Anti Money Laundering Efforts in Trade Finance

By Zhou Jin

I n recent years, the trade finance community has seen a surge of policy formulation or subsequent revision on global sanctions and Anti Money Laundering (AML). It is necessary that banks follow the trends and adopt their own riskbased approaches to have relative compliance risks in control. The following is a summary of important relevant guidance papers published in recent years. This includes some key changes made this year.

Highlights of OFAC Policies in 2019

On August 5, 2019, President Trump issued Executive Order 13884 blocking all property of the government of Venezuela, a striking escalation of sanctions against the regime of President Nicolas Maduro. Statements issued by the White House and the State Department pointed out that this escalation was meant to target the Maduro regime for its continued abuses of human rights and repression. According to a Q&A from the Office of Foreign

Assets Control (OFAC), US persons without authorization from OFAC are generally prohibited from engaging in transactions with the government of Venezuela, or persons in which the government of Venezuela owns, directly or indirectly, a 50% or greater interest. Financial institutions are expected to conduct due diligence on their own direct customers (including, for example, their ownership structure) to confirm that those customers are not persons whose property and interests in property are blocked. OFAC has issued 29 valid general licenses authorizing some transactions. Banks should make crystal clear what is prohibited and what is permitted in related transactions.

Sanction Risks in Civil Aviation

In recent year, several documents such as Sanctions Risks Related to North Korea's Shipping Practices published by OFAC revealed deceptive shipping practices used by North Korea including ship-toship transfers, shutting down ship Automatic Identification System (AIS) and falsifying shipping documents, etc. to evade sanctions. These practices may create significant sanctions risks for parties involved in the shipping industry, including insurers, flag registries, shipping companies, and financial institutions.

A recent OFAC guidance paper -- Iran-related Civil Aviation Industry Advisory -- revealed emerging sanction risks in civil aviation. As stated, both US and non-US persons operating in the civil aviation industry face potential civil and criminal consequences for violating OFAC's sanctions programs, including by engaging in unauthorized transfers of US-origin aircraft or related goods, technology, or services to Iran. Additionally, non-US persons could be designated or made subject to other sanctions actions for engaging in unauthorized activities with persons designated in connection with Iran's proliferation of weapons of mass destruction, support for international terrorism, or human rights abuses, such persons including Mahan Air and such entities designated in the advisory and those on OFAC's Specially Designated Nationals list.

For trade finance practitioners, they have mainly focused on screening and reviewing information such as shipping routes, shipper, carrier, etc. on bills of lading. However, emerging sanction risks in civil aviation will urge them to put more scrutiny on airway bills.

Sword and Armor

The European Union's Blocking Statute (Council Regulation (EC) 2271/96) serves as armor protecting EU entities from the sword-like extra-territorial application of third-country laws. The EU does not recognize the extra-territorial application of laws adopted by third countries and considers such effects to be contrary to international law. In 1996, the United States took such measures concerning Cuba, Iran and Libya. In response, the EU adopted the Blocking Statute to protect EU entities against the effects of the extra-territorial legislation by prohibiting compliance with any requirement or prohibition based on the specified foreign laws.

Soon after its withdrawal from the Joint Comprehensive Plan of Action (JCPOA), the US reimposed sanctions on Iran last year. The EU reacted in no time to update the Blocking Statute in order to include the re-imposed extra-territorial US sanctions, thereby mitigating the impact of these sanctions on EU operators doing legitimate business with Iran. On May 18, the Commission announced the launch of the formal process to activate the EU Blocking Statute (Council Regulation (EC) 2271/96) by updating the list of US sanctions on Iran falling within its scope.

In May, the UK Parliament approved the draft Protection against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2019 which will transpose the EU Blocking Statute into UK domestic law in the event of a no-deal Brexit.

The Russian State Duma is also considering amendments to Federal Law “On Measures in Response to Unfriendly Actions of the USA and (or) other Foreign States.”

Strengthened UK Sanctions

In April 2017, the sanctionsrelated provisions of the Policing and Crime Act 2017 came into force, bringing in significant changes to the UK financial sanctions enforcement framework. UK companies or banks that have any connection with the UK should be aware of these changes and make necessary preparations.

1. The Office of Financial Sanctions Implementation (OFSI) has, since its establishment in 2018, imposed £15,000 worth of penalties on two separate entities. On May 24, 2019, it levied its second civil monetary penalty against Travelex (UK) Ltd. in the amount of £10,000. This enforcement action was related to OFSI's first civil monetary penalty of £5,000 against the UK's Raphaels Bank in January of this year. Both of the penalties were imposed under EU regulations relating to Egypt, and in both cases the reason given for the penalty was “dealing with funds belonging to a designated person, without a license.” The cases emphasized the importance of timely voluntary disclosure to the regulator.

2. The UK has consecutively published several guidance papers in relation to the UK sanctions regimes aimed at ISIL and Al-Qaida, the Democratic Republic of Congo, counter-terrorism, Zimbabwe and Russia. These supplement guidance notes already published on other UK sanctions including Myanmar, Guinea-Bissau, Iran, South Sudan and Venezuela.

3. A no-deal Brexit in the very near future remains highly possible. UK legislation has been prepared to bring the changes into effect in the event of a no-deal Brexit. This includes the Sanctions and Anti-Money Laundering Act 2018, the Trade in Dual-Use Items and Firearms (Amendment) (EU Exit) Regulations 2019 and the Export Control (Amendment) (EU Exit) Regulations 2019. In terms of sanctions, it issued the Post-EU Exit Guide to Financial Sanctions in January. Upon a no-deal Brexit, sanctions legislation agreed at the EU level will no longer automatically apply to the UK, and the UK will need to implement an autonomous sanctions framework. For example, OFSI intends to take an aggressive approach of defining “owned or controlled by another person.” It is stated that the threshold will be met where it is “reasonable to expect that the person would be able to ensure the affairs of the entity are conducted in accordance with the person's wishes.” This appears to be much stricter than the mainstream standard. Overall, though the setup of OFSI is a UK version of OFAC, it is expected that its main sanction policies will be inherited largely from the EU.

Recent Papers

The Wolfsberg Group, the ICC and the Bankers Association for Finance and Trade revised their Trade Finance Principles this year. In order to cope with emerging risks in receivable financing and financial innovation products, the section of Open Account Trade Finance adds two products of Payable Finance and Receivables Discounting. The paper is also supplemented with the product of FI trade loans.

The ICC published two guidance papers about “dual use goods” and goods price checks in trade transactions. They both emphasized the overwhelming difficulties of identifying dual use goods and conducting price checks. Most of the goods in letters of credit are ordinary in name but might be applied to military use. For example, carbon fiber can be used for bicycles, but also for rockets. These names will always cause a large amount of false hits and also require professional knowledge for proper identification. The paper emphasized the necessity of adopting a comprehensive approach, including conducting enhanced due diligence related to customers in suspicious transactions. It is also noted that public-private partnership is crucial to intelligence sharing.

As for goods prices, they are severely affected by various causes such as seasons, degrees and shipping costs. Even if commodity prices can be checked on metal exchange markets, they will also be affected by future prices or commodity conditions. It is suggested that only obvious price abnormity can be easily identified and a wider control framework needs to be implemented. These two papers provoke rational thoughts on how to adopt a preferred risk-based approach in daily operations of trade finance.

Since the world is undergoing rapid changes in terms of geopolitics and international relations, it is imperative for banks to keep an eye on dynamic changes in sanction policies and other regulations. Sanctions, anti-money laundering and counter-terrorist financing have become increasingly interrelated. Thus, an overall risk control framework should be put in place. For banks in China, strict compliance with laws and regulatory requirements will be greatly conducive to building such a solid framework.

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