The Asian Development Bank (ADB) has launched a tool devised to “move the needle” on the effects of anti-money laundering (AML) rules in trade finance.
The Trade Finance Scorecard is designed to help mitigate some of the unintended consequences of regulators’ crackdown on money laundering in trade.
The diagnostic tool gives an industry-wide rating of between one and 10 to assess how a range of “elements of effective regulation” are being deployed to deal with money laundering.
Rather than focusing on individual banks, companies or countries, it is a general rating, derived from discussions with banks, national and multilateral regulators. ADB head of trade finance, Steven Beck, tells GTR it is a “market-sounding” tool, which will provide guidance to banks as to areas in which they may be “over-complying” and to those in which they can improve.
The scorecard focuses on the interpretation, implementation and compliance with AML regulations. There are seven criteria: consistency, risk alignment, co-design, communication, technology/data, enforcement and quality control (more on those below).
The overarching aim is to act as a rough barometer as to which areas of regulation are having unforeseen consequences, with a view to unlocking funds for small businesses in emerging markets.
Over the past decade, banks have become increasingly spooked by the fear of heavy fines handed out by regulators for facilitating money laundering and terrorist financing. This has led to a draining of funds from emerging markets, where the risk of lending is perceived to be higher.
Rather than perform costly due diligence, banks are choosing to stay closer to home, with the likes of the ADB and other development finance institutions being left to attempt to plug the gap.
As a measure of this, the ADB has experienced a 45% growth in both dollar value and deal volume in its trade finance programme over the past 18 months. This is often due to a lack of commercial banking alternatives.
Beck says: “I don’t think it’s getting any better. De-risking is a complicated subject. There’s a lot of relationships in emerging markets that have been de-risked. I don’t see those relationships being prepared.”
In September 2015, the International Chamber of Commerce (ICC) Banking Commission released its trade survey which found that “nearly 46% of the banks surveyed terminated correspondent relationships due to the cost or complexity of compliance, while 70% of respondents reported declining transactions due to AML/KYC requirements”.
A 2017 survey from the International Finance Corporation (IFC) found that 72% of banks globally are noting the impact of de-risking, with that figure rising to as high as 80% in some emerging markets.
In its most recent report, the ADB estimated that the trade finance gap was US$1.5tn in 2016, with 40% of that coming in developing Asia.
“The journey of a thousand miles starts with one step,” Beck says. “This is an incredibly important issue and people are afraid to talk about it. This is a useful, diagnostic tool that helps us examine the unintended consequences better, but it also provides a channel for engagement.”
He describes the scorecard initiative as “fluid”, saying that the next step is a workshop to be held early next week, which will seek to refine the tools methodology and purpose.
Contributions to the scorecard also came from the Bankers Association for Finance and Trade, the Financial Services Board, the Financial Action Task Force, the IMF, the International Chamber of Commerce, the Institute of International Finance, and the WTO.
Scores on elements of effective regulation: correspondent banking and trade finance macro issue score (1-10):
- How consistent is regulatory guidance, interpretation, and implementation across borders? (4)
- Risk alignment. Are regulatory and compliance requirements aligned to the risk character of the activity being regulated? (3)
- Co-design. Does the design and deployment of regulation include some level of market dialogue, consultation, or engagement? (2)
- Does communication between key stakeholders flow effectively? Does communication across jurisdictions, including information and data-sharing, support effective regulation and compliance? (5)
- Technology and data. Are technology and data available and leveraged to inform regulation and compliance? Do industry stakeholders collect and provide the necessary data? How well is this done in developing regions? (5)
- Are regulatory and compliance requirements appropriately and consistently enforced? (4)
- Quality control. Is a feedback process and a quality control discipline designed into regulation to verify its impact against intended outcomes? (3)