Trade facilitation: The problem of conflicting regulatory requirements

Changing global political scene and erosion of confidence among stakeholders and market players have brought international trade finance market face to face with ever newer challenges. For banks, the geopolitical shift came up at a time when regulations, including more rigorous anti-money laundering (AML) and know your customer (KYC) obligations, are dominating the landscape. Too many regulations and too many regulators became a cause for concern for many banks. They have to follow domestic regulation, the recipient bank's foreign regulation or international regulation. As a result of regulatory burden and uncertainty, at times banks avoid entering into any transaction whatsoever.
Available data identified significant gap in the provision of trade services in the context of global economy, especially for the growing small and medium-sized enterprises (SME) sectors in emerging markets. A shortfall of trade finance has become evident globally and an increase in rejection of trade finance proposals or applications has hit SME applicants. Though the situation is improving, it remains a critical challenge. According to a recent estimation of the Asian Development Bank (ADB), the global trade finance gap is notable in developing countries, and the unmet demand is the highest in Asia and the Pacific. The most recent International Chamber of Commerce (ICC) Survey observed that the trade finance proposal was rejected in a significant number of cases in 2016: 58 per cent for SMEs, 33 per cent for large corporate and 9.0 per cent for multinational companies.
Also a large-scale withdrawal of correspondent banking relationship is occurring in many regions and jurisdictions affecting trade facilitation remarkably.  Correspondent banking is threatened by an overzealous interpretation and enforcement of rules aimed at preventing money-laundering and starving terrorists of funds. The number of linkages between banks has been declining in recent years, largely because the industry has been consolidating. According to the ICC survey, 40 per cent banks terminated correspondent banking relationships because of increased cost and the complexity of the regulatory requirements. On account of declining correspondent banking relationship, the Middle East and North Africa are most affected.
There are indications of upsurge of document rejection and court injunction in recent times. Increase in allegations of fraud, court injunctions barring payment of bank undertakings and claims under bank guarantees is reported. Other challenging situations concern documentary compliance with the increase in refusal rates of documents on first presentation.  Practices of offering spurious discrepancies in documents presented under LC are also reported.
Trade finance involves a wide range of instruments and is undergoing a period of innovation. New products, such as supply chain finance and Bank Payment Obligation (BPO) are intended to reducing financial frictions. The reach and uptake of these instruments have been slow. One reason appears to be information asymmetries. Latest available  data reflect lack of familiarity with financial products. In the case of non-traditional products such as factoring, forfeiting, BPO and supply chain finance, only a limited number of companies report familiarity. Even within traditional bank products, companies reported limited familiarity with relatively established products, as observed by an ADB study.
The processes and systems of international trade are vulnerable to abuse leading to financial crime. In recent years, there has been an increasing focus on these risks for a variety of reasons, including the continued growth in world trade. Among the risks, malpractices in trade services, broadly take the form of irregularities or non-compliance of regulations and fraudulent activities. Though the malpractices (especially fraudulent activities) in trade services are not very frequent, these can prove to be very costly for banks and the parties concerned. Of the different types of crimes in the financial sector, some are directly related to international trade and cross-border service facilitation. In recent time, money laundering, cybercrime and violation of sanctions have become a global concern. Especially, trade-based money laundering is a critical area of malpractice which can be practised through misrepresentation of price, quantity or quality of imports or exports, and the techniques involved are: over- and under-invoicing of goods and services; multiple invoicing of goods and services; over- and under-shipments of goods and services; falsely described goods and services etc. In many cases, this can also involve abuse of the financial system through fraudulent transactions involving a range of money transmission instruments, such as wire transfers.
Regulatory requirements designed to mitigate the risk of financial crimes have resulted in unintended consequences particularly in emerging markets. In many instances, AML and KYC requirements created impediments to provision of lines of credit for some. Globally, Asia and Africa were said to be most negatively impacted regions. In the context of trade services, sanctions may restrict a bank's ability to perform its role and bring it to further confront different sanctions regimes imposed in multiple jurisdictions. Sanctions are imposed by the United Nations, the EU Council or individual countries to achieve political and economic ends. They may prohibit dealings with specific countries, persons or property. Thus, banks may be subjected to conflicting regulatory requirements.
Price verification in the interest of financial crime control is difficult for financial institutions (FIs). FIs generally are not in a position to make meaningful determinations of the legitimacy of unit pricing due to a lack of relevant business information, such as the terms of a business relationship, volume discounting or specific quality of goods involved. Further, many products are not traded in public markets and there are no publicly available market prices. Even where goods are publicly traded, current prices may not reflect the agreed price used in any contract of sale or purchase and these details are not usually available to the FIs involved due to competitive sensitivity of such information.
Offshore banking activities at times are causes for concern if political and financial elites are trying to hide information from public view. They impose austerity measures on hard-working citizens, but secretly hold astronomical amounts of money in offshore banks to evade taxes. The 'Panama Papers' database showed the largest-ever release of secret offshore companies and the people behind them. The leaked documents illustrate how wealthy individuals, including public officials, are able to keep personal financial information private. While offshore business entities are often not illegal, reporters found that some of the corporations used their channels for illegal purposes, including fraud, tax evasion, and evasion of international sanctions.
Most cases of malpractices in Bangladesh are related to non-compliance of regulations or guidelines. Some of these are intentional, and many of these are due to knowledge gap of service providers. There are also instances when fraudulent activities or undue legal steps by clients resulted in difficulties. Client behaviour and other external steps also affect country risks and trade services as well. Policy-makers of the country and other trading economies are particularly worried about trade-based money laundering, compliance and sanctions.
Dr. Shah Md Ahsan Habib  is Professor and Director Training, Bangladesh Institute of Bank Management (BIBM).
 ahsan@bibm.org.bd