Trade Finance: Optimising Your Risk-Based Approach to Financial Crime Compliance

Monday, November 5, 2018

Regulators worldwide are increasingly focused on the financial crime risks inherent in trade finance, offering guidance on the controls that banks should adopt. Consistent throughout this guidance is the need for banks to adopt a risk based approach as a foundation for their compliance programme. This guidance highlights the need for the control framework to be proportional, reaffirming that a risk based approach does not mean a “zero failure” regime.

So, the question facing banks is: how to implement a proportionate risk based financial crime control framework for trade finance? Banks have traditionally responded by adopting varied approaches to this challenge. But these often lead to undesired consequences, such as escalating compliance costs, increasingly unsustainable processes and in some cases an inability to adapt to emerging risks.

There are 5 key components that compliance and trade finance professionals need to consider when designing and applying their risk based approach for trade finance.

1) Customer Due Diligence (CDD)
Overcoming these challenges requires key information about a customer’s trading patterns to be collected and effectively analysed as part of the CDD process. It is the analysis that is often lacking. In addition, communication channels need to be opened so that customer risk information is shared between the front and back offices to inform and align their assessments of customer and trade finance transactional risk.

2) Risk Assessment
It’s easy to say that banks need to design a risk assessment that provides a true understanding of current and evolving risks within a bank’s trade finance book – but what should this look like?


In line with best practice, regular assessments need to take account of the factors identified by regulators, as well those associated with the client itself, any changes in its counter-parties or counter-party locations and product risk. This assessment should include involvement from the product specialists, those who own customer relationships and also financial crime compliance (FCC) teams. Senior management must scrutinise and ultimately sign off the assessment results.

3) Adapting Traditional Controls
Trade finance products can present a range of financial crime risks at various levels of significance, so there is no “one size fits all” solution for the application of controls. So how can controls be adapted to address specific product risks?


The key is to leverage the product risks identified through the risk assessment, including the way in which a product is offered to a customer. This in turn informs the required control framework. For example, within some trade finance products, banks may not have sight of all key information at the point they process a transaction, including providing finance to a customer. In these cases, they may need to perform red flag checks and sanctions screening after the transaction has taken place, at a point where the information has become available. Banks should therefore adapt their traditional control frameworks to maximise the potential for identifying and mitigating financial crime risks.

4) Technology
Detecting suspicious activity in trade finance transactions often relies on the manual review of large amounts of data contained in multiple documents. This process is conducted by back office operators, with little frontline experience. As criminals become increasingly sophisticated, the detection of financial crime risks in single trade transactions becomes correspondingly difficult. So how can compliance teams utilise the often overflowing lake of data at their disposal to keep up?


Applying data analytics across trade finance transaction data can detect high risk trading patterns, customers and typologies – both before and after a transaction takes place. This information can prompt a review of specific customer segments and transactions, in turn allowing banks to adapt control frameworks to target higher areas of risk, which cannot be detected in single transaction reviews. For example, enhanced due diligence can be applied to transactions which fit specific high risk typologies.

In addition, artificial intelligence (AI) powered technologies are already helping to automate the due diligence required to detect financial crime risks in trade finance transactions. Tools such as DDIQ help financial institutions to screen parties to transactions faster, easier and more efficiently – without the need for an army of analysts to manually review sanctions watch lists, news articles or proprietary databases. Instead, the tool’s AI engine is trained to think like a due diligence researcher, scanning all of these sources across multiple languages – and freeing up human researches to analyse risk-based information instead of just collating it.

5) Training & Awareness
The effectiveness of a risk based control framework depends heavily on the ability of the staff who execute the controls. If staff don’t understand the risk based approach, they’ll revert to a “tick box” approach. Trade finance staff are often not trained FCC professionals and have a multitude of checks to perform against a ticking clock – inhibiting their ability to identify and fully consider financial crime risks. Regular financial crime risk training is essential for such teams and should include real life case studies and emerging typologies, and it should be relevant to the jurisdictions in which they operate.

Financial crime risk in trade finance is increasingly difficult to manage at scale. Banks need to respond positively to regulator focus and following the 5 steps above will help them on their way to the risk based approach regulators call for.

Exiger utilises our proprietary disruptive technology combined with deep subject matter expertise to help banks design and implement effective trade finance financial crime risk and control frameworks.

 
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Jonathan Lawson, Associate Managing Director

Jonathan is an Associate Managing Director based in Exiger's London office, where he focuses on the firm's advisory practice, specialising in financial crime programme, project and change management within financial institutions.

Carla Phillips, Associate Director

Carla Phillips is an Associate Director based in Exiger’s London office, where she focuses on financial crime compliance and Know Your Customer (KYC) matters.  With over thirty years of banking experience, Carla has expertise in the nuances of different risks and products across the financial industry.

Stacey Reed, Managing Consultant

Stacey Reed is a Managing Consultant based in Exiger's London office, where she focuses on the firm’s regulatory and compliance efforts.

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