Compliance In Trade Finance Due Diligence
For many years companies have used trade finance instruments in order to manage risks when exporting and importing goods internationally. Trade finance ensures that cross-border business is protected against late payments, delayed delivery, geopolitical instability, currency fluctuations and other known and unknown risk factors.
Given continuing risks to trade caused by, for example, turmoil in the Ukraine, the eurozone crisis, and tensions in the Middle East and South America, compliance in trade finance due diligence is a must for multinational corporations (MNCs). But today, being prudent is about more than just managing operational and market risks – it’s about compliance. Compliance in trade finance due diligence relates to:
- Know your customer (KYC): Verifying counterparties (corporations and banks) as part of “know your customer” regulations.
- International sanctions: Ensuring that all parties to a transaction undergo a “sanction screening”, using complex matching algorithms against official sanction lists, including the Office of Foreign Assets Control (OFAC), the European Union (EU), and the United Nations (UN).
- Anti-money-laundering (AML) and Counterterrorist financing (CTF): Detecting and preventing money laundering and terrorist financing by using “red flags” and IT supported behavioural profiling techniques, and reporting suspicious activities to the authorities.
- Dual Use Goods: Preventing that the transaction include non-proliferation, weapons of mass destruction and dual use goods (including software, technology, documents and diagrams) which can be used for civil and military purpose by using “red flags” and IT supported screening methods, and reporting suspicious activities to the authorities.
Reduced Risk is Not the Only Benefit
Banks take these regulations seriously – those that fail to meet their obligations have suffered fines, in some cases of more than a billion US dollars. But what does compliance in trade finance due diligence mean for organizations involved in international trade?
Compliance in trade finance due diligence is clearly an important part of risk management – it can help you achieve your original objective of reducing risk and doing business more efficiently, as well as helping you live up to your own standards for corporate social responsibility. When your bank checks that your trade partners are not on any sanctions lists and that their banks are legitimate, it gives you reassurance that you can trade with confidence.
What Compliance In Trade Finance Due Diligence Involves
Compliance regulation has a very real effect on how trade finance transactions happen. For instance, KYC involves many checks both during new transaction setup and periodic review. Before a trade finance provider can proceed with a transaction, it needs to obtain a long list of documents from the organization, investigate its legal structure, screen for politically exposed persons (PEPs), score and classify risk, and archive the reviewed documents. Getting hold of the required documents in a timely manner can be challenging, particularly in emerging markets where banking and trading environments are historically less structured.
Transactions are also scanned in real time for sanction violations and suspected money laundering, with many different parties investigating alerts and reporting to the relevant authorities. It is a thorough and intensive process.
What to Look for in a Trade Finance Provider
Companies might be naturally be concerned that these checks will slow transactions down, add extra costs, and even result in transactions being mistakenly blocked due to excessive caution.
It does not have to be that way. Compliance in trade finance due diligence, when managed effectively by your trade finance provider, can actually be a facilitator for international trade.
A good trade finance provider should also continually be optimizing its global network of banks – ceasing to deal with those that do not meet the necessary standards, and deepening its relationship with those that are a safe partner for clients and their trading counterparts. A good provider needs to know each bank in its network thoroughly, and should be able to verify that its banks offer responsive, accurate service and financial stability. These are all important factors when you are completing a major transaction in a distant region.