I am high risk! – Part 2
I know that I have touched upon this topic before – but I feel an urge to do so again.
Recently I took part in a meeting. In the meeting a couple of “compliance people” attended. Those have no direct Trade Finance background – but are working with compliance within Trade Finance.
The opening statement of the meeting was something like this:
The Trade Finance products are “high risk” – this is stated in a number of reports. Since the payment area is getting more and more regulated, fraudsters and money launderers have now chosen Trade Finance as their primary choice when conducting their illegal business.
Wouww. Let me repeat: Wouww. And Wouww again.
I listened further and found that a main source for this view is a reading of the thematic review of Trade Finance issued by the FCA – Financial Conduct Authority who is the financial regulator in the UK.
The report mentions a number of reasons for conducting the review.
First of all because of the misuse of international Trade Finance, which apparently is one of the ways criminal organisations and terrorist financiers move money to disguise its origins and integrate it into the legitimate economy.
There is nothing in the report to support this statement. Rather the Wolfsberg Trade Finance Principles (2011) includes the following statement: “It does not however believe that currently there is sufficient evident to support an assessment of this area as high risk for AML/Sanctions purposes.”
One would even argue that the Trade Finance instruments might not be the most efficient ways if one wants to do foul play. Applicants are carefully scrutinized by the issuing banks – and every transaction leaves a long paper trail.
Secondly because of the complexity of the transactions and the huge volume of trade flows which can hide individual transactions and help criminal organisations to transfer value across borders.
Admittedly if one views Trade Finance from the “outside” it may look very complex, but for the Trade Finance Officers it is not complex at all. 95 per cent are simple trade transactions where goods are shipped and paid for – via a bank. Volumes? Perhaps – but bear in mind that within Trade Finance there is no “Straight Through Processing.” Every transaction is processed individually. Human eyes have looked at every transaction. The same cannot be said for the payment area.
Thirdly because financial institutions have gradually introduced increasingly effective controls to combat more traditional methods of money laundering and terrorist finance, and world trade has grown, and therefore it has become more attractive to criminals to use Trade Finance products.
This argument is hard to understand; more controls should logically make it less attractive for criminals to use Trade Finance products.
Concluding the above, it is fair to say that the thematic review carried out by the FCA is based on questionable – or directly wrong – arguments, and it is really sad that those wrong arguments are being expressed as universal truths.
Till date I have seen no evidence to support the statement that Trade Finance is a main source for money laundering.
I do not dispute that the examples are there – but if anyone has real figures showing the share of money laundering within Trade Finance I am eager to hear.
Till date I have not had any convincing arguments that the Trade Finance products (LCs, Collections and guarantees) in itself are “high risk.” I do acknowledge that some Trade Finance transactions are high risk – but that is because of the countries involved, the commodity involved – or the structure of the transaction.
Till date I have heard no convincing arguments as to why the risk of the Trade Finance products are higher than the payment/cash management products.
Within Trade Finance the bank has the option to check the commercial documents for sanctions and red flags. Within the payment area information are scarce – and the underlying documentation is not available to the banks.
I so look forward to the time when the issues of compliance can be discussed in a mature way – based on facts and knowledge. And not on fear and ghosts – as is the case today…..
Something to think about during the weekend …. Take care of each other and the LC.
Ps. Just for the sake of good order: I am not arguing that the Trade Finance banks should not relate to compliance. Surely there are room for improvement; much needs to be done – and the FCA report is not a bad place to start. I just think that the factual basis should be correct …
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