Trade finance banks not doing enough to detect fraud and crime say UK regulators

British regulators have written an unusually blunt letter to the CEOs of the UK’s largest banks ordering them to conduct a full financial crime risk assessment of their processes to detect money laundering, sanctions evasion, terrorist financing and fraud among their clients.

The Bank of England’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) said the letter responded to several high-profile failures of commodity and trade finance firms with significant financial loss during the past 18 months.

Major failures

The regulators’ warning follows the recent collapse of the UK’s Greensill Capital, which provided trade finance to companies before selling the loans to investment funds and the collapse of Singapore-headquartered Hin Leong Trading, which left banks including HSBC the task of recovering some US$3.5 billion.

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 the regulators said:

“We have found that firms have either failed fully to assess these risks, are unable to evidence the checks they have undertaken, or in some cases discounted them inappropriately.”

Focus on financial crime

Now the regulators say they want risk assessments with sufficient 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 regulators noted that in some instances, firms have not adequately evidenced their assessment of mitigating controls or recorded the rationale to support conclusions drawn on the level of residual risk to which the firm is exposed.

We are watching you

The regulators said assessments should be clearly documented within the business-wide financial crime risk assessment and should identify the types of customers or transactions where enhanced due diligence is needed.

“In future engagement with your firm, we may ask to see the risk assessment you have carried out and any follow-up action undertaken as a result,” the regulators concluded.

The letter to bank CEOs from the PRA and FCA with the subject heading Trade Finance Activity can be found here.



Categories: Trade Based Financial crimes News

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