What do increasing political risks mean for trade finance?

03 June, 2019Ouida Taaffe
LIBF-Trade-Finance-ConferenceBy 2021 trade finance revenues could be US$48bn a year, according to numbers quoted in the ICC’s 2018 report “Global Trade – Securing Future Growth”.  Global trade itself is several orders of magnitude greater and could reach around US$24tn by 2026, the report estimates. The caveat on this, of course, is that the numbers assume trade growth of around 6% a year and the report came out before the US started ramping up tariffs on China. However, as the sabre-rattling on import tariffs clear, trade matters to the global economy and trade finance is a vital underpinning of free trade.

Trade finance is now a national security tool

At the London Institute of Banking & Finance’s recent Annual Trade Finance Compliance Conference, Rebecca Harding of Coriolis Technologies pointed out that trade finance is now “a financial tool in the national security weapon” and she noted that there has been a spike in the shipment of so-called “dual use” goods – i.e. those that can be used for both civilian and military purposes such as sugar and technology hardware.

Governments are understandably concerned when the means of making weapons are covertly shipped around the world. That is why regulations on compliance are designed, among other things, to monitor “dual use” goods. However, since the financial crisis, compliance demands on trade finance have made some aspects of the business unsustainable. Maintaining correspondent banking relationships, in some emerging economies in particular, no longer makes commercial sense for many banks. That, in turn, has led to a “trade finance gap” – the gap between demand for trade finance and the funds available – of around US$1.5tn.

Trade-Finance-ConferenceEase the burden on banks

Governments need to “stop making the banking sector police what is going on,” argued Geoff Wynne, Head of Trade and Export Finance at Sullivan & Worcester. “If you want to stop the trade of [a particular good], tell us to stop it.”

John Turnbull, formerly at SMBC and now an expert witness on trade at Certis International, pointed out that the risk to smaller banks of heavy fines and reputational loss, should they be deemed in breach of rules on compliance, mean that they often do not take a balanced, risk-based approach.

Turnbull argued that regulators should step in to ease the burden on banks so that they, in turn, do not feel they have to take a blanket approach to customers in order to protect their own business.

Could fintech close the gap?

Could fintech help banks deal with the burden of trade finance compliance and close the trade finance gap? “It is still early days for some fintech,” said Graham Finding, Head of Business Financial Crime Risk, Global Trade and Receivables Finance at HSBC. He pointed out that in sanctions the approach is still very much list-based screening. In anti-money-laundering (AML) there are more solutions available, but all banks are concerned about how regulators view the increased used of fintech even though the regulators have been encouraging.

Trading sense

Finding, and several other bankers, pointed out that a lot of referrals on suspicious trade finance transactions come from things that an automated computer solution “could never spot” such as “the look and feel of documents”. One banker said that the smell of the paper can tell an experienced banker whether or not it is really from the firm and country it is supposed to be from. Abdul Kabiri, Director and Head of Client Services at MUFG Bank, said that while fintech can spot red flags, it cannot ask whether a trade “makes sense”. He cited a shipment of washing-up liquid from Malaysia to a university in Russia, in a 20ft container, as one that “just didn’t make sense”. Geoff Wynne “wished fintech providers would not oversell what they have”. One of the challenges for fintech, after all, is that much of trade finance is still paper-based – partly for legal reasons and partly because it can be difficult for some players in emerging markets to go fully digital. 
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