On September 9, the Financial Conduct Authority (“CIF“) and the Prudential Regulatory Authority (“ARP“) issued a letter to CEOs of banks in an attempt to reiterate the expectations of companies when undertaking trade finance activities. Dear CEO’s letter addressed both conduct and prudential issues where regulators consider that improvements are needed in business controls. Regulators stressed that “businesses must demonstrate that they have adopted a risk-sensitive approach to their control environment that ensures that relevant risks are effectively mitigated”, noting that the Last 18 months have seen several “high profile failures of commodity and trade finance companies with significant financial losses”. From a credit perspective, companies are urged to ensure that credit analysis is extended to all parties involved in a trade finance transaction before credit limits are put in place.
From a financial crime perspective, the FCA and PRA have stressed that firms in the trade finance sector should carry out a financial crime risk assessment, after finding “significant issues” with crime controls finance in trade finance. The obligation to carry out such a risk assessment is, of course, a specific legal requirement within the UK AML framework, and it is therefore particularly important that companies take note of the comments of the FCA and the PRA. The view of regulators seems to be that these risk assessments have so far often been too generic and focused on client risk factors, without sufficiently covering the specific risks present in trade finance transactions.
In particular, the letter included references to dual-use items, sanctions, fraud and anti-money laundering in the context of financial crime risk assessment requirements. The FCA and PRA said that “in our reviews to date, we have found that there is often insufficient emphasis on identifying and assessing risk factors for financial crime, such as the risk of dual assets. use or the potential for fraud”. The letter goes on to state that “you should, if you have not already done so, undertake a comprehensive assessment of the associated financial crime risks…These risks include money laundering, sanctions evasion, terrorism and fraud”. This follows a number of FCA initiatives to shine a spotlight on financial crime in the trade finance space (including in these compliance areas and others), dating back to the Thematic Review of 2013: Control by banks of financial crime risks in trade finance.
Companies should review their control frameworks in light of the letter to the dear CEO, as we can expect non-compliance to be an area of concern for regulators, who will take into account that companies have addressed issues raised in the letter when considering legal action. It will be important to document the additional steps taken so that compliance can be demonstrated.
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