https://spendmatters.com/tfmatters/b2b-payment-companies-should-be-prepared-to-raise-your-anti-money-laundering-game/

New players are innovating the way cross-border B2B payments are made and are bringing new business models that bundle these payments with other activities, such as foreign exchange conversions, wallets, invoicing, virtual accounts, etc. But with the growth in cross-border B2B payment companies, I thought it interesting that these new players are entering a space that is getting increasing scrutiny for illicit money movement by traditional means — trade misinvoicing.

What is trade misinvoicing? Simply put, moving money across borders by deliberately misreporting the value, volume, and/or type of commodity. Many anti-money laundering efforts (AML) exist to stop the practice.

According to the U.S. Government Accountability Office (GAO) research, a “congressional watchdog” that provides nonpartisan advice to federal officials, the amount of illicit money being laundered through seemingly legitimate trade transactions is “large and growing.” This comes as tougher regulations in other areas of the financial sector have meant organized criminal groups are increasingly turning to trade as a means to hide payments.

Global Financial Integrity is an organization that studies illicit trade flow, and it lists these four primary reasons to misinvoice trade:

• Money laundering — Criminals      or public officials may seek to launder the proceeds from crime or      corruption.

• Directly Evading Taxes and Customs Duties — By under-reporting the value of goods, importers are      able to immediately evade substantial customs duties or other taxes.

• Claiming Tax Incentives — Many      countries offer generous tax incentives to domestic exporters selling      their goods and services abroad. Criminals may seek to abuse these tax      incentives by over-reporting their exports.

• Dodging Capital Controls —      Many developing countries have restrictions on the amount of capital that      a person or business can bring in or out of their economies. Investors      attempting to break these capital controls often misinvoice trade      transactions as an illegal alternative to getting money in or out of the      country.

The laws around AML

In 1970, the United States Congress passed the Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (BSA). The BSA established specific requirements for record-keeping and reporting by private individuals, banks and other financial institutions. Since passage of the BSA, other laws have enhanced and amended the BSA to provide additional tools to combat money laundering. The key laws in order of enactment are:

• Money Laundering Control Act (1986)

• Anti-Drug Abuse Act of 1988

• Annunzio-Wylie Anti-Money Laundering Act (1992)

• Money Laundering Suppression Act (1994)

• Money Laundering and Financial Crimes Strategy Act (1998)

• Uniting and Strengthening America by Providing Appropriate      Tools to Restrict, Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act)

• Intelligence Reform & Terrorism Prevention Act of 2004

• Comprehensive Iran Sanctions, Accountability and Divestment Act      of 2010

The USA PATRIOT Act of 2001 is the most significant of the enhancements and amendments to the BSA. The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department is the U.S. regulator for AML regulations.

KYC

On top of AML transactional monitoring, there is the initial onboarding of companies to a B2B platform. Using the U.S. environment as an example, there are multiple layers in the know-your-customer process (KYC).

• Customer identification process (CIP),      to ensure a reasonable belief that the true identity of each customer is      known.

• Customer due diligence (CDD),      whose objective is to predict with relative certainty the transactions the      customer is likely to engage.

• Enhanced due diligence (EDD)      to establish procedures to determine high-risk customers.

Most B2B payment companies when conducting KYC and AML will rely on automation through connecting with the various government lists (and there are tons, from the State Department, Treasury, Commerce, FinCEN, etc.), including the Specialty Designated Individuals, FinCEN money laundering lists, etc. And each country has its own lists.

B2B payment companies’ primary vulnerability

Open-account trade is where the biggest concern is from the GAO report, and is defined as those cross-border transactions that do not go through letter of credit or documentary collections process. Estimates of global trade indicate that around 80% of international trade processed through financial institutions is believed to be open-account trade. What this seriously underestimates is transactions in services.

Cross-border payment transactions accounted for $23.7 trillion globally in 2018, with the bulk consisting of B2B payments. For businesses needing to send or receive payments cross border, there are now a multitude of options through the likes of Paypal, Stripe, Hyperwallet, AmazonPayments, Transfermate, Veem, etc. to pay vendors, international contractors, contingent workers, buy from online marketplaces, etc.

The challenge with an invoice-only way of moving money across border is neither the banks nor vendors can compare invoices to other documentation, such as purchase orders, bills of lading, or customs declarations, as banks can when transactions are done via letters of credit or documentary collections, thus there is potentially more risk.

B2B companies can use machine learning and algorithms to monitor transaction flow and establish different thresholds for checking transactions based on low-, medium- or high-risk country designations.  But with higher Government scrutiny potentially coming on these transactions, it pays to show regulators that you have the process, people and technology to continue to get smarter to capture fewer false positives and identify potential money laundering transactions.