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Wolfsberg Group, International Chamber of Commerce, and Bankers’ Association for Finance and Trade Principles regarding Money Laundering Prevention

Wolfsberg Group, International Chamber of Commerce, and Bankers’ Association for Finance and Trade Principles regarding Money Laundering Prevention.

Finance and Banking / Publicado el 30 de octubre de 2017.

 

I. Introduction.

 

Wolfsberg Group was incorporated in 1999, upon the association of eleven international banks, as well as the intervention of International Transparency, who mediated between European and American banks.

 

Wolfsberg Group lacks written documents detailing its incorporation, regulations, by-laws, and structure.
Wolfsberg Group’s first document was issued in the year 2000. Wolfsberg AML Principles.

 

Currently, Wolfsberg Group is comprised of thirteen international banks: Banco Santander, Bank of America, Bank of Tokyo-Mitsubishi UFJ, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase, Société Générale, Standard Chartered Bank and UBS.

 

The Group’s main objective is to develop a reference framework for managing risks related to financial crimes, such as money laundering and terrorism financing.

 

Currently, the documents issued by the Group serve, in some cases, as reference in the handbooks issued by the Financial Action Task Force on Money Laundering.

 

In the discussions conducted with several practitioners in the meetings held at the Banking Commission of the International Chamber of Commerce (“ICC”), and at other industry events, it became clear that many banks thought that the document containing the Wolfsberg Principles was fit for “bigger, international banks” rather than “their smaller, local banks”. Consequently, in case the ICC issues a handbook or makes an official publication, more banks will deem it important to follow this orientation.

 

This led to the creation, in April 2014, of the ICC-Wolfsberg Group Editorial Board of the Trade Finance Principles, whose purpose was to update and reformulate the document containing the Wolfsberg Trade Finance Principles in accordance with the handbook issued by the ICC. Such reformulation and update were conducted together with members of the Wolfsberg Group banks, international members of the ICC, and members of the Bankers’ Association for Finance and Trade (“BAFT”), to broaden the international perspective of the editorial board.

 

It must be mentioned that fundamental principles have not changed and that they do not intend to modify the responsibility that banks participating in commercial transactions have as to knowing their clients or instructing party and knowing the business being conducted, the people with whom it is being conducted, and the location where it is being conducted. Similarly, such principles do not intend to force banks to strictly follow the regulations intended to prevent and detect money laundering, terrorism financing, corruption and bribery, tax evasion, proliferation of weapons of mass destruction, and other financial crimes, or to prevent and detect evasion or non-compliance with any penalties imposed by the relevant authorities upon a country or a person.

 

The basic principles document has been extended to provide further details regarding the activities related to risk mitigation. In addition, such document describes the challenges and limitations faced, and suggests the actions that the police, customs authorities, and other government agencies still need to take to guarantee that the financial service industry complies with its obligations, as provided under the Financial Crime Compliance regulatory framework.

 

The Trade Finance Principles provide the rules to control financial crime risks (“FCR”) associated with Trade Finance activities. The term “financial crime” used herein refers to money laundering (all crimes, including without limitation, fraud, tax evasion, and human trafficking), bribery and corruption, terrorism financing, financing for the proliferation of weapons of mass destruction, and other threats to the integrity of the international financial system.

 

The Trade Finance Principles describe the role to be played by financial institutions (“FI”) when managing procedures to:

a. Address financial crime risks associated with Trade Finance activities.

b. Support compliance with regional and national sanctions and embargoes, as well as compliance with the United Nations’ requirements regarding the non-proliferation of weapons for mass destruction (“NPWMD”).

 

II. Documentary Credits for Trade Finance. .

 

A brief explanation as to how trade finance through documentary credits or letters of credit works is provided herein below.

review

 

Once the Documentary Credit (“DC”) has been initiated by Party X, the banks will review the transaction at various stages during the regular course of the DC until a payment is made. This review process will generally follow these steps:

 

a. Bank A will review the DC request made by Party X (before agreeing to issue the DC).

b. Bank B will review the DC as-it is when received by Bank A (before confirming the DC).

c. Bank B may review the documents submitted by Party Y (when Bank B received such documents in accordance with Party Y’s DC) by applying a Risk-Based Approach (“RBA”).

d. Bank A will review the documents and payment instructions submitted by Bank B (before paying Bank B – who, in turn, will pay Party Y).

e. Bank A and Bank B will filter the payment they have made or received in accordance with their financial crime policies, procedures, and controls.

 

III. Risk indicators before and after the event.

 

a. A DC is an independent payment obligation issued by a bank on behalf of a client, in order to support any commercial transaction performed between the bank’s client (usually, the buyer) and the counterparty (usually, the seller). The terms of the agreement will be agreed upon by the seller and the buyer, who will then inform the buyer’s bank so that the DC may be issued. Each DC’s terms reflect a unique combination of factors implying the specific nature of an underlying commercial transaction, the nature of the commercial relationship that exists between the parties to the transaction, the nature and the terms of the financing agreements, and the nature of the relationship between financial institutions that are Party to payment and financing agreements.

b. Given that complete performance of each DC transaction is a fragmented process involving several parties, each with different degrees of information regarding the transaction, it is extremely rare that a Bank be able to review in detail an overall trade finance procedure, especially in light of the commercial financing premise that banks deal only with documents. In addition, it must be mentioned that:

 

  • Different banks have varying system capacity levels leading to considerable differences within the industry as regards to their reviewing abilities.
  • Commercial practices and industry rules determine finite terms within which to act.
  • Banks around the world, especially those located in developing countries, have different maturity levels regarding the application of money laundering, due diligence, and sanction risks, as well as the mitigation thereof (variations in sophistication levels of the FCR systems and procedures within banks may be substantial, even within the same country). When determining if a transaction is unusual due to excessive or insufficient invoicing (or any other circumstance where a value may be falsely represented), banks must be deemed to be unable to perform the evaluation.

 

c. In the case of banks involved in DC processing, the knowledge and experience of their staff must serve as the first and best defense line against criminal abuse of these products and services. Reviewing commercial documentation is a highly manual procedure requiring that commercial documents submitted for payment be compared against the DC terms and conditions in accordance with the ICC’s rules applicable to the International Standard Banking Practice.

 

d. There is, potentially, a considerable amount of risk indicators. In this context, a distinction must be made between:

 

  • The information that must be validated before any transaction is performed or completed, and that could prevent such completion (for example, a terrorist name, an entity that has been imposed a sanction)
  • The information that must be used in the analysis following the event, as part of an investigation process and as part of the report of suspicious activities.

 

e. Banks must seek to implement (manual or automated) systems that monitor their clients’ risk indicators and business flow. In addition, banks must have procedures intended at properly reviewing and escalating any concern.

f. A list of some of the risk indicators that could appear when managing a DC transaction is contained in the Group Wolfsberg, ICC, and BAFT Trade Finance Principles (in accordance with the chart below). Such document does not contain all the risk indicators that could be generally applied through the relationship between the client and the bank. Nonetheless, such document is specifically aimed at covering some of the risk indicators related to a DC transaction procedure.

g. It must also be mentioned that some risk indicators will become evident only once a transaction has been performed, and will only be known by compliance or financial research units, as part of the formal investigation procedures thereof. Banks must create their own set of risk indicators for their own risk evaluations.

 

IV. Some Risk Indicators (without exhaustiveness) – Wolfsberg Group, ICC, and BAFT Trade Finance Principles

 

WHAT: Activity or information related to DC WHEN: Before or after the transaction

Business structures

  • Beyond the capacity and/or client’s substance
  • Improbable goods, origins, quantities, destination
  • Unusual complexity and non-conventional use of financial products

BEFORE or AFTER

Goods

  • It is likely that applicable importation or exportation control regulations are not complied with

BEFORE – as part of the Client Due Diligence procedure (“CDD”)

  • Evident anomalies in value versus quantity
  • Completely out of line with the business known by the client

BEFORE or AFTER

Name and countries

  • Regarding the penalties or the list of terrorists

BEFORE

Countries

  • Those appearing on the Bank’s high-risk list
  • Any attempt to conceal or evade the countries participating in the actual transaction

BEFORE or AFTER

Payment instructions

  • Unreasonable
  • Last-minute changes

BEFORE or AFTER

Amortization agreements

  • A third party partially finances or co-finances the value of the DC (time credits in the liquidation account)

AFTER

DC patterns

  • Constantly amended or extended
  • Regularly canceled or unused

AFTER

DC parts

  • Applicant and beneficiary
  • The applicant’s documentation controls the payment

BEFORE or AFTER

Discrepancy within the documents (not necessarily grounds for rejection under the UCP 600)

  • Descriptions of goods vary considerably
  • Special invoicing and transportation documents
  • Unexplained third parties

BEFORE or AFTER

Exempt discrepancies

  • Early exemptions
  • Absence of required transportation documents
  • DC considerably overdrawn (allowed tolerance for standard practice)

BEFORE or AFTER

 

 

Contact information.

To obtain more information regarding the foregoing, please contact the following members of BGBG:

 

Miguel Gallardo Guerra

mgallardo@bgbg.mx

Samuel Uziel Rivero Prado

surivero@bgbg.mx