Source: Finance Derivative
Gabriel Hopkins, Chief Product Officer at Ripjar
Supply chains are the backbones of modern business. The recent delays demonstrate the importance of efficient end-to-end chains in enabling the flow of goods and services across borders and ensuring that firms and markets around the world continue to function smoothly. While they deliver crucial resources and connections that organisations require, they also expose them to an increased degree of third-party criminal risk.
Whilst a bank or financial organisation may be confident that it understands the immediate compliance risks that it faces from its customers and the industry, it’s less likely that it is familiar with the risks that suppliers and other third parties along the supply chain face.
However, it’s important that firms familiarise themselves with the risks, as many anti-money laundering (AML) and counter-financing of terrorism (CFT) regulations. These require firms to ensure that third parties involved in their supply chains are not involved in criminal activity. If they fail to do this, they may face both criminal and reputational penalties.
To detect and address the AML/CFT risks associated with third parties, businesses can start with six key considerations for enhancing supply chain compliance performance.
Mapping supply chain risk exposure
To manage supply chain risk, firms must understand not only who their suppliers are, but who those suppliers work with. This requires greater visibility into all components of your supply chain, including the transport routes, manufacturing plants, storage facilities, and managerial personnel that it involves.
Assessing each of these elements in detail will enable firms to determine the AML/CFT risk they present, and then track them on an ongoing basis to capture any changes in that risk profile.
Relevant supply chain risk factors to monitor include:
Operational risk: The industry in which a third-party operates will affect the level of AML/CFT risk that it presents. Examples of high-risk industries include payment services, art, shipping and logistics. These are industries which may offer criminals opportunities to commit crimes such as money laundering.
Geographical risk: Supply chains that cross borders may encounter high-risk AML/CFT jurisdictions.
Sanctions risk: Cross-border supply chains also carry an increased risk of international sanctions compliance concerns. Firms should screen those involved in their supply chain against relevant sanctions lists on an ongoing basis.
Corruption risk: Foreign supply chains are often vulnerable to corruption, stemming from transactions involving politically exposed persons (PEP). With that in mind, firms should be aware of the political risks that their supply chain entails, and whether changes to the political landscape have impacted this.
Understanding Criminal Methodologies
Criminals are always developing increasingly sophisticated methods to evade AML/CFT controls and exploit regulatory blind-spots. When implementing an effective risk management solution, it’s important that you understand the criminal methodologies used to target supply chains. These include:
• Misrepresenting goods on official documentation or letters of credit
• Misrepresenting the value or quality of goods being transported
• Transporting illegal goods
• Unauthorised unloading of goods
Building risk management solutions
Once organisations have gained a perspective of their supply chain risk liabilities, they should develop and implement a risk management framework so they can effectively respond to potential AML/CFT alerts. The framework should align with a firm’s risk appetite, allow it to gauge the impact of the potential risks, predict the likelihood of those risks becoming a reality, and set out the compliance measures that can deal with them.
Economic conditions, new technologies, or political upheaval are all factors which mean third party business relationships change constantly, in turn altering a supply chain’s risk exposure. To stay on top of emergent risks, firms need to implement a persistent monitoring solution for every relevant aspect of the supply chain so that changes can be detected when they happen, and adjustments made to risk management solutions in a timely manner.
Conducting supply chain due diligence
Supply chain due diligence should be an important part of risk management solutions. In addition to understanding who is involved in the chain from end-to-end, that information must be verified to properly assess compliance risk exposure. Effective supply chain due diligence means gathering the following information on third parties:
• Identifying information such as supplier names, addresses, company incorporation documents, and beneficial ownership details
• Financial information such as cashflow, expense details, growth projections, and debts and liabilities
• Historical financial performance
• Regulatory environment and AML/CFT compliance performance
Recognising red flags
Once the supply chain risk management solution is implemented, it’s important that compliance employees understand how to spot the relevant indicators of AML/CFT threats in practice. Key red flag characteristics of supply chain risk include:
Corporate structures: Suppliers that have needlessly complex corporate structures present a higher risk of money laundering. Red flags include the use of shell companies or incorporation in a high-risk country.
Online activity: Suppliers without a website or have an unusual online presence that does not match their business operations.
Trading behaviour: Suppliers that trade in goods that do not match their business profile or engage in needlessly complex trade deals.
Trade routes: Suppliers that organise their shipments in needlessly complex routes between their ports of origin and destination.
Documentation: Suppliers that submit insufficient documentation for their shipments or that submit documents with inconsistencies or deficiencies.
Transactional activity: Suppliers that make frequent or last-minute changes to their financial arrangements or engage in unusually high or low volumes of transactions.
Screen for adverse media
Given the global nature of supply chain relationships, firms should seek to stay informed about AML/CFT risks by screening for adverse media involving third-party business relationships. Negative media is a particularly good indicator of AML/CFT risk because its information flows are not restricted by borders, jurisdictions, or government protocol, and stories may be broken before their confirmation by official sources.
Adverse media screening solutions should be set up to capture information about suppliers from foreign language news sources and integrate multi-language name matching tools to account for variations in name spelling or the use of non-Latinate characters. With that in mind, it is often useful for firms to integrate smart AML software tools that enhance their adverse media solution with automated speed, accuracy, and the capability to monitor breaking stories in real time.
Understanding before action
Whilst they aren’t the most obvious place to start when examining money laundering risks, it’s clear that firms would be remiss to neglect supply chains as a source of potential non-compliance.
In order to implement the most effective risk management solutions, banks and financial organisations must ensure they have a comprehensive understanding of the supply chain landscape when it comes to AML and CFT.
