Trade Finance Risks: Ahead of or Behind the Curve?

Is your Trade Finance programme prepared for a rise in demand, a set of new regulations, or a visit from the regulators themselves?

By Noemi Klein

If trade finance is what drives your business, you might just be behind the curve. Global trade growth is set to more than double in 2024, after a slump in 2023, according to international bodies such as the Organization for Economic Cooperation and Development, the International Monetary Fund, and World Trade Organization.1 On the surface, this is good news. More trade will ease inflationary pressures partly brought about by sputtering supply chains. It also represents the resilience of global trade to ongoing international geopolitical shocks.

However, banks cannot afford to merely look at the surface. They play a vital role in global trade, financing and advising deals globally through products such as Letters of Credit, Guarantees, Trade Loans, and much more. They help ensure that your new garden furniture can be shipped from its factory in China or Turkey to your local supplier on behalf of a French-owned furniture conglomerate, just in time for the start of the (likely short) British summer.

Despite appearances, these deals aren’t processed without time and money needing to be spent on compliance to mitigate inherent risks. And whilst ‘sunbeds’ and ‘Hampshire’ probably score pretty low on a transaction risk assessment, the increasing complexities of global trade do not. Countries like China and Turkey, as manufacturers and major exporters, have been brought under increased scrutiny due to their role in supporting ‘rogue’ regimes and the increased risks of modern slavery. Moreover, your renowned French conglomerate might be involved in making payments to proscribed terrorist groups, as in the case of Lafarge S.A.2

All of this might just be happening under your watch, through your compliance programme. As senior managers, you are always at risk of being held personally accountable for your firms’ failings, and with the Financial Conduct Authority (FCA) expecting Senior Management Function (SMF) 1s or 19s to attest that their controls are effective at mitigating risk, there is no room for complacency.

Managing trade finance risk is expensive, complicated, and time-consuming. It is well known that the burden on banks is being continuously exacerbated, without even considering increasing trade volumes. One of the key concerns in the world of trade has been the increased regulatory focus on Trade Finance activity. The FCA published its ‘Dear CEO: Trade Finance Activity’ letter in 2021 and we’ve seen from our work with clients that they’re sticking to their word when it comes to scrutinising Trade Finance Functions.3 This has come at a time when firms are acutely aware of the increasing complexity of the sanctions and export controls that they have to contend with as part of the due diligence process.

Indeed, the feedback from industry players, regardless of their size, seems to highlight the same struggles and uncertainties around what ‘good’ looks like when it comes to trade finance due diligence. Document checkers, analysts, and senior management alike are asking themselves the same questions: 

  • Did you cross-check your goods’ code on the UK’s strategic military and dual-use items’ list or the EU’s list?
  • Did you make sure that the vessel didn’t go ‘off the map’ near the coast of Iran?
  • Did you check to see if the ultimate beneficial owner (or controller, whatever that is) of an entity has made it onto a sanctions list for being an esteemed member of the Wagner Group? 

The above considerations aren’t plucked from thin air. They are genuine questions an analyst, manager, and ‘head of’ might ask themselves. Moreover, all three could apply to the same transaction. The process can be legitimately overwhelming and getting the right answers prone to error, causing banks to run afoul of their own risk appetite or regulator expectations.

Good trade finance crime risk management requires:

  • Adequate risk identification through a comprehensive business wide risk assessment with a trade finance lens.
  • Effective and tailored controls designed to ensure that all elements of a transaction are correctly screened, and risk assessed.
  • Comprehensive transaction risk assessment execution by well-trained and well-supported staff with a ‘sixth sense’ for spotting trade risk indicators that would otherwise be missed.
  • And a nurtured culture of compliance. 

Guidehouse is uniquely positioned to help firms with all stages of their trade finance risk management journey.

Patrick Stillman, Senior Consultant

1.  “Global Trade Growth Set to More than Double This Year.” n.d.
2.  “Lafarge Pleads Guilty to Conspiring to Provide Material Support to Foreign Terrorist Organizations.” 2022. October 18, 2022.
3.  Jackson, Rebecca, and Melanie Beaman. n.d. “Edwin Schooling Latter and David Geale Financial Conduct Authority.” Accessed May 16, 2024.

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