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"Dear CEO" of Trade Finance: Risk Management Expectations,and What They Mean for Firms

It is now around 19 months since another letter in the “Dear CEO” series was released by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) – this one directed at firms carrying out trade finance activity. The broad outline of this letter is well worth repeating with our added comments.

In light of the high-profile and well-publicised trade finance fraud and money-laundering cases of 2020/202, both the FCA and PRA took the opportunity to remind their regulated entities of the potential risks that can occur when handling trade finance transactions as well as “reiterate their expectations of firms when undertaking trade finance activity”. In the FCA & PRA’s own words, the expectations set out in the letter are “not exhaustive”; they are best to be taken as guidelines and considered alongside other relevant rules and guidance. We think that these guidelines will support organisations to correctly and cost-effectively reach and maintain their goals.

Some of the aspects highlighted in the letter included risk assessment, counterparty analysis, and transaction approval, all of which have been summarised and evaluated before, but we do so again with some insights on potential solutions.

Risk Assessment: firms are generally not yet sufficient and thorough in their transaction-level risk identification and examination of trade documents. The risks identified and assessed are often general and do not consider the specifics of each transaction. This could lead to “exposure to suspicious activity”, as there is a likelihood to miss “red flags” in trade documents. The FCA and PRA advice is to undertake an “holistic assessment” of the relevant financial crime risks, such as money laundering, corruption, and fraud.

Another aspect is Counterparty Analysis. Firms are expected to carry out sufficient and thorough credit checks on all the parties involved in the transaction, prior to the conclusion of any formal agreements. Firms should also do the “common sense check” – considering whether the activity correlates with the usual activity of its client.

Implementing these recommendations is certainly easier said than done, manually examining often numerous and highly detailed trade documents to identify specific data points, is a page-by-page, tedious and time-consuming task. TradeSpeed from Complidata has an AI process designed to extract information from PDFs of trade documents, and input the data seamlessly into bank core trade platforms in order to carry out pre-defined and automated data checks, sanctions, and red flags, reporting back with an OK or NOK status.

Transaction Approval (TA): The FCA and PRA make it clear that they “expect firms to determine if further specific analysis is required. This should include, but not be limited to, consideration of the financial and non-financial risk on the end-buyers and the rationale for the transaction. Firms should identify instances of higher risk which require enhanced due diligence”.

Without having automated the data capture, TA is possible but consistency is not. The content of a presentation in one document examiner’s eyes may not be the same in another’s. Consequently, TradeSpeed offers the ability to digitally capture any data points so that they can feed into a simple process, eliminating not only the manual capture but also allowing comparison and common standard reviews. Our solution can even further enhance this process with the automatic generation of a chosen or agreed form of communication with the salient details in place. Using our intelligent Data Extraction process the data is already captured, then the AI simply generates the text in whatever form is required to be sent.

In short, any Trade Finance department seeking to deliver against the September 2021 Dear CEO letter should be considering AI solutions – that is almost a given across the industry. However, we believe only TradeSpeed from Complidata can deliver AI with PDFs-turned-into-structured-data to allow Straight Through Processing (STP).

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