Uncovering Sanctions Risks in Trade Finance Transactions

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1 7 th February 2018 Uncovering Sanctions Risks in Trade Finance Transactions Piyush Chawla Head of Sales South Asia accuity.com

2 Accuity focuses on the needs of banks, financial institutions and corporations to ensure efficient AML screening while minimizing regulatory compliance risks Automated Trade Finance Screening 95% of the world s 500 largest banks Strategic relationships 175 years Offices in #AccuityTradeFinance

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5 $12 Million

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7 Cost of Compliance The pain is real and the investment significant Staff Total Staff Yearly spend JPMC (2014) 235,000 $1.5B DB +500 (2014) 100,000 $1.3B CITI ,000 $1.7B UBS ,000 $0.9B HSBC (2014) 260,000 $1B

8 Cost of War is higher and more painful $2.1M per year $18,000 per hour $2Tn total cost Congressional report The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11 Amy Belasco

9 Sanctions is a real foreign policy tool somewhere between condemnations and war 3

10 Banks as gate keepers are at the front lines in implementing economic sanctions it is not easy

11 A global standard is emerging in identifying tradebased money laundering risks but we re not fully evolved yet FATF Trade-based Money Laundering report 2006 The Wolfsberg Group Trade Finance Principles 2009 EAG WG Internation al TBML report Dec.2009 US FINCEN SAR/TBML Advisory Feb APG TBML Typologies Report Jul UK FCA Thematic Review: control of financial crime risks in trade finance Jul JMLSG Guidance Trade Finance Nov MAS AML CFT Controls in Trade Finance Oct HKAB Guidance paper on TBML Feb. 2016

12 Uncovering Sanctions Risks in Trade Finance It s not only about checking documents Screening data elements embedded in ancillary documents Not just embargoes but also proliferation financing Sanctions exposure country, individual, organization, items/goods, business

13 Risks go beyond screening payment messages 1. Counterparty name(s) and location(s) 2. Counterparty bank(s), their capacity in the transaction, and location(s) 3. Customer name(s) including individuals and companies 4. Carrier / charter / agent 5. Consignee 6. Country of origin 7. Description of goods / commodities (Dual Use Goods) 8. Freight forwarders and shipping companies 9. Originating and recipient entities of the goods 10. Shipper, consignee and notification party on transport documents 11. Shipping route (such as the port of loading, port of discharge, port of transhipment 12. Vessel name(s) and ownership 13. Flag of vessel

14 A L/C is not a point in time transaction are you abreast of sanctions changes? Banks should be aware of any adverse developments present in the trade finance transaction, between the inception of the trade finance transaction and submission of trade documents since there could be significant time difference during this period MAS 2015 Paragraph 2.21 Jan 1 New Corporate Customer Jan 3 OFAC Updates April 30 L/C Amendment May 1 Major Sanctions Developments May 30 Additional OFAC Sanctions Sanction List updated 4 times during an active trade transaction KYC On-boarding L/C Application Shipping Document Presentation Remittance April 2 L/C Application April 14 EU Update June 4 Docs Presented

15 Banks should determine whether the underlying goods financed are embargoed goods and there should be special attention paid to dual-use goods AML/CFT Controls In TF and CB Guidance Paper 2016

16 Dual-use Goods include a wide range of goods that are designed for commercial applications but can also have military applications or potentially be used as precursors or components of Weapons of Mass Destruction

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19 Goods descriptions can vary greatly Bromobenzyl cyanide might be referred to by: CAS # chemical formula C8H6BrN commonly referred to as Tear gas

20 DUG identification is not just a list problem but also a matching problem Present screening algorithms are programmed to match on names of people and organisations mohamed mohammed mohammed a fuzzy score is useful in this type of matching Matching on the names of goods is different to normal name screening Sodium sulphide is dual use Sodium sulphate is not fuzzy matching ~ 79%

21 Identifying High Risk Jurisdictions for Trade

22 Practical Approach to defining High Risk Jurisdictions EU Embargo UN Embargo GTI High Risk GEO High Risk

23 CTRL + F to search the DUG & military goods lists Relying on people and experience Creating & maintaining an internal goods list

24 Tracking Shipping routes. Are Bankers now the cops of the sea? Trade Finance and Compliance professionals should not be spending all day looking at a map They should not be sifting through vessel journey logs for every transaction

25 Sanctions Risks in a vessel journey The ship had stopped in a sanctioned port, though supporting trade documentation shows that the ports of loading and discharge are not in countries which are the target of sanctions. Whether a shipment enters into commerce by virtue of either cargo being offloaded or transshipped or in transit through the sanctioned country. Recent voyage history of the vessel; if the ship had docked at embargoed countries during its previous voyages BAFT/TCH Sanctions Working Group Report Feb 2017 MAS Guidelines on AML/CFT controls in Trade Finance Nov 2016

26 New technology, processes and training needs to be developed to combat TBML SPECIALIZED ALERT ALGORITHMS IDENTIFYING RISKS BEYOND SANCTIONED JURISDICTIONS ACTIVE SCREENING ACROSS TRANSACTION LIFECYCLE TRADE FINANCE SCREENING & MONITORING SOLUTION A SINGLE AUDIT TRAIL FOR THE MULTIPLE SANCTIONS CHECKS

27 Battle Ready for Trade Finance Compliance Clear policy & consistent procedures taking into view specific trade finance risk assessment. Adequate use of CDD information gathered by front office. Escalation for senior level management to review and sign-off for transactions with sanctions concerns Ability to demonstrate the basis of a decision through comprehensive audit data Specific trade finance compliance training for relevant employees.

28 Key Takeaways Expect increased enforcement from regulators on Sanctions Compliance Sanctions risks in a trade finance transaction are unique and complex Mitigation of Sanctions Risk in Trade Finance requires a specialized screening solution approach Policies, procedures and training, specifically for Trade Finance need to be in place Compliance and Trade Operations need to and are coming together