Trade finance at risk from financial crime, FCA warns

UK regulator says 'significant room for improvement' needed at most banks

The UK Financial Conduct Authority (FCA) has warned that banks need to tighten up controls around trade reporting, claiming the business is susceptible to financial crime.

The warning was made in a report published on July 1, entitled Banks' control of financial crime risks in trade finance, and covers three areas – money laundering, terrorist financing and sanctions risk. The report claims trade finance has recently become more attractive to criminals due to the complexity of transactions and the fact that huge volumes of trade flows can hide individual transactions.

Money laundering is a particular area of concern, and bank efforts to control it have not been helped by unclear regulatory guidance on the issue, experts claim. "It's generally expected, because it's a complex area and because some of the guidance from regulators in the past has not been clear about what is best practice," says Rachel Sexton, a partner in KPMG's forensic practice.

Leading banks have recently been caught in the spotlight over breaches in anti-money laundering (AML) rules. EFG Private Bank was fined £4.2 million by the FCA in April, while HSBC agreed to pay $1.9 billion in December for AML failures. Coutts, UBS, Turkish Bank UK, ICICI Bank in India and the Israeli bank Mizrahi-Tefahot have also came to the attention of their respective regulators in 2012 over AML.

"The report talked about the key areas where banks can improve," says Sexton. "For example, by training your staff a lot more about the risks within trade finance, doing a proper risk assessment and providing information to senior management."

However, some of the larger US banks sampled in the FCA's report were found to have more adequate AML measures in trade finance. Andrew Smith, chief executive of software and advisory group Cor Financial, says this is due in part to US supervisors.

"The US regulatory environment is so much tougher and better defined. I just think the US has a more vigorous policy framework in place and stronger institutions to enforce it," he says.

Elsewhere in the report, the FCA found banks across the industry had generally developed effective sanctions monitoring controls in trade finance. However, Smith warns there is still room for improvement.

"The reason sanctions monitoring has done a bit better is because it's easier to implement, but we're nowhere near to having a gold standard. We can point to a number of public examples where tier-one banks have dropped the ball," he says.

For instance, Standard Chartered Bank was forced to pay a $340 million settlement for breaching US sanctions on Iran in 2012, while ING paid $619 million in June last year for violating sanctions against Cuba and Iran through its Netherlands Caribbean Bank subsidiary.

For banks that fell short of regulatory requirements for AML, sanctions and terrorist financing, the FCA warned it is considering where further regulatory action may be required, but Smith is sceptical that regulatory fines are a sufficient deterrent.

"We've seen the size of these settlements getting bigger and bigger. However, I'm not sure we're that far away before somebody will either go to jail or some corporate enterprise might lose its licence to operate," he says.

KPMG's Sexton, meanwhile, believes the best response is for the FCA to work with banks to improve their compliance.

"Where poor conduct or poor behaviour is not involved, I think fining isn't always the best route, if it looks like the bank was trying their best to be compliant," she says. "It's definitely more efficient if the FCA works with the banks to improve their operations and to show or discuss with them what is expected and give them time to embed that into the business."

In light of its review, the FCA is currently consulting on examples of good and poor practice in the industry. Banks have until October 4, 2013 to respond.