1. TRADE FINANCE AND FINANCIAL CRIME
Strengthening Compliance Procedures
Scott Nance Compliance Consulting

2. Compliance Issues in Trade Finance
Export controls
Money laundering
Sanctions compliance

3. Factors to Consider Size of trade finance program
Identities of customers
How sophisticated are your customers?
Products covered by trade finance
Geographic areas involved
Expertise within your trade finance team
While these factors affect the details of your program, if you handle trade finance, you need some kind of a compliance program

4. Steps in Building a Trade Finance Compliance Program
Identify requirements and scope of the program
Obtain buy-in from the relevant parties
Determine the components of the program
Assign responsibilities between departments/functions
Build in communications and lines of control
Training

5. Identify Requirements and Scope
Where trade finance is handled
Departments involved
Geographic locations involved
Details of your trade finance activities
Trade finance products
Role of the bank
Issuing
Advising
confirming
Customers
Goods
Geographic areas involved

6. Obtaining Buy-in
At this point, you know the general nature and scope of the program, even if you haven’t actually designed it
Before you go much further, you need to get buy-in from the relevant parties
Relevant parties include everyone who could be involved in administering and monitoring the system
Senior management
The front office
Trade finance operations
Compliance
Legal

7. Factors to Encourage Buy-In
OFAC has imposed huge fines on foreign banks for violating US sanctions in trade finance transactions
BNP Paribas
ING
Violation of export controls can lead to
Fines
Loss of privileges
Lack of anti-money laundering controls can lead to fines and administrative penalties

8. Factors to Encourage Buy-In
A solid trade finance compliance program reduces the likelihood that other banks involved in the transaction will themselves block the transaction
A solid program enhances knowledge of the customers’ activities, and can provide useful information about their needs
While designing and implementing the program requires resources, the actual operation of the program tends to be relatively low-cost
Having a good estimate of the total cost of design, implementation, and operation increases the chance of buy-in

9. Getting Buy-In Buy-in is an iterative process
Agreement on the concept
Agreement on the design, including exact division of responsibilities
Agreement on implementation
Having a clear idea up front of exactly who will do what will increase the chances of approval at each stage
You need to have a very good view on certain things
Budgetary constraints
Resource constraints
Bank politics

10. Components of a Trade Finance Compliance System
Applicable laws, regulations, and rules
What to screen
Identifying what to look for
Screening methods
Analyzing “hits”
Acting on hits
Reporting and sharing information
Monitoring operation of the system

11. Applicable Laws and Policies
The first step in building a compliance program is determining what you’re complying with
Relevant laws
Export control laws
Sanctions laws
Anti-money laundering laws
Anti-corruption laws
Bank policies
What laws the bank chooses to comply with voluntarily
Policies regarding doing business with certain countries or entities
Industry best practices

12. Export Controls You should apply the export control laws of
The country in which you are doing business
The country of export
The country of import
Export control laws identify
Goods, services, and technology
Persons and entities
Sources and destinations
Licensing requirements
The Wassenaar Arrangement standardizes export controls across much of the world, including
The EU
The United States

13. Sanctions Laws You must apply the sanctions laws of
The country in which you’re doing business
The country of import
The country of export
“Extraterritorial” US sanctions may apply to certain categories of exports to Iran
You may choose to voluntarily comply with all UN sanctions, as well as with sanctions laws of other countries
If the transaction is in USD, you must comply with US sanctions laws

14. AML Laws
Trade transactions are increasingly being used to launder money
Application of AML laws is much more ambiguous than export control and sanctions laws
It is probably not obvious that a transaction is being used to launder money
But failure to comply with AML laws can lead to stiff fines and other regulatory penalties
The relevant AML laws are
Those of the country in which you are actually doing business
Those of your corporate parent, if you are part of a group

15. Anti-Corruption Laws
Trade transactions may be used to disguise corruption
This is really a type of AML concern
The anti-corruption laws of your country apply
However, British anti-corruption laws in particular have broad effect, and could reach some transactions, even if you’re not operating out of Britain

16. Bank Policies Bank policies regarding types of products
Many banks will not handle transactions involving certain types of goods, especially weapons
Environmental and Social Responsibility (ESR) policies
Bank policies regarding transactions involving certain countries
Bank policies regarding certain persons or entities
Internal “bad guy” lists

17. Industry Best Practices
FATF recommendations and guidance
Wolfsberg principles
Joint Money Laundering Steering Group

18. Implementing Laws and Policies
Lists
Controlled products
Restricted persons and entities
Restricted destinations
Sanctioned vessels and airlines
Sanctioned ports and airports
Procedures for
Screening
Analyzing transactions
Making decisions

19. Screening
The core of trade finance compliance is screening against lists
You may use
Official lists (US OFAC, EU Designated Persons lists, UN sanctions lists)
Lists prepared by outside vendors (WorldCheck, Fircosoft, etc.)
Internal lists
You are hopefully already screening payments and other transactions against these list

20. Determining Documents to Screen
Letter of credit
Invoice
Bill of lading
Certificate of origin
But what about other documents?
Packing lists
Insurance certificates
Inspection certificates

21. Screening Tools
All of these need to be implemented in a screening tool
Screening tools may be
Fully automated
Partially automated (human inputting names)
Purely manual
The screening tool should
Identify the list against which a hit occurred
Provide further information as to why this product, person, or destination triggered the hit
Screening may be centralized or de-centralized
This depends upon the location of your operations

22. Red Flags
Procedures for analyzing transactions – identifying red flags
Possible red flags
Unlikely products or buyers
Improbable destinations or routs
Unrealistic prices or quantities
Transactions that simply do not make commercial sense
It is difficult to automate this step

23. Red Flags: Unlikely Prices
In detecting money laundering or corruption, prices that are unusually high or low are a prominent red flag
Indicators that a price is unrealistic
Prices differ from those of earlier transactions by the same customer
Prices differ from those of the same products sold or bought by other clients
Prices differ from international benchmarks
Prices differ from those quoted on industry news web sites
Prices differ from those given on trading sites like Alibaba

24. Red Flags: Fictitious Documents
Documents lack standard information, such as price per unit, quantity, country of origin, or other necessary specifications
Documents do not follow a standard format
Documents contain obvious errors, like misspelled names
Documents differ from similar documents previously submitted in a transaction

25. Red Flags: Vessel Searches
The involvement of a sanctioned vessel in a transaction can result in a violation of sanctions
But vessels are not always identified in the documentation reviewed, and the vessel identity may not be known at the time the bank receives the documentation
You should screen vessels if
The goods are originating in or going to a part of the world where Iranian or Syrian vessels are commonly used (Middle East, India)
You have other information indicating that a sanctioned vessel might be involved

26. Assessing Transactions
Results of screening
Results of manual review for red flags
A general “sense” about the transaction
In identifying money laundering and corruption concerns in particular, expertise and familiarity with the client’s business play a key role

27. Acting on Results Who can clear a transaction
What to do if screening yields questionable results
The procedure should identify, using clear criteria,
When a transaction can be processed
When a transaction should be rejected
When you should conduct further investigation
When and where a transaction should be sent for further review
When you must notify Compliance or Legal about the results of a transaction review

28. Further Investigation
In some cases, additional information may be necessary to make a decision
The customer can often answer these questions
But you must trust the customer
Beware of “tipping off” the customer, especially if money laundering may be involved
If you seek additional information from outside sources, be aware of data privacy and bank secrecy laws

29. The Paper Trail Establishing a reliable paper trail is essential
Record
The screening results
The final decision
The basis for the final decision
If there was additional information, be sure to include it in the file of the transaction

30. Allocation of Responsibilities
Who performs the screening --trade finance operations or Compliance?
Who decides whether to clear a transaction – trade finance or Compliance?
Establish the role of Compliance in the process
Compliance can play a valuable role in reviewing questionable transactions
Establish the role of Legal in the process
Legal should certainly be involved in design, but what is its role in implementation?

31. Allocation of Responsibilities
The front office should probably not be involved in screening
But it should fully understand how the process works
The front office will normally be responsible for dealing with clients when there are problems with transactions
The front office needs clear guidelines on what to say, as legal rules may prohibit divulging some information, especially if money laundering is suspected
Internal audit must periodically assess the operation of the system

32. Communications The basic procedure should clearly
Allocate responsibilities
Identify who needs to know what when
The procedure should provide for
Reporting of overall statistics to Senior Management and Compliance (transactions processed, transactions with problems identified, transactions rejected, etc.)
Communicating changes in applicable laws and policies
Communicating with clients

33. Training Training should be provided to
Trade finance operations
The front office
Compliance
Legal
Training materials should be tailored to the specific function
It may be necessary to provide materials in different languages
Training should include
The actual training materials
Additional resources
A dedicated Intranet site is helpful

34. Contents of Training Applicable laws and policies Screening procedures
Include reporting requirements
Screening procedures
Assessing and deciding on transactions
Responsibilities of different functions
Reporting and monitoring

35. Final Thoughts
If you do trade finance, you really need a compliance system
The system should be tailored to your particular needs
Identify everyone who will be involved at any stage
Get buy-in early