The compliance burden on US trade finance lenders has never been higher. For several years, banks have grappled with a gradual escalation of rules and requirements to prevent financial crime, coupled with the threat of tough enforcement action. In the past year, the introduction of sanctions against Russia has upped the stakes further. For institutions involved in international trade, digitization is becoming increasingly important both to minimise risk and manage cost.
For US lenders, the pace of financial crime-related regulatory change is relentless. In the past year alone, [1]FinCEN – an enforcement agency that sits within the Department of the Treasury – introduced new rules around beneficial ownership, while the international [2]Wolfsberg Group unveiled a major expansion of its Financial Crime Principles for Correspondent Banking.
Those developments came hot on the heels of a [3]December 2021 FinCEN initiative to modernise the Bank Secrecy Act, which serves as the country’s primary piece of anti-money laundering and counter-terrorist financing legislation for financial institutions.
Enforcement has ranged from high-profile cases against international lenders, such as a US$550m fine against since-collapsed [4]Credit Suisse, and action against local banks, including fines totalling US$8m issued to [5]Community Bank of Texas for failing to report suspicious transactions.
Separately, the US sanctions regime has continued to expand. Authorities have widened restrictions on entities linked to trade in [6]Iranian oil, including by targeting front companies and commodity traders in Singapore, Switzerland and the UAE, and continue to impose controls on trade involving Cuba, North Korea and Venezuela, as well as designated terrorist groups in other regions. In total, authorities published details of 16 enforcement actions last year across 11 different sanctions programmes.
Sanctions against Russia are proving particularly challenging. [7]World Bank data shows Russian companies imported US goods worth nearly US$11bn in 2020, the most recent year for which figures are available, while trade in the other direction totalled over US$13bn. Yet since Russia’s invasion of Ukraine, the US Office of Foreign Assets Control (OFAC) has introduced sweeping restrictions on critical commodities and dual-use goods. [8]Alleged efforts to evade restrictions continues to prove a challenge to the public and private sectors.
As recently as [9]May 2023, the US government issued fresh rules to trade finance lenders demanding they look for specific red flags or suspicious trading patterns that could indicate efforts to evade export controls. The guidance covers nine categories of goods, and applies to banks providing credit lines, working capital loans and factoring facilities.
“We expect new Russia-centric cases to begin trickling out of OFAC during the coming year,” says US-headquartered law firm Morrison Foerster.[10]
This regulatory landscape poses major challenges – and introduces significant costs – to regulated financial institutions. The [11]ICC’s Global Trade Finance Survey for 2020 found that “concern persists about regulatory and compliance-related obstacles to growing trade finance businesses,” notably due to the burden of meeting anti-money laundering, counter-terrorism financing and sanctions requirements. 56% of respondents identified compliance as a “significant concern.”
The compliance burden is also growing independently of the US financial crime regime. The adoption of the Basel IV reforms over the next two years will have a significant impact on banks’ calculations of risk-weighted assets, while the transition to risk-free reference rates continues with the end of the US dollar LIBOR panel at the end of June this year.
Against that backdrop, for financial institutions involved in international trade, compliance is proving a major driver for digitization.
Authorities expect banks to collect and analyse a huge amount of information about their customers, and increasingly, other counterparties involved in trade transactions. Analysts estimate that around a third of a typical bank’s compliance budget is spent on meeting know-your-customer requirements. Being able to receive, analyse and handle relevant documentation digitally – relying on automation where possible – means less reliance on manual processing, while also reducing the opportunity for human error.
For example, banks are required to understand their customers’ typical trading activity, including by assessing the sectors, products and geographies where they operate, so that they can identify potential deviations that could indicate suspicious activity. This is highly challenging without the help of technology. [12]Artificial intelligence can apply information from previous trades across a bank’s entire client base and apply that to future transactions, significantly decreasing risk while also reducing the burden on compliance teams.
Challenges around adoption remain. Smaller banks in particular have complained that the cost of compliance technology remains relatively high, and some larger international lenders have chosen to cut their exposure to certain regions or client types, focusing predominantly on larger corporates. There are also regulatory barriers to data sharing between different financial institutions, creating knowledge gaps that criminal enterprises can exploit.
However, as these technologies continue to develop, implementation costs should fall. With little prospect that the regulatory burden on trade finance banks will diminish, there is little alternative but to turn to digitization.
[1] [https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements]
[2] [https://www.wolfsberg-principles.com/sites/default/files/wb/Wolfsberg%20Correspondent%20Banking%20Principles%202022.pdf]
[3] [https://www.federalregister.gov/documents/2021/12/15/2021-27081/review-of-bank-secrecy-act-regulations-and-guidance]
[4] [https://www.justice.gov/opa/pr/credit-suisse-resolves-fraudulent-mozambique-loan-case-547-million-coordinated-global]
[5] [https://www.fincen.gov/news/news-releases/fincen-announces-8-million-civil-money-penalty-against-communitybank-texas]
[6] https://www.gtreview.com/news/global/us-targets-network-of-singapore-swiss-and-uae-traders-in-iranian-oil-crackdown/]
[7] https://wits.worldbank.org/CountryProfile/en/Country/RUS/Year/LTST/Summary]
[8] https://www.ft.com/content/76fc91b2-3494-4022-83d0-9d6647b38e3d]
[9]https://www.fincen.gov/sites/default/files/shared/FinCEN%20and%20BIS%20Joint%20Alert%20_FINAL_508C.pdf]
[10] https://www.mofo.com/resources/insights/230306-us-sanctions-enforcement-2022]
[11] https://library.iccwbo.org/content/tfb/pdf/2020iccglobaltradesurveyvweb.pdf]
[12] https://www.gtreview.com/magazine/the-fintech-issue-2022/trade-based-money-laundering-the-paper-trail/]
