By John Baranello, Head of Trade & Risk Services-Americas Solutions Office, Global Transaction Banking- Trade Finance, Deutsche Bank
Most corporate finance functions have buttoned up controls on seemingly everything to ensure compliance with SOX and related regulations. However, not all corporates may be aware of the extent to which the regs that govern their banking and trading partners also affects them, e.g., new rules governing global trade and related finance (including rules curbing money-laundering and terrorist financing).
Because these rules change constantly, reflecting shifting international political environments, treasury should stay current and include international trade finance regulatory risks in any effort to revisit ERM or internal control procedures.
WHAT TO LOOK FOR
US regs alone create a multitude of compliance issues for both the buying and selling counterparty (see chart below). A few items to pay particular attention to include:
Failure to account for full scope of US regs. Under “US persons” definitions, certain transactions involving overseas affiliates can be scoped in, even if they take place entirely offshore (a circumstance that often can complicate compliance efforts). Also, many US rules have non-US equivalents, which may or may not be consistent with US requirements.
Physical shipments as well as pre- or post-shipment finance. It is important to note that US regulations govern physical shipments overseas as well as those coming in or out of the US for US persons. Thus, both in their dual role as ERM champions and supply-chain finance advisors, treasurers should help communicate the clear cost and benefit of trade agreements involved in global sourcing. The perfect example is the utilization of the ALADI treaty in LatAm.
For example, your shipping division or forwarder may obtain a low rate on moving your freight from Singapore to South Korea, but that low rate is achieved only by using an Iranian-flagged vessel. The problem is that using an Iranian-flagged vessel violates an Office of Foreign Assets Control (OFAC) mandate. Treasury therefore must ensure that its foreign affiliates know of this rule; fines and penalties for violating it may not be severe but the reputational damage could be. Additionally, when dealing with areas in the Middle East, companies must also ensure they don’t accept provisions deemed supportive of the Arab League’s boycott of Israel—conforming with the boycott violates US law. Again, the fines may not be big, but the reputational risk is.
KYC and now KYCC rules. Treasurers already know the importance of “know your customer.” But now enhanced due-diligence requirements make it equally critical to know your customer’s customer (KYCC). Plus, various bank-specific rules could apply to treasury, particularly as more companies seek to aggregate payments and adopt STP. It thus behooves treasurers to set up controls around vendor relationships and maintenance, and follow guidelines aimed at financial institutions for enhanced customer due diligence and record keeping.
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BANK ACCOUNT HURDLES As global treasury practitioners know, recent US and related foreign regulations have increased the number of challenges involved in opening bank accounts, adding new signers, and other aspects of account management. Indeed, at some point almost every effort to centralize and automate bank account management gives in to inefficiencies created by the need to satisfy bank “know-your-customer” type compliance procedures. In some instances, for example, if a signer at HQ cannot relinquish his or her passport for the time it takes, the bank may not add him or her as a signer on the account. Looking to overcome the paper documentation challenge. The passport example points out a key problem with KYC regs: there’s a lack of consensus about when and what type of electronic documentation and digital forms of identification can be accepted. General bank guidelines on customer due diligence, including account opening, published by the BIS Basel Committee on Banking Supervision don’t provide enough detail on how “electronification” will work. More guidance could come from the Financial Action Task Force (FATF), an inter-governmental body that develops and promotes national and international policies to combat money-laundering and terrorist financing. Its recommendations have been endorsed by more than 150 jurisdictions. TWIST, with cooperation from IdenTrust, is also working specifically on standards to help digitize account management. |