Rising compliance costs rupturing banks' trade finance relationships
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Rising compliance costs rupturing banks' trade finance relationships

Collaboration between transaction banks and Swift is helping to spread the burden and rocketing cost of compliance, but for some banks' trade finance businesses, client relationships have already been hit hard by the expense.

It's a similar story throughout the banking industry where the onslaught of new financial regulation and cost of complying with it has forced banks to adapt or even close banking businesses. 

Trade finance activity, in particular, was threatened by the proposed leverage ratio under Basel III until earlier this year when global regulators agreed to water it down, marking a small win for the industry. 

However, the burden and rising costs of complying with know-your-customer and anti-money laundering regulations and sanctions continues to impact banks' trade finance businesses, and to the point where some banks have no other option than cutting trade relationships all together with clients, according to Ruediger Geis, senior product manager for trade products at Commerzbank.

 Sometimes we get contradictory information from the regulators – one says to move left and the other says to move right

Ruediger Geis

“Some banks are closing down relationships,” he says. “If you have to do KYC properly, you may have to invest between $15,000 and $50,000 [to achieve adequate due diligence on a single client]. For smaller banks, this can affect relationships. If you have a limited number of transactions it can reduce the appeal of working in a country.” 

Indeed, the sheer depth and specificity of information required for each trade finance transaction can be burdensome, and an inability to collect qualitative and quantitative information – especially in emerging markets where requests for documentation, such as a supplier’s articles of incorporation, can be met with bewilderment – are making it much more difficult for banks to lend.  

Further complicating the issue is the lack of consistency in the quality of due diligence, under law, from country to country. For instance, what may be permissible in one country could turn out to be illegal in another, making banks vulnerable to massive fines or even criminal proceedings. 

That KYC customer standards vary from country to country is problematic, and simply means a company from one country might not be vetted appropriately within the counterparty’s own country, raising counterparty risk issues.  

For Geis, their needs to be greater consistency in global regulators approach to this, and across the board. “Sometimes we get contradictory information from the regulators – one says to move left and the other says to move right," he says. 

"This can make it difficult to do trade.”

One way banks are looking to tackle such counterparty risk issues, together with the rising cost and burden of KYC and AML compliance, is by collaborating with each other and Swift, the financial messaging and software provider, to launch a KYC registry, which is an electronic repository for the masses of information required by banks as part of their due-diligence process on clients. 

Having a single, centralized registry for up-to-date KYC information will reduce the time, effort and cost related to gathering, accessing and sharing KYC information,” says Pascal Augé, head of global transactions and payment services at Société Générale.

Société Générale was one of the first international banks – alongside Bank of America Merrill Lynch, Citi, Commerzbank, JPMorgan and Standard Chartered – to have signed up to the registry, which as of this month now has the support of Barclays, Deutsche Bank, Erste Group Bank, HSBC, ING and Raiffeisen Bank International. A third set of banks is expected to follow suit in September. 

“Collaboration is playing a major role in the development of this industry-driven initiative," says Luc Meurant, head of banking markets and compliance services at Swift. "Banks want to collectively address the challenges around KYC compliance."

The registry is in a pilot phase, but it is expected to go live at the end of this year. 


Although it will help to streamline processes, the list of documentation needed is not short. These include certificates of registration, banking licences and responses to the Wolfsberg anti-money laundering questionnaire. 

The registry will pool together the information to create a system that will fulfil the requirements with a standardized set of information that is required to meet the demands of due diligence. The liability for the accuracy of the documentation lies with the holding institution, although Swift will take steps to check it.

When live it will have substantial reach, being available to the 7,500 correspondent banks that are placed along the Swift network. 

Paul Taylor, director of client services at Swift, explains that the each organization contributes its own due-diligence information, providing details when requested by its counterparties. 

Through working collaboratively, a set of standardized documentation and data sets has been created and honed by this initial pilot group. Each organization also crucially maintains control of the information it provides.  

While the Swift registry is receiving growing support from the banking industry, it is not the only platform focused on addressing this issue. KYC Exchange Net (Ken) launched at the beginning of this year and has a number of international banks on board, including Commerzbank, Société Générale and Standard Chartered, which joined in June. 

This platform is being marketed on its ease of use – there is no need for additional software as it is run through standard web browsers. With the high cost of implementing new platforms potentially a deterrent, Ken provides a lower cost alternative. It also claims that information can be passed between parties in just one minute.

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