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Free Trade Zones: A Financial Fraud Freeway?

Garima Chaudhary
Oracle Financial Crime and Compliance Management Specialist, Oracle Financial Services

We’re not saying free-trade zones (FTZ) are a hotbed of financial crime. But given its duty- and tax-free status, these jurisdictions tend to attract money laundering, terrorism financing and other criminal activities, in addition to legitimate businesses.

Blind Men and the Financial Crime 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. Goods introduced in a FTZ can undergo various economic operations, such as transshipment, warehousing, re-packaging and re-labelling as well as storage.

But the same shipment may also use FTZs as a base around the globe for no other purpose than money laundering.

All of this creates a complex financial crime network with multi-layer supply chain systems that can be tough to monitor. The special status, tax and arrangements, in these areas, can often allow financial criminals to exploit the system with little regulatory oversight.

Even involved institution, with a robust transaction monitoring program may have limited visibility or just a fraction of the complete view.

It is a Family Business 

FTZs are more than commercial distribution centers and represents global, family-based, ethnic/religious networks. The operators may be linked by ethnic/religious networks across FTZs across the world that even company registry information may not be track the relationship across businesses.

Tackling the Money Laundering Threat with a 720-Degree Customer View 

Transaction monitoring of FTZs is currently ineffective because there is no holistic view of customer financial activity.

The current programs only factor internal information (such as Customer, Bill of Lading, Documents) for monitoring & investigation. However, detecting financial criminal behavior requires factoring a 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.

The more effective anti-money laundering approach is to have a 720-degee customer view that includes information beyond the institution’s purview. They need to cross-reference customer activities with other FTZ customers of a similar business nature, gathering company and shipping information, for example.

Holistic Risk Indicators:

Typical transaction monitoring parameters such as high-risk geographies and inconsistent shipping do not give an overall picture of a customer behavior.

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:

  • Individual or company linked with several other companies
  • Individual owning & operating more than one company at same time & same location
  • Companies shipping to just one country
  • Direct operations in FTZ
  • Companies & individuals with same family ties 
  • Companies registered with incorrect addresses
  • Companies doing business in high risk geographies
  • Inconsistent shipping route / change in shipping route from Bill of Lading

External Network Data is Vital 

There is no single source of database on these free ports or the merchants who sell these the goods. However, there are several types of external data that can be collected, organized and available to financial institutions, intelligence and law enforcement agencies as well as businesses. Below are a few examples of the vast variety of external information (along with internal data) needed:

  • Business operating in FTZ - names, addresses, phone numbers and websites
  • Trends report of amount of goods/services received and shipped in FTZ
  • Financial institutions (and their principal officers) serving the businesses in the FTZ
  • Shipping lines that transport goods/services from the port or ports serving the FTZ
  • Products/goods brands sold in each business
  • Data on the global supply chain. Insights on companies at every stage of the supply chain. From manufacturers and buyers to shipping and logistics

Connect Hidden Dots: Advanced Graph Analytics

What do you do with all that data?

Institutions need to connect the dots in their data, uncover hidden relationships and patterns and ensure coverage of known risks by validating existing controls and scenarios.

From a technology standpoint, an anti-money laundering solution which allows for graph visualizations for both internal & external financial crime data, that rapidly builds powerful detection patterns and generates insightful investigation dashboards for financial crime investigators and risk analysts, is crucial.

In addition, financial criminals register themselves under multiple names and addresses. By the time a link is detected, these individuals nowhere to be found. Robotic process automation,can help automate basic processes for your anti-money laundering team, enhance Know Your Customer (KYC), Know Your Customer’s Customer (KYCC) and augment Counter Terrorist Financing (CTF) investigations with a holistic customer view.

A centralized investigation hub to speed up investigations and boost investigator productivity is another critical aspect of anti-money laundering technology.

The platform should enable financial institutions to 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 through graph analytics will ease entity resolution and understand how involved parties are interconnected.

There has been increased scrutiny on trade-based money laundering recently by regulators around the globe. Tackling trade-based money laundering effectively requires factoring in the FTZ connection. An agile platform is important to keep up with the dynamic nature of criminals in fight against money laundering & financial crime.

Find out more here: https://www.oracle.com/industries/financial-services/analytics/solutions/financial-crime-compliance.html

 

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