3.2 Hidden trade and anti-money laundering – the challenge for banks
Dr. Rebecca Harding
CEO Coriolis Technologies Author, The Weaponization of Trade: the great unbalancing of politics and economics
AML and KYC have become a central pillar of bank trade finance decision making. A whole industry has built up around them to advise on how to avoid risks, how to check every client, large or small and how to increase supply chain transparency. FinTech startups are becoming RegTech startups as new technology based solutions seek to capture a share of the $100bn that banks spend on compliance. The RegTech sector looks likely to grow by 25% annualised to reach a value of $7,208m by 2023. What is the reason for this? Perhaps the best answer comes from a banker 38
Trade Finance Talks
themselves: ‘The problem is not what we know – it is what we don’t know.’ Since 2012 nearly $20bn in fines has been imposed on banks for fraud and non-compliance and much of this has arisen because the banks themselves have simply not known how to predict the AML risks in the supply chains of their clients. There are sophisticated checks for sanctions, credit risk and AML, but these are limited by virtue of the fact that, by definition, they are historical. As a result, any reaction is too late by the time it is implemented. The problem rests in trade itself. Some US $2.1tn of trade at any one point in time is hidden in the trade flow itself. Some countries produce lagged or no data, either for exports or for imports. But mirroring the flow from the partner’s perspective means that a much fuller picture of trade can
be derived. Unsurprisingly, countries in emerging markets, and particularly Africa have data that is as high as 200% higher using this approach. But equally, big financial centres also have high divergence between what they report about their own trade and what other countries report about their trade with them. Luxembourg, Switzerland, and Ireland all report significantly less trade than actually takes place. Areas not elsewhere specified account for 5% of world trade. Commodities not elsewhere specified, are some 6.5% of world trade. So what are ‘Areas not elsewhere specified’? This partner is perfectly legitimate and, according to the United Nations, consists of all those countries that are too small or too unreliable to have proper reporting mechanisms. Similarly
