Compliance hot spots for 3rd transactions and corporate remittances

In recent years, the United Arab Emirates (UAE) has been looking to become more stringent regarding compliance, alongside its aims to encourage the establishment of an open economy to facilitate foreign investment.

However, there are some challenges regarding foreign investment and compliance.

One issue is the complexity to detect the money trail in cases of third-party corporate transactions.

For example, many orders processed in the UAE are from suppliers in jurisdictions like India, Pakistan, Kenya, Congo and Hong Kong.

Payment for goods from these Asian and African countries is usually sent to firms in China, Singapore, Malaysia, the United Kingdom and the Unites States.

This is part of the process of the importation of goods involving third-party transactions.

Outbound remittances through correspondents involved in third-party transactions have some serious challenges.

Let’s take a look at some of them:

Money trail

There is a need to establish controls about how money will be transferred through a third-party from a home country to the host country or final destination.

While there is a legitimate requirement of transparent sources of funds through a banking channel, sometimes an informal transaction may take place which makes them a challenge as they have no money trail and do not undergo proper regulatory supervision.

In countries like Pakistan, India and Bangladesh, tax evasion and trade-based money laundering (TBML) are some of the common problems created through under- or over-invoicing.

Generally, the transfer of money for executing third-party payments is not always a simple matter.

It has also been observed that some corporate clients’ bank statements do not represent a true picture of the actual business transactions, because the requested amount of remittance is not justifiable through the bank statement.

Bulk cash imports are also being used as a funding source for third-party transactions through cross-border, which itself is a big challenge.

Limitations though transparency of the beneficial owner (UBO)

Ownership transparency is also an important issue in third party transactions as it can be quite difficult to get the complete information of the beneficial owner. Third party enhanced due diligence (EDD) is not a very easy task in some jurisdictions. There is also a concern about how to mitigate the risk of “nesting”.

Money laundering using fictitious and fabricated invoices

The edited bill of landing and change in details of packaging are key concerns in terms of out-ward remittances through correspondent banking.

The commercial documentation process requires complete connectivity of the documents between the ultimate remitter, beneficiary and ultimate beneficiary. The connectivity of documents may be in the form of a general agreement which may be notified or attested by the notary public.

An authorised person or party is required to establish ancillary information at the time of executing a transaction execution.

Offshore companies

Offshore-based firms are sometimes challenged companies. For example, some may only have a flexi-desk office without an organised office structure but be involved in huge money remittance transactions through money services businesses (MSBs). The UAE has over 150 MSBs and its recently published regulatory standards for MSBs and banks may be viewed as useful guidance to help mitigate the risk of third party transactions.

Sanction Screening

Sanction screening is also a big issue for third party transactions. For example, at times the complete details are not available for parties involved in transactions. This may create a risk which for which sanction screening is required. If compliance is not stringent, it can invite trouble for sanctions violation, as was the case of Habib Bank in 2017 where the DFS (Department of Financial Services, New York) penalised it with $225 million.

Efficient TMS (Transaction Monitoring System)

TMS for third-party transaction risk can be reduced by applying live parameters into the system and also doing reliable post-monitoring. The latter includes risk and behavioral analysis, which are considered to be useful automated tools. Generally, third-party transactions are usually categorised as high-risk business. To mitigate such risks, the importance of stringent enhanced due diligence (EDD) cannot be ignored, and it is preferable that such EDD be done in the respective jurisdiction, such as through on-site visits. Another idea is to collect some images as well as to verify documents. It is also useful to conduct staff or management interviews during an EDD visit.

In the UAE, firms usually maintain their reputational risk mitigation plan through regulatory guidelines. They also focus on improving the compliance team’s skills in financial institutions through training modules, which includes participating in platforms such as conferences, seminars and webinars, and so on, which is a very commendable step to improve and establish compliance culture.

Shipment is also an area of concern, in which there are three common scenarios:

1.Goods coming into a country
2.Good partially shipped to a country and partially another jurisdiction.
3.Goods completely shipped out of country.

In the above scenarios, the second and third scenarios are a big concern and require stringent controls.

Vessels tracking

Vessel tracking and problems created by letters of credit (LC) challenges are another aspect to the issue. These may include misinterpretation, and having many amendments in LC can make it controversial. Advance payment is often a mode to transfer the funds because it requires less commercial details as compared to post-payments. Launderers often take the chance to clear funds through remittances in the form of advance payment. Compliance professionals need to obtain a complete supply chain management trail in such transactions including the purchase order, delivery notes, invoices and bills of lading.

Consolidated KYC

Consolidated compliance is also a vital element to explore third-party transactions. There are many Asian Pakistani and Indian based business in the UAE, for example, and they maintain LLC or FZE companies. The same companies also have offices in their parent country so in such circumstances consolidated KYC is required to mitigate the risk of geographical risk.

The stringent approach or model is only workable if complete standard operating procedures (SOP) are being followed as per local/international regulatory guidelines.

Purpose of transaction

Raw materials, used vehicles and property investment transactions are often exploited through third-party transactions, and are vulnerable to money laundering and terror financing schemes. In cases where home and host laws differ, it is advisable to settle for the laws which have higher standards or requirements.

Some correspondent banks also face challenges when it comes to trying to curb the risk of dealing with firms based in sanctioned countries like Iran. For example, when transactions are executed through Pakistan and India, they always carry an inherent risk of dealing with the ‘Iran neighborhood.’

So while third-party transactions are legal, they require stringent compliance models to identify the riskier transactions.

About the author: Muhammad Rizwan Khan CAMS FCI,CFCS has worked in financial crime and global compliance for a number of years. He is presently the Head of Compliance for AL DAHAB Exchange-UAE.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.