Sectoral guidelines for trade finance providers

Sectoral guidelines for trade finance providers

EBA has published the final Guidelines under Articles 17 and 18(4) of Directive (EU) 2015/849 on simplified and enhanced customer due diligence. The Risk Factors guidelines give an overview on the factors credit and financial institutions should consider when assessing the money laundering and terrorist financing risk associated with individual business relationships and occasional transactions.

Sectoral guidelines for trade finance providers

152.

Trade finance means managing a payment to facilitate the movement of goods (and the provision of services) either domestically or across borders. When goods are shipped internationally, the importer faces the risk that the goods will not arrive, while the exporter may be concerned that payment will not be forthcoming. To lessen these dangers, many trade finance instruments therefore place banks in the middle of the transaction.

153.

Trade finance can take many different forms. These include:

• ‘Open account’ transactions: these are transactions where the buyer makes a payment once they have received the goods. These are the most common means of financing trade, but the underlying trade-related nature of the transaction will often not be known to the banks executing the fund transfer. Banks should refer to the guidance in Title II to manage the risk associated with such transactions.

• Documentary letters of credit (LCs): an LC is a financial instrument issued by a bank that guarantees payment to a named beneficiary (typically an exporter) upon presentation of certain ‘complying’ documents specified in the credit terms (e.g. evidence that goods have been dispatched).

• Documentary bills for collection (BCs): a BC refers to a process by which payment, or an accepted draft, is collected by a ‘collecting’ bank from an importer of goods for onward payment to the exporter. The collecting bank gives the relevant trade documentation (which will have been received from the exporter, normally through their bank) to the importer in return.

154.

Other trade finance products such as forfaiting or structured financing, or wider activity such as project finance, are outside the scope of these sectoral guidelines. Banks offering these products should refer to the general guidance in Title II.

155.

Trade finance products can be abused for money-laundering or terrorist financing purposes. For example, the buyer and seller may collude to misrepresent the price, type, quality or quantity of goods in order to transfer funds or value between countries.

156.

The International Chamber of Commerce (ICC) has developed standards that govern the use of LCs and BCs, but these do not cover matters related to financial crime.33 Banks should note that these standards do not have legal force and their use does not mean that banks do not need to comply with their legal and regulatory AML/CFT obligations.

157.

Firms in this sector should consider the following risk factors and measures alongside those set out in Title II of these guidelines. The sectoral guidelines in Title III, Chapter 1, may also be relevant in this context.

Sectoral guidelines for trade finance providers – Risk factors

158.

Banks party to trade finance transactions often have access only to partial information about the transaction and the parties to it. Trade documentation can be diverse and banks may not have expert knowledge of the different types of trade documentation they receive. This can make the identification and assessment of ML/TF risk challenging.

159.

Banks should, nevertheless, use common sense and professional judgement to assess the extent to which the information and documentation they have could give rise to concern or suspicion of ML/TF.

To the extent possible, banks should consider the following risk factors:

Sectoral guidelines for trade finance providers – Transaction risk factors

The following factors may contribute to increasing risk:

• The transaction is unusually large given what is known about a customer’s previous trading activity.
• The transaction is highly structured, fragmented or complex, involving multiple parties, without apparent legitimate justification.
• Copy documents are used in situations where original documentation would be expected, without reasonable explanation.
• There are significant discrepancies in documentation, for example between the description of goods in key documents (i.e. invoices and transport documents) and actual goods shipped, to the extent that this is known.
• The type, quantity and value of goods is inconsistent with the bank’s knowledge of the buyer’s business.
• The goods transacted are higher risk for money-laundering purposes, for example certain commodities the prices of which can fluctuate significantly, which can make bogus prices difficult to detect.
• The goods transacted require export licences.
• The trade documentation does not comply with applicable laws or standards.
• Unit pricing appears unusual, based on what the bank knows about the goods and trade.
• The transaction is otherwise unusual, for example LCs are frequently amended without a clear rationale or goods are shipped through another jurisdiction for no apparent commercial reason.

162.

The following factors may contribute to reducing risk:

• Independent inspection agents have verified the quality and quantity of the goods.
• Transactions involve established counterparties that have a proven track record of transacting with each other and due diligence has previously been carried out.

Sectoral guidelines for trade finance providers – Customer risk factors

163.

The following factors may contribute to increasing risk:

• The transaction and/or the parties involved are out of line with what the bank knows about the customer’s previous activity or line of business (e.g. the goods being shipped, or the shipping volumes, are inconsistent with what is known about the importer or exporter’s business).
• There are indications that the buyer and seller may be colluding, for example:

1.the buyer and seller are controlled by the same person;

2. transacting businesses have the same address, provide only a registered agent’s address, or have other address inconsistencies;

3. the buyer is willing or keen to accept or waive discrepancies in the documentation.

4.The customer is unable or reluctant to provide relevant documentation to support the transaction.

5. The buyer uses agents or third parties.

164.

The following factors may contribute to reducing risk:

• The customer is an existing customer whose business is well known to the bank and the transaction is in line with that business.
• The customer is listed on a stock exchange with disclosure requirements similar to the EU’s.

Sectoral guidelines for trade finance providers – Country or geographical risk factors

The following factors may contribute to increasing risk:

• A country associated with the transaction (including that where the goods originated from, which they are destined for, or which they transited through, or that where either party to the transaction is based) has currency exchange controls in place. This increases the risk that the transaction’s true purpose is to export currency in contravention of local law.

• A country associated with the transaction has higher levels of predicate offences (e.g. those related to the narcotics trade, smuggling or counterfeiting) or free trade zones.

Sectoral guidelines for trade finance providers – Measures

167.

Banks must carry out CDD on the instructing party. In practice, most banks will only accept instructions from existing customers and the wider business relationship that the bank has with the customer may assist its due diligence efforts.

168.

Where a bank provides trade finance services to a customer, it should take steps, as part of its CDD process, to understand its customer’s business. Examples of the type of information the bank could obtain include the countries with which the customer trades, which trading routes are used, which goods are traded, who the customer does business with (buyers, suppliers, etc.), whether the customer uses agents or third parties, and, if so, where these are based. This should help banks understand who the customer is and aid the detection of unusual or suspicious transactions.

169.

Where a bank is a correspondent, it must apply CDD measures to the respondent. Correspondent banks should follow the guidelines on correspondent banking in Title III, Chapter 1.

Compliance & Geldwäschebeauftragter – Sectoral guidelines for trade finance providers

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