The UK’s financial regulator conducted a series of reviews of financial crime compliance at trade finance banks over the last 12 months, according to sources with knowledge of the assessments, ordering some to tighten up controls and placing restrictions on at least one lender.

The Financial Conduct Authority’s (FCA) scrutiny focused on smaller trade finance banks and UK subsidiaries of foreign financial institutions, the sources say, focusing on their customer and transaction due diligence, risk assessments and procedures.

The sector-wide assessment, which is understood to have included at least six proactive reviews of trade finance banks, started in mid-2022.

It comes just over a year after the financial watchdog warned trade finance lenders of serious financial crime shortcomings in a ‘Dear CEO’ letter and almost 10 years after the regulator’s last thematic review of the trade finance sector.

Most outcomes short of enforcement action are not publicly announced by the FCA, but a GTR review of the financial services register shows that the regulator placed restrictions on Havin Bank, a Cuba-focused trade finance lender, in March.

The bank is not permitted to onboard new clients without prior permission from the FCA and can only process new trade finance transactions after they have been “verified” by a skilled person – FCA parlance for an external consultant authorised by the regulator – and any “deficiencies” in the proposed transaction have been addressed.

Havin Bank, which according to the notice is also required to implement a remediation plan, did not respond to an emailed request for comment, and the number for its Canary Wharf office did not connect. The lender was also sanctioned by the US Treasury in July 2020 under its Cuba sanctions regime.

“The FCA is really ramping up its oversight and its scrutiny of firms across the regulated sector, but particularly I’d say the smaller foreign financial institutions that have a very small footprint here,” says Samar Pratt, president and global head of Exiger Advisory Solutions, one of the firms that acts as a skilled person. “They’re feeling a lot of attention in the trade space.”

“We’ve had a significant uptick in the last 12 to 18 months of the FCA being interested in financial institutions” in the trade finance market, says Oliver Grimes of Avyse Partners, another skilled person firm. “They seem to have really awoken since 2013,” when the thematic review was conducted, he adds.

Banks were typically asked for documents and information by the regulator and if it was not satisfied with some of the responses, it asked the institution to appoint a skilled person to investigate or make recommendations.

The FCA also sampled records held by banks on trade transactions they had carried out, homing in on details such as whether deals were subject to proper anti-money laundering checks and if they are being screened for potential sanctions breaches.

The regulator also wants to ensure firms are assessing details such as ports of discharge and vessel history, due to the potential for sanctions violations due to illicit shipping activity, according to Anthony Eddington, a director at Exiger and former regulator.

“The FCA is looking at who’s the advising bank? Who’s the originating bank? And who’s going to pick it up at the other end and check the bill of lading,” he tells GTR.

Questions are being asked about specific products, partly as a way for the FCA to expand its own knowledge of the sector, says Grimes.

“We’re increasingly seeing the FCA ask more nuanced questions around more nuanced trade risks,” Grimes told a London Institute for Banking and Finance event in June. “There are a couple of banks that we’ve seen where they’re particularly interested in letters of indemnity. You’ve got to know what a letter of indemnity is to realise what the risk is.”

“Their approach is getting more nuanced and more detailed,” he said of the FCA. A major focus of the regulator has been due diligence, including maintaining up-to-date records on correspondent banking relationships, he added.

Outcomes for lenders probed by the FCA have been mixed, according to Grimes and others with knowledge of the assessments, including full business restrictions, skilled person reviews or simply being asked to mend failures.

Pratt says the FCA wants to see evidence that the 2021 Dear CEO letter is being heeded. “If you’re a firm, and you receive [a letter] from your regulator, the key message really has to be, ‘don’t just read it and file it, you actually have to act on it’.”

She says that while regulators don’t expect small-scale institutions to “gold-plate” their compliance efforts, if they are a subsidiary of a foreign bank and “the headquarters has deep pockets and the size of the business warrants it, I think they do expect investment and ultimately for the branch to demonstrate that they are meeting money laundering requirements here in the UK”.

Past scrutiny has extended well beyond smaller players in the market. In 2017, the UK branch of Commerzbank, Germany’s second-biggest lender, voluntarily agreed to suspend all new trade finance business until it had implemented a financial crime compliance remediation plan. The restrictions were gradually lifted after July 2020, when the lender was fined £37.8mn by the FCA over anti-money laundering failures..

Among the issues cited by the FCA and the Prudential Regulation Authority in the Dear CEO letter was an overly broad approach to risk assessments.

Pratt says lenders should carry out a second risk assessment focused solely on their trade finance business, instead of only incorporating it into their firm-wide reviews. Risk assessments are important foundational documents for regulators because they govern how closely lenders control particular products or customer types.

A spokesperson for the FCA says: “Reducing and preventing financial crime continues to be a key priority for the FCA, and feeds into the organisation’s objectives to protect consumers and to enhance the integrity of the UK financial system.”

“Our supervisory approach is intended to be risk-based, data-led and agile so resources are directed towards firms where there is the greatest risk. This includes trade finance firms.”