Trade Compliance for Banks and Financial Institutions

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. This is a requirement set by international and national organizations, such as the European Union and the US Federal government. These bodies 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 rules. Trade regulations, export controls, embargoes and sanctions 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.

OFAC Compliance

Any institution that uses US currency must comply with OFAC rules. OFAC is the US Treasury’s Office of Foreign Assets Control. 

As the US dollar is the most popular global currency, OFAC has significant reach. This is true for enterprises based outside the US. Any organization that makes or accepts transactions in US dollars is subject to OFAC regulations. 

OFAC is the organization responsible for enforcing compliance with trade sanctions against targeted foreign governments. Furthermore, it also 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. In addition, they are applied to certain 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, 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 to combat financial crime. 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. Under US law, banks must identify and assess the money laundering risk 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 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 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. However, for banks and financial services firms to do business in targeted countries, or with targeted individuals, licensing is often required. It can be challenging to manage these licensing requirements. 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. Missteps result in heavy financial penalties and reputational damage.

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.  Regulatory compliance is not optional, no matter how complex. However, technology solutions can assist banks to meet this challenge.

Trade compliance software helps compliance teams 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.

Restricted party screeningsoftware can automatically check names against published lists of denied or sanctioned individuals and groups. As these lists change frequently, banks need providers that offer daily updates to trade content.

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.

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Further Reading

ASSESSING AND MITIGATING FINANCIAL SUPPLY CHAIN RISKS

HOW DESKTOP SHIPPING SOFTWARE HELPS BANKS CONTROL COSTS

IF YOUR TRADING PARTNERS ARE CRIMINALS, SO ARE YOU