PRA and FCA have sent a joint Dear CEO letter to firms who carry out trade finance activity. The regulators want to ensure firms understand what is expected of them. Both regulators consider there is often insufficient focus on identification and assessment of financial crime risk factors in risk assessments or, where risks are identified, there is not adequate evidence of mitigating measures and controls. As with other Dear CEO letters, the regulators are also critical of overly generic client level risk assessments, meaning that the client risk ratings may be wrong, and firms may fail to consider the risks of specific transactions. The regulators have found that firms often have not fully considered the risks, cannot evidence the checks they have carried out and in some cases have inappropriately discounted them.
The letter calls for firms to carry out an immediate holistic assessments of financial crime risks associated to trade finance activity, and notes that the SMF17 function holder should be responsible for ensuring the assessment is subject to appropriate governance, oversight and challenge.
Firms must also carry out appropriate credit analysis of trade finance counterparties, and clearly address when it is appropriate to carry out due diligence on third parties.
Finally, firms must determine whether further analysis is needed before approving individual transactions and consider all persons in the payment chain, including seeking appropriate confirmations.