Financial institutions must abide by a complex web of
international trade compliance and anti-money laundering
regulations. In this QAD Precision Report we look at the challenges
of compliance for banks.
Financial institutions and banks must deal with some unique and
complicated global trade compliance requirements. International and
national organizations, such as the European Union and the US Federal
government, are deeply concerned about ensuring money that crosses
international borders – through financial transactions, shipment of
funds, and so forth – is not being used to support criminal activity,
terrorism, the spread of nuclear weapons and other such activities.
In response, government organizations have adopted a complex web of
trade regulations, embargoes and sanctions that come into play in
international transactions. Some of the most critical trade compliance
challenges facing the financial industry include OFAC regulations,
global trade compliance and licensing requirements.
Any institution that uses US currency must comply with regulations
set by the US Treasury’s Office of Foreign Assets Control (OFAC). As
the US dollar is the most popular global currency, OFAC has
significant reach. This is true for enterprises based outside the US —
if they make or accept transactions in US dollars, they are subject to
OFAC is the organization responsible for enforcing compliance with
trade sanctions against targeted foreign governments and places
controls on shipments and transactions between individuals and
governments, and can freeze assets under US jurisdiction.
The list of OFAC sanctioned persons, countries and entities is long.
Sanctions and restrictions can be applied to business entities and
individuals with ties to narcotics trafficking and terrorist
organizations, as well as countries such as Cuba, Iran, Libya, North
Korea, Sudan, Syria and others. Transnational criminal organizations
and business entities known to be associated with them, such as
mafia-type organizations and cyber-hacking collectives, are also
targeted for OFAC sanctions.
In addition to its work ensuring compliance with US trade sanctions,
OFAC is also the office that oversees compliance with UN and other
allied international mandates. It cooperates closely with
international authorities and allied governments. As a result, OFAC
compliance is a challenge for international financial institutions.
These regulations are multilateral and complex as well as subject to
change at short notice.
Anti Money Laundering Laws
The US and UN aren’t the only entities whose regulations are of
concern to banking organizations. Each individual nation has its own
trade regulations and policies. For banks that do business
internationally, these create a very complex web that can make
financial industry logistics particularly challenging.
In addition to sanctions, anti money laundering laws aim to combat
terrorism financing, financial fraud and other criminal activities. In
the US, banks and financial institutions are obliged to identify and
assess the money laundering risks presented by their customers,
products and services. Banks must also examine whether their
activities, products and delivery channels could be exploited by
criminals or terrorists.
Furthermore, US banks that engage in business with legal entities
must also be able to identify the people who own or control them. This
is to combat the use of offshore accounts, trusts and shell companies
to hide funds, evade taxes and launder money.
The European Union has similar laws to prevent terrorists or
criminals exploiting the EU financial system. Banks in the EU cannot
must perform customer due diligence to identify and verify who their
customers are. Like US regulations, this includes identifying
individuals who have ownership or control over legal entities.
Financial institutions must also comply with Financial Action Task
Force (FATF) guidelines, in the territories where they apply. FATF is
the international standard setting body tasked with combating money
laundering and terrorist financing. The body has a series of
“Recommendations” that member countries must endorse, support and work
to legislate. Thirty-seven countries and two regional bodies — the
European Commission and the Gulf Cooperation Council — are members.
Compliance with Licensing Requirements
When a nation is under sanctions, it isn’t the case that it’s
entirely illegal to conduct business there, but in order for banking
and financial services firms to be eligible to do business in targeted
countries, or with targeted individuals, licensing is often required.
It can be challenging to manage these licensing requirements since
they, too, can be subject to change on short notice as the political
or trading environment shifts.
How Technology Can Help Banks Mitigate Compliance Missteps
Trade compliance is a major issue for banks. To mitigate the risk of
violations, banks need robust compliance and screening procedures.
Manually checking customers and transactions against government and
international lists of restricted and sanctioned parties is almost
impossible. However, technology can assist banks to meet this challenge.
compliance software helps banks to monitor changes to
regulations and published lists of restricted individuals and
entities. Automated compliance software can also assist banks to
ensure that licensing requirements have been met. In addition, by
leveraging this technology banks also have a permanent audit trail of
compliance checks and results for each transaction. This provides the
required without disrupting business.
About QAD Precision – Trusted Global Trade and Transportation Execution
QAD Precision (Precision Software), a division of QAD Inc., provides
trade management, transportation
execution and multi
carrier shipping software solutions from a single, integrated
platform. Preeminent industry leaders in every region of the world
rely on QAD Precision’s global support centers to leverage thousands
of carriers and manage millions of shipping transactions every day.
Our open architecture easily integrates with Enterprise Resource
Planning, Warehouse Management Systems and legacy solutions. An
ISO-certified company, QAD Precision assists companies to minimize
shipping costs, optimize first mile and last mile deliveries, automate
free trade agreement compliance, avoid customs delays and mitigate
the risks associated with dynamic trading environments to
maximize their competitive advantage. QAD Precision’s customers span
multiple industries including banking and finance, life sciences, high
technology, retail, industrial, automotive, higher education and
public sector as well as logistics providers. For more information
about QAD Precision, visit www.qadprecision.com.