s viewpoint and would be
contrary to the requirement of the LC that the warrant list should state that
the goods were held only in its favour.”
Furthermore, Beneficiary argued that there were “grave internal irregularities

and shortcomings on the part of the [Issuer]” and that Issuer had failed to
protect itself by obtaining and maintaining prepayments.
The court noted that there were “An astonishing catalogue of deficiencies from
the board of directors downwards...” some of which had resulted in criminal
charges in the Czech Republic but also that there were no allegations of
fraud by any bank officer or employee. The court noted that when a new risk
assessment unit was established, their inquiries were regarded “as an unwel-
come form of interference”. When recommendations about the adequacy of
monitoring bank risk were made, they were not followed.
Nonetheless the court stated that it did not agree with Beneficiary’s argument
that Issuer’s own negligence was responsible for the loss. “When the bank
accepted the documents presented to it, as a result of the defendants’ fraud,
it incurred an apparent liability to the beneficiary (or its assignee) for the face
value of the LC. The defendants’ fraud was therefore an operative cause of the
loss sustained by the bank in paying that amount (or a discounted proportion).
Its own negligence in failing to obtain or retain the pre-payment specified in
the LC was a concurrent partial cause of its loss. However, the bank breached
no duty to the beneficiary in that regard and its own contributory negligence
is not available as a defence to a fraudster.”
The court noted that “[f]rom the defendants’ viewpoint there is certainly an
element of fortuity in that if the proceeds of payments by [Beneficiary] to
[Applicant] were used to repay earlier LCs issued in favour of [Beneficiary],
[Beneficiary] would cease to owe a liability to the bank in respect of those
earlier LCs; but if they were used to repay other LCs, [Beneficiary] would gain
no benefit. However, that is not something about which [Beneficiary] is enti-
tled to complain. A fraudster who pays proceeds of his fraud to an accomplice
takes his chance [with] what happens to them.”
370 | Chapter 12
Subsection 12.6.3 Mercuria Energy Trading PTE Ltd. v. Citibank, N.A.
Mercuria Energy Trading PTE Ltd. v. Citibank, N.A.

Topics: Commercial Fraud; Repo Agreements; Warehouse

Receipts
Type of Lawsuit: Buyer sued Sellers for declarations that notices
served were invalid and/or superseded by
Claimant/Buyer’s Termination Notice, and
that Sellers failed to deliver metal when they
tendered endorsed warehouse receipts. Sellers
counterclaimed for USD 271 million, which was
the price specified in the forward sales, and a
declaration that they were entitled to terminate
both Master Agreements.
Parties: Claimant/Buyer: Mercuria Energy Trading PTE
LTD (Counsel: Graham Dunning QC, David Davies
and Stuart Cribb, Stephenson Hardwood LLP)
Defendant 1/Seller 1: Citigroup Global Markets
LTD (Counsel: Daniel Toledano QC, Richard Mott
and Oliver Butler, Norton Rose Fulbright LLP)
Defendant 2/Seller 2: Commodities Inventory
Management (Counsel: Daniel Toledano QC,
Richard Mott and Oliver Butler, Norton Rose
Fulbright LLP)
Fraudsters: Decheng; Dagang Port Company
Warehouse Operators: Impala/NEMS; CWT; GKE
Underlying Obligated 18 repurchase transactions for

Transactions: aluminium and copper governed by two Master
Agreements made under English law.
12 Abstracted in Institute of International Banking Law & Practice, 2016 Annual Survey of
Decision: The High Court of Justice, Queen’s Bench

Division, Commercial Court, Phillips, J., ruled that
Sellers failed to make valid delivery of metal to
Buyer and thus could not collect payment for
the unpaid price of metal; Sellers could not make
delivery by assigning Buyer’s rights to the metal;
Sellers were liable to Buyer for failure to deliver
the metal under Transaction 6, but were not
liable for reimbursement because Seller did not
terminate the contract; Sellers were not liable for
non-delivery of the remaining 17 transactions;
and Sellers could terminate the Master
Agreements under both theories of contract and
common law; and these rights were not lost by
waiver or affirmation, and were not affected by
Sellers’ inability to deliver the metal.
Rationale: A contract to deliver an item cannot be fulfilled
by delivery of receipts issued by a warehouseman
where the warehouse does not hold the item,
whether through its own negligence or fraud or
that of others, leaving the obligee responsible
for damages in lieu of delivery. Inability to
deliver goods under contract does not affect a
party’s right to terminate a contract for future
transactions.
Factual Summary: Buyer and Sellers agreed to purchase and sell copper and
aluminium located in warehouses in the ports of Qingdao, Penglai, and Shanghai
(“metal”). The parties agreed to use 18 obligated repurchase agreements (“repo
agreements”) for the sale of the metal, under which Sellers would re-deliver
the metal or deliver other metal of “the same brand and quality and stored in
the same location” (“equivalent metal”). According to the contract, the repo
agreements were intended to finance Buyer based on the security of its metal
inventory, but were also true sales with title and risk passed between parties.
The parties entered into two Master Agreements, which both regulated the
terms of trading under the repo agreements. The Master Agreements included
a provision that granted either party the ability to bring forward the date of
payment via notices to the other party in the event that the storage facility
holding the metal was unable to safely or satisfactorily store the metal. The
Master Agreements also allowed the non-defaulting party to refuse to make
payment when the other party defaults on its obligations or is reasonably
unable to comply with the contract.
372 | Chapter 12
After the parties began trading the metal by means of warehouse receipts,
they received information that significant fraud had occurred in relation to
the metal stored in Qingdao and Penglai. Sellers had purchased the metal
from a trader. In collusion with the trader, a port company issued fraudulent
port receipts to the trader who delivered them to warehouse operators. These
warehouse operators issued warehouse receipts based on the fraudulent port
receipts, without ascertaining their correctness, in favour of the trader. The
trader delivered the warehouse receipts to Sellers as part of their transaction.
At these warehouses, significant amounts of metal were missing, and evidence
existed suggesting that Fraudsters were engaged in “multiple pledging” in
which the Fraudsters used the same metal, if the metal was present at all, to
account for different port receipts and security loans. Because of this fraud
scheme, Sellers were unable to complete their contractual obligation of de-
livery. Sellers then issued several notices to Buyer seeking to bring forward
payment (“BFE Notices”). Sellers purported to deliver the metal by delivering
endorsed warehouse receipts to Buyer. Sellers then issued notice under the
Master Agreements to Buyer claiming a material breach in the event that
Buyer failed to pay within one business day (“Material Breach Notice”). Buyer
voluntarily paid to avoid the material breach.
Buyer subsequently gave Sellers notice that Buyer viewed the events at Qingdao
and Penglai as events that could reasonably be expected to have a material
adverse effect on Sellers’ ability to deliver equivalent metal to Buyer. For
that reason, Buyer explained that it would not make payment to Sellers prior
to receiving actual delivery of the metal which it would help accomplish by
having the metal shipped to another country. Sellers responded by delivering
warehouse receipts endorsed in blank for the 17 outstanding transactions along
with invoices totalling over USD 272,000,000. Buyer rejected the warehouse
receipts. Buyer then sued Sellers for declaratory relief from the agreements
and Sellers sued Buyer for the price due and for termination due to fraud. The
Judge ruled that tender of warehouse receipts did not constitute good delivery
under the Master Agreements and, accordingly, Seller was not entitled to the
price nor could Seller deliver by assigning its rights to Buyer. Therefore, the
Judge also ruled that Seller was liable to Buyer in damages for failure to de-
liver metal and for not reimbursing the price paid for one transaction because
Buyer did not terminate the transaction. The Judge also ruled that Seller is
not liable on the other 17 transactions, because Seller’s termination of the
Master Agreement was valid even though Seller could not deliver the metal.
Legal Analysis:
1. Valid Delivery
Buyer argued that Sellers failed to make valid delivery, as defined under the
Master Agreements, by tendering the endorsed warehouse receipts. In rebuttal,
Sellers argued that the Master Agreements provided them with significantly
different delivery terms, obliging them to only make “deemed delivery” with
warehouse receipts. The Judge ruled that Sellers did not make valid delivery
of the metal when they delivered endorsed warehouse receipts to Buyer. The
Judge explained that the mere transfer of warrants or receipts issued by a
warehouse operator does not affect delivery. Warehouse operator attornment
to the buyer, official acknowledgment of a transfer, or title to the metal must
be exchanged for proper delivery to occur. At that point, the buyer acquires
constructive possession of the metal and the warehouse operator becomes
the buyer’s bailee. Sellers’ argument failed to persuade the Judge because
nothing in the Master Agreements provided that Sellers enjoyed different
delivery terms or delivery terms only requiring a transfer of documentation
instead of actual metal. To the contrary, the Master Agreements refer to both
parties’ obligation to “deliver the Metal” or “deliver the Equivalent Metal”.
Furthermore, nothing in the Master Agreements supported the notion that
endorsed warehouse receipts were to function as good title of the metal.
Sellers also argued that the Master Agreements allowed delivery regardless of
Sellers’ good title to the metal or the metal’s existence. In actuality, for every
forward sale, Sellers were contractually obligated to represent and warrant that
they held good title to and right to possession of the metal. This contractual
provision, the Judge explained, directly countered Sellers’ claim that they must
only transfer warehouse receipts. The Judge also stated that Sellers could not
interpret the forward sales confirmations to eliminate the requirement of
an attornment. Though the forward sales confirmation provided that Sellers
shall make “deemed delivery”, it expressly required delivery “by means of in
warehouse transfer…with irrevocable and unconditional transfer of title and
possession”. Since “in warehouse” delivery signifies transfer of possession
by attornment, the inconsistency within the forward sales confirmation was
construed in favour of requiring an attornment. The Judge based his ruling
on the fact that the parties would have never intended to exclude an attorn-
ment requirement because without it, the meaning and effect of both Master
Agreements and the overall commercial scheme would be fundamentally
altered. The Judge thus ruled that the endorsed warehouse receipts did not
constitute valid delivery.
374 | Chapter 12
2. Transfer of Rights to Metal

Sellers argued that if the Judge determined that the endorsed warehouse
receipts did not constitute valid delivery, they could fulfil their contractual
obligations by assigning the rights of the metal to Buyer. The Judge rejected
this argument, stating that Sellers had yet to give the Warehouse Operators
release instructions, which would clarify whether attornment occurred to Buyer,
rendering proper delivery. In elaborating on the ruling, the Judge explained
that Sellers were barred from transferring the rights to the metal because the
uncertainty surrounding the title and possession of the metal stemmed from
the Termination Event.
3. Reimbursement and Non-Delivery Claims

Buyer argued that it was entitled to reimbursement of the price paid under
one of the repo agreements executed prior to fraud discovery (“Transaction
6”). Buyer supported its claim by citing the total failure of consideration. The
Judge ruled that Buyer would not receive reimbursement for the price paid
under Transaction 6 because Buyer did not terminate the contract. The Judge
pointed to evidence that demonstrated Buyer’s ongoing attempts to recover
the metal to support his ruling. Buyer also sought damages for non-delivery.
Buyer argued that the Termination Event required Sellers to deliver the metal
to Buyer before it was obligated to pay the purchase price. The Judge dismissed
this claim, stating that while the Termination Event granted Buyer the ability
to refuse issuing payment, it did not impose upon Sellers the requirement of
delivering the metal under the remaining 17 transactions.
4. The Validity of the Bring Forward Event Notices (BFE Notices)

Under the Master Agreement Sellers must have held the relevant opinion and
the opinion must have been reasonable order for the BFE Notices to be valid.
Buyer argued that the relevant opinion-formers did not hold the requisite
opinion expressed in the BFE Notices. Buyer stated that only a lower-level
employee received the information regarding the Qingdao and Penglai fraud.
The Judge disagreed and ruled that Sellers’ required employees formed the
relevant opinion stated in the BFE Notices. The Judge accepted the evidence
presented by Sellers showing that their senior management authorised the
BFE Notices and received the relevant information regarding the fraud.
Buyer also claimed that because Sellers included the Shanghai transactions
in the BFE Notices opinion, the Notices should be rendered invalid. The Judge
ruled against Buyer on this claim because Sellers were not required to “sever”
from the BFE Notices the Shanghai transactions. The Judge explained that
even if the BFE Notices were invalid in regard to the Shanghai transactions,
they were still valid with respect to the transactions in Qingdao and Penglai.
The Judge also dismissed Sellers’ argument that the required opinion should
only concern the storage facility and its ability to hold the metal safely. The
Judge deemed this construction too narrow, as the safety of the storage facility
was not the sole issue.
Under the Master Agreements, the clause outlining how to properly issue
a BFE notice provided that the notice must be “in the reasonable opinion
of [Sellers]”. Buyer stated that the word “reasonable” should be determined
through an objective standard, and that Sellers’ opinion was objectively un-
reasonable. Sellers countered by arguing that “reasonable” should be based on
an irrationality test: if a party in Sellers’ position could hold reasonably hold
the same opinion, then it would be reasonable for the purposes of the contract.
The Judge ruled in favour of Sellers and concluded that Buyer’s interpretation
of the clause would eliminate the ability of either party to unilaterally trig-
ger a “bring forward event”. In doing so, Buyer’s interpretation would raise
“considerable uncertainty” over whether one of these events did in fact occur.
Finally, Buyer contended that uncertainty over the title and possession of
the metal vitiated the BFE Notices. Buyer argued that Sellers based the BFE
Notices on a false premise because Sellers knew that the title and location of
the metal were uncertain. The Judge also rejected this claim, stating that the
BFE Notices are not able to raise any additional representation, warranty, or
obligation, and that they did not alter Sellers’ current obligations under the
contract.
5. Buyer’s Obligation to Pay

Buyer, in attempting to withhold payment to Sellers, stated that the Master
Agreements provided that Notice it did not have to issue any payments to
Sellers until it received the quantity of metal described in the contract after
Buyer issued the Termination. The Judge ruled that Buyer was required to is-
sue payment for debts already accrued, explaining that the clause in question
needed clearer language to support Buyer’s contention.
6. Sellers’ Right to Terminate

Sellers argued that, under contract law, they could terminate the Master Agree-
ments because of Buyer’s material breach and repudiation. Buyer disagreed,
stating that Buyer neither materially breached the Master Agreements nor
repudiated when it did not purchase the metal. The Judge ruled that Sellers
could terminate the Master Agreements under both theories. In regard to
contract law, Buyer committed a material breach and repudiated the Master
Agreements when it did not issue payment for the metal after already receiving
the Material Breach Notice, which amounted to a contractual Termination
376 | Chapter 12
Event. Sellers also argued that they could terminate the Master Agreements
under common law repudiation. The Judge ruled that Buyer repudiated the
Master Agreements because Buyer actually breached as opposed to mistak-
enly clarifying and enforcing the Master Agreements’ terms. The Judge then
explained that Sellers neither lost the right to terminate nor surrendered it
through the inability to deliver the metal.
Subsection 12.6.4 Dorchester Financial Holdings

Corp. v. Banco BRJ. S.A.
Dorchester Financial Holdings Corp. v Banco BRJ. S.A.

No. 11-CV-1529 (KMW), 2016 WL 1169508 (S.D.N.Y. Mar. 21, 2016) [USA]13
The following is an excerpt from the above styled case summarising the signs that
should have made it apparent that the undertaking was not genuine.
Third, the terms of the alleged letter of credit do not match the terms of the
Alleged Letter of Credit Issuance Agreement. The Alleged Letter of Credit
Issuance Agreement states that the applicant for the letter of credit is ACP,
but the applicant listed on the alleged letter of credit itself is “Mr. Jose Luis
Cabas Alvarez,” whose name appears nowhere on the Alleged Letter of Credit
Issuance Agreement. (Def.’s 56.1 ¶¶ 64-65); (Alleged Letter of Credit Issuance
Agreement, 1 [Doc. No. 252-1]); (Letter of Credit, 1 [Doc. No. 14-9]). In addi-
tion, the Alleged Letter of Credit Issuance Agreement states that the letter of
credit will be issued in the amount of USD 100 million, but the alleged letter
of credit itself states that its value is $250 million. (Def.’s 56.1 ¶ 70); (Alleged
Letter of Credit Issuance Agreement, 1); (Letter of Credit, 1).
BRJ’s expert states that errors in terms as crucial as these would not be expected
to appear in a legitimate letter of credit. See (Byrne Report ¶¶ 47(a), 47(c)).
Dorchester has proffered no evidence to explain these significant discrepancies.
Fourth, BRJ’s expert identifies numerous terms in the alleged letter of credit
either that are inconsistent with standard letter of credit practice, or that
contradict one another. For instance, the alleged letter of credit states that
the amount is “due upon maturity but prior to the day of expiration.” (Letter
of Credit, 1). However, BRJ’s expert explains that the terms “maturity” and
“due” are not used in legitimate letters of credit, and that these terms do not
13 Abstracted in Institute of International Banking Law & Practice, 2017 Annual Review of
appear in the Uniform Customs and Practice for Documentary Credit (UCP500),
rules to which the alleged letter of credit is subject by its own terms. (Byrne
Report ¶ 47(d)). The “due upon maturity” clause also appears to render the
letter of credit unusable, as the date of “maturity” and the date of “expiration”
are the same, October 17, 2002. See (Letter of Credit, 1). The alleged letter of
credit also contains terms such as “assignable,” “freely” transferrable,” and
“callable” that, according to Professor Byrne, are not used in legitimate letters
of credit and are not used in the UCP500; Professor Byrne states that, based
on his experience, these words appear frequently in letters of credit that are
fraudulent. (Byrne Report ¶ 47(f)).
Finally, the alleged letter of credit is purportedly issued “by order of one of our
customer [sic] ACP Investments Limited.” However, as discussed previously,
Augusto de Queiroz states that ACP was never a customer or client of BRJ.
(Aug. 5 Augusto Decl. ¶ 10).
The declared value of the alleged letter of credit also supports the conclusion
that the document is inauthentic. As improbable as it is that a bank of BRJ’s
size would agree to issue a letter of credit for USD 100 million, as it purportedly
agreed to do in the Alleged Letter of Credit Issuance Agreement, it is even
more improbable that it would actually issue a letter of credit for USD 250
million, given that its total asset base is less than half that size. And Augusto
de Queiroz states that BRJ has “never entered into a single obligation even
close to the USD 250,000,000 principal amount that is in the purported letter
of credit.” (Aug. 5 Augusto Decl. ¶ 3).
Finally, the appearance of the document is inconsistent with letters of credit

issued by BRJ. For instance, the supposed BRJ seal that appears on the docu-
ment was not the seal used by BRJ at the time the alleged letter of credit was
issued—it does not show BRJ’s number of company registry in Brazil.
See (Aug. 25 Augusto Decl. ¶ 7(a)); (Claudio Decl. ¶ 10(a)). The seal appears
six times on the single-page letter of credit, something that BRJ’s expert
explains is common on letters of credit used in connection with commercial
frauds. (Byrne Report ¶ 47(f)). In addition, the font used on the document
does not match the font used by BRJ on its own documents, (Aug. 5 Augusto
Decl. ¶ 12); the letter of credit number on the document does not conform to
the numbering system BRJ uses to issue financial instruments, id. ¶ 11; and
the document is written in English, whereas the overwhelming number of
documents issued by BRJ are written in Portuguese, id. ¶ 12; (July 29 Augusto
Decl. ¶¶ 15(b), 15(d)).
378 | Chapter 12
Subsection 12.6.5 DCD Factors Plc v. Ramada Trading Ltd.
DCD Factors Plc v. Ramada Trading Ltd.

2014 WL 2557972; [2014] EWHC 1872 (QB) [England]14
Topic: Commercial Fraud
Note: Ramada Trading Ltd (Reseller), an importer of food to the U.K, was fi-
nanced by DCD Factors Plc (Financiers). DCD Trade Services (Issuer) provided
LCs to Reseller for purchasing food, which they would then resell to third
parties, which in this case would have been HFK General Trading LLC (Buyer).
Mr. Baiyat (Fraudster), an officer for DCD Factors Plc, set up a fictional client
account in the name of Buyer. Buyer was the “notify party” or the buyer named
in the documents associated with Reseller’s LCs.
Reseller would normally use an LC to make payments that were paid from
Financier’s internal nominal account, and that amount would later be credited
to the account by Buyer after a transaction of goods from Reseller. Fraudster
used the fictional account he set up under the Buyer’s name to create an
invoice of USD 1,600,000, using an LC intended for Reseller to finance the
transaction. Ultimately Buyer ended up paying USD 1,600,000 directly to
Financiers account without receiving any of the goods that Reseller would
provide. There was no real transaction.
Initially, Financier and Issuer sued Reseller for fraud, since Buyer did not re-
ceive any goods for their money. However, upon further investigation, Reseller
pointed out that the fraud actually resulted from Fraudster who worked in
Financier’s company, and not from any action of Reseller. A freeze order was
placed on the assets of Reseller until the trial date.
Both Reseller and Financier had delayed the trial date resulting in the freeze
order expiring first, so Financier brought an action to extend the freeze. Despite
evidence of Fraudster’s activities, the court refused to discharge the freezing
injunction or the underlying charges on the grounds that both parties had
delayed the trial date and that the Reseller’s evidence did not convince him
that the freezing order had denied them opportunity to pursue any commer-
cial transactions.
14 Abstracted in Institute of International Banking Law & Practice, 2015 Annual Review of
The High Court of Justice Queen’s Bench division, Andrews, J., extended the
freezing injunction. The Judge reasoned that the Resellers did not present
evidence that materially altered the previous court’s decision about the in-
junction, even if the evidence would support them in the fraud trial.

Chapter 12 (Commercial Fraud) identified various types of commercial fraud
and the impact of commercial fraud on a global economy. Chapter 12 also
discussed best practices in combating commercial fraud, including preven-
tion.

In Part I the student received an introduction to Trade Based Financial Crime
Compliance in chapter 1 and discussed Trade in chapter 2, Financial Crime
Regulation in chapter 3, the structure of a Compliance Programme in chapter
4, Exercising Due Diligence in chapter 5, and the Indicators of Trade Based
Financial Crimes in chapter 6.
In Part II, Combating Financial Crime, the student studied Anti Money Laun-
dering in chapter 7, Countering the Financing of Terrorism in chapter 8, Sanc-
tions in chapter 9, Weapons of Mass Destruction in chapter 10, and Anti
Bribery and Anti Corruption in chapter 11.
In chapter 13, the student will consider boycott and Anti Boycott regulations.
13
Chapter 13
ANTI BOYCOTT
LEARNING OBJECTIVE
After studying this topic, student should be able to demonstrate an understanding
of what a boycott is, boycott and anti boycott regulations, and various methods
to combat unapproved boycotts.
CHAPTER OVERVIEW:
This chapter on anti boycott discusses boycott and anti boycott regulations,
and explains what financial institutions must do with regard to boycotts.

necessary for financial institutions to combat them. It treated Anti Money
Laundering in chapter 7, Countering the Financing of Terrorism in chapter
8, Sanctions in chapter 9, Weapons of Mass Destruction in chapter 10, Anti
Bribery and Anti Corruption in chapter 11, and Commercial Fraud in chapter
12. This chapter on Anti Boycott will complete Part II.
381
382 | Chapter 13

Chapter 13 Anti Boycott
Section 13.1 An Overview of Boycotts
Section 13.2 Anti Boycott Regulations
Section 13.3 U.S. Anti Boycott Regulations
Section 13.4 What Financial Institutions Must Do
Subsection 13.5.1 Summary of Anti Boycott
Section 13.1 An Overview of Boycotts
Adherence with a boycott or violation of anti boycott provisions is a serious concern for
financial institutions to whom such boycotts or anti boycott provisions apply. Many of
the fines imposed by U.S. regulators have stemmed from failure of financial institutions
to spot violations of U.S. anti boycott regulations.
The name “boycott” derives from the successful voluntary actions of Irish tenant farmers
in 1880 in response to evictions by Charles Boycott, a land agent of an absentee English
landowner. They refused to deal with Boycott or to have any commerce with him, in
effect shunning him and making it impossible for him to fulfil his commission in an
economically viable manner. In the widespread news coverage, the name “Boycott” was
applied to their actions. Since then, there have been numerous boycotts in a variety of
contexts, some of which have been successful and others unsuccessful.
In the sense in which the name was originally used, a boycott is voluntary abstention
from dealing with a person, entity, or country designed to achieve the social or eco-
nomic isolation of an adversary to force the target to alter objectionable behaviour.
The term “boycott” has also been used to refer to actions mandated by governments
against other countries or private entities. It is in this sense that the term is relevant
to this Book since most voluntary boycotts are legal in most countries. Although there
are certain exceptions, they rarely relate to financial institutions. A boycott imposed by
law is, in effect, an embargo and is often described as a sanction, although the penalties
for failing to comply with such a boycott are also described as sanctions.
ACTIVITY:
What is the difference between a boycott and a sanction?
Anti Boycott | 383
Boycotts are classified and distinguished as primary, secondary, or tertiary.

1. A primary boycott is a boycott directed at a target whose actions or inactions are
desired to be changed. An example in the private sector would be the boycott of
a store that has offensive hiring policies. An example of a governmental boycott
would have been the boycott of South Africa during the apartheid regime. A
current example is the Arab League boycott of Israel, adopted in the post World
War II era, in connection with the establishment of the State of Israel.
2. A secondary boycott is an indirect attempt to influence the actions of a target
by seeking to discourage third parties from dealing with the target of the
boycott. An example of a secondary boycott is a boycott of a company that
does business with the target against which the primary boycott is directed.
With respect to the Arab League boycott of Israel, member states prohibit
companies that have done business with or invested in Israel from doing
business in their countries.
3. A tertiary boycott is one that involves use of a “blacklist” of businesses
or companies that deal with the target of a boycott. In the context of the
Arab League boycott, it intends to prohibit third parties from dealing with
“blacklisted” companies. It also prohibits ships from visiting an Israeli and
Arab port on the same trip.
For example, the U.S. boycott imposed on Cuba is intended to coerce a regime change
in Cuba that is acceptable to the U.S. In order to accomplish this goal, the boycott at-
tempted to deny Cuba access to capital, resources, technology, markets, and restrict the
free movement of Cuban citizens and their commercial entities. Likewise, the boycott
imposed upon Israel by the Arab League is intended to create economic hardship and
to sanction third party companies from dealing with Israel.
ACTIVITY:
What provisions in your company’s compliance plan address boycotts and
anti boycott regulations?
Section 13.2 Anti Boycott Regulations
It is generally conceded that a sovereign nation can elect to conduct a boycott of another
country, its citizens, and its products if it elects to do so and can require its own citizens
to comply. Thus, there are few situations where other governments seek to prohibit
primary boycotts. However, it is also recognised that a nation state can prohibit its
citizens and entities operating in its jurisdiction from being compelled to participate
in a boycott that is not instituted or approved by that nation state. The issue is whether
one country can require other countries and its citizens to comply with its boycott.
384 | Chapter 13
With the support of allies of the State of Israel, several countries have passed laws
prohibiting compliance with the Arab League boycott. These provisions are described
as anti boycott provisions. Such provisions are most rigorously enforced in the U.S. and
it is to the U.S. anti boycott regulations that this chapter will refer.
The Wolfsberg Group, Trade Finance Principles (2019) Section 1.4.1 (National and Regional
Sanctions, Embargoes and NPWMD) provides: “Anti-Boycott measures: This term
refers to measures undertaken by [Financial Institution]s to ensure that Trade Finance
transactions do not become subject to non-sanctioned embargoes designed to isolate
or create economic disadvantages for certain countries where there is countervailing
legislation that they are subject to.”1
Section 13.3 U.S. Anti Boycott Regulations
U.S. anti boycott regulations apply to activities by any U.S. person whether operating
in the U.S or in another country including individuals and permanent affiliates of non
U.S. corporations resident in the U.S. While the primary impact of the U.S. anti boycott
regulations is on the Arab League boycott, they relate to any boycott that discriminates
based on race, religion, sex, nationality, or national origin not approved by the U.S.
There are two U.S. statutes that contain anti boycott provisions, which are admin-
istered by two different U.S. agencies. One, contained in the Export Administration
Regulations (“EAR”), and enforced by the Office of Antiboycott Compliance, a unit of
the U.S. Department of Commerce’s Bureau of Industry and Security. The other provi-
sion is contained in the Internal Revenue Code and enforced by the Internal Revenue
Service of the U.S. Department of the Treasury. The goal of both is to prevent U.S.
firms (and foreign firms operating in the U.S.) from being used to facilitate economic
boycotts imposed by other countries which are contrary to the policies of the U.S.
They have somewhat different and, in some respects, conflicting provisions, different
consequences, and different reporting requirements. Violations of the EAR are subject
to criminal and administrative penalties; violations of the Treasury regulations are
subject to penalties in the form of the denial of tax benefits.
FACTFIND
Trade finance and compliance professionals should direct questions regarding
requests to potentially engage in unsanctioned foreign boycotts to the Office
of Antiboycott Compliance (OAC) Anti Boycott Advice Phone Line at 1 (202)
482 2381.
2019.pdf.
Anti Boycott | 385
To read more about U.S. Industry of Bureau and Security Anti Boycott laws,
go to: https://www.bis.doc.gov/index.php/enforcement/oac.
The EAR provisions contain prohibitions requiring reporting of the receipt of boycott
compliance requests, enforced by civil or criminal penalties, and the possible denial of
export privileges. They prohibit a U.S. person from taking actions to support or comply
with a prohibited boycott or agreeing to do so.
The Treasury Regulations penalise U.S. taxpayers who participate in or cooperate

with a prohibited boycott. Participation is defined as agreeing not to do business with
a boycotted country or its government, businesses, or nationals, or to respecting a
blacklist, or removing or refusing to employ persons due to nationality, race, or religion.
Reports are also required to be filed of requests to participate in a boycott and also of
operations in or with a boycotting country or its nationals listed by the U.S. Treasury.
The consequence of such actions is denial of tax benefits such as foreign subsidiary
deferral benefits.
FACTFIND
To read more about Anti Boycott provisions of the U.S. Internal Revenue Code,
go to: https://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-
2011-title26-subtitleA-chap1-subchapN-partV-sec999.pdf.
Under the EAR, a U.S. person can agree as a general statement that the laws of a boy-
cotting country will apply but must not agree to comply specifically with them. On
the other hand, agreeing to comply with the laws of a boycotting country is penalised
under the IRS Regulations but an agreement that boycott laws of a boycotting country
merely apply is not penalised.
A comparison of the operation of the two regulations provided by the U.S. Department
of Commerce’s Office of Antiboycott Compliance can be found at: https://www.bis.doc.
gov/index.php/documents/enforcement/404-distinctions/file.
These provisions affect contracts and actions under them that involve refusal to do
business with a specific country, or an agreement that furnishes information about race,
religion, sex, or national origin of another person. Their primary impact on financial
institutions relates to letters of credit, amendments to letters of credit, documentary
collections, and the documents presented under them. For example, they would impact
the issuance, confirmation, or honour of letters of credit or documentary collections that
contain prohibited boycott terms or conditions. Passing along documents containing
information regarding the race, sex, or national origin of a person is itself considered
to constitute the furnishing of such information and, therefore, a violation.
386 | Chapter 13
The complexity of anti boycott regulations is illustrated by a provision in a letter of

credit requiring that a document be presented under it that states that goods will not be
transported to their destination country on an Israeli vessel or airplane or on any means
of transport that will stop at an Israeli port on its route to a boycotting country. While
such a provision would seem at first glance to violate the anti boycott regulations, it
does not. In a sense, it is an exception that is based on the ability of boycotting countries,
most notably Saudi Arabia, to impose reasonable security measures on its commerce.
Such “Vessel Eligibility Certificates” are permitted if furnished by the owner, master or
charterer and are not reportable under U.S Bureau of Industry and Security regulations.
On the other hand, a requirement in a letter of credit for, or presentation under a letter
of credit or a documentary collection of, a document that provides the name, nationality,
and flag of the vessel carrying the goods and a statement that it is allowed to enter Arab
ports, is a permitted but reportable violation according to the U.S. Bureau of Industry
and Security. However, it may be subject to denial of certain tax benefits under U.S.
Treasury regulations. Likewise, the requirement of a certificate or certificate of origin
containing a statement that goods are not of Israeli origin, a “negative certificate of
origin” is prohibited, but a certificate or certificate of origin with a positive statement
of country of origin is permissible.
Section 13.4 What Financial Institutions Must Do
Financial institutions engaged in providing financial services involving international

transactions must adhere to the boycott and anti boycott laws of the countries that
have jurisdiction over them. While boycotts involve activities other than trade, they
do affect trade to a considerable extent.
In particular, in issuing and processing letters of credit and documentary collections,

employees must be alert to spot and report any violations of applicable anti boycott
regulations. For the reasons given above, these concerns apply particularly to banks
doing business in the U.S. and to U.S. banks worldwide.
Banks are expected to examine documents for signs of boycott compliance and to report
any situation in which trade documents contain such signs.
When a financial institution operates under an anti boycott regime, it must ensure
that its automated checks are programmed to flag transactions involving boycotting
countries and that its staff is trained to look for signals of possible or probable support
of the prohibited boycott.
Anti Boycott | 387
While these issues are too detailed for a Book that surveys various types of financial
crimes, some warning signs that require further scrutiny include:
• References to Israel in documents related to a transaction that has nothing
to do with Israel.
• Statements regarding the entry of vessels or aircraft into a boycotting country.
• Documents or required statements to the effect that goods are not produced
in Israel.
• The requirement or inclusion of statements regarding compliance with the
boycott laws of a country.
Because of the complexity of this area, any problematic issues should receive heightened
scrutiny by specially trained personnel in accordance with the institution’s compliance
programme.
To view examples of reported clauses and conditions representing restrictive trade

practices or boycotts, visit the U.S. Department of Commerce’s Bureau of Industry
and Security, Office of Antiboycott Compliance: https://www.bis.doc.gov/index.php/
all-articles/7-enforcement/1755-examples-of-recent-boycott-related-requests.
Where there is a violation, the appropriate response depends on the context. A financial
institution should not issue or confirm a letter of credit or an amendment or process
documents containing such terms. Whether it declines to act or seeks to have the
prohibited term changed depends on a variety of factors.
For more detailed information, see the Office of Antiboycott Compliance, Bureau of
Industry and Security, U.S. Department of Commerce’s website for more detailed in-
formation: https://www.bis.doc.gov/index.php/enforcement/oac.
ACTIVITY:
How does your bank or financial institution determine whether it is affected by
U.S. anti boycott regulations? If it is so affected, what procedures are in place to
avoid violating it?
388 | Chapter 13
Subsection 13.5.1 Summary of Anti Boycott
Chapter 13 identified the three types of boycotts in trade, discusses the provi-
sions nation states have implemented in response to boycotts, and describes
the role banks play in complying with and combating boycotts. In particular,
it examines the U.S. anti boycott regime and its application to financial in-
stitutions.
Customer located in Sri Lanka wants to ship cotton into Egypt against pay-
ment in USD with payment by commercial letter of credit. The bill of lading
is required by the terms of the credit to state that the vessel did not visit an
Israeli port.
• What should the bank do in this situation?
In the activity in section 13.1 (An Overview of Boycotts) of this chapter, the
student was encouraged to review the provisions in their compliance pro-
gramme for boycotts.
• What provisions are contained in your organisation’s compliance plan
that address boycotts?
Question 13-1. Anti boycott provisions are a nation state’s attempt to prevent its
citizens, or anyone that falls within its jurisdiction, from participat-
ing in economic boycotts or embargos that are not instituted by that
nation state. True or false?
Question 13-2. When a financial institution is affected by an anti boycott regime,

what should it rely on to check for a boycott?
Question 13-3. Why is it so complicated to comply with anti boycott regulations?

Anti Boycott | 389
Question 13-4. It is a violation of the U.S. anti boycott regulations for a financial
institution to issue a letter of credit subject to the laws of a boycotting
country. True or false?

cific types of financial crimes, chapter 13 (Anti Boycott) provided the student
with information about the various forms of boycotts, the U.S. and other anti
boycott provisions, and the importance of these provision for financial insti-
tutions.

Part I, Trade Based Financial Crime Compliance provided an Introduction to
Trade Based Financial Crime Compliance in chapter 1, and discussed Trade in
chapter 2, Financial Crime Regulation in chapter 3, the structure of a Com-
pliance Programme in chapter 4, Exercising Due Diligence in chapter 5, and
Indicators of Trade Based Financial Crime in chapter 6.
In Part II, Combating Financial Crimes, the student covered Anti Money Laun-
dering in chapter 7, Countering the Financing of Terrorism in chapter 8, Sanc-
tions in chapter 9, Weapons of Mass Destruction in chapter 10, Anti Bribery
and Anti Corruption in chapter 11, and Commercial Fraud in chapter 12.
Having completed Part II, Combating Financial Crimes, the student is now
prepared to move forward with preparations for taking the certification ex-
amination which should include taking the model examination and reviewing
the online training course.
Part 3
Appendices
A
Appendix A
ANSWERS TO REVIEW QUESTIONS
Answers to Chapter 1: An Introduction to Trade

Based Financial Crime Compliance
1-1. Answer c. Letter of credit fraud is not a part of the independence principle
but an exception to it. Moreover, fraud by the beneficiary is the basis for the
exception (or collusion between the beneficiary and the applicant) and not
fraud by the applicant (see subsection 1.2.1).
1-2. The global acceptance of standardised practice rules enshrining its indepen-
dence and the standardisation of forms (see subsection 1.2.2).
1-3. Letter of credit fraud is a doctrine that emerged in letter of credit law as a lim-
itation to the independence principle in situations where its application would
undermine the letter of credit itself by allowing it to become an instrument
of fraud. On the other hand, compliance involves public policy considerations
that override the letter of credit and the interests of letter of credit law and
do not derive its source from it but from the sovereign power of a nation state
(see subsection 1.3.1).
Answers to Chapter 2: Trade
2-1. In a collection, the bank makes no undertaking to pay. Its role is to follow the
instructions contained in the collection or transmittal letter, and to forward
or present the accompanying documents. Apart from counting the documents
and ensuring that all the documents listed are present, the bank disregards the
393
394 | Appendix A
content of the documents including any instructions that they contain. It is

only liable for negligence for failure to release the documents accompanying
the collection letter in the manner indicated (see subsection 2.7.2).
2-2. Answers a, c and e. Typically, there are a variety of additional parties who
intermediate the delivery of, and payment for, goods. Third parties can also
include a variety of intermediaries who transport goods as carriers, hold goods
as warehousemen, import or export facilitators such as freight forwarders and
customs brokers, or inspectors. They also include those who provide financial
services, including banks, other financial institutions, and insurers. In addition,
government agencies may play a variety of roles with respect to financing,
delivery, payment, and insurance (see section 2.2). While insurance plays an
important role in trade, insurance ombudsmen typically assist consumers with
their difficulties with insurers, and not companies engaged in trade. Likewise,
retail consumers benefit from trade but do not play an active role in the process.
2-3. False. This INCOTERM® option (EX WORKS) only requires the seller to make
available the goods at its own place of business, and the buyer must arrange
for transport itself (see section 2.5). This delivery term is therefore most con-
venient for the seller.
2-4. The buyer would typically favour the payment option “open account” because
this arrangement enables the buyer to receive the goods without having to part
with its money until later, presumably after it has resold the goods and been
paid itself. In a sense, open account is a form of trade finance by the seller. It has
two advantages for the buyer, receipt and ability to examine the goods before
payment is made, and financing, although the value of the latter will depend
on the rate charged for the delayed payment in interest or higher price of the
goods (see section 2.6).
2-5. True. The issuer / guarantor is obligated to honour its promise under the
independent guarantee when complying documents are presented by the
beneficiary regardless of accusations from the applicant that there has been a
breach of contract by the seller / beneficiary, or whether the applicant is able
to reimburse the issuer / guarantor (see subsection 2.7.2).
2-6. Answer c, ISP98 (ICC Publication No. 590), which stands for the International
Standby Practices (ICC Publication No. 590) is intended for independent un-
dertakings such as standbys or independent guarantees. Therefore, Answer e,
None of the above, is incorrect. Answer a URC522 stands for the Uniform Rules
for Collections which are not for independent undertakings but bank collec-
tions. Answer b, INCOTERMS®, is a collection of payment and delivery terms
Answers to Review Questions | 395
intended for in the underlying contract, and Answer d (Ex Works / EXW) is an
example of an INCOTERM (see section 2.5).
Answers to Chapter 3: Financial Crime Regulation
3-1. False. It may involve a financial institution but not necessarily (see Section 3.1).
3.2. Financial crime is the misuse of the financial system for improper and illegal
ends (see Section 3.2).
3-3. Answer a. Anti money laundering is not a financial crime. Money laundering,
however, is a financial crime (see Section 3.3).
3-4. Answer c. While financial crime may use the internet, such use does not explain
financial crime. Moreover, in most categorisations of financial crime, consumer
financial crimes are excluded (answer d) (see Section 3.3).
3-5. Answers b and e. Neither the UN International Children’s Emergency Fund nor
the UN Population Fund are involved in the fight against trade based financial
crimes (see Subsection 3.5.2.1).
3-6. The bank could be concerned about reputational risks, because the transaction
may involve questionable geographical areas, or questionable goods or services,
or questionable parties. Despite not being illegal, the transaction could pose a
risk to the bank’s reputation, and therefore be deemed too risky (see Section 3.9).
Answers to Chapter 4: The Compliance Programme
4-1. The elements of an adequate Compliance plan include:

• Assessment of Financial Crime Risks
• A Written Compliance plan
• The Compliance Officer and Team
• The Contents of the Programme
• Documentation
• Training
• Audit and Independent Testing
• Implementation
(see section 4.2)
396 | Appendix A
4.2. In order to fulfil his or her responsibilities, the officer must:

• Have direct access to the senior management, the board of directors, or
to an appropriate committee of the board.
• Be supported by sufficient staff to perform the mandated tasks. The
Compliance staff must also be adequately qualified and have sufficient
independence to carry out its duties.
• Have access to sufficient resources to fulfil his or her responsibilities
4-3. Answer d (Beneficiary). The compliance programme must provide for adequate
training for staff and with respect to trade based financial crime for those units
of the financial institution dealing with trade.
Thorough compliance training must be given to new personnel that takes into
account their position and exposure to compliance risk related issues. Training
must be given to all staff in accordance with their duties and responsibilities,
including Directors and Senior Management. There should be periodic refreshers
and updates as new developments arise (see subsection 4.2.6).
4-4. False. Having a well designed compliance plan indicating how to implement
the programme is not enough. The programme must actually be implemented
as well (see subsection 4.2.8).
4-5. What must be determined from independent testing of a compliance programme

is whether the current programme meets the indicated goals, whether it is ef-
fective, and whether adequate resources have been devoted to it (see subsection
4.2.7).
4-6. By putting the plan in writing, there is greater clarity regarding its contours,
the allocations of responsibility, and its policies. This step makes the finan-
cial institution’s commitment to the compliance programme clear within the
organisation to its own staff, and importantly, also to the examiners who are
tasked with investigating and auditing it. A written compliance plan also better
ensures that the programmes will remain intact and in effect despite turnover
of personnel, which will invariably happen over the years of an organisation’s
operation (see subsection 4.2.2).
Answers to Chapter 5: Exercising Due Diligence
5-1. Due diligence is the normal level of required scrutiny that should be given to
any customer and / or transaction which the bank will undertake. It includes
identifying the true identity of the customer, acquainting itself with the cus-
tomer’s business, including trade related transactions, what it produces, with
whom it engages, to whom it is selling or buying and past relationships, prod-
ucts, its location, and other factors and variables surrounding it. Enhanced due
diligence differs from due diligence in that it requires further and excessive
scrutiny of a transaction or person / entity involved (see sections 5.1, 5.2 and
5.3).
5-2. Certain minimal requirements include checking the customer’s name against
various watch lists, account opening procedures which include obtaining the
customer’s valid identification (photo identification when possible and notary
proof when not), capturing the date of birth for individuals, address, identi-
fication number, legal papers for legal entity, and ownership information. It
must include reasonable and practical risk based procedures for verifying the
identity of each customer (see subsection 5.3.2).
5-3. The objective of ongoing customer due diligence is to enable a bank to iden-
tify potentially suspicious transactions or patterns of behaviour, which were
not apparent or present at the beginning of the bank customer relationship.
While conducting this ongoing due diligence, the bank not only investigates its
customers and their transactions but also examines other entities with whom
the customers deal and other banks who play a role in the transactions (see
subsection 5.6.1).
5-4. True. Correspondent banks enable a bank effectively to reach jurisdictions

in which it is not physically present, offering valuable services to the bank’s
customers who deal with entities in such countries (see section 5.4).
5-5. Answers a, b, and d. In addition to the three items listed here, there are several
other items that are important for the bank to scrutinise including the type of
trade in which the customer is engaged: whether it produces parts, components,
or end products; the character and use of the products for which the customer
produces; and the countries to which the products are shipped, the means /
mode of transport, and points of transhipment (see subsection 5.3.7).
5-6. Automated scrutiny involves running checks through various computer systems
to see if a customer signals a “hit” in a system.
Manual scrutiny involves a more thorough examination by a person or persons

for the purpose of examining documents and their particulars to make judgments
regarding the nature and type of the transaction and documentation (see
subsection 5.3.4).
398 | Appendix A
Answers to Chapter 6: Indicators of Trade Based Financial Crimes
6-1. Indicator No. 5: Geographical / Jurisdictional Concerns. Conducting business

in, with, or through jurisdictions that are at a higher risk for money launder-
ing, terrorism financing or other financial crimes (see subsection 6.6.5). Other
Indicators such as No. 10 (Trade Structure Concerns) or No. 12 (Suspicious
Actions) are possible answers but less precise than No. 5.
6-2. False. The presence of an Indicator is a signal that further scrutiny is warranted.
Even if the investigation reveals the serious possibility of financial crime, a
suspicious activity report may not be appropriate. What response is appropriate
depends on the financial crime. As applied to a specific financial crime, they
may take on features that are not applicable to other crimes. And they may well
involve different responses. In some cases, a report to regulatory authorities is
appropriate and in others freezing the transaction is necessary. In still others,
the bank may elect to close the account. What the bank can disclose, and to
whom, will also vary, depending on the particular financial crime. All of these
matters are addressed in the discussion of specific financial crimes that follows
in this Part II of this Book, Combating Financial Crimes (see subsection 6.4.2).
6-3. A difficulty with the use of a list of Indicators is that the items listed do not
always seem applicable to trade transactions or the type of thing that bankers
would be able to identify in the context of their work as trade bankers. Other
Indicators seem inapt – for example, some lists point to frequent amendments
as an Indicator of financial crime. However, in some commercial LC transac-
tions, requests for amendments are common. The issue should be whether
the amendment is unusual or inappropriate within the context of the given
transaction. In addition, some of the Indicators, such as collusion, should be
identified in establishing or updating the customer relationship. Others such
as significant deviations are more likely to be identified by the relationship
manager than by trade operations. As with all aspects of trade based financial
compliance, team work between various areas of the bank is essential (see
subsection 6.5.3).
6-4. False. When it comes to suspicions of financial crime, the more the merrier.
While the presence of one Indicator suggests that further scrutiny is warranted,
the presence of multiple Indicators reinforces this suspicion and increases the
possibility that there is a financial crime (see section 6.6).
6-5. Prospective use of an Indicator involves using the Indicators as a tool to iden-
tify potential problems, ideally as early as possible in the process of exercising
due diligence when considering establishing a customer relationship or when
deciding whether to proceed with a particular transaction. Retrospective use

typically involves post mortem exercise attempting to understand what the bank
overlooked in a transaction which was problematic and has already occurred
6-6. False. While there may be collusion where the goods are over or under priced, a
determination that the price of the goods is inconsistent with their fair market
value is a sign of Apparent Inconsistencies in Proposed Transaction (Indicator
No. 9) and Suspicious Actions (Indicator No. 12) (see subsections 6.6.9 and
6.6.12).
Answers to Chapter 7: Anti Money Laundering
7-1. False. The Layering Stage consists of a series of transactions for the purpose of
creating a complex and confusing paper trail in order to hide the origin of the
money. The Integration stage aims to reconnect the launderer with the illicit
funds introduced in the placement stage of the money laundering process (see
sections 7.2.2 and 7.2.3).
7-2. Parties may attempt to hide the true identity of the Buyer and Seller from the
bank as a means of disguising the transfer of funds (see subsection 7.6.3).
7-3. Answers a, c and d. In choice a, Seller invoicing Buyer for goods that are not
sent is indicative of a scheme that is a “phantom shipment”, that is, non exis-
tent products (see subsection 7.7.4). In choice c, the invoice states an amount
that is greater than the actual amount shipped which is indicative of a scheme
that is related to “over invoicing” (see subsection 7.7.1). Finally, in choice d,
inexpensive goods can be invoiced as expensive goods which indicates “false
description of goods or services” (see subsection 7.7.5).
7-4. True. The purpose of money laundering is to channel ill gotten gains into the
financial system so the money launderer can use legitimate devices and tools
such as bank accounts, securities, checks, etc. (see section 7.1).
7-5. Answers a, b, c, and e. Clauses such as “LC unconditional, divisible, assignable”

in a LC. These phrases are not sound and common phrases used in LCs. Banks
should be suspicious when they come upon such non standard phrases (see
subsection 7.6.9). When the quantity of goods exceeds capacity of the tanker or
shipping container, it is a Red Flag that the amount on the invoice is fraudulent
and the bank must investigate (see subsection 7.6.10). Transactions involving
goods such as diamonds, precious metals, store valued cards and other easily
400 | Appendix A
liquidated goods are considered high risk, and therefore banks must exercise
enhanced due diligence (see subsection 7.6.6). Change in the type of products
customer typically purchases is listed under Indicator No. 2 and is a deviation
in the customer’s business pattern. Bank must follow up with customer to un-
derstand why customer’s product has changed and document (see subsection
7.6.2).
7-6. Over and under invoicing have some similarities with over and under shipment
in that they are both schemes used by money launderers and both involve
tampering with the transaction by means of the invoice. They will often both
involve collusion between Buyer and Seller. They differ from one another in
that over and under shipment involves an amount of goods being shipped that
is greater or less than what is indicated on the invoice and over and under
invoicing refers to the goods being priced (on the invoice) above or below the
fair market value (see subsections 7.7.1 and 7.7.3).
Answers to Chapter 8: Countering the Financing of Terrorism
8-1. To deny account relationships to terrorists and terrorist organisations and to

monitor transactions for suspicious names and actions and freeze and report
any suspicious transactions. (see subsection 8.5.2).
8-2. Answers a and c. It is imperative that banks vet their customers as part of
their compliance Programme using automated and manual screening. Banks
must also use the most updated lists to check their customers against lists of
countries that are sanctioned, PEPs, etc. On the other hand, they cannot allow
transactions suspected of terrorist links to proceed (answer b) or inform the
customer of their suspicion (answer d). Obviously, Answer e is incorrect. (see
subsection 8.5.3).
8-3. A terrorist act is an action by a terrorist intended to intimidate or compel others

to act or abstain from acting in a manner contrary to their will. Terrorist acts
are the principal means by which terrorists intimidate or compel people and
governments to act or refrain from acting in the manner desired by terrorists.
Typically, terrorist acts involve violence. A terrorist act includes not only the
violent act but the planning to carry out an attack, surveillance, obtaining
weapons and explosives, and obtaining identities (see subsections 8.2.1 and
8.2.3).
8-4. The goal of Counter Terrorism Financing (CTF) is to disrupt the flow of funds
in addition to identifying and punishing those entities that promote terrorism.
The ends are to deter, detect, and disrupt terrorism. These ends are accom-
plished through 1) systemic safeguards and 2) sanctions that target terrorists
and terrorist organisations (see subsection 8.4.1).
8-5. While such financing may not be criminalised in a number of countries (see
subsection 8.4.3), such financing is generally regarded as supporting terrorism
8-6. The goals of countering the financing of terrorism are accomplished through
1. Using systems to prevent.
2. Sanctions. (Refer to subsection 8.4.1).
8-7. Answer c. While financial institutions are not equipped to investigate (answer
a), punish (answer b), or even determine who is a terrorist (answer d), they can
stop the flow of funds to known terrorists. In light of the above, answer e is
obviously incorrect (see subsection 8.5.1).
Answers to Chapter 9: Sanctions
9-1. The goal of economic sanctions is to affect the behaviour of the person, group,
region, or nation at which the sanctions are directed (see section 9.3).
9-2. Any funds meant for a sanctioned party must go into a blocked account and
the transaction must be subsequently reported to the relevant governing body
for that jurisdiction. In addition, under certain sanctions programmes, any
documents received must also be retained and not returned to the sanctioned
party. These measures help with the effort of freezing and blocking of assets
belonging to, or destined for, sanctioned parties (see subsection 9.6.1).
9-3. False. Goods that pass through a sanctioned nation’s territorial waters, or
merely stop at a port in a sanctioned nation, are not likely to be considered
goods originating in that nation, or be seen as goods that can be classified as
being transhipped, or as having transited through that nation. Therefore, those
goods will probably not be subject to sanctions. However, if there is actual
transhipment, that is the goods are transferred from one vessel to another
in a sanctioned port, then it is more likely that those goods will be subject to
sanctions. In such a case, the bank must take appropriate steps (see section
9.5).
9-4. Sanctions violations can have legal consequences including severe fines, the
penalty of losing the license to conduct banking operations in a major world
402 | Appendix A
banking centre, such as New York, London, Hong Kong, or Singapore, and, in
addition, violations of sanctions can be devastating to a banks’ reputation (see
subsection 9.6.3).
9-5. a, b, and d. As explained in subsection 9.4.1, the nature of the policy objectives
pursued by these sanctions regimes is similar to those objectives of both the
United States and the European Union. Her Majesty’s Treasury phrases these
policies in terms of an “offending behaviour.” This offending behaviour is some
activity or aspects of some activity that the UK Government seeks to change
or end. Sanctions policies often seek to coerce a regime or individuals within a
regime to end or change their offending behaviour. Alternatively, sanctions can
be used to deny a target access to resources needed to continue an offending
behaviour. Sometimes financial sanctions are employed in order to stigmatise
or isolate a target politically. Finally, financial sanctions are used to protect
the value of assets that have been misappropriated from a country until it is
safe to repatriate the assets. Answer c is not correct because the purpose of the
sanctions programme is exactly the opposite. Therefore, answer e would also
be inapplicable.
9-6. UN sanctions have ranged from targeting and preventing the import and export
of specific items to and from a nation, such as arms or diamonds, to preventing
the trade of nearly all products into or from a specified nation. UN sanctions
also vary as to the target. UN sanctions have been directed at nations, rebel
organisations, terrorist organisations, and individuals (see subsection 9.4.1).
Answers to Chapter 10: Weapons Of Mass Destruction
10-1. The proliferation of weapons of mass destruction differs from terrorism financing
which was discussed in chapter 8 (Counter Terrorism Financing) in that terror-
ism financing involves all the activities of a terrorist organisation whereas anti
proliferation efforts focus only on WMD and involve governments as much as
terrorist organisations. WMD is related in that terrorists and terrorist organ-
isations are interested in such weapons as a tool of terror. Because financing
is needed to obtain weapons of mass destruction, the financial system can be
used to combat their proliferation and minimise potential risks of a large scale
disaster (see subsection 10.1.1).
10-2. Schedule 3 includes chemicals that have a dual use for proper commercial
uses and as a weapon of mass destruction. They include phosgene (carbonyl
dichloride), cyanogen chloride, hydrogen cyanide, chloropicrin (trichloroni-
tromethane) and their derivatives.
Schedule 3 chemicals present difficulties for banks. The key question is whether
the chemical is being used for legitimate commercial or educational purposes.
Since these uses tend to be specific, the task is much easier. If the party involved
is a proper regulator, accredited organisation, educational organisation, or
member of a specific industry, there is lessened concern (see subsection 10.2.1.1).
10-3. Answer e. Assessing the nature of the customer’s business and countries in-
volved in the transaction is part of this effort (see subsection 10.5.2). Financial
institutions must determine the nature of the customer’s business, the product
lines and countries involved and carefully scrutinise first via automated means
to see if there is a “hit”. Financial institutions must give transactions with
companies that deal in products related to WMDs, heightened due diligence
(see subsections 10.5.3 and 10.5.4). Any customer dealing in any high risk ju-
risdiction or with any chemical listed as high risk or listed as dual use should
automatically warrant heightened due diligence by the bank. Further, scrutiny
of transport documents forms an important part of the financial institutions’
contribution to the fight against WMDs (see subsection 10.5.4).
10-4. False. The propensity of chemical weapons, and not biological weapons, make
them inefficient is that their propensity for wide dispersal as a gas or liquid
makes it difficult to apply them to specific targets (see subsection 10.2.1).
10-5. Proliferation networks use front companies, intermediaries, illicit brokers, and
illegal means of operating to mask their operations and appear legitimate (see
subsection 10.4.3).
10-6. A financial institution should freeze any funds, block any transaction or doc-
uments facilitating it, and report its suspicions to the relevant authorities
in addition to any other steps required by the applicable law (see subsection
10.5.4).
Answers to Chapter 11: Bribery and Anti Corruption
11-1. Anti bribery laws generally work by prohibiting the solicitation, offering,
giving, or acceptance of bribes. These laws operate to make either an offer or
solicitation of a bribe an action that could lead to prosecution if the other party
brings the offer or solicitation to the attention of the authorities. Anti bribery
laws also typically carry penalties of monetary fines and, in severe instances,
potential jail time for violation of the laws (see subsection 11.4.1).
404 | Appendix A
11-2. Bribery undermines the public and private order by creating a system of decision
making and conduct that is not transparent. This lack of transparency affects
the organisation or person who is benefited, those who are disadvantaged,
and members of the public who are impacted by higher prices or inadequate
services or goods (see section 11.3).
11-3. False. Private and commercial bribery are the same phenomenon. The two
categories are public and private (commercial) bribery. (see section 11.2).
Answers to Chapter 12: Commercial Fraud
12-1. Answer b. (Consumer fraud). All other frauds listed are common types of com-
mercial fraud whereas consumer fraud tends to involve personal, household or
family matters, i.e. individual members of society (see subsection 12.1.2).
12-2. False. Since legal action is of limited effect in combating commercial fraud, the
best strategy is one of prevention. Prevention entails a wide variety of actions,
including having in place institutional policies that are designed to discourage
commercial fraud and limit opportunities to commit it, regular audits, adequate
education and training, and publicity (see subsection 12.3.1(d)).
12-3. Ponzi Scheme (see subsection 12.2.3).
12-4. Persons committing fraud may be someone in a job position that is superior
to the whistle blower, and thus, the whistle blower could fear retaliation from
higher level employees for informing. Or the organisation may seek to supress
disclosure of information about the fraud in order to protect its stock price or
reputation (see section 12.3.1 (f)).
12-5. Professionals are perceived to be neutral and, so, their participation or support
for a scheme provides added legitimacy to it (see subsection 12.2.3(e)).
Answer to Chapter 13: Anti Boycott
13-1. False. There are voluntary boycotts that are not affected by anti boycott pro-
visions. Even with respect to governmentally mandated boycotts, anti boycott
provisions are intended to prevent a government’s citizens from participating
in a boycott that it does not approve. Such an approved governmental boycott
may be one conducted or initiated by an allied government (see section 13.2).
13-2. Financial institutions must rely on both automated checks of relevant lists as
well as formal and regular training of its staff to look for signals of prohibited
support of the unsanctioned boycott (see section 13.4.
13-3. Because different countries have different anti boycott regulations and even
within the same country different regulations may have different provisions.
These regulations often apply to both citizens of that country and to non citi-
zen doing business in that country. In addition, a number of provisions can be
interpreted a number of ways with different consequences depending on the
boycotting country or who makes the statement (see section 13.2).
13-4. False. Agreeing to the application of the law of a boycotting country is not pro-
hibited but agreeing to comply with the boycott laws of a boycotting country
is prohibited and subject to penalties (see section 13.4).
B
Appendix B
SOURCES OF RED FLAGS / INDICATORS
1. Hong Kong Association of Banks
The Hong Kong Association of Banks’ Guidance Paper on Combating Trade-based Money
Laundering, published on 1 February 2016 contains various suggested Red Flags in
Annex B, Part 3 – Suggested Red Flags.
The document can be accessed at:

http://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/aml-cft/
Guidance_Paper_on_Combating_Trade-based_Money_Laundering.pdf
2. Monetary Authority of Singapore
The Monetary Authority of Singapore’s Guidance on Anti-Money Laundering and Countering

the Financing of Terrorism Controls in Trade Finance and Correspondent Banking: Mas
Information Paper released in October 2015 contains numerous potential Red Flags
organised by topic.

http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Monographs%20
and%20Information%20Papers/Guidance%20on%20AML%20CFT%20Controls%20
in%20Trade%20Finance%20and%20Correspondent%20Banking.pdf
3. Asia / Pacific Group on Money Laundering
The Asia / Pacific Group on Money Laundering’s APG Typology Report on Trade Based
Money Laundering (20 July 2012) contains a list of Red Flags divided by category in
ANNEX A (TBML RED FLAGS FROM CURRENT & EXISTING STUDIES).
407
408 | Appendix B

http://www.fatf-gafi.org/media/fatf/documents/reports/Trade_Based_ML_APGReport.pdf.
4. U.S. FFIEC Bank Secrecy Act / Anti Money Laundering Examination Manual
The U.S. Federal Financial Institutions Examination Council’s Bank Secrecy Act /
Anti-Money Laundering Examination Manual contains a list of potentially suspicious
activities, or “red flags” for both money laundering and terrorist financing in Appendix
F (Money Laundering and Terrorist Financing “Red Flags”).
The eDocument can be accessed at:

https://bsaaml.ffiec.gov/manual/Appendices/07.
5. U.K. Financial Conduct Authority (FCA)
The FCA Thematic Review, Banks’ control of financial crime risks in trade finance lists its
“red flags” under Appendix 1, Examples of trade based money laundering.
This document can be accessed at:

https://www.fca.org.uk/publication/thematic-reviews/tr-13-03.pdf.
C
Appendix C
GLOSSARY
Because there are many terms in connection with combating trade based
financial crime and because different terms are used to signify the same thing
under different national regimes, this Glossary of TBFC related Terms is an
important tool.
The explanations given in the Glossary are neither exhaustive nor definitive.
The source of explanations of some of the words is contained in the explanation
itself. Other explanations are drawn from common understanding of the words
in commerce and law. Bold words appear again.
Accept (verb): (1) In commerce, an action some banks will state the date and amount
by which a buyer indicates that the seller of the accepted draft. See National Credit
has performed. (2) In a Funds Transfer, Union Administration (NCUA), Compliance
a receiving Financial Institution, other Self-Assessment Guide (2004), p.37.
than the Recipient’s financial institution,
accepts a Transmittal Order by executing Acceptance (noun): In banking, the term
the transmittal order; this occurs by either means an accepted Draft or Bill of Ex-
(i) paying the recipient; (ii) by notifying change. If an acceptance is issued by a bank,
the recipient of the receipt of the order; it is known as a “Banker’s Acceptance”. If
or (iii) by otherwise becoming obligated it is accepted by a corporate entity, it is
to carry out the order. (3) Regarding Ne- known as a “Trade Acceptance”. The ma-
gotiable Instruments and Letters of turity or tenor of the acceptance is linked
Credit, the signature of the Drawee of to that of the draft or bill of exchange. If
a Draft or a Bill of Exchange by which it is payable at sight, so is the acceptance.
it becomes obligated on the instrument. If it is payable after a period of time or at
While the signature is often vertical on a fixed date, it is a time or Usance Bill.
the face of the instrument, it need not Acceptances can be a vehicle for Trade
be accompanied by any terms, although Finance on their own or in connection with
409
410 | Appendix C
Letters of Credit or Bank Collections. commercial Frauds by which victims are

The latter can contain an instruction “D persuaded to pay money in advance in the
/ A” (documents against acceptance) in expectation that they will then be able to
which case the Presenting Bank is in- obtain increased funds. The payment is
structed to release the documents against described in a variety of ways, as a “fee”,
the signature of the Drawee (typically the to cover costs, or as a sign of good faith.
buyer) on the draft / bill of exchange, that The additional funds are said to result
is against a trade acceptance. See Trade from an investment, a bequest, money
Finance Principles, Wolfsberg et al (2017), that has been uncovered, or a wide variety
p.22. See also Accept. of reasons. While the funds are typically
not returned, this method is sometimes
Accepting Bank (noun): In finance, a bank combined with Ponzi Schemes in which
that Accepts a Draft or Bill of Exchange the victim receives his or her own funds or
drawn on it as the Drawee. See Bank Secrecy those of other victims, adding credibility
Act/Anti-Money Laundering Examination to the scheme and typically inducing the
Manual (2014), p.268. See Acceptance. victim not only to reinvest but to induce
others to do so. See FCA Financial Crime:
Accessory (adjective): see Suretyship; A Firm’s Guide to Preventing Financial
Surety. Crime (2016), p.73.
Accessory Guarantee (noun): see Sure- Advice (noun): In Letter of Credit and
tyship; Surety. Independent Guarantee practice, the
term refers to the communication that
Account(s) (noun): In trade based finan- contains the terms and conditions of a
cial crime compliance, the term refers to letter of credit or proposed Amendment,
the relationship between a Customer received and relayed by the Advising Bank
and a bank in which the bank holds to the Beneficiary. See Advise; Advising;
the customer’s funds, and all data and Advising Bank.
information relating thereto. Having an
account requires the Financial Institution Advise; Advising (verb): In Letter of
to exercise Due Diligence regarding the Credit practice, the act of communicat-
customer. See FATF Recommendations: ing the terms and conditions of an LC
International Standards on Combating or proposed Amendment. See Advice;
Money Laundering and the Financing of Advising Bank.
Terrorism & Proliferation (2016), p.113;
FATF, Methodology for Assessing Technical Advising Bank (noun): In Letter of Credit
Compliance with the FATF Recommenda- practice, the bank that notifies (“advises”,
tions and the Effectiveness of AML-CFT see Advise; Advising) the terms of the
Systems (2017), p.148. letter of credit or a proposed Amendment
to the Beneficiary or to another advising
Advance Fee Fraud; Advance Pay- bank at the request of the Issuer or another
ment Fraud (noun): A method used in advising bank. The advising bank checks
Glossary | 411
the authenticity of the LC or amendment, from the context in which it is used. It can
that is that it appears to have originated mean an amendment to the terms of an
from the bank that purportedly has sent LC that is requested by the Applicant or
it and is responsible for the accuracy of Beneficiary, a communication from the
the terms that it passes on, namely that Issuer formally proposing the amendment
they reflect what it received. While the which becomes irrevocable once issued,
advising bank, as such, undertakes no a communication from a Confirmer to
obligation with respect to the LC, it may the beneficiary in which it either elects to
also be nominated, and in that capacity, propose the amendment or declines to do
act on the credit as a Negotiating Bank, so. Amendment can also relate to a term
paying bank, or Confirming Bank. See of the LC after the beneficiary consents to
UCP600 Article 9 (Advising of Credits the proposed amendment or acts on the
and Amendments); URDG 758 Articles 2 Credit after having received the amend-
(Definitions), 10 (Advising of Guarantee ment in a manner that unambiguously
or Amendment); ISP98 Rule 2.05 (Advice indicated acceptance. See UCP600 Article
of Standby or Amendment). 10 (Amendments) and ISP98 Rule 2.06
(When Amendment is Authorised and
Alternative Remittance Systems (ARS) Binding). The term amendment can also
(noun): ARS are operations to transfer relate to other independent undertakings
money without using the formal banking in a similar manner. See URDG 758 Arti-
system. ARS include unregulated networks cle 11 (Amendments). See Trade Finance
(informal bank like operations, informal Principles, Wolfsberg et al (2017), p.22.
Hawala operations), as well as regulated
networks and service providers (money ser- Analysis (noun): Analysis is a central
vice networks, for example Western Union aspect of the AML / ATF risk assessment
and similar providers). Unregulated ARS process. It entails consideration of the
can pose an increased risk for anti money probability, nature, sources, and potential
laundry and terrorism financing activities consequences of the identified Risks or
due to the lack of governmental oversight such factors. Indicators of Commercial
and monitoring. See FATF, Trade Based Crime (“Red Flags”) may help in iden-
Money Laundering (2006), p.35. See also tifying potential risks, as do Know Your
Hawala; Money Services Business (MSB). Customer (KYC) exercises. Risk analysis
can be carried out with different degrees
Amendment (noun): (1) Generally, the of detail and intensity, depending on the
term amendment signifies a change or potential risk’s severity and the aim of
proposed change to a term or agreement. the risk assessment, taking into account
(2) In international business transactions, the different indicators, and customer
amendment can relate to renegotiations and transaction information (so called
of commercial contracts, and subsequent Risk Based Approach (RBA)). See FATF,
amendments thereof. (3) In Letter of Credit Guidance on National Money Laundering
practice, the term has a variety of mean- and Terrorist Financing Risk Assessment
ings which must typically be determined (2013), p.21.
412 | Appendix C
Anti Boycott Measures (noun): This term International Standards on Combating

refers to measures undertaken by Financial Money Laundering and the Financing of
Institutions to ensure that Trade Finance Terrorism & Proliferation (2016), p.59;
transactions do not become subject to FATF, Methodology for Assessing Technical
non sanctioned Embargoes designed to Compliance with the FATF Recommenda-
isolate or create economic disadvantag- tions and the Effectiveness of AML-CFT
es for certain countries, where there is Systems (2017), p.148.
countervailing legislation to which they
are subject. See Trade Finance Principles, Asset Freezing Unit (AFU) (noun): In
Wolfsberg et al (2017), p.22. the United Kingdom, the Treasury’s Asset
Freezing Unit is the competent public body
Anti Money Laundering (noun): In the for the administration and implementa-
context of Trade Based Financial Crime, tion of the United Kingdom Sanctions
the term refers to efforts by governments, provisions. See FCA Financial Crime: A
intergovernmental organisations, regula- Firm’s Guide to Preventing Financial
tors, banks and Financial Institutions Crime (2016), p.74.
to combat the illegal practice of Money
Laundering by enacting laws and regu- Asset Misappropriation (noun): In
lations, enforcing supervision, auditing Financial Crime, the term refers to the
and fines, and requiring Compliance and theft or diversion of assets (monetary
Due Diligence in trade activities. assets, goods) by directors, officers and
other employees. It can also include
Applicant (noun): In Letter of Credit cases of embezzlement and / or acts of
practice, the Person who requests that deception. See PwC, Economic Crime in
a letter of credit undertaking be issued the Arab World (2014), p.29.
in favour of a Beneficiary. See UCP600
Article 2 (Definitions). Asset Recovery (noun): When used in
the context of Trade Based Financial
Appropriate Authorities (noun): In Crime, the term means the return or re-
FATF papers, this term refers to the com- patriation of the illicit Proceeds, where
petent authorities, including accrediting those Proceeds are often located in for-
institutions, intelligence and accrediting eign countries. See FATF, Best Practices
bodies, and self regulatory organisations. on Confiscation (Recommendations 4 &
The appropriate authorities decide on the 38) and A Framework for Ongoing Work
action required by a bank or Financial on Asset Recovery, p.1.
Institution upon discovery of Trade Based
Financial Crime, investigate banks and Associate Non Profit Organisation(s)
FIs, and impose fines or other measures (noun): In the FATF papers, includes for-
for Non Compliance. The competence of eign branches of international non profit
the acting authorities can have an impact organisations. See FATF Recommendations:
on the lawfulness of the ordered measures International Standards on Combating
or fines. See FATF Recommendations: Money Laundering and the Financing of
Glossary | 413
Terrorism & Proliferation (2016), p.122; exist since the Beneficiary of the second
FATF, Methodology for Assessing Technical LC is to make a profit. See Trade Finance
Compliance with the FATF Recommenda- Principles, Wolfsberg et al (2017), p.22.
tions and the Effectiveness of AML-CFT
Systems (2017), p.61. Bank Collection(s) (noun): In international
commercial and banking law, the term
Automated Clearing House (ACH) Trans- refers to an option for payment for goods.
action (noun): In the context of a Funds The seller arranges for shipping of the
Transfer, an ACH transaction is a batch goods, obtains respective documents, and
processed, value dated, electronic funds instructs the Remitting Bank through a
transfer between an Originating Bank collection letter or schedule. The remitting
and a Receiving Bank. See Bank Secrecy bank forwards the collection letter accom-
Act/Anti-Money Laundering Examination panied by the documents and typically a
Manual (2014), p.217. Draft to the Presenting Bank, possibly
via Collecting / Intermediary Banks. The
Automatic Identification System (AIS) collection letter instructs the presenting
(noun): In the context of international ship- bank to release the Documents Against
ping, AIS is an automated vessel tracking Payment (D / P), or against acceptance of
device which utilises ship transponders to a draft Documents Against Acceptance
broadcast position information primarily (D / A). See Uniform Rules for Collections
to avoid maritime collisions, as required (URC 522).
by the International Maritime Organisa-
tion (IMO), and other similar maritime Bank Guarantee (noun): see Independent
bodies. AIS can also provide other useful Guarantee.
data such as vessel identity, course history
(both long and short term) and speed; Bank Payment Obligation (BPO) (noun):
this data is particularly important for In Letter of Credit law and practice, a
Trade Finance as well as Trade Based BPO is an irrevocable undertaking by a
Financial Crime Compliance. Moreover, bank to make a payment as specified in
where vessels disable their AIS, especially an agreed baseline of an electronic trade
in regular intervals in specific regions, transaction made in accordance with the
this can indicate illicit activity. ICC BPO Rules, Publication 750E, in an
approved TMA supplied controlled system.
Back to Back Credit (noun): Under Letter
of Credit practice, the term means an LC Batch Transfer (noun): In a Funds Trans-
issued based on the security of a second fer, the term means a transfer comprised
LC on the understanding that Reim- of several individual Fund Transfers that
bursement will stem from documents are being sent to the same Financial
eventually presented under the first LC Institutions, but which may or may not
issued. Accordingly, each LC covers the be ultimately intended for different indi-
shipment of the same goods although viduals. See The FATF Recommendations:
price differentials in the goods will usually International Standards on Combating
414 | Appendix C
Money Laundering and the Financing of (1) One that benefits from something, or
Terrorism & Proliferation, p.76; Method- a Payee or Recipient, usually of money.
ology for Assessing Technical Compliance (2) In Letter of Credit practice, it is the
with the FATF Recommendations and the party in whose favour an LC is issued. See
Effectiveness of AML/CFT Systems, p.61; UCP600 Article 2 (Definitions). See also
see also Monetary Authority of Singapore ISP98 1.09(a) (Defined Terms); URDG758
(MAS), Notice 626 November 2015: Preven- Article 2 (Definitions); U.S. UCC Article
tion of Money Laundering and Countering 5-102(a)(3) (Definitions). (3) In Funds
the Financing of Terrorism, p.22. Transfer, it refers to the person or entity
identified by the Originator of the funds
Bearer Negotiable Instruments (BNIs) transfer as the receiver of the requested
(noun): In negotiable instruments, the funds transfer. See FATF Recommendations:
term includes Monetary Instruments in International Standards on Combating
bearer form such as: traveller’s cheques; Money Laundering and the Financing of
negotiable instruments (including cheques, Terrorism & Proliferation (2016), p.76.
promissory notes and money orders) that (4) In the context of property, it is the
are either in bearer form (i.e. “pay to bear- recipient of real property. (5) In traditional
er” or “pay to order of bearer”), endorsed dependent guarantees (see Suretyship;
without restriction, made out to a fictitious Surety), it is the party in whose favour the
Payee, or otherwise in such form that title guarantee is issued. (6) The term is also
thereto passes upon delivery. See FATF used by FATF to indicate the recipients
Recommendations: International Stan- of charitable or humanitarian assistance,
dards on Combating Money Laundering often from Non Profit Organisations. See
and the Financing of Terrorism & Prolif- FATF Recommendations: International
eration (2016), p.113; FATF, Methodology Standards on Combating Money Laun-
for Assessing Technical Compliance with dering and the Financing of Terrorism &
the FATF Recommendations and the Ef- Proliferation (2016), p.59.
fectiveness of AML-CFT Systems (2017),
p.61. See Draft and Beneficiary. Beneficiary Financial Institution (noun):
In Funds Transfer, it refers to the Finan-
Beneficial Owner (noun): In the context cial Institution which receives funds from
of Trade Based Financial Crime, it is the the ordering financial institution, either
Person(s) or entity who owns or controls directly or through an Intermediary
a Customer and / or the person on whose Financial Institution, and makes the
behalf a transaction is actually being funds available to the Beneficiary. See
conducted. See FATF Recommendations: FATF Recommendations: International
International Standards on Combating Standards on Combating Money Laun-
Money Laundering and the Financing of dering and the Financing of Terrorism &
Terrorism & Proliferation (2016), p.113. Proliferation (2016), p.76.
Beneficiary (noun): In the context of com- Bill for Collection (BC) (noun): see Bank
mercial law, the term has several meanings. Collection(s).
Glossary | 415
Bill of Exchange: see Draft. Blocking (verb): In U.S. Sanctions, the

term means a form of controlling assets
Bill of Lading (noun): In commerce and under U.S. jurisdiction. While title to
banking, a document of title evidencing blocked property remains with the des-
the receipt of goods for shipment issued ignated country or foreign national, the
by a Person engaged in the business of exercise of ownership powers and privi-
directly or indirectly transporting or for- leges is prohibited absent governmental
warding goods. It is a document commonly authorisation. Blocking immediately im-
required by a commercial Letter of Credit. poses full prohibitions against transfers or
See UCP600 Article 20 (Bill of Lading). transactions with regard to the property.
Similar terms are used in other systems.
Blockchain (noun): The term relates to See OFAC Regulations for the Financial
database technology used for storing in- Community (2012), p.3. See also Blocked
formation in a distributed, de-centralised Account; Freezing.
way (distributed ledger technology) using
certain connecting factors (cryptograph- Branch (noun): In commercial entities, the
ically created information) that digitally term means a location where an Issuer or
link (chain) each information entry (one its agent offer financial services.
block) with the next set of data (the next
block). Once entered into the database, Bribery (noun): The term means the
information cannot be modified or deleted offering or acceptance of an undue ad-
without detection, as every subsequent vantage in exchange for the improper
alteration of already entered information performance of a function or activity. See
would interfere with the chains that connect FCA Financial Crime: A Firm’s Guide to
the database entries. Providers of digital Preventing Financial Crime (2016), p.74.
database technology have introduced See also Corruption.
blockchain systems for electronic Bills of
Lading, Warehouse Receipts and other Cash Couriers (noun): In Money Laun-
digital documents that are fundamental to dering, the term means individuals that
international Trade and Trade Finance. transport currency or Bearer Negotiable
Instruments from one jurisdiction to
Blocked Account (noun): In the context another for the purpose of laundering
of Sanctions, the term refers to payments, criminal proceeds or otherwise financing
transfers, or withdrawals for a Person or terrorist activities. See FATF, Trade Based
organisation subject to sanctions, and Money Laundering (2006), p.35.
not allowed under a license (see Export
Licence; General License), must be in- Certificate of Origin (noun): In commerce,
serted into an Account that that cannot it means a document accompanying goods
be accessed by the sanctioned party. Also indicating the country where the goods
referred to as Freezing of funds. were produced. See Asia / Pacific Group
(APG), Typology Report on Trade Based
Money Laundering (2012), p.43.
416 | Appendix C
Clean Payment (noun): In Bank Collec- invoices, consular invoices, tax invoices,
tions, the term describes payment handled etc. All are regarded as the equivalent of
on the basis of a Draft without additional a commercial invoice except a preliminary
commercial documents. See Trade Finance or pro forma invoice which does not sig-
Principles, Wolfsberg et al (2017), p.23. nify shipment of the goods. Invoices are
particularly significant in the assessment
Collecting Bank (noun): (1) In Bank of customs duties and fees. (2) In Letter
Collections, the term means the bank of Credit practice, a document which
other than the Remitting Bank which is may be required in a commercial letter
instructed to collect payment from the of credit. Except to the extent that the LC
Drawee. (2) In banking, the term means provides otherwise, it must be issued by the
a bank handling an item for collection Beneficiary, made out to the Applicant
except a Paying Bank. See Trade Finance in the currency of the LC, and need not
Principles, Wolfsberg et al (2017), p.23. be signed pursuant to UCP600 Article 18
(Commercial Invoice).
Collection Order (also Collection In-
struction) (noun): In collections, the term Commercial Letter of Credit (noun): see
means a form submitted, to the Remitting Letter of Credit.
Bank by an exporter (Principal) with its
instructions regarding the goods. It is Commingling (noun, verb): In Money
the order rather than the documents or Laundering, the term means a process of
Draft to which the banks pay attention. combining the Proceeds of illicit activities
See Trade Finance Principles, Wolfsberg with the earnings of legitimate businesses
et al (2017), p.23. for the purpose of disguising the source of
these illicit funds to obfuscate their origin.
Commercial Carrier (also Common Car- See FATF, Trade Based Money Laundering
rier) (noun): In transportation, the term (2006), p.35.
means a Person engaged in the business
of transporting individuals or goods for Competent Authorities (noun): In Trade
a fee or other benefit for all persons who Based Financial Crime, the term refers
are prepared to pay the fee for the par- to all public administrators and law
ticular service offered. See Bank Secrecy enforcement officials with designated
Act/Anti-Money Laundering Examination responsibilities for combating Money
Manual (2014), p.183 & n.183. Laundering and / or Terrorist Financing.
Commercial Invoice (noun): (1) In com- Competition Law / Anti Trust Law
merce, a written statement of the goods (noun): In law and Financial Crime, the
sent, issued by the seller and addressed term describes laws which promote or
to the buyer indicating the goods being maintain market competition by regulating
delivered, their value, and any deduction, anti competitive behaviour or unfair busi-
addition, or discount. There are a num- ness conduct by organisations; examples
ber of types of invoices, such as customs include price fixing, excessive, predatory
Glossary | 417
or discriminatory pricing, unfair trading See UCP600 Article 8 (Confirming Bank

terms. See PwC, Economic Crime in the Undertaking). See Confirmation.
Arab World (2014), p.29.
Confiscation (noun): In Trade Based Fi-
Compliance (noun); Comply (verb); nancial Crime, the term, which includes
Complying (adjective): These terms have forfeiture where applicable, means the
several meanings. (1) In the context of permanent deprivation of funds or other
Letters of Credit and Independent Guar- assets by order of a Competent Authority
antees, the terms refer to the correlation or a court. This process occurs through
between presented documents and the a judicial or administrative procedure
terms and conditions of the undertaking, which transfers the ownership of specified
International Standard Banking Prac- funds or other assets to the state. Upon
tice and any applicable rules. See UCP600 confiscation, entities previously holding
Articles 2 (Definitions), 14(a) (Standards interests in the specified funds or other
for Examination of Documents), and 15 assets at the time of the confiscation or
(Complying Presentation); URDG758 forfeiture lose all such rights. See FATF
Articles 2 (Definitions), 19(a) (Exam- Recommendations: International Standards
inations), and 24(a) (Non-Complying on Combating Money Laundering and the
Demand, Waiver and Notice); ISP98 Rules Financing of Terrorism & Proliferation
2.01(a) (Undertaking to Honour by Issuer (2016), p.114-15; FATF, Methodology for
and Any Confirmer to Beneficiary), 3.01 Assessing Technical Compliance with the
(Complying Presentation under a Standby), FATF Recommendations and the Effective-
and 4.01 (Examination for Compliance). ness of AML-CFT Systems (2017), p.62.
(2) In Trade Based Financial Crime,
compliance indicates meeting statutory, Consolidated Risk Management (noun):
regulatory requirements and standard In Trade Based Financial Crime, the
practices regarding the exercise of Due term means the process of establishing
Diligence. See also Reasonable Measures. and administering processes to coordinate
and apply procedures on a group wide
Confirmation (noun): In Letter of Credit basis so as to implement a consistent and
practice, the undertaking by a bank other comprehensive baseline for managing the
than the Issuing Bank by which it adds organisation’s Risks across its operations.
its undertaking to that of the issuer. See Such procedures should be developed
UCP600 Article 8 (Confirming Bank Un- not merely to Comply with all relevant
dertaking). See Confirming Bank. laws and regulations, but also broadly to
identify, Monitor and mitigate group wide
Confirming Bank; Confirmer (noun): risks. Considerable effort should be made
In Letter of Credit law and practice, the to ensure that the ability to obtain and
term means a bank, often in the Bene- Review information in accordance with
ficiary’s country, which at the Issuing global AML / CFT policies and procedures
Bank’s request adds its undertaking to is not impaired as a result of modifications
honour Presentations by the Beneficiary. to local policies or procedures necessitat-
418 | Appendix C
ed by local legal regimes. Therefore, the the respondent bank. Large international
organisation should have robust informa- banks typically act as correspondents for
tion sharing between its head office and several other banks around the world.
its Branches. See Basel Committee on Respondent banks may be provided with a
Banking Supervision, Sound Management wide range of correspondent account ser-
of Risks Related to Money Laundering and vices, including cash management, Trade
Financing of Terrorism, p.13. Finance, international Funds Transfer,
cheque clearing, payable through accounts,
Contingent Liability (noun): In commerce, foreign exchange services, etc. (2) In Letter
the term means a liability which arises only of Credit practice, the term describes the
under specified conditions. For example, potential relationship between an Issuing
when a bank issues a Letter of Credit it Bank and a correspondent such as an
incurs a contingent obligation to make a Advising Bank or Confirming Bank. See
future payment on the condition that a e.g., UCP600 Articles 8 (Confirming Bank
conforming demand for payment is made Undertaking), 9 (Advising of Credits and
under the LC by the Beneficiary. See Trade Amendments).
Finance Principles, Wolfsberg et al (2017),
p.23. See also Standby Letter of Credit Corruption (noun): In law, the abuse of
and Independent Guarantee. public or private office to obtain an undue
advantage. Corruption includes Bribery as
Continuous Linked Settlement (CLS) well as other categories of misconduct or
Bank (noun): Regarding a Funds Trans- improper behaviour. This behaviour may
fer, a privately operated, special purpose or may not be induced by the prospect of
bank which simultaneously settles both obtaining an undue advantage from an-
payment obligations arising from a single other Person. See FCA Financial Crime:
foreign exchange transaction. The CLS A Firm’s Guide to Preventing Financial
payment versus payment settlement model Crime (2016), p.75.
ensures that one payment segment of a
foreign exchange transaction is settled if Cover Payment (noun): In a Funds Trans-
and only if the corresponding payment fer, a transfer where payments between
segment is also settled, eliminating the Customers of two banks in different coun-
foreign exchange settlement Risk that tries and currencies require settlement by
arises when each segment of the foreign means of matching inter bank payments;
exchange transaction is settled separately. this process generally combines a payment
See Bank Secrecy Act/Anti-Money Laun- message, sent directly by the ordering
dering Examination Manual (2014), p.209. institution to the Beneficiary institution,
with the routing of the funding instruction
Correspondent; Correspondent Bank; (the “cover”) from the ordering institution
Correspondent Account (noun): (1) In to the beneficiary institution through one
banking generally, the term means the or more Intermediary Institutions. See
provision of banking services by one bank, Monetary Authority of Singapore (MAS),
the correspondent bank, to another bank, Notice 626 November 2015: Prevention of
Glossary | 419
Money Laundering and Countering the Based Financial Crime, a written policy
Financing of Terrorism, p.22; FATF Rec- and procedure produced by each financial
ommendations: International Standards institution, appropriate for its size and
on Combating Money Laundering and the type of business, and that includes certain
Financing of Terrorism & Proliferation minimum requirements, depending on
(2016), p.76. the Money Laundering and Terrorist
Finance laws of the relevant jurisdiction.
Credit (noun): (1) In banking, where a Properly developed, a CIP enables the
bank lends money or assumes a Contin- bank to form a reasonable belief that it
gent Liability; i.e. credit facilities or the knows the true identity of its Customers.
granting of credit approval. (2) In Letter The CIP must include Account opening
of Credit practice, shorthand for letter procedures that specify the identifying
of credit. information obtained from each customer
and it must have reasonable and practical
Currency (noun): In commerce, banknotes, Risk Based procedures for verifying the
coins (Specie), or other legal tender identity of each customer. See Bank Secrecy
circulated and accepted as a medium of Act/Anti-Money Laundering Examination
exchange (fiat money). Manual (2014), p. 47.
Customer (noun): (1) In banking, a Per- Customs Invoice (noun): see Commercial
son with whom the bank establishes or Invoice.
intends to establish business relations, or
for whom the bank undertakes or intends Cybercrime (noun): In Financial Crime,
to undertake any transaction without an economic offence committed using a
an Account being opened. (2) In Trade computer and the internet. Typical in-
Based Financial Crime, an entity as to stances of cybercrime are the distribution
whom Due Diligence must be exercised. of viruses, malware, phishing and theft of
personal information such as bank Ac-
Customer Due Diligence (CDD) (noun): In count details. This excludes routine Fraud
Trade Based Financial Crime, describes whereby a computer has been used as a
measures Financial Institutions are mere instrument to perpetrate the fraud;
required take to identify, and verify the cybercrime only includes such Economic
identity of, Customers. CDD includes Crimes where computer, internet or use of
measures to obtain information regard- electronic media and devices is the main
ing the intended nature of the business element and not an incidental one. See
relationship. Customer Due Diligence and PwC, Economic Crime in the Arab World
Know Your Customer (KYC) are occa- (2014), p.29.
sionally used interchangeably. See also
Customer Identification Program (CIP). Designated Person or Entity; Designation
(noun): Regarding Sanctions, the term
Customer Identification Program (CIP) means any and all Persons, organisations,
(noun): In the U.S. approach to Trade or undertakings designated for the appli-
420 | Appendix C
cation of Targeted Financial Sanctions Credit or Independent Guarantee, and

under UN Security Council Resolutions its terms. If the documents do not Comply
1267 (1999); 1373 (2001); 1718 & 1737 with the documentary conditions in the
(2006); and 1988 (2011). The term also letter of credit (see Presentation), any
covers any successor resolutions to those rules applicable to it, or International
above and resolutions in the future which Standard Banking Practice, they can be
impose targeted financial sanctions in the rejected as discrepant (see also Waiver).
context of the financing of Proliferation of See UCP600 Articles 2 (Definitions), 14
Weapons of Mass Destruction. See FATF, (Standards for Examination of Documents),
Methodology for Assessing Technical Com- 15 (Complying Presentation), 16 (Dis-
pliance with the FATF Recommendations crepant Documents, Waiver and Notice);
and the Effectiveness of AML-CFT Systems ISP98 Rules 1.06 (Nature of Standbys),
(2017), p.153; FATF Recommendations: 2.01 (Undertaking to Honour by Issuer
International Standards on Combating and Any Confirmer to Beneficiary), 4.01
Money Laundering and the Financing of (Examination for Compliance); URDG 758
Terrorism & Proliferation (2016), p.118. Articles 2 (Definitions), 19 (Examination),
24 (Non-Complying Demand, Waiver and
Discount (verb); Discounting (noun, verb) Notice).
(1) In commercial transactions and bank-
ing, these terms refer to the sale, purchase Documentary Letter of Credit: see Letter
or prepayment of goods. (2) In Letter of of Credit.
Credit practice, a Nominated Bank or
Issuer will sometimes discount a time or Documents Against Acceptance (D /
Usance obligation. In that situation, the A) (noun): In commercial and banking
purchaser is entitled to Reimbursement law, this is an instruction used in Bank
at maturity (see Due Date). The situation Collections for commercial documents
is complicated when the obligation to pay (e.g. Bill of Lading, various Certificates,
is embodied in an Accepted Draft or Bill Insurance Documents) to be released to
of Exchange, in which case there are two the Drawee in exchange for the drawee’s
obligations, that under the letter of credit Acceptance of the Bill of Exchange.
and that under the bill of exchange or It typically appears in the cover letter
draft. UCP600 Articles 7(c) (Issuing Bank (instructions) or schedule. See Uniform
Undertaking) and 12(b) (Nomination) Rules for Collections (URC 522). See
provide protection to a nominated bank Trade Finance Principles, Wolfsberg et
that discounts. See also Discounting Bank. al (2017), p.24.
Discrepancy (noun): (1) Generally, the word Documents Against Payment (D /

signifies a deviation from facts expected to P) (noun): In commercial and banking
be congruent, and a state of dissimilarity. law, this is an instruction used in Bank
(2) In commercial and banking law, dis- Collections for commercial documents
crepancy refers to the difference between (e.g. Bill of Lading, various Certificate,
documents presented under a Letter of Insurance Documents) to be released to
Glossary | 421
the Drawee in exchange for the drawee’s their Customers without other documents
payment. It typically appears in the cover related to a transaction (Clean Payment).
letter (instructions) or schedule. See Uni- See Trade Finance Principles, Wolfsberg
form Rules for Collections (URC 522). et al (2017), p.23-24.
See Trade Finance Principles, Wolfsberg
et al (2017), p.24. Drawee (noun): see Draft.
Domestic Wire Transfer (noun): See Funds Drawer (noun): see Draft.
Transfer. In this context, domestic relates
to the fact that the ordering Financial Dual Use Goods (noun): In Trade Based
Institution and the Beneficiary financial Financial Crime, the term means items
institution are located in the same country which may have legitimate commercial
or jurisdiction. See FATF, Methodology uses but also possess applications for
for Assessing Technical Compliance programmes to develop Weapons of
with the FATF Recommendations and Mass Destruction (WMD). Examples
the Effectiveness of AML-CFT Systems may be alloys constructed to tolerances
(2017), p.154; FATF Recommendations: and thresholds sufficiently high such that
International Standards on Combating they are suitable for use in nuclear reactors.
Money Laundering and the Financing of Many such goods are regulated to restrict
Terrorism & Proliferation (2016), p.77. their unlicensed export or import. See
FCA Financial Crime: A Firm’s Guide to
Draft (noun): In banking, the terms mean Preventing Financial Crime (2016), p.76.
a signed writing which states an uncon- See also Import Licence; Export Licence;
ditional order (or demand) by the Person Specific License.
issuing the order (Drawer), addressed to
the person being ordered to pay the funds Due Date (noun): In banking, the term
(Drawee), to pay a fixed sum of money at means the maturity date for payment. See
a definite time to the order of a person also Discount; Discounting.
(Payee) or to bearer. Drafts can be used as
a means of payment (typically as cheques) Due Diligence (noun): In Trade Based
or as a means of collection. In the latter Financial Crime, the term describes both
instance, the drawer and the drawee are the written procedures for identifying and
the seller and buyer, respectively. The knowing the bank’s Customer (KYC),
payee can either be the seller, its bank, but also the risk based checks in relation
or a third party creditor to whom it owes to parties who may not be customers.
funds. Drafts are also used in connection Because of the increasing scope of the
with documents presented under Letters term, reference will be made as necessary
of Credit (although they are superfluous to “basic” or “appropriate” due diligence,
unless the credit is an Acceptance credit), which may consist of risk based checks
Bank Collections, or on their own as a only. See also Customer Due Diligence
tool of finance. Although not functions of (CDD); Risk Based Approach; and Rea-
Trade, banks may collect drafts drawn on sonable Measures.
422 | Appendix C
Economic Crime (noun): In commerce Factoring (noun, verb): Factoring trans-

and Trade Based Financial Crime, the actions enable the seller, an exporter of
term means an intentional use of deceit by goods, to improve its cash flow by receiving
a Person or group to unlawfully deprive payment sooner than agreed with the
another of money or property for financial buyer. In a factoring transaction, the seller
gain; this term is used interchangeably assigns its claim for payment against the
with Financial Crime. buyer under the sales agreement to a third
party. The third party is referred to as the
Economic Sanctions (noun): see Sanctions. factor, and is usually a bank, finance house
or financial institution. In exchange for
Embargo(es) (noun): In Trade Based the assignment of the claim, the factor
Financial Crime, means the restriction, will pay the seller immediately a certain
by governmental proclamation or order, percentage of the Commercial Invoice
of the commercial activity of a specified amount, and collect on the invoice from
country. These restrictions are typically the buyer when the invoice become due.
levied in response to unfavourable polit- Forfaiting is similar to factoring, but the
ical or economic circumstances between sales agreement typically relates to goods
nations. The restriction attempts to isolate that are commodities, capital goods, or
the country and create difficulties for its items of higher value. The tenor of the
governing body, forcing it to act on any extension of credit is longer, usually more
underlying issues. See also Sanctions. than six months, whereas factoring typ-
ically relates to shorter payment terms.
Enhanced Due Diligence (noun): In
the context of Trade Based Financial Fedwire Funds Service (Fedwire) (noun):
Crime, the term refers to an increased In U.S. banking, the term means an oper-
level of scrutiny and an elevated level ation administered by the Federal Reserve
of Due Diligence required because of which allows a participant to transfer Funds
suspicious circumstances, Indicators of from its master Account at the Federal
Commercial Crime, or other “hits” in the Reserve Banks to the master account of any
Screening process. See also Know Your other bank. Fedwire payment is final and
Customer and Customer Identification irrevocable once the Federal Reserve Bank
Program (CIP). either credits the amount of the payment
order to the Receiving Bank’s Federal
Export Licence (noun): In regard to Reserve Bank master account, or sends
controlled goods, the term refers to the notice to the receiving bank, whichever is
formal permission to export such controlled earlier. While there virtually no settlement
goods or technology. See Trade Finance risk to Fedwire participants, they may be
Principles, Wolfsberg et al (2017), p.24. See exposed to other Risks, such as errors,
also Import Licence; General License; omissions, and Fraud. See Bank Secrecy
Specific License. Act/Anti-Money Laundering Examination
Manual (2014), p.208.
Glossary | 423
Financial Crime (noun): see Economic damages substantiating therefrom. For

Crime. examples of typical fraudulent schemes,
see FCA Financial Crime: A Firm’s Guide
Financial Institution (noun): In commerce, to Preventing Financial Crime (2016), p.79.
any natural or legal Person who engages
in activities on behalf of a Customer, Fraud Risk Assessment (noun): see
including banks and trust companies, Consolidated Risk Management; Risk
savings banks, building and loan associ- Based Approach; Due Diligence.
ations, savings and loan companies, and
credit unions. Freeze; Freezing (verb): In Sanctions,
the term means a prohibition on transfer,
Financial Intelligence Unit (FIU) (noun): conversion, disposition or movement
In Trade Based Financial Crime in the of any property, funds or other assets
UK, the term means a national agency on the basis of an action initiated by a
principally responsible for receiving, an- Competent Authority or a court under
alysing, and transmitting disclosures on the appropriate order, or until a forfeiture
suspicious transactions to its Competent or acquisition determination is made. The
Authorities. See FCA Financial Crime: target property, funds or other assets re-
A Firm’s Guide to Preventing Financial main the property of the natural or legal
Crime (2016), p.78. Person(s) that held an interest in them at
the time of the action. Targeted property
Financial Sanctions Regime (noun): In may continue to be administered by third
the context of Sanctions, this term refers parties, or through other arrangements
to a set of statutory or regulatory provisions established prior to freezing. See FATF
which make it illegal to provide funds or Recommendations: International Standards
financial services to any Person or entity on Combating Money Laundering and the
subject to such sanctions. Financing of Terrorism & Proliferation
(2016), p.120-21. See also Seize.
First Demand Guarantee (noun): see
Independent Guarantee. Front Company (noun): In the context
of Financial Crime, this term refers to
Forfaiting (noun, verb): see Factoring. a corporate vehicle that can be used to
disguise the beneficial ownership of an
Fraud (noun): In law, the term encom- organisation or corporate structure. See
passes a range of nefarious, intentional FATF, Trade Based Money Laundering
conduct including, without limitation, (2006), p.35.
deceit, misrepresentation or concealment
undertaken to induce another to act in Funds (noun): In the context of Financial
his or her legal or fiscal detriment. While Crime, the term refers to all forms and
legal standards for proving fraud vary kinds of assets (tangible and intangible,
across jurisdictions, common elements movable and immovable). See FATF Rec-
include false representation, reliance, and ommendations: International Standards
424 | Appendix C
on Combating Money Laundering and the (Suretyship contract, “true” or “traditional”

Financing of Terrorism & Proliferation guarantees). For independent guarantees
(2016), p.121. payable on demand, see Independent
Guarantee.
Funds Transfer (noun): In the context
of Financial Crime Compliance and Guarantor (noun): In commercial and
banking, the term refers to movement banking law, the term refers to the bank
of Funds, either physically (e.g. delivery or Financial Institution that issues the
of cash or Negotiable Instruments) or Guarantee. See Independent Guarantee;
electronically (e.g. bank transfer, or use and Suretyship; Surety.
of Alternative Remittance Systems).
Hawala (noun): The term refers to a Funds
Funnel Account (noun): In the context Transfer and Alternative Remittance
of Financial Crime Compliance, the System popular in certain regions of the
term refers to the practice of splitting world. The sender entrusts cash to a Ha-
up sums of money and depositing it into wala operator (so called hawaladar), who
such an Account to avoid reaching a cer- will pay out the money through broker
tain threshold amount. The perpetrators counterparts in the destination country
attempt to avoid the attention of author- to the receiver upon Presentation of
ities, and the triggering of Enhanced a pin or password. Hawala services can
Due Diligence exercises or other more be registered and licenced (and then re-
intensified transaction reviews. See also semble other well known money transfer
Structuring. operators), or operate unregistered and
without the necessary licence or regulatory
General License (noun): In the context oversight. Hawala services can be used for
of Sanctions and OFAC, the term refers legitimate purposes, but also for criminal
to the formal permission to export certain transaction due to the typical absence of
groups or categories of goods, services or government oversight. See Bank Secrecy
technology, which would otherwise be Act/Anti-Money Laundering Examination
illegal due to sanctions. See also Import Manual (2014), p.8-9; FATF, Trade Based
Licence; Export Licence; Specific License. Money Laundering (2006), p.35.
Guarantee (noun): In commercial and Import Licence (noun): In the context of

banking law, this term refers to a con- Sanctions, this term refers to the formal
tractual agreement by which a party (the permission to import certain groups or
Guarantor) answers for the debt of another categories of goods, services or technology,
party. The guarantor is obligated to pay a which would otherwise be illegal due to
certain sum, or perform a certain act, upon sanctions or other regulations. See also
the demand of a Beneficiary. Generally, Export Licence; and Specific License.
guarantees can be classified into two
categories: Independent Guarantees, Independent Guarantee (noun): In the
and Accessory, dependent guarantees context of commercial and banking law,
Glossary | 425
this term refers to an obligation by a banking practice, this term refers to a

party (Guarantor) to pay a certain sum document attesting to certain qualities,
of money upon the Complying presenta- quantities or other properties of goods
tion of documents by a Beneficiary. The and commodities. It may be issued by the
guarantor’s obligation is independent from seller but more commonly by a third party
the underlying relationship between the such as a surveyor, inspection agency or
Applicant and the beneficiary (similar to other expert or organisation. Letters of
a Letter of Credit or Standby, but unlike Credit regularly require the submission of
a Suretyship contract). Independent an inspection certificate for a Complying
guarantees can be made subject to the Presentation. See also ISBP2013 (A3-A5;
URDG 758 or the ISP98. See also Guar- Q1-Q11).
antee; Advice; Discrepancy; Principal;
Presenting Bank. Insurance Document (noun): In the con-
text of international commerce and banking
Indicators of Commercial Crime (“Red practice, this term refers to documents
Flags”) (noun): In the context of financial evidencing the purchase of insurance
crime compliance, this term refers to data, for goods to be shipped. Commercial
documents, activities and other points Letters of Credit commonly require the
of reference which can point towards submission of insurance documents for a
the potential occurrence of commercial Complying Presentation, possibly with
crime. Several organisations have issued specific requirements as to the type of
lists of indicators which can be used by document (policy, certificate, declaration
Financial Institutions in their Screening under open cover), the insured amount,
procedures and exercise of Due Diligence. the Risk covered, and the insured Person
The presence of such an indicator does able to claim in case of damage or loss.
not necessarily mean that a transaction See Uniform Customs and Practice 600
or Customer is in fact associated with (UCP600) Article 28 (Insurance Document
criminal activity, but it should motivate and Coverage); ISBP2013 (paragraphs
the exercise of Enhanced Due Diligence. K1-K23). See also Transport Documents,
See also Monitoring; KYC; and CIP. Bills of Lading, Inspection Certificate,
Weight Certificate, Complying, and
Insider Fraud (noun): In the context of Presentation.
commercial Fraud, the term refers to fraud
activities against a company or organisa- Intermediary Bank; Intermediary Fi-
tion by an employee, typically exploiting nancial Institution (noun): In the context
weaknesses or using information acquired of international banking, this term refers
in the course of the employment. See to banks or financial institutions which
FCA Financial Crime: A Firm’s Guide to are part of a serial or chain of Funds
Preventing Financial Crime (2016), p.80. Transfer instructions from the ordering
Person to the ultimate Beneficiary, or
Inspection Certificate (noun): In the banks or financial institutions which are
context of international commerce and otherwise involved in the processing of
426 | Appendix C
payment instructions, funds transfers (2014), p.267; UCP600 Article 7 (Issuing

or execution of Trade products. See also Bank Undertaking).
Correspondent Bank; Bank Collection;
Letter of Credit; and Nominated Bank. Know Your Customer (KYC) (noun): see
Customer Due Diligence; Due Diligence.
International Standard Banking Practice
(ISBP) (noun): This term refers to estab- Letter of Credit (LC) (noun): In banking,
lished and accepted norms, procedures, a definite undertaking, usually on the
expectations and understandings among part of a bank and at the request of an
the international banking community. In Applicant or Customer, to pay a named
this Book, it is primarily used in regard Beneficiary up to a stated amount of
to Letter of Credit transactions. It can money upon Presentation of required
also refer to an ICC publication, The documents stated in the letter of credit
International Standard Banking Practice and in Compliance with it terms and
(ISBP2013, and ISBP2007), which is an conditions. The term applies to all similar
attempt to capture such international undertakings such as Commercial Let-
standard banking practices. ters of Credit (also documentary LCs),
Independent Guarantees, and Standby
International Standby Practices (ISP98) Letters of Credit. See UCP600 Article 2
(noun): The International Standby Practices (Definitions); see also Credit.
(ISP98), ICC Publication No.590. Rules for
use of Standby Letters of Credit. Means of Delivery (noun): In the context
of Weapons of Mass Destruction, this
Invoice (noun): see Commercial Invoice. term refers to rockets, missiles, or other
systems and technologies, used for the
ISP98: see International Standby Prac- purpose of delivering weapons or agents
tices (ISP98). of nuclear, chemical or biological nature
to inflict harm. See UN Security Council
Issuer; Issuing Bank (also Opening Resolution 1540 (2004). See also Prolif-
Bank) (noun): (1) In banking, the institu- eration.
tion ultimately responsible for payment
of money orders, traveller’s checks or Monetary Instrument (noun): In the
other such instruments as the Drawer, context of banking and finance, this term
or a money transmitter that has the obli- refers to bank notes (cash), traveller’s
gation to guarantee payment of a money cheques, and Negotiable Instruments,
transfer. (2) In Letter of Credit practice, which are payable to the bearer or freely
a bank that makes an undertaking at the endorsed enabling the passing of title
request of an Applicant and in favour of upon delivery. See National Credit Union
a Beneficiary either directly or through Administration (NCUA) Consumer Compli-
an Advising Bank. Also, an Issuer need ance Self Assessment Guide (2004), p.40.
not be a bank. See Bank Secrecy Act/An-
ti-Money Laundering Examination Manual
Glossary | 427
Money Laundering (noun): In the context invoices for the same shipment by the
of Trade Based Financial Crime, the term seller. This process enables the seller to
refers to the practice of processing assets receive two or more payments, without
derived from criminal activities through attracting attention, for one shipment. It
Placement, Layering and Integration so can be undertaken for Money Laundering
that they appear to originate from legiti- purposes, Terrorism Financing, Collu-
mate sources. See PwC, Economic Crime in sion, or to defraud a bank or third party.
the Arab World (2014), p.30; Bank Secrecy See Trade Finance Principles, Wolfsberg
Act/Anti-Money Laundering Examination et al (2017), p.10. See also Over Invoicing.
Manual (2014), p.7; FCA Financial Crime:
A Firm’s Guide to Preventing Financial Negotiable Instrument (noun): In the
Crime (2016), p.81. context of commercial law, this term
refers to documents which embody an
Money Service Business (MSB) (noun): unconditional promise to pay a certain
In the context of movement of funds, the amount of money to the bearer or en-
term refers to a Person or organisation dorsee of the document either at Sight
engaging in various activities relating to or upon maturity (see Maturity Date). In
Funds Transfer, cheque cashing, cur- the context of Letters of Credit and Bank
rency exchange and similar services. See Collections, this is typically an accepted
Hawala; and Alternative Remittance Draft. The holder or endorsee of a nego-
Systems (ARS). See FCA Financial Crime: tiable instrument usually enjoys special
A Firm’s Guide to Preventing Financial protection under commercial law regarding
Crime (2016), p.82; Money Laundering the enforceability of the document. See also
Prevention: A Money Services Business Negotiation; Negotiate; Discounting;
Guide, p.45. Nominated Bank; Acceptance.
Monitoring (noun, verb); Monitor (verb): Negotiation (noun); Negotiate (verb): In

In the context of Trade Based Financial the context of commercial and banking
Crime Compliance, the terms refer to law, these terms have several meanings.
scrutinising and analysing by a bank or (1) Generally, they refer to the contract
Financial Institution of its Customers, making stage in which the parties dis-
their transactions and Accounts, and their cuss and bargain in order to conclude a
business patterns and behaviour, to ensure commercial agreement. (2) In the context
Due Diligence and Compliance with of Letters of Credit, the terms refer to
applicable laws and regulations. See also the purchase of Complying documents
Ongoing Monitoring; Screening; KYC or Drafts by a Nominated Bank which
(Know your Customer); CIP (Customer prepays the presenter before the Maturity
Identification Program). Date, and seeks Reimbursement later
from a Confirming or Issuing Bank. See
Multiple Invoicing (noun, verb): In the UCP600 Articles 2 (Definitions), 12(b)
context of Trade Based Financial Crime, (Nomination).
this term refers to issuing of two or more
428 | Appendix C
Nominated Bank (noun): In the context of procedures in respect to Customers, Mon-

Letter of Credit practice, the term refers to itoring their behaviour and transactions.
a bank which is requested by the Issuer to Banks and Financial Institutions have to
Advise the credit, to pay the LC, or Accept continue the monitoring and Screening
a Draft upon a Complying Presentation process also after the establishment of a
by the Beneficiary. See UCP600 Articles 2 customer relationship, so that changes in
(Definitions), 12 (Nomination); ISP98 Rule circumstances, transaction pattern and
2.04 (Nomination). See also Paying Bank. intentions can be identified and analysed
to satisfy due diligence expectations by
Non Cooperative Countries and Ju- regulatory authorities. See also Enhanced
risdictions (noun): In the context of Due Diligence; KYC; CIP; Risk Based
Financial Crime, Money Laundering, Approach.
and Terrorism Financing, the terms refer
to countries or jurisdictions which do not Originator (noun): Regarding a Funds
cooperate in terms of data exchange or Transfer, the term means the Account
enforcement of Anti Money Laundering holder who initially authorises the
and anti terrorism financing regulations transfer from the account. Where there
and procedures. Organisations like FATF is no account, the natural or legal Person
identify countries and jurisdictions desig- which places the order with the ordering
nated as non cooperative or high Risk in institution to otherwise do so. See FATF,
this regard, and publish them in reports. Methodology for Assessing Technical
If transactions involve any connecting Compliance with the FATF Recommenda-
factors to such a country or jurisdiction, tions and the Effectiveness of AML/CFT
Enhanced Due Diligence is warranted. Systems, p.158.
Non Profit Organisation (NPO) (noun): Originator’s Bank (noun): In a Funds

In the context of corporate law, this term Transfer, the Receiving Bank to which
refers to a legal Person that pursues general the payment order of the Originator is
cultural, charitable or other social causes issued if the originator is not a bank or
without the aim of generating monetary foreign bank, or the originator if the orig-
profits, or it pretends to do so. Due to the inator is a bank or foreign bank.
absence, or lessened, regulatory oversight
by authorities, such organisations can be Over Invoicing (noun): In Trade Based
of interest to perpetrators of commercial Financial Crime, the misrepresentation
and other crime and of concern regard- of the price of the goods in the invoice and
ing Money Laundering and Terrorism other documentation (stating it higher than
Finance. the actual value) so that the seller gains
excess value as a result of the payment. See
Ongoing Monitoring (noun, verb): In Trade Finance Principles, Wolfsberg et al
the context of Trade Based Financial (2017), p.10; see also Multiple Invoicing
Crime Compliance, this term refers to the and Under Invoicing.
continuous exercising of Due Diligence
Glossary | 429
Over Shipping (noun): In Trade Based tration (NCUA) Consumer Compliance Self
Financial Crime, the term means a prac- Assessment Guide (2004), p.42.
tice by which the seller ships more than
the invoiced quantity or quality of goods Phantom Shipping (noun): In Financial
thereby misrepresenting the actual value Crime, this term describes fraudulent
of goods in the relevant documents. See activity relating to an alleged trade trans-
Trade Finance Principles, Wolfsberg et al action in which no goods are shipped.
(2017), p.10; see also Phantom Shipping. Documents relating to the transaction
and alleged shipment (invoices, packing
Packing List (noun): In commerce, a doc- lists, Transport Documents like Bills
ument usually supplied by the exporting of Lading, Inspection Certificates)
shipper in instances where diversified are entirely falsified. See Trade Finance
shipments are packed into several con- Principles, Wolfsberg et al (2017), p.10.
tainers or compartments; the list will
identify the contents of shipment by a Physical Cross Border Transportation
specific number. (noun): (1) In the context of commercial
transactions, the term typically refers to
Payee (noun): see Draft. the movement of goods which involves
the crossing of at least one international
Paying Bank (noun): In the context of border. (2) In an Anti Money Laundering
Letter of Credit practice, the term refers to context, it refers mostly to the movement
the bank that makes payment under a letter of currency (cash) and other tangible
of credit to the Beneficiary. Depending on instruments for payment (e.g. Negotia-
the terms of the LC, it can be the Issuer, ble Instruments) from one country to
a Confirming Bank, a Nominated Bank, another. See FATF Recommendations:
or any other bank to whom a Complying International Standards on Combating
Presentation is made if the LC is avail- Money Laundering and the Financing of
able with any bank. See UCP600 Articles Terrorism & Proliferation (2016), p.105;
2 (Definitions), 6 (Availability, Expiry Date FATF, Methodology for Assessing Technical
and Place of presentation), 7 (Issuing Bank Compliance with the FATF Recommenda-
Undertaking), 12 (Nomination). tions and the Effectiveness of AML-CFT
Systems (2017), p.158.
Person (noun): In law and with respect to
companies, the term refers to an individ- Placement, Layering, Integration (noun):
ual (natural person), or to a corporation, In an Anti Money Laundering context,
company or any other organisation, group these terms describe the three stages in
or entity recognised or recognisable as Money Laundering. Placement (first stage)
having a legal personality (so called ju- entails illegal money being entered into
ristic or legal person). The recognition of the financial system. Layering (second
juristic persons may vary depending on stage) refers to the money being moved
the jurisdiction and applicable (domestic) around through a series of transactions
law. See National Credit Union Adminis- (investing, purchase agreements, payments)
430 | Appendix C
in order to conceal and disguise the ori- originating from the same or other victims,
gins. Integration (third stage) means the while claiming that it is proceeds from an
money, now sufficiently distanced from its alleged investment opportunity. Paying
illegal origin, is used openly to buy goods, out some money incentivises victims to
real estate, Negotiable Instruments, reinvest, or even promote the scheme to
used to make payments or conduct any third parties. Ponzi schemes inevitably
other transactions requiring cash. See collapse after some time in operation, when
FCA Financial Crime: A Firm’s Guide to fresh money is insufficient to serve the
Preventing Financial Crime (2016), p.84. outstanding debts and promised returns.
See FCA Financial Crime: A Firm’s Guide
Politically Exposed Person(s) (PEP, PEPs) to Preventing Financial Crime (2016), p.84.
(noun): In the context of Trade Based
Financial Crime, a Person entrusted Predicate Offence (noun): The term is used
with, or appointed to, an important public in an Anti Money Laundering context.
function or office. It typically includes se- The United Nations Convention against
nior government employees (office bearers Transnational Organized Crime (2000),
of considerable influence and seniority, Article 2(h) (Use of terms) defines it as
ministers), high ranking members of the “any offence as a result of which proceeds
military or the judiciary, or senior exec- have been generated that may become the
utive officers at state owned entities. To subject of an offence as defined in Article
avoid too broad a definition, PEPs do not 6” (Criminalization of the laundering of
include junior or middle ranking officials. proceeds of crime).
Dealing with PEPs in Trade transactions
usually requires the exercise of Enhanced Presentation (noun): (1) Generally, the
Due Diligence. See ABS, Guidelines on term describes the process of making an
Anti-Money Laundering and Countering item, information or an award available.
the Financing of Terrorism (2015), p.25; (2) In Letter of Credit practice, it has two
Monetary Authority of Singapore (MAS), meanings: it either relates (i) to the act of
Notice 626 November 2015: Prevention submitting documents supporting a claim
of Money Laundering and Countering on a letter of credit or Independent Guar-
the Financing of Terrorism, p.29; FATF, antee, or (ii) to the submitted documents
Methodology for Assessing Technical themselves. See UCP600 Article 2 (Defini-
Compliance with the FATF Recommenda- tions); URDG 758 Article 2 (Definitions);
tions and the Effectiveness of AML-CFT ISP98 Rule 1.09(a) (Defined Terms). (3)
Systems (2017), p.159; FCA Financial Crime: In Bank Collections, “presentation is
A Firm’s Guide to Preventing Financial the procedure whereby the presenting
Crime (2016), p.84. bank makes the documents available to
the drawee as instructed”. See Uniform
Ponzi Scheme (noun): In the context Rules for Collections (URC 522) Article
of commercial Fraud, the term Ponzi 5(a) (Presentation). See Trade Finance
scheme refers to a fraudulent activity in Principles, Wolfsberg et al (2017), p.26.
which the fraudsters pay money to victims
Glossary | 431
See Compliance; Comply; Discrepancy; Procurement Fraud (noun): In com-

Waiver. mercial Fraud, the term refers to illegal
conduct in regard to the procurement
Presenting Bank (noun): The term has process by which the fraudsters gain an
several meanings in the legal context. (1) unfair advantage, avoid an obligation
Generally, it refers to a bank that is pre- or cause financial or other losses to any
senting documents for payment or other organisation involved in the procurement
commercial reasons. (2) In a Letter of process. Procurement fraud can take many
Credit or Independent Guarantee context, forms, for example overstating expenses,
the term refers to the bank presenting collusion between tendering party and
documents under the letter of credit or employee of the awarding party, price fixing
independent guarantee for payment or between allegedly competing parties. See
Reimbursement. (3) In the context of a PwC, Economic Crime in the Arab World
Bank Collection, the term refers to the (2014), p.30.
bank of the buyer who is requested by the
Remitting Bank to present documents Proliferation (noun): In the context of
(e.g. Invoice, Bill of Lading, Insurance Weapons of Mass Destruction, this term
Documents), to the buyer for payment refers to the export of nuclear, chemi-
or Acceptance (e.g. Draft). cal, and biological weapons, as well as
technology, components and expertise
Principal (noun): In a legal context, the for their use and development. See also
term has several meanings. (1) In lending, Means of Delivery.
it refers to the sum borrowed (as opposed
to the interest due or costs for the offering Pyramid Scheme (noun): In the context
of the loan). (2) In agency law, it refers to of commercial Fraud, the term Pyramid
the person authorising an agent (principal scheme refers to a fraudulent activity in
agent relationship). (3) In an Independent which the fraudsters encourage parties
Guarantee context, it is occasionally used (who are often themselves victims) to put
to refer to the Applicant for the under- up money and promote the scheme to third
taking. (4) In a Bank Collection context, parties, in order to earn proportions and
the term refers to the Person instructing bonuses derived from subsequent other
the Remitting Bank with the collection “investors” / victims. Due to the mounting
instructions. outstanding debt and increasing number
of participants, any Pyramid scheme
Proceeds of Crime (noun): The term will eventually collapse. It is not always
is used in an Anti Money Laundering clear whether the persons promoting the
context. The United Nations Convention investment are aware of its fraudulent
against Transnational Organized Crime character, but at some point it must be
(2000), Article 2(e) (Use of terms) de- apparent to them that the scheme does
fines it as “any property derived from or not entail genuine investment activities.
obtained, directly or indirectly, through See FCA Financial Crime: A Firm’s Guide
the commission of an offence”. to Preventing Financial Crime (2016), p.84.
432 | Appendix C
Reasonable Measures (noun): In Sin- pursuant to that bank’s Reimbursement

gapore, this term is used to refer to the undertaking.
appropriate response by a bank or Financial
Institution faced with Risks of Money Related Materials (noun): Regarding
Laundering or Terrorism Financing, Weapons of Mass Destruction (WMDs),
which has to be commensurate and cor- the term means any materials or tech-
responding. See Monetary Authority of nology covered by relevant multilateral
Singapore (MAS), Notice 626 November treaties and arrangements, or included on
2015: Prevention of Money Laundering governmental control lists, which could
and Countering the Financing of Terror- be used for the design, development, or
ism, 2.1 (Definitions). See also Risk Based use of nuclear, chemical or biological
Approach; Due Diligence; Enhanced weapons. See also Dual Use Goods; Means
Due Diligence; Compliance. of Delivery.
Receiving Bank (noun): In the context Related Party (noun): In Trade Based
of Funds Transfer, this term refers to Financial Crime, the term means any legal
the bank to which the Originator of the Person that is a subsidiary, associate, or
funds transfer addressed instructions for which otherwise maintains a relationship
payment. See National Credit Union Admin- with the Customer, but does not operate
istration (NCUA) Consumer Compliance within arm’s length of the customer’s
Self Assessment Guide (2004), p.42. financial institution. See Trade Finance
Principles, Wolfsberg et al (2017), p.26;
Red Flags (noun): see Indicators of Com- see also Due Diligence.
mercial Crime.
Relevant Party (noun): In Trade Based
Reimbursement (noun): In Letter of Credit Financial Crime, the term means a legal
practice, the term means an irrevocable Person identified as an entity against which
commitment by a nominated Reimbursing Enhanced Due Diligence procedures
Bank to honour a Complying repayment are exercised when that entity appears
claim made by a bank authorised to do so in related documents or in research ac-
in the reimbursement undertaking. See tivities during basic Due Diligence. See
ICC Publication No. 725 (Uniform Rules Trade Finance Principles, Wolfsberg et al
for Bank to Bank Reimbursement under (2017), p.26.
Documentary Credits); see also Uniform
Rules for Bank to Bank Reimbursement Remitting Bank (noun): In the context of
(URR). Bank Collections, the term refers to the
bank requested by the Person initiating the
Reimbursing Bank (noun): In Letter of collection (usually the seller) to forward
Credit practice, the term means a bank au- the collection instructions, accompanied
thorised by the Issuing Bank to reimburse by a Draft and various documents. See
the Negotiating Bank or Paying Bank also Presenting Bank; Uniform Rules
for Collection.
Glossary | 433
Reviewing (noun, verb): see Screening. nesses, organisations, or Persons, and

can be trade based, whereby Embargoes
Risk (noun): In the context of Trade are placed on certain goods or services.
Based Financial Crime compliance and Furthermore, sanctions can encompass
Money Laundering, FATF views this travel limitations, asset freezes (see Freeze,
term as product of threat, vulnerability arms Embargoes, or capital restrictions.
and consequence. The Assessment of risk See also Designated Person or Entity.
and the application of a Risked Based
Approach are important components of Sanctions Screening (noun, verb): In the
Due Diligence and Screening exercis- context of Trade Based Financial Crime
es. See FATF Guidance National Money Compliance, this term refers to the pro-
Laundering and Terrorist Financing Risk cess (which may be automated, manual,
Assessment (2013), p.7. or both) of ensuring that Customers and
Trade activities comply with applicable
Risk Based Approach (RBA); Risk Based Sanctions. See also Screening, Monitor-
Analysis (RBA) (noun): In the context of ing; Due Diligence.
Commercial Crime Compliance, these
terms refer to the process of developing Screening (noun, verb): In Trade Based
a Compliance Plan and exercising Due Financial Crime, the term means a process
Diligence founded on Analysis related (occasionally automated) in which lists
to Risk and potential consequences. of Persons, countries or organisations,
Banks must identify and evaluate the risk derived from various official sanctions or
for each Customer, Account and trade prohibited persons lists, are used to cross
transaction, and conduct the appropriate reference suspicions of Fraud, Sanctions
scrutiny (see also Enhanced Due Dili- violations or other concerns with respect
gence; Reasonable Measures). See Trade to a relationship or transaction of the
Finance Principles, Wolfsberg et al (2017), Reviewing Financial Institution. See
p.26-27. See also Screening, Monitoring, Trade Finance Principles, Wolfsberg et
Ongoing Monitoring. al (2017), p.27.
Sanction(s) (noun): In the context of Seize (verb); Seizure (noun): In Trade

Trade Based Financial Crime, is the Based Financial Crime, the term means
deliberate limitation or cessation of trade to prohibit the movement or conversion of
and financial intercourse by a nation or property on the basis of an action initiated
intergovernmental body with a specified by a Competent Authority or a court;
nation, region, government, industry, however, separate from a Freezing action, a
group, or person as a response to, or in an seizure may allow the competent authority
effort to, alter social, political, economic, or court to take control of the particular
or military policy. Sanctions can prohibit item. The seized property remains the
all commercial activity with regard to a property of the natural or legal Person(s)
country, can be targeted in which it blocks holding an interest in it at the time of the
transactions of and with particular busi- seizure, but the competent authority or
434 | Appendix C
court will often control its possession, See Trade Finance Principles, Wolfsberg
administration or management. See FATF et al (2017), p.27.
Recommendations: International Standards
on Combating Money Laundering and the Simplified Due Diligence (noun): In
Financing of Terrorism & Proliferation Trade Based Financial Crime, a bank’s
(2016), p.124; see also Blocking, Freeze. Due Diligence procedure for specific
situations which present low Money
Shell Bank(s); Shell Financial Insti- Laundering Risk. By applying a lower
tution(s); Shell Company(ies) (noun): level of due diligence, a Customer is not
The word shell signifies that the essence exempt from Ongoing Monitoring of the
of the entity is covered or hidden from relationship; continued reporting of any
view. (1) In banking, the terms shell banks suspicious transactions remains applicable.
or shell Financial Institutions, mean See FCA Financial Crime: A Firm’s Guide
banks or financial institutions that lack a to Preventing Financial Crime (2016), p.86.
physical presence in the country of their
incorporation and licensure; such banks Specially Designated Nationals and
are typically unaffiliated with a regulated Blocked Persons (noun): In the context
financial group subject to effective con- of commercial crime and Sanctions, the
solidated supervision. (2) The term shell term refers to a Person or organisation
company refers to an organised entity connected to, or owned by, a targeted
without a physical presence, significant government or associated with Terror-
assets or operations. In the US, FinCEN ist activities. Names and affiliations are
has issued guidance alerting financial compiled in official lists and updated
institutions to the potential Risks asso- regularly. Transactions with such persons
ciated with providing financial services or organisations are illegal, and must be
to shell companies and reminding them blocked. See OFAC Regulations for the
of the importance of managing those Financial Community (2012), p.4.
risks. See Bank Secrecy Act/Anti-Money
Laundering Examination Manual (2014), Specie (noun): A term for a physical,
p.314; FATF, Trade Based Money Launder- precious metal coin of an established
ing (2006), p.35; FATF Recommendations: mass and fineness, often bearing a seal or
International Standards on Combating governmental stamp intended to denote
Money Laundering and the Financing of its value as Currency or fiat money.
Terrorism & Proliferation (2016), p.124.
Specific License (noun): In the context of
Sight (adjective): A term used to signify U.S. Sanctions and OFAC, the term refers
that immediate payment is expected. A to the formal permission to a specific
Draft or Bill of Exchange payable at sight Person allowing a transaction or activity
is payable on Presentation to the Drawee, which would otherwise be illegal due to
i.e. on demand or when it is “sighted”. It sanctions. See OFAC Regulations for the
is the opposite of a time or Usance Draft. Financial Community (2012), p.4. See also
Export License; General License.
Glossary | 435
Standby Letter of Credit (noun): In Letter by Freezing the funds or through pro-
of Credit practice, the term refers to a writ- hibitions. See FATF Recommendations:
ten obligation by a party (Issuer) to pay a International Standards on Combating
certain sum of money upon Presentation Money Laundering and the Financing of
of Complying documents by a Beneficiary. Terrorism & Proliferation (2016), p.125;
The issuer’s obligation is independent from FATF, Guidance for A Risk-Based Approach:
the underlying relationship between the Effective Supervision and Enforcement
Applicant and the beneficiary (similar by AML/CFT Supervisors of the Financial
an Independent Guarantee, but unlike Sector and Law Enforcement (2015), p.46;
a Suretyship contract). Standby letters of FATF, Methodology for Assessing Technical
credit are typically subject to the ISP98 or Compliance with the FATF Recommenda-
UCP600. See Independent Guarantee. tions and the Effectiveness of AML-CFT
Systems (2017), p.161.
Structuring (noun, verb): In the context of
commercial crime and Money Laundering, Terrorist (noun): The term refers to any
the term refers to activities related to Funds natural Person who: (1) commits, or at-
Transfers or other commercial activities tempts to commit, terrorist acts by any
aimed at avoiding detection, Enhanced means, directly or indirectly, unlawfully and
Due Diligence or scrutiny by Competent wilfully; (2) participates as an accomplice
Authorities, banks, and Financial Insti- in terrorist acts; (3) organises or directs
tutions. Large sums or transactions are others to commit terrorist acts; or (4)
artificially divided or broken into smaller contributes to the commission of terrorist
fractions, so that threshold amounts are acts by a group of persons acting with a
missed, and detection or investigation common purpose where the contribution
avoided. See also Funnel Account. is made intentionally and with the aim
of furthering the terrorist act or with the
Suretyship; Surety (noun): In law, a knowledge of the intention of the group
promise by which a Person agrees to to commit a terrorist act. See FATF, Rec-
answer for the debt of another (principal) ommendations: International Standards
by engaging its own liability; following on Combating Money Laundering and the
the obligor’s default, the surety may seek Financing of Terrorism & Proliferation
Reimbursement from the principle after (2016), p.125; FATF, Methodology for
satisfying the obligor’s promise, or seek Assessing Technical Compliance with the
subrogation of the obligor’s rights. See also FATF Recommendations and the Effective-
Accessory Guarantee and Independent ness of AML-CFT Systems (2017), p.161.
Guarantee.
Terrorist(ism) (adjective): A term that
Targeted Financial Sanctions (noun): links the following noun to terrorism,
The phrase refers steps to prevent Funds such as Terrorist Financing.
or other assets from being accessed di-
rectly or indirectly by Persons or entities Terrorist(ism) Act (noun): A Terrorist
who are designated. These steps can be act includes: (1) an act which constitutes
436 | Appendix C
an offence within the scope of, and as Compliance with the FATF Recommenda-
defined in one of the following treaties: tions and the Effectiveness of AML-CFT
(i) Convention for the Suppression of Systems (2017), p.162.
Unlawful Seizure of Aircraft (1970); (ii)
Convention for the Suppression of Unlawful Terrorist(ism) Finance(ing) (noun): The
Acts against the Safety of Civil Aviation terms signify provision of Funds or other
(1971); (iii) Convention on the Prevention assets to support or finance a Terrorist
and Punishment of Crimes against Inter- Act, terrorist, ideology, organization,
nationally Protected Persons, including infrastructure, or operation. The terms
Diplomatic Agents (1973); (iv) International can also be applied to the solicitation or
Convention against the Taking of Hostages collection of funds from legal or illegal
(1979); (v) Convention on the Physical sources to be used to support terrorism.
Protection of Nuclear Material (1980); (vi) See FCA Financial Crime: A Firm’s Guide
Protocol for the Suppression of Unlawful to Preventing Financial Crime (2016), p.87;
Acts of Violence at Airports Serving In- FATF, Recommendations: International
ternational Civil Aviation, supplementary Standards on Combating Money Laun-
to the Convention for the Suppression of dering and the Financing of Terrorism
Unlawful Acts against the Safety of Civil & Proliferation (2016), p.125-126; FATF,
Aviation (1988); (vii) Convention for the Methodology for Assessing Technical
Suppression of Unlawful Acts against the Compliance with the FATF Recommenda-
Safety of Maritime Navigation (2005); (viii) tions and the Effectiveness of AML-CFT
Protocol for the Suppression of Unlawful Systems (2017), p.162; ABS, Guidelines on
Acts against the Safety of Fixed Platforms Anti-Money Laundering and Countering
located on the Continental Shelf (2005); the Financing of Terrorism (2015), p.6.
(ix) International Convention for the
Suppression of Terrorist Bombings (1997); Terrorist(ism) Organisation (noun):
and (x) International Convention for the refers to any group of Terrorists that:
Suppression of the Financing of Terror- (1) commits, or attempts to commit,
ism (1999); (2) any other act intended terrorist acts by any means, directly or
to cause death or serious bodily injury indirectly, unlawfully and wilfully; (2)
to a civilian, or to any other person not participates as an accomplice in terrorist
taking an active part in the hostilities in acts; (3) organises or directs others to
a situation of armed conflict, when the commit terrorist acts; or (4) contributes
purpose of such act, by its nature or con- to the commission of terrorist acts by a
text, is to intimidate a population, or to group of persons acting with a common
compel a Government or an international purpose where the contribution is made
organisation to do or to abstain from do- intentionally and with the aim of furthering
ing any act. See FATF, Recommendations: the terrorist act or with the knowledge
International Standards on Combating of the intention of the group to commit
Money Laundering and the Financing of a terrorist act. FATF, Recommendations:
Terrorism & Proliferation (2016), p.125; International Standards on Combating
FATF, Methodology for Assessing Technical Money Laundering and the Financing of
Glossary | 437
Terrorism & Proliferation (2016), p.126; Trade Based Money Laundering (noun):
FATF, Methodology for Assessing Technical The name refers to the illegal movement
Compliance with the FATF Recommenda- of money by misrepresenting Trade or
tions and the Effectiveness of AML-CFT using it as a cover.
Systems (2017), p.162.
Trade Finance (noun): This term refers
Tipping Off (noun, verb): In the UK, the to financing Trade and includes financial
term signifies disclosure by a Person which products and activities (for example Let-
has made a report under the Proceeds of ters of Credit, Bank Collections, Funds
Crime Act 2002 to any Competent Au- Transfers) relating to trade and parties
thorities regarding Money Laundering, active in trade.
where that disclosure is likely to preju-
dice any investigation into the report; Transaction Monitoring (noun, verb):
or an investigation into allegations that Process, either automated or manual, that is
money laundering has been committed post transaction, whereby transactions are
or planned. See FCA Financial Crime: reviewed and assessed to identify if there
A Firm’s Guide to Preventing Financial are any suspicious or unusual activities or
Crime (2016), p.87. In other jurisdictions patterns in the customer’s behaviour. See
different terminology may be employed, Trade Finance Principles, Wolfsberg et al
such as “whistleblowing”. (2017), p.27-28.
Trade (noun): (1) The purchase and sale of Transferable Credit (noun): This term
goods or services which can be domestic or refers to a Letter of Credit in which the
international. (2) When used in connection Beneficiary can be changed to a third
with another word, the term signifies its person. The Issuer is obligated to honour a
relationship to the purchase and sale of Complying Presentation by this Person.
goods, most commonly as Trade Based. The transfer, however, is effected by the
issuer or a Nominated Bank. The transfer
Trade Based (adjective): When used in can be in whole (Standby or Independent
connection with types of financial or Guarantee), or in part (commercial letter
Economic Crime, the term signifies that of credit). See UCP600 Article 38 (Trans-
the conduct from which it originates flows ferable Credits); ISP98 Rules 6.01 et seq
from Trade; for example, Trade Based (Transfer, Assignment, and Transfer by
Money Laundering, Trade Based Fi- Operation of Law); URDG 758 Article 33
nancial Crime. (Transfer of Guarantee and Assignment
of Proceeds).
Trade Based Financial Crime (TBFC)
(noun): The term signifies a type of Eco- Transmittal Order (noun): see Funds
nomic Crime which uses Trade products Transfer; Originator.
to mask its illegal character.
Transport Document (Bill of Lading;
Airway Bill; Railway Consignment Note)
438 | Appendix C
(noun): These terms refer to documents UCP600 has alternative rules that apply.
issued by the carrier describing the goods ISP98, on the other hand, makes the URR
accepted for carriage. The Bill of Lading applicable unless the standby provides
may also function as a document of title otherwise.
regarding the goods and should include
data consistent with any Letter of Credit, Uniform Rules for Collection (URC
for example shipment date, information 522) (noun): These rules are intended for
on the goods (general descriptions re- Bank Collections in which the banking
garding quality and quantity), loading system facilitates payment by forwarding
and discharging point, and the name of documents from the seller to the buyer,
the consignee. See Asia / Pacific Group releasing them against either payment or
(APG), Typology Report on Trade Based Acceptance of a Draft drawn on the buyer
Money Laundering (2012), p.43. pursuant to the instruction or cover letter
or schedule. The most recent iteration of
Under Invoicing (noun, verb): In the the URC is contained in ICC Publication
context of Trade Based Financial Crime, No. 522 (1995) revision.
this term refers to the deliberate misrep-
resentation of the actual value of goods Uniform Rules for Demand Guarantees
in documents relating to the transaction (URDG 758) (noun): The name signifies
(Commercial Invoice, Transport Docu- rules intended to govern Independent
ments, Insurance Documents), so that Guarantees which are also described
the seller can receive higher payment, as “demand”, “first demand”, or “bank”
for example for Money Laundering or Guarantees. The current version is ICC
Terrorism Financing purposes. See also Publication No. 758 (2010).
Multiple Invoicing; Over Invoicing.
Unique Transaction Reference Number
Uniform Customs and Practice for (noun): In Funds Transfers, this term refers
Documentary Credits (UCP600) (noun): to the combination of letters, numbers and
This product is a set of practice rules used symbols that are issued by the payment
almost universally for commercial Letters service provider under the protocols of
of Credit. the payment and settlement system, al-
lowing the transaction to be traced. See
Uniform Rules for Bank to Bank Reim- FATF, Recommendations: International
bursement (URR 725) (noun): In Letter of Standards on Combating Money Laun-
Credit practice, these rules are intended dering and the Financing of Terrorism &
for claims of Reimbursement for pay- Proliferation (2016), p.74 & n.37.
ments made by Nominated Banks. The
Reimbursing Bank is authorised to effect Usance Bill (noun): A Draft or Bill of Ex-
reimbursement in the LC or a separate change which allows the Drawee a term
communication. The current version is or period of time (usance period) before
URR 725 (2008). Where the reimbursement payment is due (maturity). The term is
is not expressly made subject to the URR, usually stated in days (e.g. 30 days) and
Glossary | 439
starts either from the date of the bill (e.g. the letter of credit or when the Applicant
30 days date) or from the date of shipment, agrees to pay for documents presented after
or from sight by the drawee (e.g. 30 days waiving the presence of discrepancies in
sight) which in practice means from the the documents. While this statement is
date of Acceptance. See Trade Finance not wrong, it is misleading to the extent
Principles, Wolfsberg et al (2017), p.28. that it suggests that the waiver by the
applicant has any binding effect on the
Vessel (noun): In commence, the term Issuer or Confirmer. Only a waiver of
signifies any form of transport, depending discrepancies by the issuer has any effect.
on the context. It could include air, marine, (3) In Bank Collections, the term is used
inland water, rail, road or other forms of with respect to charges and / or interest
transport but typically denotes water to be collected from the Drawee.
transport. The term has a specially defined
meaning in the United Nations Convention Warehouse Receipt (noun): In commer-
against Transnational Organized Crime cial law, this term refers to a document
(UNTOC), namely any type of water craft, issued by a warehouse operator for the
including seaplanes, used or capable of receipt of goods for storage and sometimes
use as a means of transportation on water, processing. Depending on the applicable
except a warship, naval auxiliary or other rules and laws, a warehouse receipt can
strictly governmental ship. be in negotiable form which enables
parties to confer ownership by delivering
Vulnerabilities (noun): As used in a the warehouse receipt (as opposed to the
Risk Based Approach, the term means actual goods stored in the warehouse).
elements of a transaction which may be
exploited or that may support or facilitate Weapon(s) of Mass Destruction (WMD)
its activities and the process of searching (noun): In the context of Trade Based
for weaknesses as distinct from threats by Financial Crime, this term refers to sys-
analysing factors that represent potential tems and technologies involving nuclear,
problems in AML / CFT systems. Factors biological or chemical agents and material,
may include features of a particular sector, designed and capable of harming humans
financial product or service that makes and the environment on a serious scale.
them attractive for AML / CFT purposes. See also Proliferation; Proliferation
See FATF, Guidance on National Money Finance; Means of Delivery; Dual Use
Laundering and Terrorist Financing Risk Goods.
Assessment (2013), p.7.
Weight Certificate (noun): In commerce,
Waive (verb); Waiver (noun): (1) In law, a weight certificate is a document certi-
the term means the deliberate or knowing fying the weight of its respective goods.
relinquishment of a right. (2) In Letter It may be issued by a variety of entities
of Credit practice, the term is used in associated with the seller / exporter, the
reference to discrepancies between the carrier, or an independent. It may indicate
documents presented and the terms of weight as net, gross or in some other
440 | Appendix C
relevant manner, particularly where the Person who places the wire transfer order
goods may be affected by water (e.g. rice). with the ordering institution to perform
The document is commonly required by the wire transfer. See Originator.
Commercial Letters of Credit and sent in
Bank Collections. It is also used regularly Without Delay (noun, adverb): In the
by carriers to calculate freight charges. context of Sanctions administered by
the UN, the term means, ideally, within
Whistleblowing (noun, verb): see Tipping a matter of hours of a designation by the
Off. United Nations Security Council or its
relevant Sanctions Committee (e.g. the
Wire Transfer (noun): see Funds Transfer. 1267 Committee, the 1988 Committee,
the 1718 Sanctions Committee or the 1737
Wire Transfer Beneficiary (noun): In Sanctions Committee). See FATF Recom-
Funds Transfers, means the natural or mendations: International Standards on
legal Person or who is identified by the Combating Money Laundering and the
wire transfer Originator as the receiver Financing of Terrorism & Proliferation
of the funds. See Beneficiary. (2016), p.127.
Wire Transfer Originator (noun): In Funds

Transfers, means the Account holder who
allows the wire transfer from that account,
or where there is no account, the natural or
D
Appendix D
ABBREVIATIONS RELATED TO TRADE

BASED FINANCIAL CRIME
As will be apparent from the size of this extensive list of abbreviations, Trade
Based Financial Crime Compliance uses abbreviations extensively. This Appendix
is included to aid the reader who does not know, has forgotten, or was confused
by what they signify.
The abbreviations include terms commonly used in combating financial crime and
the abbreviations of organisations connected with it. While the chart identifies
the name or term being abbreviated, it does not provide any further information.
For that information, the reader must use other appendices, most likely Appendix
C (Glossary) for the meaning of terms appearing in this table of abbreviations,
and Appendix E (Organisations) for information about the names and functions of
organisations listed below.
While it might have been more convenient to have compiled all of this information
in one Appendix, its length would make it unduly cumbersome for a reader seeking
simply to know the meaning of an abbreviation.
Abbreviation Full name

ABS Association of Banks in Singapore
ACFCS Association of Certified Financial Crime Specialists
ACH Automated Clearing House
ACP African, Caribbean and Pacific Group of States
AFMLS Asset Forfeiture Money Laundering Section
AFRICOM U.S. Military Command for Africa
AFTA ASEAN Free Trade Area
441
442 | Appendix D

AFU Asset Freezing Unit
AML Anti Money Laundering
AML / CFT Anti Money Laundering and Countering the Financing of Terrorism
APEC Asia-Pacific Economic Cooperation
APG Asia / Pacific Group
APIS Advanced Passenger Information System
APT Asset Protection Trust
ARBIFT Arab Bank for Investment and Foreign Trade
ARS Alternative Remittance Services
ASEAN Association of Southeast Asian Nations
ATM Automated Teller Machine
AVC Asset Value Correlation
BaFin The Federal Financial Supervisory Authority
BAFT Bankers’ Association for Finance and Trade
BCBS Basel Committee on Banking Supervision
BCD Banking Consolidation Directive
BCR Border Cash Report
BCs Documentary Bills for Collections
BCTR BSA CTR (replaced FinCEN CTR Form 104)
BEA British Exporters Association
BHC Bank Holding Company
BIS Bank for International Settlements
BNI Bearer Negotiable Instrument
BO Beneficial Ownership
BOP Balance of Payments
BPO Bank Payment Obligation
BSA Bank Secrecy Act
BSA-ID Bank Secrecy Act Identification Number (utilised in FinCEN Query
System)
BSAR Bank Secrecy Act Suspicious Activity Report (replaced FinCEN
SAR-DI Form TD 90-22.47)
BTPICC Banking Technique and Practice of the International Chamber of
Commerce
BWC 1972 Biological Weapons Convention
CACM Central American Common Market
CAD Commercial Affairs Department
CARICC Central Asia Regional Information Coordination Center
Abbreviations Related to Trade Based Financial Crime | 443

CARICOM Caribbean Common Market
CARSI Central America Regional Security Initiative
CBCRR Cross Border Currency / Bearer Negotiable Instruments Reporting
Regime
CBP Customs and Border Protection
CBSI Caribbean Basin Security Initiative
CCF Credit Conversion Factor
CDD Customer Due Diligence
CDSA Corruption, Drug Trafficking and Other Serious Crimes
(Confiscation of Benefits) Act (Cap 65A)
CEMAC Economic and Monetary Community of Central Africa
CF Commercial Fraud
CFATF Caribbean Financial Action Task Force
CFR Code of Federal Regulations
CFT Countering the Financing of Terrorism
CGFS Committee on the Global Financial System
CHIPS Clearing House Interbank Payments System
CI Criminal Investigation
CIF Costs, Insurance, Freight (Incoterms)
CIP Customer Identification Program
CISADA Comprehensive Iran Sanctions, Accountability and Divestment Act
CJS Criminal Justice System
CMIR Report of International Transportation of Currency or Monetary
Instruments
COD Collect on Delivery / Cash on Delivery (Incoterms)
COMESA Common Market for Eastern and Southern Africa
CPF Central Provident Fund
CPS Crown Prosecution Service
CPT Carriage Paid To (Incoterms)
CTFC Certificate in Trade Finance Compliance
CTR Currency Transaction Report
CTRC Currency Transaction Report Casino
D/A Documents Against Acceptance
D/P Documents Against Payment
DAR Detailed Assessment Report
DARE Drug Abuse Resistance Education
DARTTS Data Analysis and Research for Trade Transparency System
444 | Appendix D

DC Documentary Letter of Credit
DCN Document Control Number
DCs Documentary Credits
DEA Drug Enforcement Administration
DFIs Depository Financial Institutions
DHS U.S. Department of Homeland Security
DHS/HSI Department of Homeland Security / Homeland Security
Investigations
DNFBP Designated Non Financial Business or Profession
DOEP Designation of Exempt Person Report
DOJ Department of Justice
DOS Department of State
DPA Data Protection Act 1998
DTO Drug Trafficking Organization
EAG Eurasian Group to Combat Money Laundering and Terrorist
Financing
EAM External Asset Managers
EAR Export Administration Regulations
E-banking Electronic Banking
EC European Commission
ECAs Export Credit Agencies
ECCAS Economic Community of Central African States
ECOWAS Economic Community of West African States
EDD Enhanced Due Diligence
EDPS European Data Protection Supervisor
EEA European Economic Area
EFT Electronic Funds Transfer
EFTA European Free Trade Association
EIC Examiner in Charge
EIN Employer Identification Number
EMEs Emerging Market Economies
EMIs E-Money Institutions
EMLC Emerging Markets Bank Lending Conditions Survey
EO Executive Order
EPN Electronic Payments Network
ERA Enterprise Risk Assessment
ERISA Employee Retirement Income Security Act of 1974

ESAAMLG Eastern and Southern Africa Anti-Money Laundering Group
EU European Union
EU TFTS European Terrorist Finance Tracking System
Eurojust European Union Judicial Agency
Europol European Police Office
EUROSTAT Statistical Office of the European Communities
EXW Ex Works (Incoterms)
FAO Food and Agriculture Organization of the United Nations
FAQ Frequently Asked Question
FATF Financial Action Task Force
FATS Foreign Affiliates Statistics
FBAR Report of Foreign Bank and Financial Accounts
FBI Federal Bureau of Investigation
FCA Financial Conduct Authority (UK)
FCA Free Carrier (Incoterms)
FCC Financial Crime Compliance
FCI Financial Conditions Index
FCR Financial Crime Risk
FCUA Federal Credit Union Act
FDI Foreign Direct Investment
FDIA Federal Deposit Insurance Act
FDIC Federal Deposit Insurance Corporation
FDSS Federal Drug Seizure System
FEC Financial Expertise Centre
FED Federal Reserve Board
FedWire Federal Reserve Wire Network Funds Service
FFIEC Federal Financial Institutions Examination Council
FGO Foreign Gateway Operator
FHA Federal Housing Administration
FI Financial Institution
FIL Financial Institution Letter
FinCEN Financial Crimes Enforcement Network
FINTRAC Financial Transactions and Reports Analysis Centre (Canada)
FITA Federation of International Trade Associations
FIU Financial Intelligence Unit
FOIA Freedom of Information Act
446 | Appendix D

FSA Financial Services Authority
FSB Financial Stability Board
FSMA Financial Services and Markets Act 2000
FSRB FATF Style Regional Bodies
FT Financing of Terrorism
FTC Federal Trade Commission
FTDs Financial Transaction Documents
FTZ Free Trade Zone
GABAC Action Group against Money Laundering in Central Africa
GAFILAT Financial Action Task Force of Latin America
GAO U.S. Government Accountability Office
GCC Gulf Co-Operation Council
GDCA Global Digital Currency Association
GDP Gross Domestic Product
GFI Global Financial Integrity
GIABA Inter-Governmental Action Group against Money Laundering
GNP Gross National Product
GO Gateway Operator
GPR General Purpose Reloadable Card
GTA Global Money Laundering and Terrorist Financing Threat
Assessment
GTIS Global Trade Information Services Inc.
HIDTA High Intensity Drug Trafficking Area
HIFCA High Intensity Financial Crime Area
HKAB Hong Kong Association of Bankers
HKMA The Hong Kong Monetary Authority
HMRC Her Majesty’s Revenue and Customs
HQLA High Quality Liquid Assets
HS Harmonized Commodity Description and Coding System
IAEA International Atomic Energy Agency
IAIS International Association of Insurance Supervisors
IAT International Automated Clearing House Transaction
IBC International Business Corporation
IBOA The International Banking Operations Association
ICAEW Institute of Chartered Accountants in England and Wales
ICC International Chamber of Commerce

ICE Immigration and Customs Enforcement
ICO Information Commissioner’s Office
ICRG International Cooperation Review Group
ICS International Chamber of Shipping
IEA International Energy Agency
IEEPA International Emergency Economic Powers Act
IFB Insurance Fraud Bureau
IFC International Financial Corporation
IFTR International Funds Transfer Report
IGRA Indian Gaming Regulatory Act
IGWG Indian Gaming Working Group
IIF Institute of International Finance
ILEA International Law Enforcement Academy
IMF International Monetary Fund
IMO International Maritime Organization
INCB International Narcotics Control Board
INCOTERMS® International Commercial Terms
INCSR International Narcotics Control Strategy Report
INL U.S. Department of State’s Bureau of International Narcotics and
Law Enforcement Affairs
IOLTA Interest on Lawyers’ Trust Account
IOSCO International Organization of Securities Commissions
IP Internet Protocol
IRA Individual Retirement Account
IRB Internal Ratings Based
IRS Internal Revenue Service
IRS-CID Internal Revenue Service Criminal Investigative Division
ISIC International Standard Industrial Classification
ISIL (ISIS; IS) Islamic State of Iraq and the Levant
ISO Independent Sales Organization
ISP98 The International Standby Practices, ICC Publication No. 590
ITA International Trade Administration
ITIN Individual Taxpayer Identification Number
IVTS Informal Value Transfer System
JIATF-S Joint Interagency Task Force South
JIATF-W Joint Interagency Task Force West
448 | Appendix D

JMLSG Joint Money Laundering Steering Group
KEXIM Korean Export-Import Bank
KLPD National Police Services Agency
KYC Know Your Customer
KYCC Know Your Customer’s Customer
LC Letter of Credit
LCR Liquidity Coverage Ratio
LDCs Least Developed Countries
LEA Law Enforcement Agency
LIBF London Institute of Banking & Finance
LRO Money Laundering Reporting Officer
LTROs Longer Term Refinancing Operations
MAOC-N Maritime Analysis and Operations Centre Narcotics
MAS Monetary Authority of Singapore
MDBs Multilateral Development Banks
MENAFATF Middle East and North Africa Financial Action Task Force
MEPS+ MAS Electronic Payment System
MER Mutual Evaluation Report
MERCOSUR Southern Common Market
MIS Management Information Systems
ML Money Laundering
ML / TF Money Laundering / Terrorist (Terrorism) Financing
MLA Mutual Legal Assistance
MLAT Mutual Legal Assistance Treaty
MLRO Money Laundering Reporting Officer
MLSA Money Laundering Suppression Act of 1994
MLTA U.S. Money Laundering Threat Assessment
MONEYVAL Committee of Experts on the Evaluation of Anti-Money Laundering
Measures and the Financing of Terrorism
MPE Multiple Point of Entry
MRP Minimum Retention Period
MSB Money Services Business
MTIC Missing Trader Intra Community
MVT Money and Value Transfer
MVTS Money or Value Transfer Service(s)
NACHA National Automated Clearing House Association

NAFTA North American Free Trade Agreement
NAIC National Association of Insurance Commissioners
NASD National Association of Securities Dealers
NASDAQ National Association of Securities Dealers Automated Quotation
Systems
NBFI Non-Bank Financial Institutions
NCA National Crime Agency
NCCT Non-Cooperative Countries and Territories
NCUA National Credit Union Administration
NDIP Non-Deposit Investment Products
NFA National Fraud Authority
NGO Non Governmental Organisation
NMLS Nationwide Multi-State Licensing System & Registry
NPO Non Profit Organisation (Not For Profit Organisation)
NPWMD Non Proliferation of Weapons of Mass Destruction
NRA Non Resident Alien
NRA Singapore National Money Laundering and Terrorist Financing Risk
Assessment Report
NRA National Risk Assessment
NSF Non Sufficient Funds
NSFR Net Stable Funding Ratio
NTA National Threat Assessment
OAS Organization of American States
OAS/CICAD Inter-American Drug Abuse Control Commission
OCC Office of the Comptroller of the Currency
OCDETF Organized Crime Drug Enforcement Task Force
OCIT Outbound Currency Interdiction Training
ODFI Originating Depository Financial Institution
OECD Organisation for Economic Cooperation and Development
OFAC Office of Foreign Assets Control
OFC Offshore Financial Center
OFSI Office of Financial Sanctions Implementation
OIA Office of Intelligence and Analysis
ONDCP Office of National Drug Control Policy
OPCW The Organization for the Prohibition of Chemical Weapons
OPDAT Office of Overseas Prosecutorial Development, Assistance and
Training
450 | Appendix D

OSCE Organization for Security and Co-operation in Europe
OTA Office of Technical Assistance
OTS Office of Thrift Supervision
Palermo The United Nations Convention against Transnational Organized
Convention Crime 2000
PDPA Personal Data Protection Act
PEP Politically Exposed Person
PIC Private Investment Company
POS Point of Sale
PRA Prudential Regulation Authority
PTA Payable Through Account
PUPID Payable Upon Proper Identification
RA Regulatory Alerts
RBA Risk Based Approach (or Analysis)
RCC Remotely Created Check
RDC Remote Deposit Capture
RDFI Receiving Depository Financial Institution
RMA Relationship Management Application
ROE Report of Examination
RUSI Royal United Services Institute (UK)
RWA Risk Weighted Assets
SAARC South Asian Association for Regional Cooperation
SADC Southern African Development Community
SAPTA South Asian Preferential Trade Arrangement
SAR Suspicious Activity Report
SAR-MSB Suspicious Activity Report by Money Services Businesses
SAR-SF Suspicious Activity Report by the Securities & Futures Industries
SBLC Standby Letters of Credit
SDD Simplified Due Diligence
SDN Specially Designated Nationals
SEC Securities and Exchange Commission
SELEC Southern European Law Enforcement Center
SENTRI Secure Electronic Network for Travelers Rapid Inspection
SGS Société Générale de Surveillance
SISS Secure Information Sharing System
SITC Standard International Trade Classification

SIU Special Investigative Unit
SOD Summary of Deposits
SPE Single Point of Entry
SRA Solicitors Regulation Authority
SRB Self Regulating Body
SSN Social Security Number
STR Suspicious Transaction Report
STRO Suspicious Transaction Reporting Office
SWIFT Society for Worldwide Interbank Financial Telecommunication
SWIFT RMA Society for Worldwide Interbank Financial Telecommunications
Relationship Management Account
TBFCC Trade Based Financial Crime Compliance
TBML Trade Based Money Laundering
TCSP Trust and Company Service Provider
TEOAF Treasury Executive Office for Asset Forfeiture
Terrorist The International Convention for the Suppression of the Financing
Financing of Terrorism 1999
Convention
TF Terrorist (Terrorism) Financing (Finance)
TFEU Treaty on the Functioning of the European Union
TFFC Office of Terrorist Financing & Financial Crime
TFI Office of Terrorism and Financial Intelligence
TFTP Terrorist Finance Tracking Programme
TIDE Terrorist Identities Datamart Environment
TIN Taxpayer Identification Number
TMA Transaction Matching Application
TOC Transnational Organised Crime
TPSP Third Party Service Provider
TSOFA Terrorism (Suppression of Financing) Act (Cap 325)
TTU Trade Transparency Unit
TWEA Trading With the Enemy Act (1917)
UBO Ultimate Beneficial Owner
UBPR Uniform Bank Performance Report
UCP / UCP600 Uniform Customs and Practice for Documentary Credits (ICC
Publication No. 600)
UN United Nations
UNCAC United Nations Convention against Corruption
452 | Appendix D

UNCITRAL United Nations Commission on International Trade Law
UNCTAD United Nations Conference on Trade and Development
UNDOC United Nations Office on Drugs and Crime
UNECE United Nations Economic Commission for Europe
UNECLAC United Nations Economic Commission for Latin America and the
Caribbean
UNGPML United Nations Global Programme against Money Laundering
UNIDO United Nations Industrial Development Organization
UNODA United Nations Office of Disarmament Affairs
UNODC United Nations Office on Drugs and Crime
UNSC United Nations Security Council
UNSCR United Nation Security Council Resolution
UNSD United Nations Statistics Division
UNTOC United Nations Convention against Transnational Organized Crime
URBPO Uniform Rules for Bank Payment Obligations (ICC Publication No.
750)
URC Uniform Rules for Collections (ICC Publication No. 522)
URDG Uniform Rules for Demand Guarantees (ICC Publication No. 758)
URR Uniform Rules for Bank to Bank Reimbursement (ICC Publication
No. 725)
USA PATRIOT Uniting and Strengthening America by Providing Appropriate Tools
Act Required to Intercept and Obstruct Terrorism Act of 2001
USAID U.S. Agency for International Development
USC U.S. Code
USCIB U.S. Council for International Business (ICC-USA)
VACIS Vehicle and Cargo Inspection System
WACSI West Africa Cooperative Security Initiative
WAEMU West African Economic and Monetary Union
Web CBRS Web Currency and Banking Retrieval System
WMD(s) Weapon(s) of Mass Destruction
WTO World Trade Organization
E
Appendix E
ORGANISATIONS
This Appendix lists some of the major organisations involved in preventing and
combating trade based financial crime, provides a brief explanation of them, and
a URL to enable the reader to find further information. This list is not exhaustive
and focuses on the organisations referred to in this Book. Because it is arranged
alphabetically by the proper names of the organisations and not the abbreviations
by which they are commonly known, the reader may have to check the list of Ab-
breviations contained in Appendix D (Abbreviations) for the proper name.
Much of this information is taken from descriptions of the organisations themselves

and is not intended as a comment on their effectiveness.
Asia / Pacific Group on Money Laundering (APG). The APG operates in a style sim-
ilar to FATF, focusing on the Asia / Pacific region. APG is an organisation made up of
41 nation state members formed for the purpose of combating money laundering and
terrorism financing through mutual evaluations of the members, providing technical
assistance and training, conducting research and analysis, developing global policy,
and educating and engaging with the private sector.
http://www.apgml.org/
Association of Banks in Singapore (ABS). ABS is a voluntary non-profit organisation

of the major banks in Singapore that represents the interests of the commercial and
investment banking community. The roles of ABS include representing the Commercial
and Investment Banking Industry, upholding the integrity of its members, building
relationships within the industry, and collaborating with regional and international
organisations. ABS cooperates closely with the Singaporean government and its offices
are located in the MAS building.
https://www.abs.org.sg/
453
454 | Appendix E
Australian Transaction Reports and Analysis Centre (Austrac). Australia’s gov-

ernmental financial intelligence unit with regulatory responsibility for anti money
laundering and counter-terrorism financing.
http://www.austrac.gov.au/
Bank for International Settlements (BIS). The BIS was established through The Hague
Agreements of 1930 and organised to serve central banks as they pursue monetary and
financial stability, and to foster international cooperation between them.
https://www.bis.org
Bankers Association for Finance and Trade (BAFT). BAFT is an international

transaction banking association that serves as a forum for members to come together
and shape banking practice and governmental legislation. BAFT engages on a wide
range of topics affecting transaction banking, including trade finance, payments, and
compliance. BAFTs stated strategic pillars are to better the international trade banking
industry by promoting thought leadership, conducting advocacy, providing education
and training, and building a global community.
https://www.baft.org
Basel Committee on Banking Supervision (BCBS). BCBS is a committee of BIS,

charged with setting global standards for sound regulation of banks. BCBSs mandate
is to “strengthen the regulation, supervision and practices of banks worldwide with
the purpose of enhancing financial stability”.
https://www.bis.org/bcbs/index.htm?m=3%7C14%7C625
Clearing House Interbank Payments System (CHIPS). CHIPS is a privately operat-

ed, real time, multilateral payments system typically used for large dollar payments.
CHIPS is owned by banks, and any banking organisation with a regulated U.S. presence
may become a participant in the system. Banks use CHIPS for the settlement of both
interbank and customer transactions, including, for example, payments associated with
commercial transactions, bank loans, and securities transactions. CHIPS also plays a
large role in the settlement of USD payments related to international transactions, such
as foreign exchange, international commercial transactions, and offshore investments.
https://www.theclearinghouse.org/payments/chips
Egmont Group of Financial Intelligence Units. The Egmont Group serves as a fo-
rum for financial intelligence united to exchange ideas and expertise on combatting
money laundering and terrorism financing in a secure way, allowing for national and
international cooperation between these intelligence units.
https://www.egmontgroup.org
Organisations | 455
The Electronic Payments Association (NACHA): NACHA is the administrator of the

Automated Clearing House (ACH) Network. The ACH Network is a payment system that
allows for direct consumer, business and government payments. The ACH Network is
governed by the NACHA Operating Rules, which provides the legal foundation for the
exchange of ACH and IAT payments.
https://www.nacha.org/
European Economic Area (EEA) firms. Firms from the EEA that carry on relevant
business from a UK branch will be subject to the requirements of the UK Handbook and
of the Money Laundering Regulations 2007. However, an EEA firm that only provides
services on a cross border basis (and so, does not have a UK branch) will not be subject
to the Money Laundering Regulations 2007, unless it carries on its business through
representatives who are temporarily located in the UK. See FCA Financial crime: A
firm’s guide to preventing financial crime, p.76.
https://www.fca.org.uk/firms/passporting/regulators-eu-eea
Federal Financial Institutions Examination Council (FFIEC). FFIEC is a US gov-

ernment interagency body consisting of the Board of Governors of the Federal Reserve
System (FRB), Federal Deposit Insurance Corporation (FDIC), the National Credit Union
Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the
Consumer Financial Protection Bureau (CFPB). The FFIEC is “empowered to prescribe
uniform principles, standards, and report forms for the federal examination of financial
institutions” and is able to offer recommendations that promote and implement the
uniform supervision of financial institutions.
https://www.ffiec.gov/
Financial Action Task Force (FATF). FATF is an intergovernmental body established

for the purpose of setting standards and promoting the effective implementation of
legal, regulatory, and operational measures for combating money laundering, terrorist
financing and other threats to the international financial system. FATF works towards
these goals by publishing Recommendations and conducting mutual evaluations of
its members.
http://www.fatf-gafi.org/
Financial Conduct Authority (FCA). The FCA is a United Kingdom financial regula-
tory body that is independent of the UK government and financed by collecting fees
from the institutions it regulates. The FCA focuses on UK consumers and is charged
with ensuring that the financial markets in the UK are fair and effective by regulating
the conduct of UK businesses. The goal of the FCA is to protect consumers, protect the
integrity of the UK financial markets, and promote competition.
https://www.fca.org.uk/
456 | Appendix E
Financial Crimes Enforcement Network (FinCEN). A bureau of the U.S. Department

of the Treasury, FinCEN is charged with protecting the financial system from illicit use,
combating money laundering, and promoting U.S. national security through utilisation
of financial authorities.
https://www.fincen.gov/
Financial Industry Regulatory Authority (FINRA). FINRA is a private organisation

dedicated to investor protection and maintain the integrity of the market through
effective and efficient regulations.
http://www.finra.org/
Financial Stability Board (FSB). FSB is an international body that promotes interna-
tional financial stability by coordinating the efforts of national financial authorities
and by monitoring and making recommendations about the global financial system.
http://www.fsb.org/
Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). FINTRAC the
financial intelligence arm of the Canadian government charged with detection and pre-
vention of money laundering as well as countering the financing of terrorism. FINTRAC
analyses suspicious activity reports from all businesses and organisations (“Reporting
Entities”) under its regulatory umbrella on a case by case basis; where analysis of the
suspicious reports generates “reasonable grounds” for further investigation, FINTRAC
will disclose its financial intelligence to law enforcement for appropriate action.
https://www.fintrac-canafe.gc.ca/intro-eng
Hong Kong Association of Banks (HKAB). The HKAB was formed under a govern-
mental ordinance that provides a framework for the government to exchange ideas with
the banking sector. Among other roles, the HKAB promotes the interests of licensed
banks in Hong Kong and promotes best practices to members.
https://www.hkab.org.hk/index.jsp
Hong Kong Monetary Authority (HKMA). The HKMA is the government authority
in Hong Kong responsible for maintaining monetary and banking stability. The HKMA
supervises and regulates banks and institutions that take deposits, and regulates banks
and their staff who are registered with the Securities and Futures Commission.
http://www.hkma.gov.hk/eng/index.shtml
International Chamber of Commerce (ICC). The ICC is a private sector organisation

founded after World War I to promote and assist international business. Among other
areas, the Commission on Banking Technique and Practice focuses on international
banking practice through rule setting, dispute resolution, and policy advocacy. The ICC
Organisations | 457
has standardised practice rules for letters of credit and demand guarantees with UCP600
and URDG 758, respectively. Another commission of the ICC publishes INCOTERMS.
https://iccwbo.org/
International Monetary Fund (IMF). The IMF is an intergovernmental organisation

formed to ensure cooperation and stability in the international monetary system while
promoting international trade and economic growth.
http://www.imf.org/external/index.htm
Joint Money Laundering Steering Group (JMLSG). JMLSG is an organisation of UK

trade associations in the financial services industry. JMLSG’s goal is to promote good
practices in the attempt to prevent money laundering and to assist companies in in-
terpreting and abiding by UK anti money laundering regulations.
http://www.jmlsg.org.uk/
Monetary Authority of Singapore (MAS). MAS is a government agency charged

with the regulation and supervision of financial institutions located in Singapore. It
issues rules that are supplemented by legislation, directions, notices, regulations, and
authoritative guidelines regarding best practices.
http://www.mas.gov.sg/
Office of Foreign Assets Control (OFAC). OFAC, an agency of the U.S. Department
of the Treasury, administers and enforces US economic and trade sanctions against
targeted foreign countries and regimes, individuals such as terrorists, international
narcotics traffickers, those engaged in activities related to the proliferation of weapons
of mass destruction, and other entities or persons that are determined to be a threat
to the national security, foreign policy, or economy of the United States.
https://www.treasury.gov/about/organizational-structure/offices/Pages/
Office-of-Foreign-Assets-Control.aspx
Organisation for Economic Co-operation and Development (OECD). OECD is an

international economic organisation designed to provide a forum for governments to
discuss ideas and work together on policies that improve the economic and social well
being of people around the globe.
http://www.oecd.org/
Prudential Regulation Authority (PRA). The PRA is a limited company wholly

owned by the Bank of England and responsible for regulating and supervising banks,
building societies, credit unions, insurers, and investment firms by promoting safety,
soundness, and competition.
https://www.bankofengland.co.uk/prudential-regulation
458 | Appendix E
Society for Worldwide Interbank Financial Telecommunication (SWIFT): SWIFT

is a messaging infrastructure, not a payments system, which provides users with a pri-
vate international communications network to send and receive information regarding
financial transactions. The actual funds movements (payments) are completed through
correspondent bank relationships, Fedwire, or CHIPS. Movement of payments denom-
inated in different currencies occurs through correspondent bank relationships or over
funds transfer systems in the relevant country. In addition to customer and bank funds
transfers, SWIFT is used to transmit foreign exchange confirmations, debit and credit
entry confirmations, statements, collections, and documentary credits.
https://www.swift.com
Swiss Financial Market Supervisory Authority (FINMA). FINMA is the Swiss govern-
mental body responsible for financial regulation in Switzerland, including, supervising
banks, insurance companies, stock exchanges and securities dealers, as well as other
financial intermediaries operating in Switzerland.
https://www.finma.ch/en/
United Nations (UN). The UN is an intergovernmental organisation formed after World

War II to promote international co-operation. The UN plays a major role in combating
trade based financial crime through numerous bodies working under its auspices. The
UN Security Council, which consists of the People’s Republic of China, France, Russia,
the United Kingdom, and the United States, plus ten alternating members, is respon-
sible for imposing economic sanctions, and drafting and implementing conventions.
Two bodies of the UN also have played an important role in combating commercial and
financial crime, namely the UN Office of Drugs and Crime and the UN Commission on
International Trade Law (UNCITRAL).
http://www.un.org/en/index.html
United Nations Commission on International Trade Law (UNCITRAL). UNCITRAL

is the core legal body of the UN dedicated to international trade law. UNCITRAL works to
create harmonised rules through conventions, model laws, and rules. Notably, UNCITRAL
developed Recognizing and Preventing Commercial Fraud: Indicators of Commercial Fraud.
http://www.uncitral.org/
United Nations Office on Drugs and Crime (UNODC). UNODC is a body of the UN
charged with assisting UN member states in combating illicit drugs, crime, and terrorism
through cooperation between member states, conducting research and analysis, and
assisting member states in ratifying international treaties and in drafting domestic
legislation.
Organisations | 459
United States Department of the Treasury (U.S. Treasury). The U.S. Department
of the Treasury is the executive agency responsible for promoting economic prosper-
ity and ensuring the financial security of the United States. The mission of the U.S.
Department of the Treasury is to “maintain a strong economy and create economic
and job opportunities by promoting the conditions that enable economic growth and
stability at home and abroad, strengthen national security by combating threats and
protecting the integrity of the financial system, and manage the U.S. Government’s
finances and resources effectively.” The U.S. Department of the Treasury has a tre-
mendous impact on trade based financial crime compliance through, among other
agencies, OFAC and FinCEN.
https://www.treasury.gov/Pages/default.aspx
West African Economic and Monetary Union (UEMOA). UEMOA is an organisation

comprised of eight African nations (Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau,
Mali, Niger, Senegal, and Togo) for the purpose of promoting competiveness through
open markets, creating a common market, and harmonising social and economic policies.
http://www.uemoa.int/
Wolfsberg Group. The Wolfsberg Group is an association of global banks whose mandate
is to develop financial services industry standards and guidance related to anti money
laundering and counter terrorism financing policies. The standards and guidance are
intended to provide general assistance to industry participants and regulatory bodies
to shape their own policies and guidance.
http://www.wolfsberg-principles.com/index.html
INDEX
A Bank Collections
Anti Boycott....................................§13.3
Abbreviations, see Appendix D for Collecting / Presenting Bank.........§5.9.2
List of Abbreviations. Diligence......................... §§2.6, 2.7.2, 5.9
Acceptance.......................................... §2.7.2 Remitting Bank..............................§5.9.1
Accessory Undertakings, see Dependent Bank Examiners, see Financial Institution
Guarantees. Examiners.
Advance Payment...................................§2.6 Bank Guarantee, see Independent
Advice.................................................. §2.7.2 Guarantee.
Advising Bank Bank Payment Obligation.................... §2.7.2
Diligence........................................§5.8.5 Banker’s Acceptance, see Acceptance.
Anti Boycott Banking, see Financial Institutions.
Generally Chapter 13 Bill of Exchange................................... §2.7.2
Explained........................................§13.2 Blocked Funds
Violations of Prohibitions................§3.3 Generally....................................§9.4.2.1
Anti boycott, Regulations.....................§13.2 EU Terminology.............................§9.6.1
U.S. Regulations..............................§13.3 OFAC Terminology......................§9.4.3.1
Anti Bribery Laws & Conventions.....§11.4.1 Weapons of Mass Destruction.....§10.5.4
Anti Money Laundering Blocked Persons, see Specially Designated
Generally Chapter 7 Nationals.
APG Boycott.................................................§13.1
Indicators.........................................§6.3 Arab League......................... §§13.1, 13.2
Asia / Pacific Group, see APG. Primary...........................................§13.1
Automated Screening, see Customer. Secondary.......................................§13.1
Tertiary...........................................§13.1
BPO, see Bank Payment Obligation.
B
Bribery....................................................§3.3
BAFT.................................................§3.5.2.3 Generally Chapter 11
List of Indicators of Combating......................................§11.4
Financial Crime................................§6.3 Defined...........................................§11.1
Sources of Red Flags.............Appendix B Effects of.........................................§11.3
Bank, see Financial Institutions. ISO Anti Bribery Management
461
462 | Appendix E
Systems............................ §§11.4, 11.4.2 Compliance Programme

Private............................................§11.2 Generally Chapter 4
Public..............................................§11.2 Amendment...................................§4.4.3
Anti Money Laundering....................§7.5
Bank Response to Money
C Laundering.......................................§7.8
Chemical Weapons Commercial Fraud.......................§12.3.1
Conventions (CWC)...........................§10.2.1 Contents........................................§4.2.4
CIP, see Customer Identification Program. Documentation..............................§4.2.5
Collusion Documenting Exercise of
Generally.......................................§6.6.3 Diligence........................................ §5.7.3
Anti Money Laundering................. §7.6.3 Duality of “Compliance
Commercial Fraud......... §§12.2.3, 12.4.3 Programme”......................................§4.1
Counter Terrorism Financing........§8.6.3 Elements...........................................§4.2
Commercial Banks..................................§2.7 Implementation.............................§4.2.8
Commercial Bribery, see Bribery, Public. Independent Testing.....................§4.2.7
Commercial Fraud Internal Monitoring.......................§4.2.7
Generally Chapter 12 Penalties for Failure.........................§4.3
Abuse by Professionals................§12.2.3 Officer............................................§4.2.3
Collusion between Parties...........§12.2.3 Trade Based......................................§4.4
Combating...................................§12.3.1 Training............................. §§4.2.6, 4.4.6
Commodities Fraud.....................§12.2.2 Sanctions Response..........................§9.6
Cyber and Internet Fraud............§12.2.2 Sanctions Violations.........................§9.5
Explained.....................................§12.1.3 Written..........................................§4.2.2
Financial Instrument Fraud.........§12.2.2 See also Diligence.
Forgeries and Fraudulent Confirmation....................................... §2.7.2
Documents..................................§12.2.3 Control of Companies, see Collusion.
Indicators of...................................§12.4 The Convention on the Prohibition of the
Insurance Fraud...........................§12.2.2 Development, Production and Stockpiling of
Bacteriological and Toxin Weapons, and on
Kiting Method..............................§12.2.3
their Destruction (the Biological Weapons
Methods of...................................§12.2.3 Convention).......................................§10.2.2
Ponzi / Pyramid Scheme..............§12.2.3 Correspondent Bank(s)(ing)
Procurement Fraud......................§12.2.2 Commercial LCs.............................§5.8.2
Responses to...................................§12.3 Due Diligence................... §2.7, 2.7.2, 5.4
Transport Fraud...........................§12.2.2 Explained.......................................§5.4.1
Tax Fraud.....................................§12.2.2 Non Customer Financial
Types of...................§§3.3, 12.1.2, 12.2.2 Institutions....................................§5.4.5
Commercial Letter of Credit, see Letter Trade Based Products.......................§5.8
of Credit. Weapons of Mass Destruction.....§10.5.5
Commission on Banking Technique & Corruption, see Bribery.
Practice, see ICC.
Counter Guarantee, see Counter
Compliance Officer.................. §§4.2.3, 4.4.4 Undertaking.
Compliance Plan, see Compliance Counter Standby, see Counter Undertaking.
Programme.
Counter Terrorism Financing
Compliance
Generally Chapter 8
In Trade Based Financial Crime.....§3.4.4
Goals..................................... §§8.4, 8.4.1
Two Uses Described........................§3.11
Organisations................................§8.4.5
Index | 463
Role of Banks....................................§8.5 See also High Risk Transactions.

Counter Undertaking........................... §2.7.2 See also Indicators.
Cuba Documentary Collections, see Bank
Anti Boycott....................................§13.1 Collections.
Sanctions..........................................§9.3 Documentary Letter of Credit, see Letter of
Customer Credit.
Beyond Customers............................§5.5 Documents
Customer Profile...........................§5.3.3 Forged and Fraudulent................§12.2.3
Defined.............................................§5.2 Sanctions.......................................§9.6.1
Non Customer Financial Weapons of Mass Destruction.....§10.5.4
Institutions, Diligence...................§5.4.5 Dorchester Fin. Holdings Corp. v Banco
Sanctions Violation..........................§9.5 BRJ. S.A............................................... §12.6.4
Screening: Automated and Manual.§5.3.4 Draft, see Bill of Exchange.
Verification....................................§5.3.1 Dual Use Goods
Weapons of Mass Destruction.....§10.5.2 Generally.......................................§6.6.8
See also Know Your Customer’s Commercial Fraud.......................§12.4.8
Customer. Counter Terrorism Financing........§8.6.8
Customer Identification Program...........§5.3 Weapons of Mass Destruction
....................................... §§10.2.1, 10.5.4
Due Diligence, see Diligence.
D
DCD Factors Plc v. Ramada Trading Ltd. E
........................................................... §12.6.5
De Risk(ing).........................................§3.6.3 EU Sanctions...................... §§3.5.2.2, 9.4.3.1
Deferred Payment Undertaking, see Economic Crime, see Financial Crime.
Letter of Credit. Economic Sanctions, see Sanctions.
Delivery......................................... §§2.2, 2.5 Enhanced Due Diligence, see Diligence.
Demand Guarantee, see Independent European Union, see EU.
Guarantee. Examination Procedures, U.S, OCC......§4.5.2
Dependent Guarantees................§§2.6, 2.7.2 Examiners, see Financial Institution
Diligence Examiners.
Generally Chapter 5 Exercising Due Diligence, see Diligence.
Advising Bank................................§5.8.5 Export License.....................................§9.6.1
Commercial Fraud Responses......§12.3.1
Degrees of...................................... §5.7.1 F
Documenting................................. §5.7.3
Enhanced.................................... §5.7.1.2 Factoring............................................. §2.7.2
LC Applicant..................................§5.8.3 FATF
Ongoing Monitoring........§§5.5, 5.6, 5.10 Indicators of Financial Crime...........§6.3
Other Banks...................................§5.8.4 Sources of Red Flags.............Appendix B
Overview...........................................§5.1 Terrorism Financing....... §§3.5.2.2, 8.4.5
Sanctions Violation..........................§9.5 Weapons of Mass Destruction.....§10.3.2
Stages of Defence.......................... §5.7.2 Federal Republic of Germany, see Germany.
Standby, Independent Guarantee..§5.8.6 Financial Crime
Third Party....................................§5.3.5 Commercial Fraud....................§12.1.1.1
Weapons of Mass Destruction.....§10.5.4 Defined.............................................§3.2
See also Compliance Programme. Types................................................§3.3
464 | Appendix E
Financial Crime Regulation I

Defined.............................................§3.2
Evolution..........................................§3.5 ICC................................................................
General Comments...........................§3.6 Role in Combating Financial
Layers.........................................§3.5.3.1 Crime.............................. §§1.2.2, 3.5.2.3
Multiple Regulatory Systems............§3.8 Impala Warehousing & Logistics Co. v.
Wanxiang Resources Pte. Ltd.............. §12.6.1
Regulatory Bodies.. §§3.5.2, 3.5.2.1, 3.5.3
Inconsistencies in Transactions
See also Inter Governmental
Organisations. Generally.......................................§6.6.9
Financial Crimes Enforcement Network, see Anti Money Laundering................. §7.6.7
FinCEN. Commercial Fraud.......................§12.4.9
Financial Institution Examiners.......§3.5.3.4 Counter Terrorism Financing........§8.6.9
Financial Institutions.............................§2.1 INCOTERMS.................................. §§2.4, 2.5
(use of “Bank” and “Banking” explained) Independence Principle.. §§1.2.1, 1.2.2, 1.2.3
FinCEN Independent Guarantee
Free Trade Zones..............................§6.3 Diligence.............§§1.2.2, 2.6, 2.7.2, 5.8.6
Forfait.................................................. §2.7.2 Sanctions.......................................§9.6.1
Fraud, see Letter of Credit Fraud. Indicators of Financial Crime
Front Companies, see Shell Companies. Generally Chapter 6
Funds Transfer..................................... §2.7.2 Anti Money Laundering....................§7.6
Freeze, see Blocked Funds. Cautions about their Use..................§6.5
Commercial Fraud..........................§12.4
Comparison of Different Lists...........§6.3
G
Counter Terrorism Financing...........§8.6
Geographical Concerns Defined..........................................§6.2.2
Generally.......................................§6.6.5 Inappropriate Use..........................§6.5.2
Anti Money Laundering................. §7.6.5 Sources of Red Flags.............Appendix B
Commercial Fraud.......................§12.4.5 Sources..........................................§6.2.3
Counter Terrorism Financing........§8.6.5 Specific Indicators Related to Trade..§6.6
Germany...........................................§3.5.2.1 Using them.......................................§6.4
Government Regulators, see Financial Inter Governmental Organisations
Crime Regulation. Combating Terrorism............ §§3.5.2.2, 8.4.5
See also EU.
See also United Nations.
H
International Banking Operations..........§1.2
High Risk Transactions International Chamber of Commerce, see
Generally.......................................§6.6.6 ICC.
Anti Money Laundering................. §7.6.6 International Standby Practices, see ISP98.
Commercial Fraud.......................§12.4.6 ISP98
Counter Terrorism Financing........§8.6.6 ISP98 Model Form 1.......................§5.8.6
High Risk Transactions............... §5.7.1.3 Rule 1.06(c)....................................§1.2.2
HKAB
Generally..........................................§6.3 J
Sources of Red Flags.............Appendix B
Hong Kong Association of Banks, see HKAB. Jurisdictional Issues, see Geographical
Hong Kong Concerns.
Sanctions..................... §§3.5.2.1, 9.4.3.3
Index | 465
K False Description of Goods or

Services.......................................... §7.7.5
Know Your Customer Funnel Account.............................. §7.5.1
KYC Plan............................... §§5.3, 5.3.2 Integration.................................... §7.2.3
Sanctions Violations.........................§9.5 Layering......................................... §7.2.2
Weapons of Mass Destruction.....§10.5.2 Multiple Invoicing......................... §7.7.2
Know Your Customer’s Customer........§5.3.6 Over and Under Invoicing.............. §7.7.1
Komercni Banka A.S. v. Stone & Over and Under Shipment............. §7.7.3
Rolls Ltd.............................................§12.6.2 Phantom Shipment........................ §7.7.4
KYC, see Know Your Customer. Placement Stage............................ §7.2.1
KYCC, see Know Your Customer’s Customer. Stages of...........................................§7.2
MT700,........................................ see SWIFT.
L
N
Letter of Credit Fraud..........................§1.2.3
Letter(s) of Credit Non Customer, see Customer.
Anti Boycott..........................................§13.3
Anti Money Laundering....................... §7.6.9
O
Applicant Due Diligence......................§5.8.3
Commercial Fraud...........................§12.4.11 Office of Antiboycott Compliance.........§13.3
Concerns as Indicator of Office of Financial Sanctions
Financial Crime.................................§6.6.11 Implementation, see OFSI.
Counter Terrorism Financing............§8.6.11 Officer, see Compliance Officer.
Deferred Payment Undertaking...§§2.6, 2.7.2 OFAC
Diligence regarding Correspondent Licenses.........................................§9.6.1
Banks...................................................§5.8.2 U.S. Targeted Sanctions.. §§9.4.2, 9.4.2.3
LC Practice...........................................§1.2.2 OFSI..................................................§9.4.3.2
Public Policy Exception.......................§1.3.1 Open Account.........................................§2.6
Sanctions.............................................§9.6.1 Organisation for the Prohibition of
License Chemical Weapons (OPCW)...............§10.2.1
Specific License.. §§9.4.2.1, 9.4.3.2, 9.6.1
General License.............. §§9.4.2.1, 9.6.1
P
Lists of Terrorists, see Terrorism.
Lombard v. Landmark...........................§1.2.3 Parties
Commercial Fraud.......................§12.4.7
M Counter Terrorism Financing........§8.6.7
High Risk Transactions............... §5.7.1.3
Manual Screening, see Customer. Problematic...................................§6.6.7
MAS Payment..................................§§2.2, 2.4, 2.6
List of Indicators..............................§6.3 Penalties
Sources of Red Flags.............Appendix B For Failure to Implement Compliance
Mercuria Energy Trading Pte Ltd. v. Programme............................ §§3.10, 4.3
Citibank, N.A. .................................... §12.6.3 PEP...............................................................
Monetary Authority of Singapore, see MAS. Counter Terrorism
Money Laundering Financing............................§§6.6.7, 8.6.7
Generally.....................§§3.2, 3.3, 7.1-7.4 Described.................................... §5.7.1.3
Defined.............................................§7.1 Politically Exposed Persons, see PEP.
466 | Appendix E
Privacy....................................................§3.7 Generally.......................................§6.6.2
Promissory Note.................................. §2.7.2 Anti Money Laundering................. §7.6.2
Public Bribery.......................................§11.2 Commercial Fraud.......................§12.4.2
Counter Terrorism Financing........§8.6.2
Singapore.........................................§3.5.2.1
R
Sanctions....................................§9.4.3.4
Regulators, see Financial Crime Regulation. Specially Designated Nationals
Reimbursement Undertaking............... §2.7.2 OFAC Terminology......................§9.4.2.1
Reputation..............................................§3.9 Sanctions Violation..........................§9.5
Risk Assessment U.K. Sanctions............................§9.4.3.2
Anti Money U.S. Targeted Sanctions..............§9.4.2.3
Laundering.................. §§4.2.1, 4.4.2, 7.6 SDN, see Specially Designated Nationals.
RMA, see SWIFT. Standby Letter of Credit..............§§2.6, 2.7.2
Royal Bank of Canada v. IRC....................§3.7 Diligence........................................§5.8.6
Structure of Trade Transactions
S Generally.....................................§6.6.10
Anti Money Laundering................. §7.6.8
S. Satyanarayana and Co. v. W. Quay Commercial Fraud.....................§12.4.10
Multiport Pvt. Ltd.................................§1.2.3 Counter Terrorism Financing......§8.6.10
Sanctions Suretyship Undertakings, see Dependent
Generally Chapter 9 Guarantees.
Consequences................................§9.6.3 Suspicious Actions
Defined & Explained........................§9.1 Generally.....................................§6.6.12
Economic Sanctions.........................§9.2 Anti Money Laundering............... §7.6.10
European Union..........................§9.4.3.1 Commercial Fraud.....................§12.4.12
Hong Kong..................................§9.4.3.3 Counter Terrorism Financing......§8.6.12
In Trade Based Financial SWIFT......................................... §§1.2.2, 2.7
Crime.................................... §§3.3, 3.4.4 RMA............................................§5.4.1.1
Other Jurisdictions.....................§9.4.3.5
Secondary Sanctions...................§9.4.2.2
Singapore....................................§9.4.3.4 T
Terrorism Financing......................§8.4.4 Terrorism
United Kingdom.........................§9.4.3.2 Acts................................................§8.2.3
United Nations..............................§9.4.1 Designation of Terrorist................§8.4.6
United States.................................§9.4.2 Explained..........................................§8.2
United States Targeted Lists of...........................................§8.4.6
Sanctions....................................§9.4.2.3
Motives..........................................§8.2.2
Violations.........................................§9.5
Organisations................................§8.2.5
Sanctions, Relation to Boycott..............§13.1
Terrorism Financing
Screening, see Customer.
Generally Chapter 8
Shadow Banking.....................................§2.7
Criminalisation..............................§8.4.3
Shell Companies
Sources...........................§§3.3, 8.3, 8.3.2
Generally.......................................§6.6.4
Tournier v. National Provincial and Union
Anti Money Laundering................. §7.6.4 Bank of England......................................§3.7
Commercial Fraud.......................§12.4.4 Trade
Counter Terrorism Financing........§8.6.4 Explained..........................................§2.2
Significant Deviations Finance.............................................§2.2
Index | 467
Intermediaries..................................§2.2 United Nations Office for Disarmament

Parties..................................... §§2.2, 2.3 Affairs (UNODA)................................§10.3.1
Statistics...........................................§2.2 United Nations Security Council Resolutions
Trade Acceptance................................. §2.7.2 Weapons of Mass Destruction...........§10.3.1
Trade Based Financial Crime Unusual Transactions
Description of Trade Based Generally.......................................§6.6.1
Financial Crime.............................§3.4.2 Anti Money Laundering................. §7.6.1
Evolution.......................................§3.4.1 Commercial Fraud.......................§12.4.1
Explained..........................................§3.2 Counter Terrorism Financing........§8.6.1
Trade Based Money Laundering URC.........................................................§2.6
Defined.............................................§7.4 URDG 758, see URDG
Trade Finance URDG...................................................§1.2.2
Implications for Regulation...........§3.4.3 URR...................................................... §2.7.2
Training...............................................§4.2.6 U.S. Office of Foreign Asset Controls, see
Transport.................................§§2.3, 2.4, 2.5 OFAC.
Transport Document
Sanctions Violation..........................§9.5 V
Weapons of Mass Destruction.....§10.5.4
Verification, Customer, see Customer.
U
W
U.K.
Sanctions..................... §§3.5.2.1, 9.4.3.2 Weapons of Mass Destruction
U.S. Generally Chapter 10
Sanctions........................ §§3.5.2.1, 9.4.2 Biological Weapons.....................§10.2.2
UCP......................................................§1.2.2 Chemical Weapons......................§10.2.1
UCP600 Article 5............................§1.2.2 Explained............................ §§3.3, 10.1.1
UCP600, see UCP. ISO 28000....................................§10.4.3
UN Convention on Contracts for the Nuclear / Radiological Weapons..§10.2.3
International Sale of Goods Whistle Blower..................................§12.3.1
Article 30..........................................§2.2 Wire transfer, see Funds Transfer.
Article 54..........................................§2.2 WMD, see Weapons of Mass Destruction.
UN Convention on Independent Wolfsberg Group...............................§3.5.2.3
Guarantees Article 3............................§1.2.1
UN International Convention on the
Suppression of the Financing of
Terrorism.............................................§8.4.5
Uniform Customs and Practice, see UCP.
Uniform Rules for Collections, see URC.
Uniform Rules for Demand Guarantees, see
URDG.
Uniform Rules for Reimbursement, see URR.
United Nations
Combating Terrorism...... §§3.5.2.2, 8.4.5
Sanctions.......................................§9.4.1
Weapons of Mass Destruction.....§10.3.1
United Nations International Atomic
Energy Agency (IAEA).......................§10.2.3

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Trade Based Financial

Michael Byrne Banking Law & Practice

All rights reserved

No reproduction of this material may be made without express written permission.

The Institute of International Banking Law & Practice, Inc.

Library of Congress Control Number: 2021917287

Trade Based Financial Crime Compliance is published by the Institute of International

Professor James E. BYRNE

Dr. Karl MARXEN, LLM, LLD

Matthew J. KOZAKOWSKI, J.D.

The Institute of International Banking Law & Practice, Inc.

Montgomery Village, MD, USA

My co-authors Karl MARXEN and Matthew KOZAKOWSKI have been a part of

Many thanks go to our esteemed colleagues and their various organisations

In the area of commercial fraud, he has conducted an extensive study of

Karl MARXEN is a Research Associate at the Faculty of Law at the University

Matthew J. KOZAKOWSKI is Associate Counsel at the Institute of Interna-

Michael P. BYRNE is the President and CEO of the Institute of International

Prior to IIBLP, Michael served as an independent consultant to Philip Morris

The Institute of International Banking Law & Practice is a not-for-profit edu-

Headquartered in the United States with Associate Directors in Singapore and

Their focus is on lifelong learning, equipping professionals with the knowledge,

By providing a balance of experience, insight and thought leadership delivered by

Learn more about LIBF at: www.LIBF.ac.uk

Coastline Solutions is the world’s leading online training and information

As a partner in the TBFC Certification Programme Coastline has developed

Other Coastline Online Training Courses include:

Part 1 Trade Based Financial Crime Compliance

Part 2 Combating Financial Crimes

Acknowledgements – Second Edition.........................................................................................v

PART 1 TRADE BASED FINANCIAL CRIME COMPLIANCE

PART 2 COMBATING FINANCIAL CRIMES

2018 Trade Based Financial Compliance Conference held in London

What is “compliance”? For years compliance involved determining wheth-

However, despite the abundance of resources available to financial

Professor James E. Byrne, May 2o18

Back to the beginning of this: what exactly is trade-based financial crime

This Book is broken into two parts.

AN INTRODUCTION TO TRADE BASED

WHERE THIS FITS IN THE BOOK:

Outline of this Chapter

Section 1.1 Overview of this Book

While not deliberately avoiding relevant theoretical or intellectually challenging

Section 1.2 International Banking Operations

Subsection 1.2.1 The Independence Principle

Article 3 (Independence of undertaking) of the UN Convention on Independent

a) Dependent upon the existence or validity of any underlying transaction, or

In the second place, it is founded on a fiction, namely, that in examining documents,

Subsection 1.2.2 International Letter of Credit Practice

UCP600 Article 5 (Documents v. Goods, Services or Performance)

ISP98 Rule 1.06(c) (Nature of Standbys)

“Because a standby is independent, the enforceability of an issuer’s obligations under

i. the issuer’s right or ability to obtain reimbursement from the applicant;

Subsection 1.2.3 The Fraud Exception

Section 1.3 The Compliance System

Subsection 1.3.1 The Impact of Public Policy on Letter

Subsection 1.3.2 The World of Regulatory Compliance

Whether this scepticism is warranted, however, is irrelevant for financial institutions,

Section 1.4 Studying Trade Based Financial Crime Compliance