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Innovation has been synonymous with business growth for decades and continues to be so. Compliance’, however, is a word innovators within financial services dread to hear. The truth is, in the current regulatory environment, a non-compliant business is almost certainly headed for destruction by reputational damage and financial losses. The financial penalties imposed on banks especially continue to have a retributive impact. Observing regulatory compliance should at least be near the top, if not at the top, of every institutions agenda.
Trade finance facilitates international business; however, doing business this way also heightens the risks of financial crime. Trading across borders significantly increases the risks of money laundering, terrorist financing and the proliferation of weapons of mass destruction. Yet a thematic review conducted by the Financial Conduct Authority (FCA) in 2013 showed that banks in the UK were inconsistent in their approach to assessing risks within trade finance. The findings showed that some banks failed to implement controls to identify suspicious transactions, effectively allowing trade finance to be used as a tool for the proliferation of terrorism and money laundering under their watch.
Some of the work OpusDatum has carried out confirms that a lacklustre approach taken towards trade sanctions compliance occurs as a result of weak controls. Sanctions circumvention controls and the identification of resubmissions through payment systems were high on the list of weak controls. Of course, sanctioned entities are always looking for ways to circumvent the controls in place against them, therefore a phlegmatic approach to sanctions compliance allow their plans to flourish. In some of the retrospective reviews we have carried out, there have been instances where customers simply strip sanctions information from their trade application and successfully resubmit the amended application. This shows that financial institutions must regularly test the resilience of their trade finance and electronic payment systems. Other times, we noted the nature of the goods involved in the trade itself had not been observed and so the trade would be successfully financed when it should have been rejected.
It is true that there are some grey areas in any financial institution’s attempt to protect itself. For example, in any trade sanctions investigation, tools such as the International Maritime Bureau (IMB) report and Lloyds List Intelligence report are useful in pointing out where a ship has been and where it intends to go. However, there have been instances where the information on IMB reports conflict with the information on Lloyds List Intelligence report with regards to where a ship has docked, in that case how do you address your analysis?
Secondly, there has been some controversy about whether a ship stopping over at a sanctioned port without docking is to be considered a sanctions breach. We know that when docking in a sanctioned port there is the possibility of an exchange of good and services, which could provide economic benefit to the sanctioned country; but what about if the the ship hasn't actually docked but just 'passed through'? Many questions should cloud the minds of sanctions analysts in such cases. For example, why should a ship stop at a sanctioned port if they are not loading or off-loading goods, or if there will be no exchange of good and services? Furthermore, if the boat did dock at a sanctioned port, should the buying of food, water and fuel be enough to satisfy the notion that a sanctioned country has been unlawfully enriched as a result?
While there is a lack of clarity around this issue, taking a risk-based approach allows us to help our clients protect themselves against the risk of breaching OFAC sanctions regulations. As such, for us at OpusDatum the exchange of cash for any goods or services, be it bottled water, could potentially result in a breach of sanctions regulations.