Free-trade zones pose inherent AML/CFT risk — but location is everything

Free-trade zones (FTZs) pose an inherent money laundering risk but the region in which they are located also affects their risk weighting. That was the central theme of a panel discussion on combating trade-based money laundering (TBML) in free zones during a recent Middle East anti-money laundering event in Dubai.

Delegates heard that FTZs posed money laundering, terrorism financing and sanctions risks no matter where they were located, although the regions where such zones were based did matter, said Brandon Nordhoff, a panelist and special agent with the U.S. Department of Homeland Security’s investigations team.

“Regional is going to be what type of crime is [committed]. Panama is going to be mostly drug cartels,” he told Thomson Reuters Regulatory Intelligence.

Nordhoff’s comments were made at the Association of Certified Anti-Money Laundering Specialists (ACAMS) Annual AML and Financial Crime Conference for the Middle East and North Africa (MENA) in Dubai.

Vulnerabilities stem from structure and region

“As a compliance professional, I would say free zones are vulnerable but not dangerous. For example, China may have nice rules and regulations, [and] if they are applied in the free-trade zone, then you are on the safe side. But sometimes, regulations [in] practice are relaxed inside [FTZs] and when you go outside, it is a different environment,” said a MENA-based compliance officer who attended the session but asked to remain anonymous. “Even if you are in the same jurisdiction, you have such granularity,” he said.

The compliance officer said that financial regulators tended to be fixated on banks outside FTZs, rather than those within them.

The policy rationale behind the creation of such zones was often to lure foreign direct investment (FDI). They generally offered incentives for multinational corporations and banking and financial institutions to set up shop and attract new clients to the region.
“The region plays a role in raising or keeping risk at bay. If it is a strict regulatory environment, it will serve the free-trade zone,” the MENA-based compliance officer said.
“What is peculiar today about our discussion of free-trade zones is the relaxed oversight inside these jurisdictions. Many times you have a jurisdiction with a robust [AML and sanctions] regime, with clear compliance rules and regulations. But when you come inside the zone, things get more relaxed. You have much leeway,” said Shawki Ahwash, head of AML/CFT for North Africa Commercial Bank SAL in Beirut.

Such variance, Ahwash said, may be a magnet to criminals and money launderers to establish business operations within FTZs, where they could repackage and re-label the goods and services they exported.

“There is also [the issue of] portability and anonymous cash inside the free zones, especially for the banks going inside,” he said.

Money often lingers locally

Ahwash said that a key principle for TBML in free zones was that, quite often, illicit proceeds did not leave the jurisdiction. “You have the money generated by drugs that stays in the jurisdiction, but takes another mask or another form.”

Ahwash cited the example of a clothing wholesaler established in Curacao, a Dutch Caribbean island. The company there was established within a FTZ and imported clothing from China. Seventy percent of the wholesaler’s sales went to Venezuela and accounts were credited against the cost of goods.

In return, the Curacao company, as well as banks within that locale, accepted illicit funds from drug trafficking amounting to millions of U.S. dollars in cash, Ahwash said.
“[The wholesaler] claimed to the bank that the funds [it deposited] were the proceeds of clothes sold to Venezuela. So, by doing this, they helped the traffickers launder their money and everyone was happy. The traders in Venezuela got their clothing and the traffickers got their money laundered. The lessons from that trade finance [case study] cannot be assessed in terms of risk as a snapshot,” he said.

Ensuring certainty

Ahwash said that letters of credit (LC) were fluid documents that could be changed and altered, and that banks needed to record such amendments to mitigate their risks. “Understand the parties of [a] LC and make sure they are a really a legitimate business.”

He referred the audience to the Wolfsburg Group guidelines on such matters.

“If we take a transaction in trade finance and if an entity is in a free zone, more due diligence will apply because of the risks we are talking about,” said Samar Baasiri, head of compliance at BankMed in Beirut, who was the panel’s moderator. “For example, we all live in this region and both of us [have] branches in high-risk countries like Iraq. We have trade with Iraq. A lot of cash [is] presented to banks from traders in Iran who import merchandise from China through suppliers in [the] UAE,” Baasiri told Ahwash and the audience.

“It is big money, a lot of cash. How do you make sure, even if you apply enhanced due diligence that is included in Financial Action Task Force documents … unfortunately, this is the dilemma we all live with,” she said.

Yet, solutions may be on the horizon. Many Gulf Cooperation Council (GCC) countries have begun to offer or establish public registries for beneficial owners of FTZ companies, the anonymous compliance officer said.

“So, if we know they [FTZ businesses] are being used to hide certain types of people who are sanctioned, GCC countries are mitigating the risk of these entities by bringing them toward transparency,” he said.

Produced by Thomson Reuters Accelus Regulatory Intelligence
Published 15-Nov-2017 by
 Ajay Shamdasani, Regulatory Intelligence

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