I am high risk!
These days
I seem to stumble into various compliance issues wherever I turn. It is like it
has all exploded – it is in everything – it is everywhere.
It actually
makes me a bit grumpy. Not that the talk is about compliance issues (that is
actually an interesting and challenging topic) – but the fact that the
discussions around it seems to be totally “locked” – it is like everybody is
saying the same thing over and over again (regardless if it is true) – and only
rarely I find any structured approach to the issue.
So for
example when the talk hits compliance – and it is related to the trade finance
products – one of the first comments you will hear is that “trade finance is
high risk” …. When I ask why trade finance is high risk, I am told that it is
because of the complex nature of the products and the exotic markets and
countries involved in the trade finance transactions.
I have so
many comments to this statement I am not even sure where I shall end and begin.
But let me try to touch upon some of the main points:
I guess it
is fair to say that the trade finance products are “complex” to the people that
do not know them. But for the people working with trade finance they are not
complex. There may well be single transactions with a complex structure.
I argue
that the trade finance products are not as such complex. They are like everything
else. If you know it: Piece of cake! If not … piece of complex cake ….
Exotic
markets? I guess that depend on how you define an “exotic” market or country.
It is fair to say that trade finance is normally used when the counterpart is
in a market far away or different from your own. I.e. you want to migrate your
counterparty risk.
What is
important however is that the products that trade finance is compared to, also
has no limitation in terms of market. One can make a clean payment from
basically everywhere to basically everywhere.
So the fair
statement is that SOME trade finance transactions involve a country that may be
defined as “high risk” – for example based on the “Corruption Perceptions Index
2013” (http://cpi.transparency.org/cpi2013/results/)
But on the
other hand, so does SOME clean payments!
Then comes
the statement of trade finance being “high risk” in terms of commercial crime.
This seems to be a well-accepted fact! However I still have not seen any
evidence supporting this fact. What I have seen for example is the statistics from
the ICC Trade Register. From this you can – as an example – see that the
transaction default rate for confirmed export LCs is 0,016% - indicating that
it is NOT high risk confirming LCs. The same figure for issuing LCs is 0,020%.
I.e. same level.
I know of
course that the data in the ICC Trade Register is not directly aimed against
commercial crime risk within trade finance. However – it does give an
indication of a very LOW RISK product area.
(More
information on the ICC Trade Register here: http://www.iccwbo.org/Products-and-Services/Trade-facilitation/ICC-Trade-Register/)
Then of
course the counter argument is that there is an AML and CTF risk – i.e. the
risk of trade finance products being used for illegal purposes – like
laundering money. These cases may never be detected because no one within the
trade finance transaction looses money.
That of
course is a fair argument – but it is equally fair if applied to the cash
management products. Here you can actually argue that the AML/CTF risk in terms
of trade finance products is lower than the cash management products. Let me
elaborate:
Within
trade finance you normally have a rather good overview of the transaction as a
whole. For example the issuing bank have made their customer due diligence,
they will have the LC application – outlining the transaction (including
counterpart, goods and other details of the transaction). Once the documents
are presented the bank will have the full documentation of the transaction;
i.e. have the possibility to check against red flags, sanction lists etc.
Taking the
same example on a clean payment, what the bank will see is the party sending
the money, the party to receive it as well as the amount. In other words – the
bank will not see the underlying transaction, and have very little chance of
detecting foul play.
The
argument is NOT that since you see the trade documentation in trade finance
transactions there is NO risk! Of course there is a risk – the point is that it
is NOT correct to argue that the risk increases because you actually see the
documentation. Logically it may be the other way around.
One may
even question how suitable the trade finance products are for – for example –
anti money laundering. The fraudsters would need to set up a company – that
looks “real” in both ends of the transaction. And more than that they would
need to be able to “cheat” the banks customer due diligence. Then they would
need to “construct” trade finance transactions that looks real … and as said in
the beginning – if you do not know trade finance it may be complex – just
getting the terminology right may be hard. Last but not least trade finance
leave a long paper trail – which is not desirable for a fraudster. I am not
saying that it does not happen. It does! I am only saying that it is not likely
that the trade finance products are the first choice …
Further on
the issue of trade finance being high risk – I have found some quotes that I
want to share with you:
In
exercising its implementing powers [..] the commission should respect [..] the
balance of costs and benefits on a long-term basis in any implementing measures
(EU Directive 2005/60EC)
Trade Based
Money Laundering provides an important avenue for disguising funds of illicit
origin and for moving value to finance illegal activities
(APG Typology Report)
It does not
however believe that currently there is sufficient evident to support an
assessment of this area as high risk for AML/Sanctions purposes.
(The Wolfsberg Trade Finance Principles
(2011))
In other
words – the EU believe that it is possible to find a balance of costs and
benefits in preventing anti money laundering. So at least from the perspective
of the EU the AML risk is “manageable.”
This seems almost
contradictory to the APG Typology Report, which indicate that trade finance is
an avenue for disguising funds of illicit origin and for moving value to
finance illegal activities. If that really is the case, then I guess the banks should
stop doing trade finance!
At the
other end of the spectrum is The Wolfsberg Trade Finance Principles from 2011,
who simply need to see the evidence that trade finance is high risk.
Okay – I
admit the background for writing the above is that it really makes me grumpy
that trade finance is classified as high risk – without any sign of evidence or
statistics to support it.
I admit
also that when doing trade finance the risk of commercial crime is there – no
doubt about that. However, if one is to migrate this risk in a good and solid
manner, then a detailed and structured approach is required; one that relates
to the ACTUAL risk – of the individual step of the individual product.
For example
the AML risk is higher for LCs than it is for guarantees, because there is a
flow of money in an LC – and there is not in a guarantee.
Likewise
the sanction risk is higher on direct collection than it is on a “normal”
collection where the documents are forwarded to the collecting bank from the
remitting bank.
So simply saying
that trade finance is “high risk” does not help in migrating the risk – it only
scares people!
As said in the beginning – compliance issues
are everywhere. I do not mind that. What I mind is that the bankers talking about
this act like “hysterical women.” Screaming how dangerous it is. How complex it
is. This is not a good and mature approach. This is an area that must be
addressed by every bank – but it must be addressed like any other risk. Which
should not be that hard. After all – banks make their money by evaluating risks
… so normally they are able to handle that in a structured way.
Please try
the same here…..
And take
care of each other and the LC.
Best
regards
Kim