Trade Based Money Laundering

Sheikh Emanul Haque

Assistant General Manager
CI, SBTI, Khulna

Introduction: Money laundering and terrorist financing in nature is a trans-national

organized crime. Criminal always creates an extra layer of security by siphoning off the
illicitly gained money into the overseas so that they could enjoy it risk free. Similarly, the
smuggler requires foreign currency to repay their dues related to arms, gold, drugs and
other related things.

The Global Financial Integrity (GFI) estimated that from 2005 to 2015 within 10 years 7.8
trillion USD siphoned off from underdeveloped or developing countries to the developed
world with a 6.5% increasing rate each year. The same estimate shows that from
Bangladesh almost 55 billion USD siphoned off in different ways, among them 83% by
means of trade. This means almost 50 billion USD siphoned off from Bangladesh from
2005 to 2015 via trade-based money laundering (TBML).

TBML and Illicit Financial Flows and published National ML/TF Strategy 2019-21 as a
part of sectoral initiatives Bangladesh Financial Intelligence Unit (BFIU) has issued a
standard Guideline for Banks on TBML.

Sonali Bank Limied, being the largest state-owned commercial bank is highly committed
and aligned with every government initiative and serving for the betterment of the nation.
As the TBML is a curse for our nation and barrier for the national development, the Sonali
Bank Limited will put its best efforts by all means to curb TBML and the following Laws,
Rules, Regulations and Guidelines to be read together with :
(a) Money Laundering Prevention Act, 2012.
(b) Money Laundering Prevention Rules, 2019.
(c) Anti-Terrorism Act, 2009.
(d) Anti-Terrorism Rules, 2013.
(e) Foreign Exchange Regulations Act, 1947.
(f) Customs Act, 1969.
(g) The Import and Export Control Act, 1950.
(h) Importers, Exporters and Indenters (Registration) Order, 1981.
(i) Value Added Tex Act, 1991.
(j) Import Policy Order and Export Policy in force.
(k) Rules, Govt. SROs, Circulars, Circular letters, Guidelines, instructions issued
by relevant authorities/regulators.
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What is Trade
Trade is the act or process of buying, selling, or exchanging commodities, at either
wholesale or retail, within a country or between countries with compensation or without
by a buyer to a seller, or the exchange of goods of services between parties. The whole
act or process is government by a specific terms and conditions.
Products & Services Related to Trade
A. Import Products/Services :
1. Cash Letter of Credit (Cash LC)
2. Cash Usance/Deferred Letter of Credit (Usance/Deferred LC)
3. Standby Letter of Credit (SBLC)
4. Usance Payment at Sight Letter of Credit (UPAS LC)
5. Back to Back Letter of Credit (BTB LC)
6. Loan Against Trust Receipt (LTR)
7. Loan Against Import Merchandise (LIM)
8. Foreign Demand Draft (FDD)
9. Payment Against Documents (PAD)
10. Import without LC (though LCAF)
11. Advance Payment
12. Advance Payment Guarantee (APG)
13. Bill Payment
14. Export Development Fund(EDF) Facility
15. BARTER Trade Facility (subject to Govt. Agreement)
16. Border Trade Facility
17. Border Haat transaction Facility
18. Open Account (Domestic Factoring/Receivable Financing)
B. Export Products/Services :
1. Letter of Credit (LC) Advise
2. Letter of Credit (LC) Transfer
3. Bill Collection
4. Packing Credit (PC)
5. Pre-shipment Credit (PSC)
6. Loan Against Inland Bills (LIB)
7. Foreign Bills Purchase and Negotiation (FBPN)
8. TOD Against Cash Assistance/incentive
9. BARTER Trade Facility (subject to Govt. Agreement
10. Border Haat transaction Facility
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 11. Border Trade Facility
12. Cash Assistance/incentive
13. Foreign Demand Draft (FDD)
14. Bank Guarantee (BG)/ Performance Guarantee (PG)
15. Cash Against Document(s) (CAD) (not applicable for all)
16. Exports‟ Retention Quota A/C (ERQAC)
17. Advance Payment
Definition of Trade Customer
Any person or entity maintaining an account or a business relationship relevant to the
trade, the beneficial owner of the account of business relationship, the person or entity
involved in a financial transaction that may pose reputational of other risk to this
institution is a customer. In any single transaction though banking channel, there must be
at least two parties involved. Depending on the nature of transaction, there may be
engagement of three of more parties in a single transaction. Outside the banking channel,
there are also some other intermediaries involved in trade.
A Typical Trade Process Flow-LC

Among the trade payment methods mostly followed in Bangladesh are documentary credit
and documentary collection. In a documentary credit process, the issuing banks have
primary obligations in the transaction. The process flow is as under:
a. The Buyer (importer) and the seller (exporter) furnish sale/purchase contract.
b. The applicant (Buyer) requests the issuing bank to open documentary credit in
account of the buyer.

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 c. The issuing bank issues the credit in favor of the beneficiary and transmits
though the advising bank (usually).
d. The advising bank advises the credit to the beneficiary (Seller).
e. The beneficiary ships the goods, prepares, collects & collates the required
documents under the credit and presents to the nominated bank (usually).
f. The nominated bank forwards documents to the issuing bank/confirming bank.
Nominated bank can honor/negotiate document i.e., make payments and claim
re-imbursement if documents are in order as per LC terms.
g. Issuing bank on receipt of complying presentation and/ or obtaining documents
effects payment to the beneficiary and/ or nominated bank, as the case maybe.
h. The applicant releases documents from the issuing bank.
i. The applicant clears the goods from the customs through his appointed clearing
agent.
A Typical Trade Process Flow-Documentary Collection
Under documentary collection, Banks involve in the transaction without incurring its own
payment undertaking & the process flow (form exporter perspective) is as under:
a. The Buyer (importer) and the seller (exporter) furnishe sale/purchase contract
b. The Buyer (exporter) ships the goods & submits documents to the remitting bank
c. The remitting bank sends documents to the collecting bank
d. The collecting bank sends documents to the presenting bank [sometime collecting
and presenting bank are same]
e. The presenting bank releases documents to the drawee (the importer) as per
collection instructions, and
f. The drawee clears the goods from the customs through his appointed clearing
agent.
Major parties and their Role in Import
The Importer is the primary player in the import market and other participant‟s have their
respective roles. Roles are as under:
a. Buyer and seller furnish sale/purchase contract.
b. Exporter supplies the goods/services as per the terms agreed in the LC/Contract.
c. Shipping Lines/Airlines/Transport Agency transports the goods from exporter‟s
end to the importer‟s end.
d. Port authority is the custodian of the goods till those are released properly.
e. Customs Authority is responsible to assess collect duties-taxes, issue release order
for the imported goods and combat trade-based money laundering.
f. Clearing Agent acts as the agent of importer to release the goods from the customs.
g. Indenter is the agent of exporter.
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Major parties and their Role in Export
Though the process of export is literally the reverse to the import, some participants
change their roles in the process. However, the exporter is obviously the primary player in
the market and the other players in the process support export surrounding the primary
player. The roles of the parties are as follows:
a. Buyer and seller furnish sale/purchase contract
b. LC issuing Bank issues the LC
c. LC Advising Bank advises the LC to the exporter/supplier
d. Exporter ships the goods to the importer/buyer or named destination
e. Forwarding Agent acts as the agent of exporter to arrange shipment of the goods
f. Shipping Lines/Airlines/Transport Agency transports the goods from supplier‟s end
to the buyer‟s end
g. Exporter prepares, collects and submits does to bank.
h. LC issuing bank makes payment to the exporter as per the terms agreed in the LC
i. Port Authority is the custodian of the goods
j. Customs Authority is responsible to assess, collect duties-taxes and allow goods to
export from exporting country and permits goods to release.
k. LC Nominated Bank honors/negotiates/prepays/purchases/discounts the
documents.
l. Indenter is here the agent of buyer.
Definition of TBML
Trade-based money laundering was originally defined by FATF in 2006 as `the process of
disguising the proceeds of crime and moving value through the use of trade transaction in
an attempt to legitimize their illicit origins.‟ However, The FATF Paper on Best Practices
(2008) broadened the definition terrorist financing, as such trade-based money laundering
and terrorist financing (TBML/FT) refer to the process of disguising the proceeds of crime
and moving value through the use of trade transactions in an attempt to legitimize their
illegal origin or finance their activities.
Therefore, generally, in order to transfer a large volume of money across international
borders and integrate it into the formal economy, some criminals employ a method known
as trade-based money laundering. This process involves disguising and moving the
proceeds of crime using trade transactions in an attempt to legitimize the source of the
funds. In practice, this can be achieved misrepresentation of the price, quantity of imports
of exports.

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Types of TBML
Trade based money laundering can be categorized as follows:
 TBML through invoicing: The following are the basic techniques used for trade-
based money laundering.
o Over & Under Invoicing: This means colluded agreement between buyer and
seller and value transfer through manipulating prices.
o Over & Under Shipment: This means colluded agreement between buyer and
seller and value transfer through manipulating quantity of products.
o Phantom Shipment: This means colluded agreement between buyer and
seller where all paper works done only. However, no physical goods
transported but payment done accordingly.
o Black-Market peso Exchange: In this methods local US exchange house are
working for Colombia Drug Money conversion into Peso and then push back
these Peso to Colombia again under the disguise of another trade deal.
 TBML through services: Other than import and export pricing and quantity,
TBML can be done using followings:
o Related third party transactions-transfer pricing: The common example when
a subsidiary buys some technical support from its overseas parent company
and pay huge amount of money as fee which may be several times lower
then paid amount.
o Sale/purchase of intangible goods: The common example of intangible
goods is software, determination of which price varies hugely from vendor
to vendor, country to country.
o Cash Smuggling: It‟s not a threat for Banks, however, it‟s a method of
TBML, when illicit money itself transported and smuggled then it‟s called
cash smuggling.
Few Regulatory Framework Governing Bangladesh Trade
Following regulations and instructions are from competent authorities form the regulatory
framework of trade services in Bangladesh :
 The Foreign Exchange Regulation Act,1947
 The Import and Export Control Act,1950
 The Customs Act, 1969
 The Bangladesh Bank Order, 1972
 The Importer, Exporter and Indentors (Registration Order, 1981)
 Import Policy Order (IPO) and the Export Policy
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  BEPZA, BEZA, EZ and PEZ regulations regulate the import and export of Special
Economic Zones
 Various Ministries, Departments and Divisions of Govt. import against permission
of these authorities
 BB issues instructions under FERA in the form if FE circulars and FE circular
letters from time to time to regulate foreign exchange market of the country
 Guidelines for Foreign Exchange Transactions (GFET) summarizes all the
instructions issues for authorized dealers (Ads) and money changers
Legal Regulatory and compliance framework of TBML :
Money Laundering Prevention Act, 2012 : As per section 2(v)(ịị) of Money Laundering
Prevention Act, 2012 smuggling of money or property is money laundering while section
2(a) of the Act defines ``smuggling of money or property”
Import Policy Order 2015-2018: Chapter 2 ``General Provisions for Import”,
Section 5(4) ``Import at competitive rate”:
a) Import shall be made at the most competitive rate and it is obligatory for the
importers, at any time, to submit documents to Import Control Authority
regarding the price paid or to be paid by them;
b) In case of import under United commodity Aid in the private sector, goods
shall be imported at the most competitive rate by obtaining quotations from at
least three suppliers or indenters representing at least two source countries:
provided at this conditions shall notapply for opening LC up to tk. One lac;
and
c) For import at the most competitive rate by the public sector importers,
quotations have to be invited before opening Letter of Credit, and goods shall
be imported at the most competitive price.

Guidelines for foreign Exchange transactions (GFET), 2018:Volume-1

Chapter 7, Para 20 “Verification of import price etc.”:
“Before opening of LC or issuing LCAF, the AD shall have to take usual and reasonable
cautionary measures to ensure that both the exporter and importer are bonafide business
person of the goods concerned, the exporting country is the usual exporter of the goods
concerned and the price of the goods concerned is competitive in terms of prevailing price
in the international market on the date of contract and/or similar imports in contemporary
period. Ads are advised to verify the above, if needed, with the help of concerned
Bangladesh mission abroad.”
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Chapter 8, Para 7 “Certification of EXP forms by ADs”:
In order to avoid any loss of foreign exchange to the country. ADs shall not certify any
EXP Form unless they have satisfied themselves with regard to the followings :
Bonafides of the buyers/congignees abroad and their credentials etc. where necessary,
ADs should make discreet enquires in this regard through their correspondents abroad
etc.,greater care should be taken particularly in case of shipments against contract alone
and shipments on CAD/DA basis. Where ADs doubt the bonafides and standing of the
buyers/ consignees abroad or where owing to common inters or otherwise they suspect
collusion with the intent of delay ignor avoiding repatriation of export proceeds, ADs
should report such cases promptly to Bangladesh Bank. Similarly ADs should report to
Bangladesh Bank cases where they come to their knowledge that the exporters are directly
or indirectly ave any financial or other interest in the buyer/consignee abroad. Where felt
necessary, discreet enquiry about the bonafides and credential of the charter party should
also be made in case the shipment is to be against a charter party Bill of Lading so as to
These are only few examples of regulatory instructions. Infact, there are many other
regulatory instructions relevant to combating TBLM.
TBLM Compliance Framework for Sonali Bank Limited As per Laws, Regulations
and BFIU Circulars
To combat the risk of TBLM at every sphere of the Sonali Bank Limited, it has to
implement a specific AML/CFT compliance program which will include at a minimum
the followings:
 Risk Based Approach (RBA):
o The Sonali Bank Limited has taken to implement Risk Based Approach
(RBA) as first line of defense to deal with TBML. In doing so, Sonali Bank
Limited provides 360- degree assessment of TBML risk including products,
customer, transaction, geography and institutional capabilities. Based on the
assessment this policy also determined level of compliance associated with
different layers of due diligence measures. Central Compliance Committee
(CCC) shall have to review this risk assessment yearly basis.
 Trade transaction monitoring:
o Every trade related frontline/operation officer of the Sonali Bank Limited
shall have to meticulously monitor the trade related transactions, which
include price, quantity, country of origin, port, vessel, sanctions, or suspicion
found, review those transactions from historical data or open sources data.

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  Sanction screening:
o Each and every trade as well as remittances of the Sonali Bank Limited shall
have to be screened. In that case SWIFT platform shall be used temporarily
unless and until the Sonali Bank Limited has not procured a full solution for
sanction screening. The respective Division Head/Branch Manager will
assign the designated officials for this avoid tax opening LCs of lower value
and releasing goods through copy documents. As the breach of trust between
importer and exporter occurred and the exporter didn‟t receive payment,
complaint was lodged and the incidence came to light.

Some Cases of TBML:

Case -1 TBLM through import LC issuance and import payment
„ABC‟ is a very reputed and leading company in Bangladesh in computer and accessories.
This company has multiple joint ventures in countries like Singapore, Malaysia, Hong
kong, China and India. They are also involved in providing financial services and have
some trust operations in Cayman Island. This company (non EPZ in nature) is also
dominant in Bangladesh with good reputation as conglomerate and their business slogan
is „Customer is first‟. They are willing to pay higher fees if same day payment is
guaranteed The company imports different types of computers, parts and accessories from
different countries of the world. They have both industrial and commercial IRCs. `ABC‟
company requested their banks „X‟ to issue one import LC favoring beneficiary in
Singapore. PI indicates import LC value is $1,000,000.00 consisting of import of
computer monitor, keyboard and other accessories. They prefer „X‟ bank as it makes
payment very quickly after receiving import documents and customer always likes to pre
accept the discrepancy. Customer also wants to avail UPAS benefit as this import is
industrial in nature. Though customer opens LC under industrial IRC, Their underlying
purpose is to sell the imported items commercially. Conducting due diligence, bank issues
import LC and receives import bill later on. While lodging import bill, bank officials finds
that some of the items are not available in PI but these are included in CI. When asked by
bank, importer confirms that they import product on demand and schedule is very tight. In
addition, computer technology is ever changing element. Hence during shipment they
changed some of the items with change in unit price. When bank Official wants to take
more time for scrutiny, customer becomes unhappy about the service and threatens to
move business to other banks. Customer also confirmed that their counterpart in
Singapore wants payment copy by the same day. Considering charges, commission and
other incomes, the size of business and customer pressure, bank processes the bill and
makes payment. Thus, importing inferior quality goods and over invoicing lead to TBLM.
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TBLM Alerts:
1) Customer is very keen to waive discrepancy and make quick payment.
2) Customer is not concerned about charges.
3) Customer always expresses his acceptance on import documents before receiving
import bill.
4) Avails UPAS benefit under industrial LC for commercial purpose.
5) Trust in Cayman Island may be owned by both importer and exporter.

Case -2 TBLM through over invoicing

M/s „R‟ Enterprise, a client of „X‟ Bank branch, located in border area, deals in import
and export business. Besides, the client also deals with the cattle business from India to
Bangladesh. The client usually imports onion from India. M/s. „R‟ Enterprise approaches
„X‟ branch to avail an LC valued USD 60,000 for importing 100 metric ton onion from
India favoring M/S. „D‟ Enterprise. „X‟ branch issues the LC in favor of M/S. „D‟
Enterprise, India. M/S. „R‟ Enterprise receives the goods and sells in the market duly and
payment is made accordingly. But it is observed that it sells TK. 25000/- per metric Ton
in the open market while the total import cost per Metric Ton onion is of BDT. 50,000/-.
Later M/S. „D‟ Enterprise makes cross border smuggling of 30cattle from India to
Bangladesh. M/s. „R‟ Enterprise receives the cattle, sells them in the market and gets
illicit proceeds.

TBLM Alerts :

1) Over invoicing.
2) Illegal cross border.

Case -3 TBLM through phantom shipment

Mr. “F” an importer of fruits, usually operates with „p Bank‟ with small scale LCs. All on
a sudden, he opened account with three other banks and at a time opened 21 Lcs with the
four banks worth USD 9,106,842.50. Banks made import payments based on shipping
documents. No single shipment was made against the LCs and the amounts remitted were
not refunded.

TBLM Alerts:
1)Lack of proper due diligence for the customer by the three banks.
2)Vessel container was not tracked.
3)Number and value of LC inconsistent with customer‟s business pattern.
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Case-4 : TBLM through import of old/used capital machinery
Mr. „M‟ opened a usance LC to import old/used capital machinery for aroumd USD
16,000.00 in 2016. Within one month and a half shipment was made and documents were
received by the bank. Though initially discrepancy was established under UCP 600,
payment was madeby the bank. While releasing machine from customs, it was found that
the minimum economic life exceeds the limit permitted in current IPO and the certifying
authority was not nominated by NBR. Goods were confiscated by customs. Meanwhile,
import payments were made and the machineries were placed for public auction by the
customs.

TBLM Alerts:
1) Import involved high risk goods.
2) Certifying authority was no nominated by NBR.
3) Importer and exporter were somehow related parties.
4) Old/Used machinery import rules and regulations were violated by the bank and the
importer.

Case-5 : TBLM through importing different goods

Mr. ‟Z‟, a new importer opened an LC for importing malt beverage (lower duties and
taxes) from Singapore worth USD 5,460. Goods were shipped and shipping documents
were received by the bank. Upon instigation of the importer, bank official raised a minor
discrepancy and held the documents. Meanwhile, Customs imposed higher taxes and
duties on the goods while releasing those as it was revealed that the goods were light-
alcoholic beer. Consequently, customer refused to take the goods. Goods were confiscated
and placed for public auction by customs. The highest bidder who got the auctioned goods
was the agent of the importer. Thus, importer released the goods, sold it in the market and
then informed the bank of his readiness to accept the discrepant documents. Therefore,
bank made the import payments. In this way, Customs lost the applicable taxes and
probably the rest of the prices of the light-alcoholic beer was suspected to be paid through
informal channel.

TBLM Alerts :

1) Misrepresentation of goods for duty and tax evasion purpose.

2) Importer behavior to raise discrepancy in the beginning and afterwards his
readiness to receive discrepant documents.
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Case-6 SWIFT password was hacked from back office and used to make fraudulent
payment

SWIFT password was hacked and payment instruction was made to the Nostro A/C to pay
USD for the payment against import. Consequently payment was made and statement was
sent to back office accordingly. But back office did not scrutinize and the middle office
also didn‟t reconcile with the requisition from the branch to pay USD against import
payment. Next day another instruction was made to pay GBP to GBP was not available in
the Nostro A/C. Trasury Management Department (TMD) was asked to place GBP to the
Nostro A/C of GBP but TMD had no requisition in support with the instruction. TMD
asked the NOstro A/C to stop the payment. USD payment had already been executed and
it was not possible to recover the amount.
TBLM Alerts :

1) SWIFT message did not mention underlying transaction reference.

2) Lack of checking by back office and no reconciliation by middle office.
3) Rationale behind payment instruction was not verified.

Case-7 : Guarantees converted into funded liabilities

Exporter received contract from a European country for export of vessel and received
advances in various installments from the importer. Advance payment guarantee and
performance guarantee were issued by the exporters bank. Counter guarantees were issued
by another foreign bank. Exports were not executed within the stipulated time and
contracts were cancelled. Consequently guarantees were en-cashed by the foreign bank.
Local bank created forced loan to pay guarantee amount with interest. The client i. e the
exporter failed to pay the amount and the loan converted to term loan and finally turned
into performing into Non Performing Loans.

TBLM Alerts :
1) End use of advanced receipt against prospective Export was not monitored and
confirmed by the bank.
2) Performance of the exporter was not assessed accurately.

THE END

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