Blog by: Garima Chaudhary, Oracle Financial Crime and Compliance Management Specialist
There are more than 3000 Free Trade Zones (FTZs) around the world with a total turnover in the billions of dollars. The largest FTZ is Hong Kong and second largest is Colon, Panama. FTZs are designed to support the development of exports, foreign direct investment (FDI), and local employment. In addition to boosting economic opportunity, these incentives can create opportunities for money laundering and the financing of terrorism. Because the same characteristics such as exemptions from duty and taxes, simplified administrative procedures, and the duty-free importation of raw materials, machinery, parts and equipment can make FTZs attractive to legitimate business, can also be extremely attractive to criminals.
Blind Men & an Elephant
The scope and degree of Customs control over the goods introduced, and the economic operations carried out in FTZs, vary from one jurisdiction to another. Consistent with the purposes of establishing FTZs, goods introduced in a FTZ are generally not subject to the usual Customs controls. There is therefore a risk of exploiting the FTZ.
Goods introduced in a FTZ can undergo various economic operations, such as transshipment, assembly, manufacturing, processing, warehousing, re-packaging and re-labelling as well as storage for timely marketing, delivery and transshipment. The tracking of shipments, especially for repackaging is a key element in the control of FTZs. The same shipment may use FTZs as a base around the globe for no other purpose than to launder funds. All of this creates a complex relationship with multi-layer supply chain system, which makes it very tough to monitor. Even every involved institution, with a robust monitoring program will have limited visibility of complete view, which is just a fraction. Therefore, not understood by institutions wholly.
It is a Family Business
FTZs are more than commercial distribution centers and represents global, family-based, ethnic/religious networks. The merchants consist of specific ethnic/religious network are main players in the FTZ around the world and are linked together based on family relationships. These families own several businesses operating in one or many FTZs and other parts of world. Even with company registry information it is almost impossible to gather real relationship between these businesses.
Tacking the Threat: Customer 720-Degree View
The current programs factor internal information (such as Customer, Bill of Lading, Documents) only for monitoring & investigation. However, overall behavior requires factoring good amount of external information, such as comparison of customer activity with overall FTZ customers of similar business nature, company information, actual vessel route and many more. One of the key reasons for ineffective FTZ monitoring is the lack of holistic view of customer activity. More effective approach is to expand customer view beyond institution purview and include external relevant data - customer 720-degree view.
1. Holistic Risk Indicators:
In a typical program, monitoring rules are around internal data such as customers involved in high risk geographies, change in activity & inconsistent shipping. Such behaviors are good indicators of risk however, are not overall behavior of the customer. These internal red flags should be correlated with external information to understand the holistic view and any discrepancies in customer behavior. Below are examples of some holistic risk indicators:
2. External Data is Vital
There is no single source of a global database on these FTZs and the merchants who sell the goods. There are several types of data which should be collected, organized and available to financial institutions, intelligence and law enforcement agencies as well as businesses. Below is an example of the vast variety of external information (along with internal data) which is needed:
3. Connect Hidden Dots: Graph Analytics
From technology standpoint, a platform which allows for graph visualizations for both internal & external financial crime data, to rapidly build powerful detection patterns and insightful investigation dashboards for financial crime investigators and risk analysts, is crucial. For discovery institutions must connect the dots in their data, uncover hidden relationships and patterns using analytics visualizations and ensure coverage of known risks by validating existing controls and scenarios.
A centralized investigation hub to speed up investigations and boost investigator productivity is another critical aspect of technology. Platform should enable search across customers, bill of lading, watchlists and external data such as FTZ trends, vessel movement, company information and many more. Due to the global nature of business, automating the manual data collection, linking, foreign language processing by leveraging graph analytics for entity resolution will allow for non-redundant definition of customer and involved parties. This approach enhances Know Your Customer (KYC), Know Your Customer’s Customer (KYCC), Anti Money Laundering (AML) and Counter Terrorist Financing (CTF) investigations with a true holistic behavioral view.
There is a closure view on how FTZs operate and to what degree for criminal activities. There are substantial indications that due to various geographical & economic reasons, these FTZs could be used as hub for money laundering & terrorist financing. There has been increased scrutiny on trade-based money laundering recently by regulators around the globe however, trade-based money laundering cannot be tackled without factoring FTZ aspect. An agile platform is going to be key in keeping up with the dynamic nature of criminals in fight against money laundering & terrorist financing.