Counterfeit Goods: Money Laundering in Plain Sight (Part 4 — What Financial Institutions Can Do)

Topics: Compliance, Corporate Legal, Financial Crime, Financial Fraud & Anti-Money Laundering, Government, Risk Management


This is the fourth of a new five-part blog series, “Counterfeit Goods: Money Laundering in Plain Sight”, where we will examine how the production, distribution and sale of counterfeit goods enables bad actors to generate and launder illicit proceeds through front businesses. (You can read the three previous parts of the series here.)

There are several steps financial institutions can take to help combat money laundering through counterfeit goods and monitor for human trafficking. This includes better risk assessment and better screening of goods and customers.

Risk Assessment

The Federal Financial Institutions Examination Council’s (FFIEC) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination manual provides the core examination principles that can be used to determine the fitness of a financial institutions’ BSA/AML program. The manual goes into detail regarding the nature of risk assessments, noting that BSA/AML risk assessments should be utilized to determine a financial institution’s exposure to geographic risks, product risks, customer risks, and any other special risk categorizations specific to that institution.

The manual also states that risk assessments must be periodically updated; but once established, the risk assessment provides the foundation for the institution’s BSA/AML program’s policies, procedures, and controls. Therefore, it would be possible to leverage either the foundation of (or updating of) the risk assessment to determine if there is an enterprise-wide exposure to the sale of counterfeit goods. If so, the institution could calibrate its AML controls accordingly to provide additional scrutiny to customers, products, and services that may present a degree of heightened risk.

Negative Media Screening and the Customer Identification Program (CIP)

The Customer Identification Program (CIP) requirement is the overarching mandate that requires that financial institutions maintain a risk-based process for upholding assurances that the institution is reasonably certain of the identity of its clients, and therefore the risks that those clients may present. No “legitimate” merchant advertises themselves as counterfeit producers, sellers, or distributors. However, a financial institution with potential exposure to the sale of counterfeit goods could mitigate their risk of onboarding or retaining these types of bad-actor clients by leveraging adverse media screenings for both new and existing clients.

A viable source for cross-reference beyond just customer reviews and media is the Office of the U.S. Trade Representative. This office maintains the Notorious Markets List (NML), which “highlights prominent online and physical marketplaces that reportedly engage in and facilitate substantial copyright piracy and trademark counterfeiting.” In this way, the NML could be utilized as an additional control source to identify whether new or existing customers, or their beneficiaries, may be engaged in the sale of counterfeit goods.

Products and Services

Many of the risks associated with counterfeit goods align very closely to the common risks inherent with trade-related products and services. In this blog post, we examined products only. These products could include letters of credit, the provision of finance, underwriting insurance, and providing trade settlement wire services. It is therefore possible to develop or enhance existing AML controls to strengthen a risk-based approach that could mitigate the risk of unknowingly supporting the production of counterfeit goods.

Products — The issuance of letters of credit require the identification of the underlying parties, geography involved, and specified terms. Geographic risk, for example, could come from the goods’ country of origin, as well as any transshipment points in between their manufacture point and ultimate destination. Many risk profiles for trade-related products examine geographic risk from an AML prospective; and these risks, in general, are tailored to several factors such as regulatory guidance and input from non-government organizations including the Transparency International’s Corruption Perceptions Index (CPI).

Since the sale of counterfeit goods is corruption-enabled, a potential control enhancement might be to screen for countries which pose heightened corruption risk (meaning a lower CPI score) against the U.S. Department of Labor, List of Goods Produced by Child Labor or Forced Labor. Understanding that these two data sources would not necessarily provide determinative results, however, the output would certainly suggest that certain products from certain geographies may in fact present an unacceptable level of risk.

In the last of our five-part series on the nexus between counterfeit goods and money laundering, we will examine the need for a heightened awareness in the services banks provide, and how banks can rethink transaction screening in combating counterfeit goods.