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On September 9, the Financial Conduct Authority (“FCA“) and the Prudential Regulatory Authority (“PRA“) issued a letter to CEOs of banks in an attempt to reiterate the expectations of companies when undertaking trade finance activities. The Dear CEO letter addressed both conduct and prudential issues for which regulators believe that improvements are needed in company controls. Regulators have stressed that “companies must demonstrate that they have adopted a risk-sensitive approach to their control environment that ensures that relevant risks are effectively mitigated,” noting that the past 18 months have seen several “high profile failures of commodity and trade finance companies with significant financial losses.” From a credit perspective, businesses are urged to ensure that credit analysis is extended to all parties involved in a trade finance transaction before credit limits are put in place.

From a financial crime perspective, the FCA and PRA stressed that companies in the trade finance sector should conduct a financial crime risk assessment after discovering “significant issues” related to crime controls. financial related to trade finance. The obligation to carry out such a risk assessment is, of course, a specific legal requirement under UK AML, and therefore it is particularly important that companies take note of the FCA’s comments and the PRA. The view of regulators seems to be that these risk assessments to date have often been too generic and focused on client risk factors, without sufficient coverage of the specific risks present in trade finance transactions.

In particular, the letter made particular reference to dual-use items, sanctions, fraud and AML in the context of financial crime risk assessment requirements. The FCA and PRA said that “in our reviews to date, we have found that there is often not enough attention to identifying and assessing risk factors for financial crime, such as the risk of dual-use goods or the potential for fraud ”. The letter goes on to state that “you should, if you haven’t already done so, undertake a holistic assessment of the associated financial crime risks… These risks include money laundering, evasion of sanctions, terrorist financing. and fraud. This follows a number of FCA initiatives to shine the spotlight on financial crime in the area of ​​trade finance (including in these and other compliance areas), dating back to the 2013 thematic review. : the control by banks of the risks of financial crime in the financing of trade.

Companies should review their control frameworks in light of the Dear CEO letter, as we can expect non-compliance to be an area of ​​focus for regulators, who will consider whether companies addressed the issues raised in the letter when considering enforcement action. It will be important to document the additional actions taken in order to be able to demonstrate compliance.