Recent years have seen renewed regulatory interest in banks’ trade finance operations. This is perhaps most keenly felt by banks with a presence in the UK, where the PRA / FCA "Dear CEO" letter has set out requirements for a risk assessment that should cover, among other topics, counterparty analysis.

But beyond the UK, regulators are increasingly advocating for (and even incentivizing) organizations to embrace technological advancements in their fight against financial crime, as trade-based money laundering (TBML) remains a prevalent channel for criminals (and a big challenge for institutions). As an example, Global Transparency International estimates that as of 2021, trade-related illicit fund flows in and out of developing economies averaged approximately 20% of the total value of their trade with developed economies.  

Concurrently, amid this heightened regulatory scrutiny, numerous trade finance banks have embarked on a re-platforming journey of their core booking systems. This transformation presents a unique chance for banks to review and automate existing process flows, address data capture requirements, and fortify control frameworks to safeguard against future challenges.

With this in mind, the following outlines some noteworthy considerations for trade finance banks looking to optimize their AML and Fraud controls.

1. Consider the end-to-end control framework and opportunities for control streamlining

Banks will at times respond to new regulatory requirements by introducing further controls on top of existing frameworks—e.g., by incorporating automated post-transaction monitoring while maintaining manual red flag checks. This can materially increase the overall cost of compliance and impact the profitability of the business.

As such, it is important to consider the end-to-end control structure and process flows to determine at which point any given risk mitigation measure can be most effective and efficient. For example:

• Could some or all of the existing in-flight manual checks be moved to post-transaction, either via an automated solution or as part of investigation steps?

• Could some of the existing controls be discontinued entirely if there is evidence they have not helped identify confirmed risk?

• If the controls must remain in-flight, could they be automated so that they don’t present a blocker for straight-through processing in the future?

Banks who express discomfort with the idea of relying primarily on post-transaction monitoring usually cite the need for speedy risk identification and intervention as the primary reason—e.g., stopping a transaction before money leaves the door. In practice, however, while a particular transaction may be rejected as a result of in-flight checks, few banks will stop processing further transactions for the same customer/counterparty unless a more lengthy and in-depth investigation provides a recommendation to do so. This makes the definition of "in-flight" somewhat relative.

Reviewing the end-to-end control framework can offer opportunities to drive efficiencies, reduce the undue burden on trade finance operations, and help support the journey to straight-through processing.

2. Obtain buy-in from trade finance senior leadership

Most successful trade finance risk monitoring implementation projects are either driven by the business directly or have heavy buy-in from the key stakeholders in the business (including operations). This is most effective if the trade stakeholders have a vested interest in the success of the project—for example, if it helps support safe business expansion or a safe reduction in the overall cost base for the product.

This ensures:

• Close involvement and input from experts who understand the trade business, associated risks, and data structures. This input is key for every aspect of the project, from data modelling to score design to investigation procedures and training

• Ability and willingness to make changes to how transactions are processed in order to streamline monitoring and make the deployment a success

• Greater business case support and alignment to business strategic objectives

3. Challenge the definition of trade finance risk

Trade finance risk identification has historically focused primarily on documentary risk indicators, partly as a result of limited technological solutions at the time the checks were introduced, and partly because regulatory guidance heavily focused on such indicators. While new solutions are now available in the market and regulatory guidance now explicitly considers monitoring for related parties and collusion as a requirement, shifting internal investigation mindsets away from individual transactions and toward holistic customer reviews can be challenging.

The key to overcoming this barrier is to review and break down traditional risk silos between product, KYC, and individual risk areas. If the activity of a particular customer is cause for concern, it is highly unlikely that only a single product area or transaction set will be affected. Investigators should not be limited in their ability to act on concerns simply because they may sit outside of their perceived remit.

4. Start small, with imperfect data, but work to improve over time

Obtaining data across multiple sources can be the biggest barrier to implementing a comprehensive monitoring solution. Nonetheless, a trade monitoring solution can be made operational with fairly basic trade finance data points. Optical character recognition or the capture of additional data, beyond that which is already captured for sanctions screening, is not usually a requirement.

However, many banks choose to use their risk transformation projects as accelerators of system upgrades. Over time, close alignment with the trade finance business can help ensure all required data is captured in an appropriate format while allowing for an operationally optimized process.

5. Measure success holistically

While many monitoring transformation projects stem from regulatory requirements, these projects frequently deliver far broader value to any business. Examples of additional value streams beyond risk identification include:

• Robust KYC feedback loops: Monitoring can help uncover information about customers that, while within risk appetite, is not something the bank was already aware of, therefore strengthening KYC profiles

• Reduced impact to "good" customers: Reducing the number of in-flight checks will result in less friction for the broader customer base, and fewer transactions being held pending an escalation decision

• Fewer and better RFIs to front line staff and customers: A more holistic review of customer activity across multiple counterparties will ultimately deliver more comprehensive / robust RFIs while reducing their total number

• Faster transaction processing times: Reducing the number of in-flight checks will allow less time spent per transaction and will reduce the control burden for operations staff

• Reduced alert volumes and levels of false positives: Moving away from individual transaction escalation will reduce the overall alert volumes as well as the number of false-positive escalations

Measuring and capturing these value streams can be integral to building support for the transformation project, ensuring continuous funding for enhancements, and getting buy-in and active input from the trade finance business. It is also crucial to secure agreement with all stakeholders at the outset, and to regularly review changes with them as the project evolves.