State Bank issues draft framework to combat trade-based money laundering

KARACHI: The State Bank of Pakistan (SBP) on Thursday issued draft guidelines on risk management of trade-based money laundering and terrorist financing to drive transparency and efficiency across trading finance.

“The prime objective of this framework is to strengthen the trade-related anti-money laundering (AML), combating financing of terrorism (CFT) and combating proliferation financing (CPF) regime and conserve foreign exchange,” the SBP said.

“This framework applies to all banks authorised by the SBP to deal in foreign exchange.”

The latest set of guidelines will ensure that Pakistan is compliant with the Financial Action Task Force (FATF) anti-money laundering and terrorist financing standards.

Currently, the country is following a 10-point action plan to curb illicit financial flows made through money laundering and terrorist financing modes. FATF expressed satisfaction over Pakistan’s efforts and action plan and indicated some areas to do more before May 2019 to get removed from the grey list.

The central bank’s document said 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 added.

Banks are required to screening procedure of customers for trade transactions. They must follow procedure for identification and monitoring of trade transactions with related party. The SBP also advised the banks to enhance the oversight role of board of directors and senior management of the bank in the areas of ML/TF/PF risks associated with trade transactions.

In this respect, the banks will define clear policies and procedures, defining therein responsibilities of bank’s board of directors or its sub-committee and senior management with specific focus on development and implementation of customer risk profile framework and transaction monitoring system for managing money laundering and terrorist financing risks.

“Authorised dealers [banks] shall ensure that risk-based approach is adopted, while conducting know your customer and due diligence of trade-related customers,” the central bank said.

At the time of taking onboard a customer, the banks would capture the relevant information about trade-related activities of the customer and incorporate it in the risk profile giving due weightage to various risk factors.

However, in case, the customer is not engaged in the trade-related activities at the time of getting onboard, the relevant information would be captured and made part of the customer’s risk profile when the customer enters into the domain of trade business, it said. Authorised Dealers would also integrate the performance of the trade clients in their risk profile, including historic and outstanding over dues [export bills; advance payment imports, advance payment exports, regulatory penalties, etc.].

Further, the authorised dealers would formulate procedure; whereby, each of their clients, based on the risk assessment conducted at the time of their getting onboard with respect to trade-related activities, performance history and historic reporting of a suspicious transaction reports to financial monitoring unit.

That’s assigned a risk category in addition to the general risk profile of the customer being maintained by the authorised dealers under AML instructions issued by the State Bank from time-to-time, it added.