Focus on Trade Finance Fraud
Recent
years the area of compliance within Trade Finance has simply been booming. In
that respect "compliance" is understood to be "regulatory
compliance" - basically covering:
* KYC
procedures
* Sanction
management
* Measures
to prevent money laundering
* Measures
to prevent terrorist financing
* Measures
to identify dual use- and embargoed goods
Most banks
today have processes in place in respect of the above. Of course more or less
robust - but all are somehow on the agenda of the banks.
What is interesting
is that only few banks have any structured process in place specifically
addressing fraud.
Playing the
devils advocate one could argue that banks do exactly what they have to – and
not one step more than that. They have to have good KYC and AML procedures in
place because the law forces them to - and increasingly the local regulators
follow up on how well the banks do this. This has resulted in warnings and
fines to some of the big banks.
Turned
around: There is no (external) pressure on the banks fraud procedures - hence
not really on the agenda!
That is
indeed surprising: Fraud is actually a direct threat on the banks. A successful
fraud may mean that the banks will loose money - and reputation. So there
should be good incentive indeed.
The good
news is that there are two basic "tools" to combat and identify
fraud:
1: Robust
KYC procedures, i.e. that the banks (and their customers) knows well the
parties they work with.
2: "Red
Flags" - i.e. warning signs allowing banks to identify the customers and
transactions to investigate further.
Why is this
the good news you may ask? It is good news because it is the same basic tools
used to identify potential money laundering and terrorist financing, and many
banks have that in place already. In fact the Red Flags overlap to a large
extent.
However,
what is important to understand is that the structures of money laundering
versus terrorist financing versus fraud are not the same. Thereby the
dynamics and drivers are not the same. Thereby the Red Flags may not be
used 1:1.
Let me
explain:
* Money
laundering is about turning money obtained via illegal activities legal. A
successful money-laundering scheme may never be detected.
* Terrorist
financing is about channelling money (legal as well as illegal) to terrorist
organisations or persons. This may be directly to a terrorist organisation –
but it may also be to the bereaved family.
* Fraud is
the crime of using dishonest methods to take something valuable from another person.
A successful fraud will mean that someone loses something (goods or money).
As can be
seen the structures are different. What is similar however, is that the Trade
Finance customer has a big responsibility in seeking to prevent this. I have
experienced more than once that a customer have asked for my support in a
transaction that seemed "too good to be true". I did not support it -
because it was indeed too good to be true.
But, also
here the Trade Finance customer should have good incentive in preventing this: They
are directly at risk of loosing money and/or the goods.
On the
basis of the above it is recommended that banks ensure that fraud is on their
radar - and preferably address it clearly in their compliance checks directed
towards money laundering and terrorist financing.
In my new
book "From A to UCP" (available end April) there is a chapter in
Fraud in Trade Finance.
The
"lcviews White Paper on Trade Finance Compliance" offer an approach
to identifying money laundering and terrorist financing - including an outline
of the relevant Red Flags.
(http://lcviews.com/index.php?page_id472)
I hope this
will help you making Trade Finance a little bit safer and urge you to take care
of the LC. It needs it more now than ever.
Kind
regards
Kim