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Bills of Collection

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Bills of Collection- Core Insights

  • Bills of collection refer to a trade finance service designed for the settlement of payment obligations between buyers and sellers.
  • The key TBML techniques involving documentary collections are over/under-invoicing, phantom shipments, and duplicate bills.
  • Common challenges include over-reliance on automated screening tools and difficulties in balancing commercial speed with AML scrutiny.
  • AML Consultants UK help with AML compliance and reduces the risk of bills of collection by delivering TBML-focused risk assessments, AML training, and drafting policies and procedures.

What Are Bills of Collection in a UK AML Law

Bills of collection refer to a document used by banks or agents to collect money from someone on behalf of the seller. Bills of collection are trade finance tools used in commercial banking, where banks act as middlemen and ensure that the seller gets the money and the buyers receive the goods.

The documentary collections operate with four key parties, including:

  • Exporter: the one who ships the goods and provides the documents to the bank.
  • Importer: pays the bank or accepts the bills of exchange to receive the goods.
  • Remitting bank: the bank of the seller of the goods, which sends the documents and collection instructions to the importer’s bank.
  • Collecting bank: the importer’s bank that receives documents and instructions, which request payment from the importer and releases the document when the payment is made.

The difference between bills of collection and letters of credit from a financial crime risk perspective is that letters of credit offer guaranteed payments and carry more ML/TF risks, whereas bills of collection act as an agent and don’t guarantee payments and pose lower risks for banks.

UK-regulated firms that are handling documentary collections fall within the scope of AML obligations whenever they handle trade payments or act on behalf of customers.

UK firms handling bills of collection are under the supervision of the FCA, which requires them to implement a risk-based approach to ensure regulatory compliance.

How Can Bills of Collection Be Used for Trade-Based Money Laundering in the UK?

The key examples of how bills of collection are used for TBML in the UK are as follows:

  • The common misuse techniques involved using over/under invoicing (pricing goods higher or lower than the original value), phantom shipments (goods shipped only on documents and not in reality), and duplicate bills (using the same shipment bills multiple times), as banks only rely on documents and not on physical goods, and documents can be forged easily.
  • The UK authorities often see the higher TBML risks in goods that include electronics, textiles, or commodities, as they carry high-value, small in size, which makes them easy to move, and they are often hard to price accurately.
  • The banks rely heavily on the documents in bills of collection and don’t check the authenticity of trade, which makes them more vulnerable to TBML.
  • Criminals often manipulate shipping documents, falsifying bills of lading and creating invoice discrepancies indicating ML/TF risks.
  • Bills of collection involve multiple cross-border jurisdictions where AML laws are weaker, and a lack of transparency results in increased risks.

What UK AML Laws and Regulatory Expectations Apply to Bills of Collection?

The regulatory expectations applied to bills of collection include:

  • Under the Money Laundering Regulations 2017, and the Proceeds of Crime Act 2002 (POCA), the firms handling bills of collection must apply a risk-based approach, conduct customer due diligence, ongoing monitoring, and report suspicious activity to prevent money laundering.
  • The trade finance clients must apply customer due diligence and enhanced due diligence to identify and verify the importers and exporters, and implement extra checks on high-risk areas.
  • The Financial Conduct Authority (FCA) expects firms to implement effective financial crime systems and controls, including a risk-based approach, to prevent the risk of TBML.
  • The Joint Money Laundering Steering Group (JMLSG) provides guidance on how to implement AML/CFT controls, KYC/CDD, and ongoing monitoring to prevent ML/TF risks.
  • The firms must also identify and verify beneficial ownership and report the suspicious activity detected; failure to do so can result in regulatory enforcement.

What Are Effective AML Controls for Firms Handling Bills of Collection?

The effective AML controls for firms handling bills of collection include:

  • The firms must conduct trade-finance specific risk assessments across jurisdictions, products and services offered, and customer profiles, which enables firms to address or prioritise high-risk more.
  • Bills of collection transactions rely on documentation; firms should also implement detailed document verifications, including invoice consistency checks, shipping verification, and third-party data validations, which help in identifying misinterpretation of goods.
  • The firms should monitor suspicious transactions and patterns such as unusual trade volumes, repeated amendments (multiple changes in invoices), or circular trade patterns (same goods moving multiple entities).
  • Firms should implement screening controls that extend beyond just the customers and watch out for hidden counterparties, vessels, and shipping routes.
  • The firms should have strong governance and oversight to identify risks linked with bills of collection. The Money Laundering Reporting Officers (MLROs) have clear authority to review high-risk trade activities; there should also be clear escalation procedures for high-risk, and the staff must get specialised TBML training to identify red flags and manage risks effectively.

What Compliance Challenges Do UK Firms Face with Documentary Collections?

The compliance challenges that UK firms often face with documentary collections:

  • The key challenges include operational inefficiency in verifying the underlying commercial reality of trade versus document-based review, as bills of collection use document-based review, which makes it difficult to identify whether the trade actually exists or if the goods are correctly valued.
  • Supervisors have raised concerns about over-relying on automated screening tools, which sometimes fail to detect TBML risks. The supervisors expect firms to complement automation with a manual, risk-based approach, especially for the high-risk trade scenarios.
  • The challenges also include detecting sophisticated TBML schemes embedded in legitimate trade, where the involved companies and documents appear real and goods actually exist, but criminals exploit them, making it difficult to distinguish between normal trade activities and laundering schemes.
  • Regulators have repeatedly identified insufficient EDD in cross-border trade due to limited understanding of counterparties, inadequate assessments, and failure to escalate the unusual trade risks.
  • Firms often face challenges balancing commercial speed with AML scrutiny, as moving too quickly can lead to missed red flags and risks, while excessive checks can delay processing and create operational inefficiencies.

How AML Consultants UK Can Help with Bills of Collection AML Compliance

AML Consultants UK help with AML compliance in bills of collection and trade finance by delivering TBML-focused risk assessment, which is designed for documentary collection processes, allowing firms to implement extra checks on high-risk areas.

They provide practical support through their services, such as AML audits, AML policies and procedures drafting, AML training, and MLRO support, to ensure that the staff are equipped to detect suspicious activity effectively.

AML Consultants UK support FCA-regulated firms to prepare for financial crime reviews in trade finance operations, which enables firms to meet the regulatory expectations.

They also help in analysing gaps and provide controls enhancements and remediation where required, specific to documentary trade instruments.

FAQs on Bills of Collection

Bills of collection are considered high-risk under the Money Laundering Regulations 2017, due to high funds volumes, cross- border payments, over-reliance on trade documents, and potential use in TBML.

The AML checks applied to documentary collections in trade finance include customer due diligence, enhanced due diligence, ongoing monitoring, and reporting of suspicious activity.

Yes, enhanced due diligence is required for high-risk trade jurisdictions.

The red flags that indicate TBML in documentary collection transactions include over/under invoicing, phantom shipments, duplicate bills, unusual trade volumes, or transactions involving high-risk jurisdictions.

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