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Author: TradeSun chief executive Nigel Hook
Trade-based financial crime is a trillion-dollar business for malign actors. Criminal organizations continue to target global trade finance, for money-laundering schemes, tax evasion, and the shipping of dual use goods, because its complex and siloed nature provides negligible transparency.
A single trade finance transaction can involve up to 100 documents, according to the International Chamber of Commerce, in non-standard format and with stakeholders spread across different jurisdictions subject to different rules.
In recent years, authorities around the world – including the UK’s Financial Conduct Authority, the US’ Office of Foreign Assets Control, and the UAE Central Bank – have increasingly warned of the financial crime risks facing banks and their corporate clients, handing out hefty fines over non-compliance in trade.
As well as this action, authorities are providing guidance on how to tackle financial crimes in trade. Last week, the Financial Action Task Force (FATF), an influential standards-setting body, urged for better data sharing in trade and beyond to counter illicit activities.
The report calls for an “effective regime” for anti-money laundering, counter-terrorist financing and counter-proliferation financing that meets data protection and privacy laws.
More of the ‘puzzle’
The FATF lists several reasons as to why data sharing supports improved financial crime prevention: customer identification, transaction monitoring, compliance screening, risk management, identification of beneficial owners and typologies of crime, and to aid intelligence-driven inquiries.
However, up until now, players across the trade ecosystem have been unable to share their data – trade data is highly valuable and, as such, fiercely protected.
Such privacy concerns over data sharing are holding back global trade in curbing illicit activity. For example, it is impossible to know if an invoice has been duplicated if access to anonymized invoice data processed by other banks is not available to those reviewing an invoice.
As the FATF report points out, a single bank has “only a partial view of transactions and sees one small piece of what is often a large, complex puzzle”. It adds that criminals exploit this information gap by using multiple financial institutions within or across jurisdictions to layer their illicit financial flows.
There are other obstacles in sharing data, including growing disparate islands of data, and interoperability among emerging solutions, which can act as a hurdle for bringing technologies together to root out crime.
Without access to more accurate and consistent information, it is difficult for individual banks to detect and intercept malign activities before it is too late.
There are several high-level initiatives that aim to facilitate the private sector in sharing data for financial crime prevention.
The Monetary Authority of Singapore’s (MAS) Cosmic platform, launching next year, is a digital platform for financial institutions to share relevant information on customers and transactions to prevent money laundering, terrorism financing and proliferation financing.
MAS is developing Cosmic along with the Singapore Police Force, and six major banks that will be its initial users. According to the FATF, MAS has been working closely with Singapore’s Personal Data Protection Commission to ensure that sharing of information on the platform is in line with the commission’s principles for use of personal data.
Elsewhere, the UAE Trade Connect, a platform to combat duplicate financing across the United Arab Emirates, was launched last year with several participating banks.
These initiatives, that leverage blockchain technology to achieve secure transparency in sharing data, are a good start in shining a broader light on the shadows of dark trade transactions.
Private companies are also paving the way in tackling trade finance fraud. Last year, Singapore-based MonetaGo partnered with Swift to take its digital platform to combat deduplication across trade worldwide with secure and highly scalable cloud technologies.
There are now more options to share data privately and with scalability using secure cloud technologies.
The use of application programming interfaces (APIs) and open architectures are making it easier for solutions providers to integrate with one another seamlessly and securely, bringing data sources together.
While the maturing of trust frameworks aided by distributed ledger technology (DLT) and confidential computing are helping to process and secure data without need to identify its owner.
Privacy enhancing technologies such as zero knowledge proof, data encryption and self-sovereign identity will also support data sharing on a minimum need-to-know basis.
In its report, the FATF makes several recommendations to the public and private sector with regards to technology to better enable the sharing of data to prevent financial crime.
The public sector should consider taking an active facilitation role by, for example, developing projects to promote data interoperability and consistency. Meanwhile the private sector should consider the application of privacy enhancing technologies, take steps towards data preparation, and pursue “data protection by design”.
The only way to curb illicit activity, from trade-based money laundering to sanctions evasion, is with smarter data sharing that is secure, seamless, and anonymous. High-level initiatives, along with open architectures and privacy enhancing technologies, will support banks in casting a bright light to illuminate the shady schemes undermining global trade.