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.
(http://www.fca.org.uk/news/tr13-03-banks-control-of-financial-crime-risks-in-trade-finance)
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.
Best
regards
Kim
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 …