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:
- Deal
structure
- Goods
- Countries
- Payment
instructions
- Repayment
arrangements
- LC patterns
- LC
Counterparties
- Document
discrepancies
- Discrepancies
waived
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
Kim
Extra
reading material:
- Pocket
guide for international trade: Sanctions and Compliance (App in Apple Store and
Google Play)
- FCA report:
Banks’ control of financial crime risks in trade finance
- The
Wolfsberg Trade Finance Principles (2011)
- EU
Directive 2005/60/EC – on the prevention of the use of the financial system for
the purpose of money laundering and terrorist financing
- APG
Typology Report on Trade Based Money Laundering (20 July 2012)