Compliance – revisited

Lately – I have been working – again – with compliance. And again I have to acknowledge the good old truth: The more you know – the more you don’t know!


But let me start somewhere else. When you read about compliance versus trade finance you are told that trade finance is a “high risk area” – i.e. in respect of money laundering terrorist financing and breach of international sanctions. Nowhere however I have seen any evidence supporting that. In fact I have seen only few of such cases – less than one per year I have worked within this area.


And the interesting thing is that about 80 per cent of world trade is carried out under open account. This is where the bank will only see the payment message!

At least when it comes to trade finance – the transaction will be established with parties that are known to the banks – and the banks will have access to the full trade documentation. So in fact it is much harder to hide any suspicious activity in – for example – and LC compared to open account ….


Does this mean that there is no risk? And that nothing should be done? Of course not! But my point is that when you view trade finance from the outside – without detailed knowledge of how it works – with the perception that it is “high risk” – then it looks really really dangerous – perhaps better to shut it down all together. This of course is not the right approach. The right approach is to make a good and solid risk assessment – and migrate the identified risks in good and solid ways ….


But let’s return to what I do not know:


Last time I worked with compliance it was basically related to sanctions – and how to do compliance checks against the various sanction lists. I found this really difficult and complex. Now – coming back to this I find that this is actually the easy part! This is basically checking parties, entities, persons, companies and vessels against the identified lists. Of course doing it may be tricky. Some can be done automatically (like the MT700 swift message) – but how to identify only the “right” hits? Some is done manually – but that is a (hmm) manual and cumbersome process. Ane how to handle the “hits.” So of course this is not a walk in the park ….


However it almost is when you compare it to doing anti money laundering. Here there are lots of parameters that may be really hard to deal with. Take a look for example at “The Wolfsberg Trade Finance Principles (2011)” (page 20), which lists some “risk indicators” under the following headlines:



For example the payment structure is “illogical” – i.e. payment is to be made to a country that makes no sense in terms of the transaction…


These things – these “red lights” are hard to catch because it is the trade finance officers doing the transaction that are to catch – and report it. And these days the trade finance officers are under extreme pressure for speed and efficiency.


But it gets worse … because there is also the issue of “dual use goods.” I.e. goods that may be used for weapons of mass destruction. Now that is difficult to identify ….. especially if you are a banker with little knowledge of specialised commodities.


So the more you drill down the harder it gets … and that got me thinking! Of course banks should take appropriate measures to prevent all of the above. That being said it seems to me that the regulators use the bank as their extended arm for these things … and of course punish banks if they do not do this well. Somehow this is not right. I have said it before, and I will say it again: there is a massive lack of good “compliance practice!”

For example I would argue that if the regulators want to exercise this kind of control – they should do so themselves – and (for example) issue an “export permit” each time they have approved a transaction, that the customer can present to the bank proving that counter parts, goods, prices etc. has been checked and approved.


The above is not likely to happen … but if things are not to get worse, then banks must unite and speak with one voice. Local, regional and international.


Take care of each other and the LC - and have a great weekend.


Best regards




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