On 9 September the Financial Conduct Authority (“FCA“) and the Prudential Regulation Authority (“PRA“) published a letter to bank CEOs with the purpose of reiterating expectations of firms when undertaking trade finance activities. The Dear CEO letter addressed both conduct and prudential issues where the regulators consider that improvements are required in firms’ controls. The regulators stressed that “firms need to demonstrate that they have taken a risk sensitive approach to their control environment that ensures the relevant risks are effectively mitigated”, noting that the last 18 months have seen several “high-profile failures of commodity and trade finance firms with significant financial loss”. From a credit perspective, firms are being urged to ensure that credit analysis is extended to all relevant parties in a trade finance transaction prior to credit limits being put in place.
From a financial crime perspective, the FCA and PRA emphasised that firms in the trade finance space should carry out a financial-crime risk assessment, after finding “significant issues” relating to trade-finance financial crime controls. The requirement to carry out such a risk assessment is, of course, a specific legal requirement under the UK’s AML framework, and it is therefore particularly important that firms take notice of the FCA’s and PRA’s comments. The regulators’ view seems to be that such risk assessments to date have often been too generic and focused on customer risk factors, without sufficient coverage of the specific risks present in trade finance transactions.
In particular, the letter made particular reference to dual-use goods, sanctions, fraud and AML in the context of financial-crime risk assessment requirements. The FCA and PRA stated that “in our reviews to date we have found that there is often 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.” The letter goes on to state that “you should, if you have not already, undertake a holistic assessment of the associated financial crime risks… These risks include money laundering, sanctions evasion, terrorist financing and fraud.” This follows a number of FCA initiatives to shine the spot-light on financial crime in the trade finance space (including in these compliance areas and others), dating back to the 2013 Thematic Review: Banks’ control of financial crime risks in trade finance.
Firms should be revisiting their control frameworks in light of the Dear CEO Letter, as we can expect non-compliance to be an area of focus for the regulators, who will take into account whether firms addressed the issues raised in the Letter when considering whether to bring enforcement action. Documenting additional steps taken will be important, so as to be able to evidence compliance.