Trade finance capgemini

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  • PDF Role of Trade Finance for Inclusive Growth
  • TRADE FINANCE - INTRODUCTION What is trade finance?

TRADE FINANCE - INTRODUCTION What is trade finance?

Trade Finance
Digitise your Trade Finance Processes
May 2016
Digitise your Trade
Finance Processes !
All global banks involved in
Trade Finance are now facing
the same tremendous challenge:
Cope with the stressing Figure 1 : Financial sanctions for embargoes violation
constraint to abide by the
multiple, ever-evolving and more
and more drastic compliance
regulations, making Compliance
risk mitigation a top priority
among their other projects.
yy Within the Transaction Banking
business, Trade Finance activities 2015 $787m
tend to strongly appear in the
spotlight of Compliance, notably $8.970m
as they are closely tied to
international, global commercial 2014 $315m
flows, and henceforth carrying $311,6m
many related risks (client,
counterparty, country, goods,
currency...). Considering only the
breach of US Financial Rules, 2013 $250m
Banks have thus had to pay around $100m
16.5 billion dollars fine for the past $474m
6 years (as shown by the chart).
2012 $2.296m
yy Adding to that the wide extent of $894m
existing regulations, ranging from $619m
European Basel III rules, Ethics,
to AML and Corporate and Social 2011
responsibility, Banks and financial $88,3m
institutions are now facing severe
financial sanctions from different
authorities, and are consequently 2010 $500m
exposed to high reputational risks
in the event they fail to comply.
yy Worse, Banks could potentially
lose their Banking license. In that 2009 $536m
context, Banks need urgently $567m
to initiate operational and
organizational transformation, TOTAL: ~ $ 16 500m
by strengthening their internal
Compliance control frameworks
and implementing relevant
remediation plans.
TRANSFORM or QUIT 2 major stakes for the banks, addressed by the DIGITAL
Business-wise, the Trade Finance TRANSFORMATION of the Trade business
market is currently marked by a
fierce competition and increasing
commoditization. Figure 2 : Financial sanctions for embargoes violation
yy Indeed, the higher pressure on
prices, resulting from the downward Reach best-in-class Compliance Move toward Operational Excellence
trend on Traditional Trade products
like Letter of Credits (lower European
commissions observed this last Anti-Money regulations
few years) and the progressive shift Laundering (B?les, Pressure Efficiency
towards Open Account financing (AML) BCBC 239, on margins
(~80/85% of transactions), directly IFRS 9...)
undermine the margins and thus Ethics,
reduce Banks' profitability. Corporate Digitisation
& Social
yy Therefore, focus should be US Financial Responsibility Trade Third party
made on improving Operational Sanctions Finance data management
Excellence on the entire value chain (sanctioned Performance
countries Internal monitoring
(from Front Office, to Middle and & persons) Procedures & traceability
Back Offices), while searching for
scalability to be in a position to
grow and reach capacity to lower Reputation Centralization Back Office
costs and keep pricing at par with of the expertise externalization
competitors. interests
yy Furthermore, Banks also cope
with the strong necessity to
propose innovative, value-added 1 How to secure a consistent and streamlined 1 How to efficiently monitor Trade Finance
products and services to improve end-to-end Compliance control framework for activity and profitability?
their visibility on the market and Trade Finance activities?
enhance their clients' experience. 2 How to enhance the KYC information work flow 2 How to enhance the operating model to reduce
In that area, technology, more and secure the KYC validity at a Trade costs while maintaining a satisfactory level of
specifically Digitisation, would transaction's opening? margin?
appear as a key enabler to meet 3 How to secure a robust KYT process during a 3 How to integrate/develop new products and
clients' sophisticated needs Trade transaction's life? services at best cost and time to market?
(e.g. E-Banking, host-to-host
connectivity, bundling).
This paper mainly addresses the following scope of Trade Finance products:
Traditional Trade
Documentary Business Guarantees Working Capital
Import/ Export Letter of Credits ? Guarantee issuance ? Payables
Import/ Export Collections ? Guarantee re-issuance ? Receivables
Reach best-in-class Compliance
Reach best-in-class
How to secure a consistent and streamlined end-to-end Compliance control framework for Trade Finance activities?
impacts on COMPLIANCE risks mitigation
To reach a consistent and streamlined end-to-end
Compliance control framework for Trade Finance
activities, Banks should focus on achieving the
following objectives :
A. Implement a standard framework at Group level to
ensure homogeneity of Compliance controls,
B. Ensure a full coverage of Compliance risks at each
event of a transaction.
Implement a standard framework at Group level to ensure
homogeneity of Compliance controls yy To ensure this consistency, the following
yy Although Trade finance products have existed for centuries, the
elements could be considered as key success
management of their processes by Global Bank remains complex,
due to specific characteristics of this business - a global business, A global alignment on the "rules" (e.g. Embargo
following several process steps requiring different capabilities (e.g. and Financial sanctions rules, AML regulation,
commercial capabilities, transportation expertise, client business local law, bank internal rules) by documenting
understanding, credit risk analysis capabilities,...) and involving a and providing Group Procedures.
significant mass of documents to analyse in a limited time frame.
A global alignment on the Control Practices,
yy As already mentioned, Trade Finance operations are global - by setting up an unique Control Framework at
usually involving buyers and sellers from different countries. Then, Global Level, for each process step.
several entities within a Banking Group should be able to process
these products. Consistency of Trade Finance practices among A clear view on the full ? End-to-end ?
entities is key for different reasons, but especially regarding processes, as exchange of information might
Compliance controls. A first level of consistency among Banking be required between Front, Middle and Back
Group entities is related to Banking fees. This alignment should Offices.
prevent the client from potential arbitrations for cheaper entities A common Governance, to secure the
within the same Group. Back to Compliance control, alignment continuity of the set up.
among entities is required for the same reasons : a corporate
should not be ? tempted ? to route its deals to a specific entity
because controls might be ?easier?.
Use a workflow management tool, such as BPM solution, to enhance efficiency and productivity, and to secure the
communication between Front, Middle and Back Office
Ensure a full coverage of Compliance risks at each event of a yy These controls are facing two major stakes :
The freshness of the control. Regulations are
yy A Trade finance transaction could last months (even years in updated frequently. KYC validity control and
the Guarantees business). During this "Transaction life", the KYT controls should be performed, and re-
transactions are going through several steps, from the facility performed in regular bases.
set up (i.e. origination) to the payment phase. As described
in the following scheme, different types of control should be The materialisation of the controls : record the
performed at different steps. Some of these controls might be result of the control (e.g. KYC status at a given
repeated during the Transaction life, due to frequent changes in moment). An adapted materialisation should
the Compliance Procedures and in the ? Lists ? (e.g. Specially ensure the audit trail to secure the traceability
Designed Nationals [SDN] List) of these controls, and the possibility to link
with related documentation (e.g. a potential
Figure 3 : Compliance controls on a Letter of Credit life cycle waiver from Compliance to process a sensitive
Origination Issuance Amendment Utilization Payment
yy Each event of a transaction is presenting different characteristics:
for example, the "opening" of the Transaction, when the Letter
of Credit is issued, will be a key step as the Bank will commit
itself. But later on, during the "utilisation" step, the full pack of
documentation will be received and a detailed analysis of the deal
might be possible only at this stage.
Two types of controls apply during the product life cycle :
Know Your Customer [KYC] validity control : focusing on the
client's KYC validity which could be characterised by (i) a status
(e.g. updated or overdue), (ii) a client's sensitivity (e.g. high risk
or low risk), and (iii) by specific restrictions (e.g. not to perform
business with this client under certain conditions such as specific
products, currencies or amounts).
Actually, the KYC integrates several other components (e.g.
ownership, countries of incorporation and of residence, rating,
business sector, geographical analysis of the business activity,
major clients) and is comparable to a client "profile".
Know Your Transaction [KYT] controls : focusing on the
information related to each transaction, such as the client(s)
counterparties, the countries involved (i.e. country of origin of
the goods, country of departure and of destination), information
on the transportation (e.g. ports, vessels), and the nature of the
transported goods.
Use a tool to keep a snapshot and an audit trail of the control, and to archive it
Use a scanning tool to perform frequent automated control of the client and counterparties database

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