The Overpriced Dyeing Machines
Harbour Bank's trade finance desk receives a documentary credit application from Lankara Garments Ltd for USD 1.8 million to import 'industrial dyeing machines' from a supplier in a free-trade zone. The supplier and Lankara share a director, and the invoice price is about 40% above the bank's reference price for comparable equipment. The bill of lading shows the goods were originally manufactured in a country subject to an arms embargo, and the HS code on the invoice could cover both textile machinery and certain dual-use components. The documents also show the goods will be transshipped through a port with weak customs controls. The applicant asks Harbour Bank to negotiate documents 'as presented' because the shipment must sail tomorrow. The relationship manager notes the customer has a clean 5-year record and the discrepancy is only 'a documentation issue'. The bank's trade-based money laundering policy requires escalation of price anomalies, related-party transactions, and dual-use goods. The compliance officer must decide whether to process the documents and whether to report.
1. Identify the red flags and explain why treating the matter as a documentation issue is inadequate.
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Red flags
The supplier and the applicant share a director, so this is a related-party transaction. The invoice is about 40% above the bank's reference price, which is a classic over-invoicing indicator: value can be moved out of the applicant's country through an inflated import price. The goods originate in an arms-embargoed country, the HS code may cover dual-use components, and the route includes a weak-customs port. The urgency and the request to negotiate 'as presented' increase pressure to bypass controls. A five-year clean record is context, not a defence.
Why 'documentation issue' is inadequate
Calling the matter a documentation issue separates the papers from the underlying trade and ignores the bank's TBML policy, which expressly requires escalation of price anomalies, related-party transactions and dual-use goods. Documentary compliance and AML compliance are not alternatives. The documents could be internally consistent and still support a prohibited shipment or an over-invoicing scheme. The correct approach is to resolve the substantive questions before processing, not to negotiate first and investigate later.
2. Decide whether Harbour Bank should process the documents and whether it should report. Include how to handle confidentiality and any correspondent bank.
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Processing decision
Do not process the documents as presented. Require a technical description of the machines, the exact HS classification, an end-user certificate, the manufacturer and the ownership chain of the supplier, and an explanation of the price difference against independent references. Check the vessel, ports, parties and goods against sanctions and dual-use lists. If the documents are discrepant, return or refuse them in the ordinary way and record the discrepancy. If the goods are prohibited or the explanation is unsatisfactory, do not finance or negotiate the credit.
Reporting and confidentiality
If suspicion remains after enquiries, file an STR with the FIU and avoid tipping off the customer. Inform the relationship manager only on a need-to-know basis and instruct them not to warn the customer. If a correspondent bank is involved, provide the information it requests without disclosing the STR or the bank's internal suspicion analysis. Record the technical advice obtained, the enquiries made, the discrepancies and the decision. The customer's sailing deadline does not override these steps; a missed shipment is preferable to facilitating a prohibited or criminal transaction.