Banks as Enforcement Cops for Money Laundering and Supply Chain Finance

As more third-party non-bank money pours into Supply Chain Finance, one thing to be conscious of is how banks are relied on to ensure money laundering laws by the U.S. government.

Recent conversations I’ve had with regional banks in the U.S. indicate they are now starting to review their anti-money laundering policies in addition to the documentary checks.  Most of this has to do with pressure from regulators.

John Zdanowicz, Ph.D., a professor at Florida International University, has said the bar has been raised because of the 9/11 incident and the concern about terrorist financing.

Money can be moved out of the U.S. by undervaluing exports and overvaluing imports. Conversely, money can be moved into the U.S. by overvaluing exports or undervaluing imports, said John. 

It is important to understand the link between trade finance and potential money laundering.  Goods shipped between countries are typically financed by banks with Letters of Credit (L/C). 

Henry Balani, Managing Director of Accuity, a payment and compliance firm, said money can be laundered via trade in several ways:

  1. through inaccurate representation of goods on L/Cs;
  2. misrepresenting the true value of the goods shipped;
  3. shipping prohibited goods;
  4. unloading goods at sanctioned ports of calls


All the above activities allow integration of illicit funds into the legitimate financial system.  If the bank uses the SWIFT network, they may also screen their MT700s for sanctioned entities.

There are certainly red flags to look for but they are not easy in trade.  If you look at how payments can be made, many times there are a few intermediaries involved (buying agents, selling agents, sellers reps, etc.)

One thing is for sure.  A buyer’s approved invoice is usually a positive sign, as the buyer should know their supplier.  But in trade, the world is much more complex.

So as the likes of various vendors look to find alternative sources of liquidity with non-banks, they should be aware that if the size of this activity gets too big, they may find the U.S. government poking its head into this form of shadow banking.

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