How ”risky” is Trade Finance actually?
How ”risky” is Trade Finance actually? And what are the factors determining the appropriate risk level?
The new “Wolfsberg Group, ICC and the BAFT Trade Finance Principles” phrases it like this:
“There is a perception that Trade Finance is a “higher risk” area of business from a financial crime perspective, therefore, all FIs involved in Trade Finance should have risk policies and controls which are appropriate for their business. FIs should have an end-to-end FCR management programme, which can be applied to Trade Finance and the specific products and transactions outlined in this paper.”
The “lcviews White Paper on Trade Finance Compliance” phrases it like this:
“The premise for this document is that it is misleading to label Trade Finance as being particularly risky. Although, Trade Finance activity is sometimes referred to as being “High Risk”, it is misleading to consider activities under this as “High Risk” per se. As described in chapter 1, “Trade Finance Risk evaluation”, the level of risk will depend on how the products are being used by the individual bank; and this risk-based approach should be the basis for the controls that the individual banks have in place.”
I have worked intensively with Trade Finance for 20+ years and I have never seen the evidence that it is High Risk from a financial crime perspective. Of course I have seen fraud cases and fraud attempts – but extremely few compared to the total volumes. And hardly ever any cases of money laundering!
In that respect I will add another quote from “The Wolfsberg Group, ICC and the BAFT Trade Finance Principles”:
“Trade Based Money Laundering (“TBML”) has become a widely used term. It covers a broad spectrum of financial and other services, including those financial services referred to as Trade Finance, but also transactional activities across current and deposit accounts and payments for example, which are not in the purview of Trade Finance operations of FIs…”
Notwithstanding the above there is more than a perception that Trade Finance is High Risk from a financial crime perspective. It is actually regarded as a fact.
This has a negative impact on Trade Finance departments around the world. And that is a fact!
Take care of each other and the LC.
The Wolfsberg Group, ICC and the BAFT Trade Finance Principles
lcviews White Paper on Trade Finance Compliance