The FCA sent a “Dear CEO” letter on 9 September 2021 to firms engaged in trade finance activity, reiterating its expectations.
The letter notes that, during the past 18 months there have been several high-profile failures of commodity and trade finance firms with significant financial loss. As such, the FCA expect firms to consider the issues raised in the letter carefully.
Points of note:
- Insufficient focus on the identification and assessment of financial crime risk factors, such as the risk of dual-use goods or the potential for fraud.
- Assessments have been too generic to cover the different types of risk exposures that may exist in trade finance client relationships, such as the industry or jurisdictions in which the client operates.
- Failure to assess or understand risks that can lead to insufficient due diligence being undertaken such as additional pricing checks or using tools such as vessel tracking and independent document verification.
- Appropriate credit analysis of all trade finance counterparts prior to formal credit limits. This analysis should include all parties with an interest in the transaction and not be limited to the borrower i.e. the end-buyer, credit insurer and other parties.
- Prior to individual transactions being approved, firms to determine if further specific analysis is required. This should include, but not be limited to, consideration of the financial and non-financial risk on the end-buyers and the rationale for the transaction.
- Where the end-buyers represent the primary source of repayment under the transaction, prudent risk management to include obtaining formal written acknowledgement from the end-buyer that the amount due and payable under the trade finance transaction is payable to the financing firm, and not to the borrower.
It is important that firms demonstrate that they have taken a risk sensitive approach to their control environment that ensures the relevant risks are effectively mitigated.
Ince has combined its legal and consultancy advice with Windward’s world’s leading maritime predictive intelligence to be able to assist you manage trade finance activity risk.
For more information - https://www.incegd.com/en/incemaritime/sanctions
Please note this article was written by Annette Fong, who is no longer with Ince. If you would like any advice in this regard, please contact Julia Dao.
"Our recent assessments of individual firms have highlighted several significant issues relating to both credit risk analysis and financial crime controls. These issues have exposed firms to unnecessary risks that are material in both a conduct and prudential context", the FCA says.