Back to Back LCs seen as Money Laundering Tool
DCW reports in the current issue that so called "back to back LCs" are increasingly being used in money laundering and terrorist financing schemes. Reporting from a recent AML, Compliance and Financial Crime conference in the Cayman Islands reveals that one of the ways in which the back to back LC is used includes:
“an onshore export firm and an offshore trading company – a company that matches wholesale buyers and sellers– that have the same shareholders. In that method, the onshore exporter may send goods to an importer – or it may not, depending on how fraudulent the scheme is – which pays the trading company. Instead of paying the exporter, the offshore trading company holds onto the payment or wires it to other entities, avoiding regulatory detection in the exporter’s home country in the process.” (Oct 2017 DCW)
Back to Back Letter of Credit: What is it?
Now we know that back to back LCs are sometimes being used to facilitate illicit transactions, but what exactly is a back to back LC? According to the Wolfsberg Group's Trade Finance Principles, a back-to-back credit is "a Documentary Credit issued against the security of another Documentary Credit (master credit) on the understanding that reimbursement will stem from documents eventually presented under the first credit (master credit) issued." Accordingly, each LC covers the shipment of the same goods although price differentials in the goods will usually exist since the Beneficiary of the second LC is to make a profit.
How Should Banks React?
Given that back to back LCs are commonly used in trade finance transactions in many parts of the world, their misuse can be especially difficult to handle. The basic practices of "Know Your Customer" (KYC), and even "Know Your Customer's Customer" (KYCC) are certainly helpful. However, given the increasing complexity of schemes (and of course the creativity of financial criminals), it is essential to have a trade finance team that is well versed in the myriad forms of trade based financial crime, and how to curb them. Fortunately, there are many resources readily available for the training of bankers, bank lawyers, and compliance teams.
The London Institute of Banking & Finance (CDCS, CITF, and CDSG) is now offering a Certificate in Trade Finance Compliance, or CTFC. Geared toward Trade Finance Operations Staff, Relationship Managers, Bank Audit and Compliance Staff, and Risk Managers, this professional certification program covers key critical areas in trade based financial crime. The goal of the CTFC is to provide participants with the technical knowledge, skills & insights into international best practices in the ever-changing trade finance compliance landscape.
In terms of literature, IIBLP itself offers the most comprehensive and up-to-date book on TBML and trade based financial crime compliance at large. Available as a hardback, softback, and eBook, Trade Based Financial Crime Compliance provides financial institutions, bankers, lawyers, compliance officers, and corporates the necessary information to identify and combat trade based crime and remain compliant.
This topic is regularly covered by the IIBLP blog, as well as Documentary Credit World. See previous blog posts on the BAFT Anti Money Laundering Paper, Compliance Challenges, and the Wolfsberg Paper. Also be sure to look at the Trade Based Anti Money Laundering Primer.