Banks may be asked verifying goods valuation to check trade based money laundering

KARACHI: Banks shall be required to verify valuation of goods before approving electronic or manual import payment in order to prevent incidents of money laundering and terror financing.

According to draft “Framework for Managing Risks of Trade Based Money Laundering, Terrorist Financing and Proliferation Financing” issued by State Bank of Pakistan (SBP) banks shall make a reasonable effort to verify the prices of underlying contracts as declared on EIF/MIF, EFE/MFE from reliable sources i.e. local business circles, daily newspaper, Internet, historic appraisements, Customs valuation rulings etc. and shall satisfy themselves that the prices declared by their client represent the fair market value of goods before approving an EIF/MIF, EFE/MFE.

In the draft framework, the SBP said that transferring value through legitimate trade transactions has become increasingly attractive avenue for money launderers, terrorist financiers and proliferation financiers, as they are able to easily obscure their transactions in significant volumes of international trade and escape detection.

“The main methods by which such people transfer value through legitimate trade transactions are under invoicing, over invoicing, short/over shipment, obfuscation of type of goods/services etc.” it said.

As the international trade is becoming highly vulnerable to ML/TF/PF risks, effective regulatory framework is required to mitigate the misuse of trade transactions.

The SBP said that the document contains instructions that shall help banks in effectively managing ML/TF/PF risks.

However, it may not be construed as exhaustive list of measures for curbing TBML.

Further, the compliance of the provisions of this framework does not absolve ADs from their legal and regulatory obligations under prevailing AML/CFT/CPF laws/rules and regulations or any other relevant law for the time being in force.

The prime objective of this framework is to strengthen the trade related AML/CFT/CPF regime and conserve foreign exchange.

This framework applies to all banks authorized by SBP to deal in foreign exchange.

Bank’s AML/CFT/CPF Policies

i. ADs shall emphasize on the overall trade related risks in their AML/CFT/CPF and relevant trade business guidelines, policies and procedures.

Such policies and procedures should, inter alia, specify:

a) Screening procedure of customers for trade transactions

b) Procedure for identification and monitoring of trade transactions with related party.

c) Procedure for complete risk profiling of customers involved in or intending to be involved in trade.

d) Procedure for verification of prices of underlying contracts related to import/export of services.

e) Procedure for handling descriptions, which are unclear, coded or worded in a language other than English.

f) Screening procedure of goods being traded as per relevant Trade Policy

g) Procedure for Identification of dual use of goods such as:

Price related Due Diligence

i. Banks shall define clear policies and procedures for price verification, including defining the level of acceptable price variance, escalation procedures and suspicious transaction reporting mechanism when significant differences in prices are identified.

ii. Banks shall make a reasonable effort to verify the prices of underlying contracts as declared on EIF/MIF, EFE/MFE from reliable sources i.e. local business circles, daily newspaper, Internet, historic appraisements, Customs valuation rulings etc. and shall satisfy themselves that the prices declared by their client represent the fair market value of goods before approving an EIF/MIF, EFE/MFE.

iii. In case of advance payment export, Banks shall satisfy themselves, before disbursing the amount to the exporter, that price declared on Advance Payment Voucher represents the fair market value of goods or services. In this respect, banks shall require the exporter to submit a copy of underlying sale contract alongwith revised Appendix V-14.

iv. The procedure of price verification shall be documented by banks for later review /audit/inspection.

v. In order to enhance the effectiveness, this function shall be performed by the department other than the front office/centralized trade-processing unit where transaction is taking place.

vi. The significant variance between prices declared on EIF/MIF, EFE/MFE, Advance Payment Voucher and fair market value of goods declared therein shall serve as one of the prime red flag indicators and all such transactions shall be escalated to the higher management which shall review the same and consider the option of filing STR with FMU etc. This procedure shall be documented by banks for later review /audit/inspection.

vii. Further, banks shall develop the detailed scenarios of other trade related red flag indicators. A non-exhaustive list of common red flag indicators is also provided for guidance.

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