TRADE FINANCE AND FINANCIAL CRIME

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 • 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