New guidance on preventing financial crime in trade finance | Wolters Kluwer Financial Services
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  • New guidance on preventing financial crime in trade finance

    By Michael Imeson

    Published March 07, 2017

    Money launderers, terrorist financiers and sanctions busters beware – new efforts are being made to reduce financial crime in trade transactions. Michael Imeson explains.

    Global banking organisations have updated their guidance for banks on how to detect and prevent financial crime carried out in the course of trade finance transactions. The Wolfsberg Group, the Banking Commission of the International Chamber of Commerce (ICC) and the Bankers Association for Finance and Trade (BAFT) published the new advice in January 2017.

    The new paper, entitled, The Wolfsberg Group, ICC and BAFT Trade Finance Principles, sets out the standards that banks should follow to control financial crime risks in domestic and international trade finance – crimes such as money laundering, terrorist financing, the financing of the proliferation of weapons of mass destruction, fraud, tax evasion, bribery, corruption and sanctions breaking.

    What has changed is that the guidance now provides a lot more detail in several areas, namely:

    The financial crime risk mitigation measures banks should be taking.

    Section 1, Core Principles

    This section, as in the 2011 paper, defines trade finance, explains the parties involved in trade transactions and outlines the financial crime risks (FCRs). It goes on to explain how banks should carry out risk assessments on customers and transactions, taking into consideration the type of customer relationship, country factors (such as sovereign risk and the Financial Action Task Force’s Deficient Countries list); what sort of controls banks should apply to check customers and trade transactions; and how to record decisions made.

    Finally, it makes several recommendations for banks, governments, trade bodies and transport companies to share information with each other to help counter the threat of financial crime without breaking any laws on data privacy and the client confidentiality. Such information includes lists of internationally sanctioned entities and individuals, and the latest techniques used by criminals to launder money or commit other trade finance crimes.

    Section 2, Control Mechanisms

    This section provides more details on the controls banks should be using to counter trade finance-based financial crime, namely:

    • Customer Due Diligence (CDD). This entails understanding a trade account customer’s business model, its main counterparties, the countries where its counterparties are located, the goods or services exchanged and the annual volumes and values of those goods and services. Enhanced CDD may be required “where higher risk circumstances are recognised”.
    • Name screening. This entails having an effective screening system in place to compare information on trade transactions with names of individuals and entities on sanctions lists. Banks must have access to the relevant lists. They must reduce the number of false matches, also known as “false positives”, created when names of customers are similar to names on sanctions list, as too many false matches can obscure true matches.
    • Activity-based financial sanctions. Banks should be aware of UN resolutions “on the proliferation of nuclear weapons, WMD, dual-use goods” and of national laws and regulations based on these resolutions. Sources of information on this include the UN Security Council Resolutions and the Financial Action Task Force. Again, banks should have “robust list management processes and procedures in place” to reduce the number of false matches.
    • Export controls. Where a highly structured trade finance transaction is concerned, or where enhanced CDD is being conducted, it may be appropriate for the bank to obtain assurances from the customer that the required export licences have been obtained. Banks are not normally expected to determine whether an export licence is required or obtained, but in these circumstances, they should.

    Section 3, Escalation Procedures

    It is one thing to look out for warning signs of financial crime; but what should be done when signs are spotted? How should the matter be escalated up the chain of command? The answer, according to the revised guidance, is that the response should be based on the “three lines of defence model” used in risk management. The first line of defence resides in the front line business operations; the second line of defence is the risk management oversight function; the third line is the internal audit department.

    To apply the three lines of defence, the paper provides a flow chart showing the first line of defence detecting a potential crime, and then investigating it. If suspicions remain, the first line refers the matter to the second line for escalation, investigation by the experts – in the case of suspected money laundering the expert would be the money laundering reporting officer (MLRO), and if the MLRO has good reason to believe a crime is being committed he or she refers the transaction to authorities. The independent third line of defence will periodically review the escalation process to ensure it is working properly.

    Section 4, Glossary

    This is simply an alphabetical list of terms used in trade finance. For example, it describes the Financial Action Task Force (FATF) as: “An inter-governmental body established in 1989 by the ministers of its member jurisdictions. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system…The FATF has developed a series of Recommendations that are recognised as the international standard for combating money laundering and the financing of terrorism and proliferation of weapons of mass destruction.”

    Expert opinion

    Like many other Wolfsberg papers, the updated Trade Finance Principles were published with little fanfare and received little press attention,” says Simon Lovegrove, Head of Financial Services Knowledge – Global, at law firm Norton Rose Fulbright. “However, the background to the paper is interesting. As noted in the foreword, many banks generally see the Wolfsberg Principles as voluntary guidance for the ‘large banks’ only but to counter this and also make them applicable to ‘smaller local banks’ the updated Trade Finance Principles have been published in the style of ICC guidance, with input from the Wolfsberg Group of banks, ICC members and BAFT.”

    Mr Lovegrove refers to the Financial Conduct Authority’s thematic review on “Banks’ control of financial crime risks in trade finance” published in 2013, which urged banks to follow guidance published by bodies such as the Wolfsberg Group and FATF. “In light of this,” says Mr Lovegrove, “banks of all sizes need to carefully read the latest version of the Principles and update their AML policies and procedures appropriately.”

    Financial crime will never be eradicated. But if banks get better at detecting and preventing it, at least it can be contained.

    About the author: Michael Imeson Chartered MCSI is Contributing Editor of The Banker magazine; Senior Content Editor at Financial Times Live where his role is to organise and/or chair events on financial services; and the owner of editorial services agency Financial & Business Publication. Michael is also a regular contributor to Wolters Kluwer’s Compliance Resource Network.


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