The sector in brief
Commodity brokers arrange the purchase and sale of commodities such as metals, energy and agricultural products on behalf of clients. They may deal on exchanges or arrange private trades. Their clients are often traders, producers and funds, and the transactions often cross several borders.
Trade-based money laundering is the central concern. Because genuine trade involves large movements of goods and money across borders, criminals can mix illicit funds into it by misrepresenting the price, the quantity or the quality of goods, or by making payments through third parties.
Brokers are close enough to the transaction to see when the economics are strange. Supervisors expect them to use that view, and to ask when a price, a route or a counterparty does not make sense.
Where the risk sits
Over- and under-invoicing
Pricing goods above or below their real value allows funds to move from one party to another under the cover of a trade.
Phantom or multiple shipments
Invoicing for goods that never move, or using the same shipment to justify several payments, creates a paper trail for money with no underlying trade.
Third-party payments
Settlement by companies other than the buyer and seller, or into accounts in unrelated countries, is a classic feature of trade-based laundering.
High-risk goods and routes
Some commodities, such as gold and oil, and some routes through high-risk or sanctioned countries, carry extra risk.
Opaque counterparties
Newly formed trading companies with few staff and little history appear frequently in suspicious trades.
Who supervises you
Commodity brokers are supervised by the Capital Markets Authority onshore. Brokers dealing in other zones answer to the regulator that licensed them. If you deal in precious metals as a trader, see the page on precious metals and stones dealers as well.
The supervisor decides the detailed rules for your licence category, so always read its current guidance alongside this page.
What supervisors expect
- A compliance officer or MLRO who understands commodity trade and has authority to stop a deal.
- A business risk assessment covering products, counterparties, routes, countries and payment methods.
- Client and counterparty due diligence, including owners and controllers, with extra checks for newly formed or opaque companies.
- Understanding of the commercial logic of each deal: who is buying, why, at what price, and how it will be shipped and paid for.
- Sanctions screening of clients, counterparties, vessels and countries, with documented review of matches.
- Monitoring of trading and payments for mispricing, third-party settlement and unusual routes.
- Reporting through goAML, training, record keeping and independent testing.
Red flags to watch
- A price that differs sharply from the market with no explanation.
- Payment from or to a company that is not party to the contract.
- Shipping routes that make no commercial sense.
- A counterparty that is newly formed and handles very large deals.
- Requests to change documents, amounts or payment details late in the deal.
- Goods described in vague or inconsistent terms.
A worked example
A deal priced well below the market
A client asks a broker to arrange the sale of a cargo of metal to a buyer in another country at a price noticeably under the market, and asks for payment to be made to a third company. The broker asks why the price is so low and why the buyer is not paying directly. The answers are vague. The broker declines to proceed until shipping documents, contracts and ownership of the payer have been provided, records the discussion and, if the information does not satisfy it, the compliance officer considers a report.
How Adventant helps
Questions answered
What is trade-based money laundering?
The use of trade transactions to move value across borders and hide the origin of funds, for example by misdescribing goods or prices. It is a main concern in a trading hub.
How can a broker spot mispricing?
By comparing the price with market benchmarks and asking for an explanation of any large difference. A broker should keep records of the comparison and the answer.
Do we have to check the vessels and routes?
In proportion to the risk, yes. Sanctions exposure often shows through vessels, ports and countries, not only through the names of the parties.
Can we accept payments from third parties?
Only with a clear reason and extra checks. Many firms refuse them unless the payer is verified and its connection to the deal is understood.
How does this relate to precious metals rules?
If you deal in precious metals, you may also fall under the rules for dealers in precious metals and stones. Check how your licence describes your activity.