Focus on Trade Finance Fraud
Recent years the area of compliance within Trade Finance has simply been booming. In that respect "compliance" is understood to be "regulatory compliance" - basically covering:
* KYC procedures
* Sanction management
* Measures to prevent money laundering
* Measures to prevent terrorist financing
* Measures to identify dual use- and embargoed goods
Most banks today have processes in place in respect of the above. Of course more or less robust - but all are somehow on the agenda of the banks.
What is interesting is that only few banks have any structured process in place specifically addressing fraud.
Playing the devils advocate one could argue that banks do exactly what they have to – and not one step more than that. They have to have good KYC and AML procedures in place because the law forces them to - and increasingly the local regulators follow up on how well the banks do this. This has resulted in warnings and fines to some of the big banks.
Turned around: There is no (external) pressure on the banks fraud procedures - hence not really on the agenda!
That is indeed surprising: Fraud is actually a direct threat on the banks. A successful fraud may mean that the banks will loose money - and reputation. So there should be good incentive indeed.
The good news is that there are two basic "tools" to combat and identify fraud:
1: Robust KYC procedures, i.e. that the banks (and their customers) knows well the parties they work with.
2: "Red Flags" - i.e. warning signs allowing banks to identify the customers and transactions to investigate further.
Why is this the good news you may ask? It is good news because it is the same basic tools used to identify potential money laundering and terrorist financing, and many banks have that in place already. In fact the Red Flags overlap to a large extent.
However, what is important to understand is that the structures of money laundering versus terrorist financing versus fraud are not the same. Thereby the dynamics and drivers are not the same. Thereby the Red Flags may not be used 1:1.
Let me explain:
* Money laundering is about turning money obtained via illegal activities legal. A successful money-laundering scheme may never be detected.
* Terrorist financing is about channelling money (legal as well as illegal) to terrorist organisations or persons. This may be directly to a terrorist organisation – but it may also be to the bereaved family.
* Fraud is the crime of using dishonest methods to take something valuable from another person. A successful fraud will mean that someone loses something (goods or money).
As can be seen the structures are different. What is similar however, is that the Trade Finance customer has a big responsibility in seeking to prevent this. I have experienced more than once that a customer have asked for my support in a transaction that seemed "too good to be true". I did not support it - because it was indeed too good to be true.
But, also here the Trade Finance customer should have good incentive in preventing this: They are directly at risk of loosing money and/or the goods.
On the basis of the above it is recommended that banks ensure that fraud is on their radar - and preferably address it clearly in their compliance checks directed towards money laundering and terrorist financing.
In my new book "From A to UCP" (available end April) there is a chapter in Fraud in Trade Finance.
The "lcviews White Paper on Trade Finance Compliance" offer an approach to identifying money laundering and terrorist financing - including an outline of the relevant Red Flags.
I hope this will help you making Trade Finance a little bit safer and urge you to take care of the LC. It needs it more now than ever.
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