Trade Finance Compliance: Lessons for the Middle East

Over the past decade, the compliance function of a bank has
largely been seen as managing the customer relationships, from on-boarding to
payments.  Global sanctions, politically exposed persons, and other high-risk
entities have been the primary focus for compliance officers but increasing
regulatory pressure has put greater emphasis on the trade finance areas of a

One of the growing profit centres for a bank, this heightened
attention is bringing increased pressures, and time delays to trade finance
functions globally. In the Middle East, shipping, payment and receiving areas
and the content of goods shipped, all need to be particular areas of focus for
compliance officers.

Entity Compliance

Entity compliance refers to the screening and risk associated with the
parties involved in the trade finance transaction.  It begins with initial
screening of the entities, encompasses the payment of funds and extends all the
way through to who is handling the goods.  For many years, this has been an
area which has been identified as one which the compliance function of a bank
should implement more controls over.  However, internal processes have often
delayed this. 

One such delay is how the financial industry is
gathering entity information during the exchange of a transaction.  Instead of
traditional electronic data gathering methods, this area is still dominated by
paper documents. Globally, bills of landing, letters of credit, and other
documents are utilised in this area instead of open account transactions as
organisations view them as guaranteed trade financing tools. Therefore, unlike
other bank operations that implement digital data gathering methods, trade
finance has allowed entities to circumvent traditional anti-money laundering
(AML) screening in account on-boarding and payments. 

governments and transnational institutions are pushing financial organisations
to do more to prevent trade with sanctioned nations.  Iran in particular, is a
country causing the most problems for Middle Eastern banks. It can prove
difficult to flag, research and identify a trade finance transaction which
might include an Iranian beneficiary, especially in a process still dominated
by paper.

It is critical for Middle Eastern compliance professionals
to push their organisations to modernise and digitise the trade finance entity
process to more easily identify transactions which may involve sanctioned
entities.  Without this, financial institutions in the region will continue to
be at high risk of fines or even the threat of losing their banking licences in
the US and Europe.

Goods Compliance

Goods compliance is a newer area of the compliance function, which has only
started to raise red flags quite recently. Compliance officers at Middle
Eastern banks need to look closer at goods compliance, as regulators are
starting to put more pressure on banks to screen all parties involved due to
country sanctions.  When blanket sanctions against a country such as Iran and
North Korea apply, this is a fairly simple process to implement; in short no
transactions, except very tightly defined exceptions around humanitarian or
other types of aide, are allowed when a beneficiary with Iranian and North
Korean ties are involved.  However, screening becomes much more difficult when
you are dealing with goods shipped to countries without blanket sanctions. 

Within most systems that compliance officers have access to, the
ability to get this information is likely not available.  The main issue for
Middle East banks in the trade finance realm is that government regulators are
increasingly looking to the institutions to help monitor these shipments
instead of relying solely on shipping agents to do so.  Also, as the
underwriters of credit for these shipments, banks are now ‘on the hook’ should
anything go awry.

Criminal gangs operating globally cause further
issues for banks, capitalising on the huge sums of money flowing through the
trade finance industry and inefficient processes to defraud, evade taxes and
launder money through the system in highly complicated ways.  Just as account
on-boarding, wires and payments were manipulated over a decade ago, trade
finance is now the ‘go to’ area for these types of activities and so Middle
East compliance officers should be wary.

Globally, the compliance
industry is recognising that this function is more complicated and more
integral than ever in the day-to-day operations of a bank.  From on-boarding,
to payments, to credit risk and now trade finance, the Middle East compliance
officer must have intimate knowledge of all aspects of the bank.  Along with
this, they must have access to the tools and data necessary to effectively
monitor report and enable compliance for the bank.


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