The recovering global economy and increased trade to emerging markets are boosting trade finance activities at banks, but that is in turn leading to new opportunities for criminals to launder money and conduct other illicit activities through international trade, says Bob McKay, managing director of Accuity.
Banks have been heavily focused on anti-money laundering (AML) screening in processing international transactions, and regulators have pushed banks to increase their controls and monitoring in that area. In comparison trade finance is a ripe target for criminals, McKay points out, as most banks still rely heavily on manual processes for compliance screening in their trade departments.
“If you’re a criminal, it’s understandable to look at trade finance as an opportunity. Screening is still paper-based, and most of it is done post-facto,” McKay shares.
[For More On Compliance in Banking, Check Out Our 2014 Regulatory Forecast: The New Year in Regulation and Compliance]
Automating screening in trade finance could help please regulators and customers, who are turned off by the delays normally associated with paper-based processes, McKay says. And those customers can usually take their business to competitors if they’re dissatisfied, he adds.
Regulators are increasingly looking for due diligence in monitoring for over or under-invoicing of goods for evading taxes or laundering money, and for tracking dual-use goods, items that could have both legal or illegal uses, such as fertilizer components, he adds.
To successfully monitor for such activities, “banks could leverage account and transaction screening processes… that can plow through input data, and compare those to sanctions data. Those could be expanded to include real-time data on commodity lists and pricing,” McKay notes.
In addition to an audit trail, regulators want to see that banks have properly trained staff, have defined compliance procedures and are tracking valuations and decisions, according to McKay.
U.K. regulators released a white paper last year with guidance on how banks can improve their trade finance screening, and McKay says he expects other countries to soon follow with similar guidance.
As with screening in financial transactions, much of the hard work in trade finance screening can be done up front when the customer is initially on-boarded. Banks should understand the nature of the client’s business -- whether they’re an importer or exporter, and what goods they usually trade. That understanding can form the basis of risk profile for each customer, McKay notes. And it will help banks find potential red flags when the customer is conducting business outside of its normal patterns, such as trading new types of goods, or shipping to new destinations, he adds.
While banks have pulled out of some businesses due to increased compliance risk in those areas, trade finance is becoming an increasingly important source of profit for them. They can’t afford to ignore a market where profit margins are still high, as margins in other businesses are being squeezed, McKay advises.
“These are typically your core corporate customers that you’re dealign with. Most trade finance is happening through open accounts. I expect to see banks becoming more diligent about those customers… and raise the importance of understanding them for compliance,” he predicts.
Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio