Import-export business: How to deal with impending compliance requirement

Nowadays, compliance has become the most important aspect in carrying out interbank transactions. During the last ten years, regulatory requirements have changed so rapidly that banks and financial institutions have been striving hard to comply with those requirements. As soon as one requirement is met, another comes into effect. Alongside regulatory requirement, technology has made compliance procedures more complex and cumbersome too. Banks and financial institutions now extensively rely on the use of technology in ensuring compliance in their own organisations. And technology has turned into a very fast-moving and rapidly changing platform. One application, soon after its successful implementation, turns obsolete requiring a new and advanced one. With the fast pace of regulatory changes and technological advancements, banks are now found to be increasingly focused on compliance. Still bank's compliance cannot be made foolproof, and this is evident from the incidence of paying billions of dollars in penalty by many large banks.
NEW COMPLIANCE REQUIREMENT: In order to avoid such situation, banks are now strengthening their compliance procedures. In a rapidly changing regulatory requirement and big data environment, when a new regulatory policy emerges, banks endeavour to make their compliance foolproof. In the past KYC (Know Your Customer) and DD (Due Diligence) were the key prerequisites for compliance, but now they are required to apply KYCC (Know Your Customers' Customer) and EDD (Enhanced Due Diligence) for ensuring compliance. Similarly, onboarding [client onboarding is the process a bank undertakes when bringing a new business customer onboard] of any bank's headquarters was the only requirement for establishing transactional relationship with that particular bank and its branches as well. Now, new a regulatory requirement is coming into effect for onboarding of clients not only in the Head Office of any bank but also in its transacting branches. Under this new requirement, in spite of onboarding the Head Office of a bank, transaction by its any branch which is not onboarded yet, cannot be undertaken by foreign correspondent bank.
IMPACT OF THE NEW COMPLIANCE REQUIREMENT: This new compliance requirement will have serious impact on international trade conducted through banking channels. Commercial LC/Standby LC and advance payment will be adversely affected by it. When the requirement of onboarding each transacting branch of a bank will become effective, the openness of international trade is likely to drastically shrink. It is almost impossible to bring all branches of each bank under onboarding network and consequently, the transaction originated by the branch of a bank which is not onboarded, will not be entertained by counterparty bank although there may be correspondent relationship with that bank's Head Office. This requirement will leave all banks and exporters of emerging markets in a very disadvantageous position because these banks in general face tremendous difficulty in satisfying stringent compliance requirements demanded by banks of developed countries. Correspondent relationship of innumerable banks in the emerging market has already been terminated by some large banks in the developed countries. So, this new measure will put additional burden that many banks will find difficult to get along with -- until and unless special arrangements are made.
MORE IMPACT ON IMPORT THAN EXPORT: International trade, irrespective of import and export, will be adversely impacted by the new compliance requirement of onboarding the transacting branch of a bank. However, import business will be impacted more than export business, particularly in emerging markets when export LC (import LC for developed country) will be established by the bank of a developed country which may not necessarily maintain direct relationship with the branch of the advising/negotiating bank in the exporter's country. In this situation, onboarding of bank's Head Office is good enough for the LC-issuing banks of the developed country because they transmit the LC to the Head Office which may advise through its branches. So, in this situation, requirement of onboarding of a branch can easily be avoided. For example, ABC Bank in the USA is required to issue an LC in favour of an exporter in Chattogram. For this it will need to advise through a Chattogram branch of XYZ Bank in Bangladesh. In this situation, it is not important for ABC Bank to have onboarding completed with the respective branch of XYZ Bank because they will just transmit the LC to XYZ Bank which may advise through its Chattogram branch.
But our country's import business cannot be carried out in this way because import LC (export LC for developed country) issued by a Bangladeshi bank will require onboarding of its transacting branch as a regulatory requirement. Say, one importer from Chattogram is required to open LC in favour of an exporter in the USA. At his request, Chattogram branch of XYZ Bank establishes LC through advising bank, ABC Bank, in the USA. The ABC bank will not handle this LC if the latter has not completed onboarding requirement of the Chattogram branch. In this situation, XYZ Bank in Bangladesh will have great difficulties in advising its LC even though its Head Office maintains correspondent relationship with that bank and eventually, the importer will be in trouble while importing desired goods. In this situation, the Bangladeshi bank may have to go through several other banks which may have completed onboarding requirement but for doing so, import cost will abnormally rise. It may be mentioned here that as per North American standard, every action taken by a bank costs minimum USD 500 which can even be higher depending on the value of transaction. So if three banks are required to be involved, minimum charge will cost USD 1,500 which will be added to the import value.
OVERCOMING THE SITUATION: The onboarding policy is discriminatory in approach. Coping with this situation is a very difficult and challenging task. The banks are eager to explore more business in the emerging market because growth prospect is tremendously high in this area. However, they cannot proceed as per their own plans because regulators are always after them. Many banks have already paid enormous amounts in penalty due to compliance failure. Under this situation, banks in the emerging markets, including ours, will have to develop their own strategy so that they can manage their import business in this changing environment.
The first strategy should come from the importers who must explore alternative exporters, particularly from other emerging countries or less developed countries where regulatory requirement is not so stringent. There are many exporters in the world and no exporter deals in proprietary item any more. In this situation, our banks should also play an important role in providing relevant information to their customers. In fact, banks should develop a specialised team which will render services of all-in-bank solution to the customers. In the developed world, corporate bankers/investment bankers regularly provide such services to their customers at a set fee.
Secondly, banks may try to centralise their trade processing centres from where all LCs and Standby LCs will be handled for their entire customer network in the country. This centralised Trade Finance Centre will have to be updated in the Bankers' Almanac where it will be specifically mentioned as Trade Finance Unit of the bank. And in all communication from issuance of LC to the final settlement, only one SWIFT code i.e. bank's Head Office SWIFT code will be used because issuing entity is always verified with its SWIFT code. When a LC is required to be opened, the respective branch will send all necessary information to the Trade Finance Processing Centre which will issue the LC. When LC is issued, the phrase "on behalf of any particular branch" should not be mentioned anywhere. Through establishment of centralised trade processing centre, many large banks are trying to address this situation. However, this approach may not equally work for the banks in emerging market which is always considered as the place of weak regulation.
Thirdly, if centralisation does not work and counterparty bank insists on onboarding the branches with customer (importer) account, there must be alternative arrangements. In this situation, the bank should designate some branches with high volume of trade finance transactions and pursue all correspondent banks to get these branches onboarded and all trade finance transaction should be handled by those designated branches which are already onboarded.
Finally, our banks should take initiative to establish correspondent relationship with a number of banks instead of only one large bank. Many small and medium-size banks which are usually categorised as scheduled B and scheduled C banks, can be included in the basket of correspondent relationship. Small and medium banks are very sincere and eager to maintain relationship for increasing their business, so they are very cooperative and responsive. If our banks maintain multiple correspondent relationships, their LC can easily be channelled through small and medium banks if not directly accepted by large banks or exporter's preferred banks. LC once confirmed by a medium/small bank can easily be accepted by any bank which will then take risk on their country's bank instead of issuing bank in the emerging country.
This new requirement of onboarding the transacting branches of banks has not come into force yet, but will commence very soon - probably by the end of next year (2020). Now all large banks are busy with their groundwork and preparing themselves to cope with this new requirement. Our banks should start their preparation well ahead of enforcement so that they don't have to face difficulty at the time of need. Many banks in our country are already facing difficulties in keeping correspondent relationship and maintaining counterparty limit. This tight situation will further worsen when the new requirement of onboarding will be implemented. Banks and our business community should work together to develop strategies to cope with the impending compliance requirement. The Bangladesh Bank should review this new development and provide appropriate guideline/direction to all commercial banks in this regard

Nironjan Roy is a banker based in Toronto, Canada. [email protected]