Page 23 - Banking Finance November 2021

ARTICLE

4 International trade is denominated in terms of transaction types such as documentary (e.g., letters of
internationally acceptable currencies. Trade becomes credit, collections, guarantees) and non-documentary (e.g.,
exposed to the vulnerabilities of the foreign exchange trade loans, receivables/payables financing). In documentary
market. transactions, the bank handles or processes documentation
such as bills of lading, invoices, packing lists, etc.
4 The long supply chain necessary for international trade
make the trade more vulnerable to TBML. This chain
In non-documentary transactions, the bank may have access
of manufacturer, trader, consigner, consignee, notifying to only a portion of documentation based on the structure
party, financier shipper, insurer and freight forwarder of the transaction and policy of the institution. For example,
broaden the scope for abuse of the system by the pre-shipment financing occurs before shipping documents
criminals because of all the vulnerabilities that exist.
and invoices are produced.

The dilemma for regulators and policy For non-bank intermediated transactions, the bank only
makers handles the transfer of funds without seeing any underlying
documents that identify the payment as being trade
The dilemma which is faced by policy makers is the related.- Processing a wire transfer to settle an open
requirement to balance the needs of a free, fair and account transaction.
predictable trade regime with the needs for regulation of
trade so as to prevent its abuse. For context, the WTO In 2017, Wolfsberg estimated that approximately 80% of
Statistical Review of 2020 stated that the volume of the global trade was transacted using open account settlement.
global trade in world merchandise (i.e. goods) trade stood Banks receive underlying documentation for the
at USD 19.05 trillion while the value of global trade for approximate 20% of global trade out of which a portion is
commercial services stood at USD 5.898 trillion, which documentary trade and a portion of non-documentary bank-
indicates the potential for absorption and movement of intermediated trade. This adds to the dilemma of bankers
funds of criminal origin through international trade and the on how to detect a potential TBML activity if the same is
need to study TBML. being undertaken through Open Account Settlement.

To further understand scope and red flag indicators of TBML, Given the above differentiation of bank intermediated and
we need to differentiate between - trade that is bank non-intermediated transactions and the lesser scope of banks
intermediated and trade that is not bank intermediated. to handle underlying documents in 80% of trade
transactions, it is generally perceived that bank won't be
Various types of trade and nontrade transactions that banks able to see any red flag indicators.
undertake are as under along with set of rules and
framework governing them: However, Bankers Association for Finance and Trade (BAFT)
4 Documentary trade governed by ICC rules in its guidance note for the year 2017 has mapped different
red flag indicators to payments transactions, Open account
4 Open accounts bank intermediated transactions -
Governed by Deal specific and Lender Specific Policy . Trade Payments & Documentary Trade Payments as under:
4 Non bank Intermediated transactions - Governed
broadly by Country Exchange Regulations.

Trade can be intermediated through various modes such as
open account settlement , collection documents, trade
credit products, letter of credit & advance payment .Bank
intermediated trade means the trade wherein bank is
having an access to underlying trade documents and is in a
position to ask for further documents if required under its
regular due diligence. In instances where trade is bank-
intermediated, the bank may provide financing and/or risk
mitigation. Financing occurs in a variety of forms including

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