International trade bodies Baft, The Wolfsberg Group, and the International Chamber of Commerce (ICC) have published a 2019 update to their Trade Finance Principles guidance document.

The Trade Finance Principles outline the role of financial institutions in addressing risks of financial crime associated with trade finance activities, and compliance with national and regional sanctions and embargoes. In keeping with the changing face of global trade, the new appendices to the original 2017 document, released at the end of last month, now feature information on open account trade and bank-to-bank trade loans, as well as elaborating on receivables purchase techniques.

“The trade industry has been clamoring for more specific guidance on articulating controls for open account trade products,” says Tod Burwell, president and CEO of Baft. “Finally, a resource has been developed by the leading industry associations working together to provide guidance on payables finance, receivables discounting and bank-to-bank trade loan products.”

Speaking to GTR, Stacey Facter, senior vice-president of trade products at Baft, explains the impetus for the update of the document, and highlights the key points of note.


GTR: What is behind the release of this amendment?

Facter: This amendment addresses the products that were not specifically called out in the original documents. Since payables finance and receivables discounting are the two main receivables purchase products that are very hot in the market, we have focused on those as well as the bank-to-bank trade loans. The core structure and principles of the original paper remain the same, but the new appendices provide guidance on the specific application of controls in the context of open account trade.


GTR: Why now?

Facter: Regulators around the globe have not yet provided guidelines to the industry as it relates to supply chain finance and open account. Different jurisdictions have different expectations and we want as an industry to get in front of the issue. With this document using a risk-based approach, we aim to advise them what we could do as opposed to them telling us what we should do, which in some cases we can’t do. We are preparing a briefing letter to go to all the regulators around the globe that we have been working with, whether it is in the US, Singapore, Hong Kong, the UK and other jurisdictions, to help to make the requirements consistent across jurisdictions and to assist the banks in identifying for the regulators what the banks can and can’t do.


GTR: What challenges and limitations do banks face when it comes to meeting their financial crime compliance obligations, and what does this 2019 amendment do to help?

Facter: Around 80% of trade is conducted on an open account basis, which makes it more difficult for a bank to find problems or identify a financial crime compliance issue or trade-based money-laundering. What can you do without that paper? How can you identify the anomalies without the paper? Who can you rely on to identify those anomalies? This amendment addresses what needs to be done when you don’t have those pieces of paper, and especially in the new automated environment, it gives guidance on how you analyse your customer and your customer’s counterparty if necessary, when you can and when you can’t, and if you can rely on your customer to do some of the analysis on your behalf.

The concern for trade finance banks is: how do you know what level of due diligence you need to do on all the parties to a trade transaction? The open account section of the amendment helps you to identify who your customer is, what level of due diligence you should be doing on your customer, what level of due diligence, if any, you may need to do on the counterparties of your customer – or your customer’s customer – which is an issue that has been plaguing the industry. It is know your customer and customer due diligence for transactions on open account, but there is always clarification required for the industry. You need to have guidance on what you are really expected to do, and so this provides that kind of level of clarification.

In the bank-to-bank trade loans space, there are other stakeholders in the transactions that may have access to more information than you do as a financial institution. Before a loan is made between two banks, a lot of the information of the underlying trade is provided to the financial institution making the loan to the other borrower or financial institution, so you will have, by email or via Swift, the list of who the buyer is, who the seller is, what products the transaction is for, who the importer or exporter is, and what ports it is going through. There is information in there that you can review and that you have access to.

On the payables finance side, the buyer is the bank’s customer, while on the receivables discounting side, the seller is the bank’s customer. Given those broad parameters, what do you need to do on the other stakeholders in the programme, and what level of due diligence are you required to do on the other entities as the bank that is working with either the buyer or the seller? Do you need to do a full KYC? Do you need to do a ‘light’ KYC? Do you need to know just basic information?

This document helps to clarify expectations because the industry has spent so much money trying to identify compliance-related issues, and in many cases it has been very expensive but has had few results.