CSS CSS Correspondent Banking & Trade Finance 2 — Questions and Answers
Question 1: Which type of trade finance instrument is most vulnerable to sanctions evasion through over- or under-invoicing of goods?
- Standby letters of credit
- Documentary letters of credit and open account trade (Correct answer)
- Bank guarantees
- Forfaiting transactions
Correct answer: Documentary letters of credit and open account trade
Documentary LCs and open account trade are common vehicles for trade-based money laundering (TBML) and sanctions evasion through price manipulation (over/under-invoicing), allowing illicit value transfers disguised as legitimate trade.
Question 2: A correspondent bank's 'nested correspondent banking' arrangement creates sanctions risk because:
- It requires additional SWIFT message fields that may expose SDN information
- Third-party banks gain access to the correspondent's network, making it difficult to identify the ultimate originator of transactions (Correct answer)
- Nested arrangements always involve offshore financial centers
- It increases currency settlement risk in cross-border transactions
Correct answer: Third-party banks gain access to the correspondent's network, making it difficult to identify the ultimate originator of transactions
Nested correspondent banking occurs when a smaller foreign bank uses another foreign bank's correspondent account to access U.S. dollar clearing, hiding the ultimate transaction originator from the U.S. correspondent bank.
Question 3: What is the significance of Automatic Identification System (AIS) data in maritime sanctions compliance?
- AIS data is used to verify insurance coverage of commercial vessels
- AIS transponder data allows compliance teams to track vessel movements and identify sanctioned port calls or ship-to-ship transfers (Correct answer)
- AIS data is required by OFAC for all vessel licensing applications
- AIS is the standard format for vessel cargo manifests
Correct answer: AIS transponder data allows compliance teams to track vessel movements and identify sanctioned port calls or ship-to-ship transfers
AIS transponder data provides real-time and historical vessel location information, enabling compliance teams to detect when vessels have called at sanctioned ports, conducted ship-to-ship transfers, or engaged in other suspicious behaviors.
Question 4: In the context of trade-based sanctions evasion, 'transshipment' refers to:
- Shipping goods through a non-sanctioned third country to disguise their origin or ultimate destination (Correct answer)
- The process of transferring cargo between ships at sea
- An ICC Incoterms delivery arrangement
- Re-packaging goods to change their HS tariff classification
Correct answer: Shipping goods through a non-sanctioned third country to disguise their origin or ultimate destination
Transshipment as a sanctions evasion technique involves routing goods through a third, non-sanctioned country (a 'transit hub') to obscure that they originated from or are destined for a sanctioned country.
Question 5: Which financial institution action is required when it receives a SWIFT MT202 COV (cover payment) where underlying payment information reveals a sanctions concern?
- Process the MT202 COV since the sanctioned party is not a direct counterparty
- Hold the MT202 COV and investigate the underlying transaction details to determine if blocking or rejection is required (Correct answer)
- File a CTR and process the payment normally
- Transfer the funds to a blocked account without investigating the underlying payment
Correct answer: Hold the MT202 COV and investigate the underlying transaction details to determine if blocking or rejection is required
MT202 COV messages contain underlying payment information that must be screened — financial institutions cannot ignore sanctions red flags in underlying payment data even if the direct counterparty appears clean.
Question 6: Which red flag is most indicative of potential sanctions evasion in a trade finance transaction?
- The buyer and seller are in different countries
- The goods described are inconsistent with the known business of the buyer or seller, or the transaction route is illogical (Correct answer)
- The transaction currency is U.S. dollars
- The transaction uses a standby letter of credit
Correct answer: The goods described are inconsistent with the known business of the buyer or seller, or the transaction route is illogical
Goods inconsistent with a party's known business profile, or transaction routes that make no commercial sense (e.g., routing through countries with no logical connection to the trade), are strong red flags for potential sanctions evasion or TBML.
CSS CSS Correspondent Banking & Trade Finance 2
Which type of trade finance instrument is most vulnerable to sanctions evasion through over- or under-invoicing of goods?