Dear CEO | Release Date: 9th September 2021

To read a longer summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Short Summary

The Financial Conduct Authority (FCA) has issued guidance to firms engaged in trade finance, emphasising enhanced risk management and due diligence to prevent scams, fraud, and market abuse. The directive underscores the need for a comprehensive approach to managing the inherent risks of trade finance—a complex sector involving large volumes and multiple currencies.

Recent evaluations have uncovered significant shortcomings in credit risk analysis and financial crime controls within some firms, exposing them to undue risks. The FCA stresses the importance of conducting a thorough financial crime risk assessment covering money laundering, sanctions evasion, terrorist financing, and fraud. This assessment should be well-documented and governed with proper oversight.

Firms must perform detailed credit analyses of all parties involved in trade finance transactions before establishing credit limits. This includes not just the borrower but also end-buyers and credit insurers. Transactions must have a clear and sensible business rationale to prevent potential fraudulent activity.

The FCA expects firms to identify any high-risk transactions that might require enhanced due diligence. A structured risk assessment process and clear policies are essential for identifying transactions that may need additional scrutiny. Firms must ensure adequate oversight to maintain the effectiveness of their policies and controls.

Key takeaway:

Firms involved in trade finance must strengthen their risk management frameworks to effectively address the sector’s risks, with a focus on comprehensive risk assessments and meticulous analysis of all transaction parties. The FCA will monitor compliance and expects firms to demonstrate robust governance and oversight in their trade finance operations.