Following the publication of Thematic Review 13/3, “Banks’ control of financial crime risks in trade finance” (the Review), the Financial Conduct Authority (FCA) is presently consulting on examples of good and poor practice in the trade finance sector, as set out in Guidance Consultation 13/3, “Examples of good and poor practice in ‘Banks’ control of financial crime risks in trade finance’” (the Consultation).

Trade finance, which involves banks acting as intermediaries between importers and exporters in international trade, has long been exploited by criminals and terrorist financiers who use it to move illicit funds through cross border financial transactions, often for the purpose of funding illegal and terrorist activity. The money laundering techniques adopted can be complex and are often used in varying combinations in order to distort the money trail.

The aim of the FCA’s Review was to assess the suitability of controls and systems over such risks in UK banks, more specifically over money laundering, terrorist financing, and sanctions breaches (collectively known as financial crimes risks) in the trade finance sector.

The Review found that banks generally had effective controls in place to ensure that they were not dealing with sanctioned individuals and entities in the course of trade finance transactions. However, the majority of banks’ anti-money laundering policies, procedures and controls were generally considered to be poor, particularly in relation to dual-use goods (those with both civil and military functions). In particular, the FCA considered that staff responsible for managing financial crime risks were not sufficiently trained to identify potentially suspicious transactions or customers, and that this prevented relevant information from being passed on to senior management and appropriate action being taken.

The Consultation, which provides extensive guidance as to how banks will be expected to address these issues in the future, indicates that banks will need to ensure the following examples of good practice are complied with:

  • Roles and responsibilities for the management of financial crime risks should be defined and documented.
  • A detailed risk assessment, with appropriate weight given to money laundering and sanctions risks, should be documented for each transaction.
  • Due diligence procedures, and the circumstances in which they should be implemented, should be defined clearly. Trade processing teams should utilise the knowledge of customers’ activity held by other teams within the bank. Thorough audit trails should be produced.
  • Tailored training should be provided to staff.
  • Anti-money laundering procedures should be improved generally, through (a) the employment of level 1 trade processors (with a good knowledge of international trade, customers’ expected activity and a sound understanding of trade-based money laundering risks), (b) use of “red flag” suspicious transactions lists by trade processors (see Review, pages 46-48), (c) swift escalation of suspicious transactions, (d) periodic quality assurance work, and (d) employment of trade based money laundering experts in non-trade finance teams for the provision of independent advice.
  • Thorough customer screening procedures should be implemented and tailored according to the risk level of each transaction.

The FCA proposes to include these examples in a new chapter of its regulatory guidance, “Financial crime: a guide for firms”, and invites views on the consultation paper by 4 October 2013.