FCA Requires Trade Finance Firms to Strengthen AML Controls

The Financial Conduct Authority ( FCA) has recently sent a 'Dear CEO' letter to firms who conduct trade financing activity, requiring these organizations to complete a financial crime risk assessment based on the substantial issues relating to both credit risk analysis and financial crime controls, which have exposed firms to unnecessary risks. 

The FCA are expected to strenghthen surveillance and monitoring over trade finance organisations, warning that these firms should implement the right policies, procedures, and technology, especially in financial crime and money laundering.

The present letter follows a prior 'Dear CEO' letter addressed to retail banks in the UK in May 2021, in which the FCA highlighted the common control failings in AML frameworks exposed in these banks' assessments, including governance and oversight, risk assessments, due diligence, transaction monitoring, and suspicious activity reporting. The letter required retail banks to complete a gap analysis in each area with the threat of regulatory intervention for firms whose response was deemed inadequate.

About the compliance risk in trade finance, the FCA discovered a number of flaws in risk assessment, including a lack of emphasis on identifying and analysing financial crime risk indicators. The FCA also found that there was insufficient evidence of migrating controls, and that genericized risk assessments at the client risk level did not adequately cover the various risk exposures in the trade finance client relationship. All of these are areas where businesses must review and make changes to increase their focus on these issues. Furthermore, the FCA discovered a lack of evidence in the checks conducted to correctly assess client and transaction-specific risk, as well as insufficient due diligence, including the absence of extra pricing checks, vessel tracking, and other due diligence procedures.  

"As a firm that undertakes trade finance activity, you should, if you have not already, undertake a holistic assessment of the associated financial crime risks. These risks include money laundering, sanctions evasion, terrorist financing and fraud. The Money Laundering Reporting Officer (SMF17) should be responsible for ensuring that the assessment is subject to appropriate governance, oversight and challenge," FCA stated in the letter. "In carrying out this assessment we expect your firm to also consider the issues raised in this letter. The assessment should be clearly documented within the business-wide financial crime risk assessment and should identify the types of customers or transactions where enhanced due diligence is needed. In future engagement with your firm, we may ask to see the risk assessment you have carried out and any follow-up action undertaken as a result."