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Banking

WHY TRADE-BASED MONEY LAUNDERING (TBML) CAN NO LONGER SOLELY BE CONSIDERED A BANK’S RESPONSIBILITY

Alexon Bell, Chief Product Officer at Quantexa

Criminals are increasingly taking advantage of cross-border trade in order to change the financial proceeds of their illegal activities into revenues that seem legitimate. This practise, known as trade-based money laundering (TBML), occurs in domestic as well as international trade. The international trade system offers more opportunity for money launderers due to the complexity and enormous volume of natural cross-border trade connections, allowing criminals to hide in plain sight. 

Alongside this, criminals are become increasingly sophisticated and financially literate.  They are now using multiple companies and foreign exchange transactions, mingling diverse trade financing agreements with normal transactions, and are even starting to mix legitimate and illicit funds. The limited resources of customs agencies makes it even harder to detect suspicious trade transactions.

As financial products, practices and technologies continue to evolve, so do the possible threats to the broader financial system, with TBML becoming increasingly sophisticated. Consequently, it is vital that financial institutions , regulators, governments and law enforcement work together to reduce the impact of TBML within the global markets.

How is TBML conducted?

TBML is about transferring value from one party to another and disguising this as a legitimate business-to-business transaction. Criminals use a variety of mechanisms to transfer money; for example, party A pays for 10 motor cycles and only 5 are shipped (partial shipment), or sometime none are shipped. Another method would be over or under invoicing, where for example, the motor cycles are worth £10,000 each but are only invoiced at £5,000 each. In many cases the banks are not even aware if the £50,000 payment is for motorcycles, mobile phones or carrots.  Banks only see this information when they finance the trade, which only accounts for around 15% of all transactions.

Alexon Bell, Chief Product Officer at Quantexa

Suspicious activity can also involve payments to a vendor by unrelated third parties, false reporting, repeated importation and exportation of the same high-value commodity (this is known as carousel transactions), commodities being traded that do not match the business involved, unusual shipping routes, inconsistent packaging and double-invoicing.

The growing threat

TBML is a primary vehicle for moving funds overseas and plays a major part in the layering and integration stages of money laundering. 80 per cent of illicit financial flows from developing countries are accomplished through TBML, and an estimated $2.3 trillion was moved out of the US from 2003 to 2014 as a result of deliberate pricing anomalies.

The scale of TBML is vast because of the amount of money that can be moved. If a business sends another business a payment, they are trading, buying goods or services, paying royalties or commissions and TBML covers all of this. Consequently, it’s much more complicated than detecting placement, since cash is not involved and it has already been placed into the banking system.  

The rise in TBML has precipitated a recent increase in regulatory scrutiny, as well as new guidelines from global bodies including The Wolfsberg Group. New regulations aim to develop financial industry standards for anti-money laundering (AML), know your customer (KYC) and counter terrorist financing (CTF) policies. The Monetary Authority of Singapore (MAS) has also recently issued specific guidance on TBML.

Whose responsibility is it to tackle TBML?

Banks play a large role in tackling TBML as they process the payments, but to really combat TBML, we need cross-industry collaboration between banks, governments, shipping and logistics companies.

For example, banks have no way to know if a shipping container contains 40,000 shirts or 40,000 computer chips. This must be validated by the shipping company or port authority but it simply isn’t practical to open every single container; the busiest port in the UK handles over 3.5 million containers a year.

Alongside this, the banks often have no idea what is being shipped, as 85 per cent of all transactions are straight payments, with no documentation or financing involved. Take, for example, 10 companies in the UK importing T-shirts from the same manufacturer in Bangladesh. If each UK company banks with a different bank, each bank only has 1/10th of the data on the Bangladeshi T-shirt manufacturer. This is where shipping companies and logistics firms can help, as they have detailed knowledge of what they are transporting.

It is at this point that governments need to step in. The only point at which all imports are seen is the port and tax authority, although the cargo cannot be thoroughly checked. The government is the only entity that will see all the imports from the Bangladeshi T-shirt manufacturer, so it must act to pull this data together and share it.

Next steps

An approach to tackle TBML needs to be agreed and this requires cooperation from across the finance industry, the governments and law enforcement. One effective method would be to remove the paper from the documentation process and better record who is shipping what to whom. Currently, banks are investing heavily in digitising paper documents into something a computer can use. This seems strange as the Bills of lading and invoices are no longer written by hand, but are instead created on a computer and printed.  We should stop digitisation and start forcing businesses to upload their documents in a machine-readable format in order for them to gain access to finance and be able to import into a country.

One suggestion is that the G20 governments should mandate that all imports are registered electronically. A simple spreadsheet consisting of the sender and recipient details, the delivery location, a short breakdown of each item, quantity and price should be sufficient for banks to use this same information for financing and processing transactions.  For emerging markets and developing nations, trading with each other paper will still be required but this would be a step in the right direction.

Meanwhile, banks should ensure they are conducting comprehensive risk assessments of their trade finance businesses, taking into account their customer base, geographical locations, products offered and any risks in order to determine the amount of financial crime risks they could be exposed to. Banks should also make use of advanced data analytics, network analytics and machine-learning technologies that are able to identify information, trends, connections and anomalies indicative of TBML schemes.

TBML may never be fully eradicated, but with the right technology and processes in place, and through collaboration and regulation, we can devote the required time and resources to create a robust AML program that can stand firm against financial crime.

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Banking

NO SAFE HARBOUR FOR DIGITAL BANKING

by Konstantin Bodragin, Business Analyst and Digital Marketing Officer at Bruc Bond

 

At the beginning of 2020, the future of digital banking was pretty clear. Between Open Banking initiatives, regulatory frameworks like the PSD2, and growing customer demand for more advanced digital services, bank-watchers the world over felt confident in their predictions. The course was set for full digitisation, likely brought about by victorious challenger banks replacing stuffy and lumbering traditional banks. Then the winds changed and ongoing disasters shook the world’s seemingly endless confidence in fintech and the bright future it promised to the core.

COVID-19 dropped on us like a sudden thunderstorm on a birthday party. Sure, experts, analysts, prognosticators (and perhaps even meteorologists) all warned of an inevitable pandemic event. But the rest of us, including most leaders and financial giants, were taken almost entirely by surprise. A majority of us managed to get drenched, even though the forecast predicted stormy weathers. Now, leaders and investors are scrambling to reach high ground and keep whatever they can from being swept away in the torrential floods.

Konstantin Bodragin

In practice this means redirecting funds from aspirational projects towards more immediate goals, and shedding as much unnecessary weight as possible, in case the water rises higher. In the year of COVID, who gets what is not so much a question of wants, but of pure necessity. Unless you’re a government with bottomless pockets, superb credit rating, and a deep desire to stave off a Great Depression-style downturn by means of public works, chances are you too are cutting costs. Big Business is doing the same. Autonomous car projects will be put on hold (if they haven’t been frozen yet), status symbol product launches will be postponed until customers feel confident to spend their extra cash again, and ambitious digitisation projects will be slowed unless their worth can be demonstrated even for the current times.

As they say, when it rains it pours, and this year is particularly wet for fintech. Even if Hurricane Covid hadn’t battered the shores of the global economy quite to so hard, the void left by the sinking of the titanic WireCard would suck much of the industry down beneath the water with it. Just last month, WireCard served as the main provider of banking infrastructure for much of Europe’s Non-Bank Financial Institution industry. NBFIs, tautologically, are not banks. As a rule, until they grow large enough to acquire a bank or banking licence of their own, NBFIs rely on financial and banking facilities provided by another. This is by design, with frameworks like PSD2 regulating access and relationships between various institutions.

Such relationships, under the watchful eyes of local and international regulators, are meant to best serve the interests of customers and consumers. And for the most part they do. Failing or unscrupulous institutions get sidestepped and the system heals around them. Unless, of course, the problem actor is too large. WireCard is one such giant dud, and the sinking of this fintech suppliers will have repercussions that will be hard to mitigate.

WireCard served so many financial institutions that many millions of customers have been affected. Many of these institutions will not be able to survive, and one can only hope that end consumers will be protected from the fallout. On the business end, such hopes for salvation could be too optimistic. Many companies don’t have the resources to withstand several weeks or months of inactivity while they work to replace their financial infrastructure, especially not with extremely depleted budgets due to the ravages of COVID-19.

Those institutions that do survive will face a new reality of confused and likely higher costs, which will almost necessarily have to be passed on to consumers. The more savvy of WireCard’s survivors will try to shore up their defences against the recurrence of such a disaster by spreading the risk and their activity between several providers. This will hopefully lead to a normalisation of costs and a reduction in fees, but by then consumers could once again be too wary to take the risk with digital services whose fees could seemingly spike at any moment.

Loss of confidence won’t be limited to the consumer side, either. Regulators, wary of being made the fool again, are likely to treat fintech and the NBFI sector with much harsher gloves than it did so far. Increased scrutiny, stricter regulatory requirements, and a general lack of cooperation from regulators could sink any hopes of quick recovery for the battered industry. Not to mention the increased costs from such requirements, that are, again, liable to be passed down to the consumers.

Regulators and authorities are not the only power brokers digital banking suppliers will have to contend with. Partners in the banking industry were already eyeing fintechs with suspicion, not least thanks to the egregious claims of the latter to replace the former. Little wonder then, now that the seemingly unbeatable leviathan of WireCard has sunk to the bottom of the deep, that banks will loath to lend a helping hand to NBFIs struggling to find replacement providers.

So what will happen? In this climate, with demands for justice at their peak, some funds will surely be diverted from risky digitisation projects to PR-friendly investment in diversity. Behind the scenes, certain players will carry on their digitisation projects, but their approach is bound to change. The three Ss – slow, steady, stable – are likely to reign supreme, at least until Hurricane Covid passes, and the economic seas are calm once again.

 

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Banking

WHY OPEN BANKING SHOULD BE EVERY MARKETER’S BEST FRIEND

By Kathryn Wright, CSO, Upside

 

To date, Open Banking has been mainly utilised to help consumers with account switching and account aggregation. Being able to have a birds-eye-view of our spending always helps us realise how much money might be slowly ‘leaking out’ of our pockets. As useful as some of the applications have been so far, they are somewhat passive in nature and there is a bigger opportunity at play with Open Banking.

Personalisation has been the holy grail in sales and marketing for some time now, often twinned with omni-channel propositions. According to a study by Gartner in 2018, the brands who personalised discounts and calls-to-action outperform their competitors in revenue by at least 20%. The demand for a completely personalised customer experience has seen many SaaS offerings come to market, promising a complete understanding of your customer.

Many of these technologies are riddled with challenges though, such as customers flitting between devices, moving from mobile to tablet to laptop, and all at different IP locations – which is where omni-channel solutions are needed, but only work reliably when a customer is ‘logged in’. Cookie tracking, or the lack of it, also impacts what is shown to a customer. There’s nothing worse for a customer than clicking through an email and landing on a website just to see a large pop-over asking them to sign up to emails and offers. That’s clear evidence and an example of personalisation not working!

Another bad example in basic segmentation is generalisation. Businesses often take a few pieces of demographic data and then make wildly inaccurate assumptions about the customer. No retailer or marketer needs more data. They need actionable data with insights which can drive action and engagement.

And this is when Open Banking comes into play. By pairing past spending data through Open Banking, marketing teams can better understand their customer base, and brands can personalise which products and offers are shown and when. The end-result is an all-round better experience for the customer, which in turn means an increase in their brand loyalty.

 

Single Source Of Truth

Businesses currently struggle to know who really is a new customer. It’s kind of tricky when all of the largest discounts are designed to get a new customer on board and marketing teams are heavily focused on new customer acquisition and the cost per new customer.

So who is a new customer? Someone with a new email address that you haven’t seen before? But what about a different delivery address or using PayPal one time and then a card the next time. One customer can potentially register as a ‘new customer’ up to around seven times. Additionally, if I leave my broadband provider this year and come back after a year, am I a repeat or new customer? Brian Dunne from Gift Card Consulting, advisor and investor to Upside puts it well: “There is no such thing as new customers, they’ve all seen you at some point. You are just not getting all their spend most of the time.”

False customer categorisation affects all other business metrics. CAC, CLTV, Repeat purchase rate, customer churn – and these are not trivial metrics, these are metrics upon which huge budgets are committed to or culled. The answer to these questions and challenges in customer personalisation lies in Open Banking. The single source of truth where money can only come out once. Of course, there are credit cards and multiple bank accounts, but the idea is for the customer to have all of these linked.

A new world of data analysis opens up when Open Banking is applied. Retailers can see the frequency of spend, location and average order value. Most brands have this information, but only for themselves. Outside of their walled-garden, it’s more of a mystery. Open Banking allows businesses to benchmark all of these metrics against the rest of their industry, showing what percentage of wallet share they have, which is more meaningful as a metric than an incorrect measure of new customer sign-ups.

For Open Banking to fully show its potential, the conversation with customers needs to change. Brands need to reward repeat purchases and loyalty, instead of offering all of the best discounts to ‘new customers’. Leveraging new fintechs and Open Banking, retailers will be able to know for sure who is a new customer, which will allow them to attract new, win back old and delight their most loyal customers more accurately.

 

Open Banking – Fiction or the Future of Retail? 

Pairing machine learning with Open Banking brings personalisation to a whole new level above simple segmentation and improves the customer experience. Machine learning and AI, combined with Open Banking, are ways to create insights from the masses of data that businesses have. As an example, over time, businesses will be able to recognise when a particular customer looks like they are going to lapse into no longer shopping there, or shop less regularly, and suggest to the brand that at this stage, they offer a special cashback rate. Rather than a ‘spray and pray’ attitude to marketing it means brands can give customers what they need at the right time and ensure their communications are relevant.

Does this sound like a dream? It is not – the technology is ready. Open banking and machine learning can change the way marketing and sales work for any industry. Estimates sit around 95% for the prediction of future revenue which will come from as little as 5% of a brand’s existing customer base. A study by the Center for Generational Kinetics reveals 80% of consumers would visit a store they hadn’t visited before if given a direct cashback. Given statistics like these, retention through delighting and rewarding existing customers, as well as new user acquisition, is imperative.

It’s only the mindset which often holds businesses back. Those retailers, businesses and Open Banking providers who grasp this opportunity and move away from the old discounting culture will rise in the post-Covid-19 world.

 

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