International trade financial crime risk management practices

Hello and welcome to GTR trade insights. I'm Shannon Manders and I'm GTR editorial director. Now today we're diving into a critical and very timely topic, streamlining fraud and financial crime risk management practices. So fraud and financial crime continue to pose significant challenges to the trade industry, impacting corporates, financial institutions and supply chains globally. So in this episode, we'll explore the scale of the problem, we'll uncover key challenges, and we're also going to talk about some of the innovative solutions that can help mitigate these risks effectively. To help us navigate this discussion, I'm really delighted to welcome two esteemed experts from Barclays. So Jaya Vora is the managing director global, head of trade and working capital, product and client management. And Nadia Raman is Head of Financial Crime for the investment bank and UK corporate bank. Welcome to you, both, Jaya and Nadia.

Thank you, Shannon, great to speak to you, and great to be speaking on this topic as well. Very interesting time to discuss. Thanks.

Shannon, it's great to be part of this discussion.

Excellent. So let's get started. Jaya Barclays and the ICC UK, for some time now, have been co chairing a trade digitization Task Force to try and accelerate the adoption and implementation of digital trade here in the UK. Now I understand that the group recently released a paper on fraud, which has brought some key recommendations to the market. Can you maybe start off by sharing some of the main takeaways from that paper?

Absolutely Shannon and great to speak here on this topic. Just a quick recap. As you mentioned, the trade digitalization Task Force has been set up to put forward recommendations to the government broadly around four topics, capital efficiency in Basel 3.1 was one when we had early wins, we published a paper on fraud, and there is an upcoming roadmap on digitalization of trade and a further paper on financial crime efficiencies. I guess, underpinning the task force is a key point around collaboration and the power of the collective around industry bodies, government regulators and banks coming together to solve for key challenges. So specifically regarding recommendations to the government on fraud, there are four key recommendations we've put forward within the paper, and the paper also carries an annex that actually talks about best practices amongst banks and FIS around managing the risk of fraud, and what you will glean from that is today, a lot of individual effort is carried on across organizations. We have our own sets of procedures, policies, controls around tackling and mitigating the risk of fraud, but the paper talks about the first recommendation being deeper regulatory cooperation with industry to promote innovation, and what that really means is enabling that collaborative dialog amongst all the relevant parties around promoting data sharing, innovation, fraud detection systems and how we could bring together that intelligence while keeping in place The principles of data privacy intact, but still enabling data sharing across the ecosystem to help identify risk of fraud early on. The second recommendation is around standardizing information and connecting government and financial systems. The use of APIs, or what they would essentially Application Programming Interface, is really accelerating these days, and what that could help with is alert systems. So create systems that could alert across government departments and financial systems for efficient fraud detection and prevention. For example, fraudsters nameless those from agencies involved in the specific task force led by the NECC at the national economic crime center, that links in the different departments within government organizations, and that could be considered as a practical solution to help share some of the alerts across the ecosystem. The third really is the role of Companies House. Now there is an ongoing review of the company's house, which the task force really welcomed around, for example, identity verification of key individuals. But along with this, the task force recommends the integration of digital identities, or also known as legal sorry, legal entity identifiers that would be seen as an enabler of further transparent. See enabling that transparency across cross border assistance as well. What the lei really can help with is identification of legal entities in a financial transaction, enhanced ability for an fi to evaluate risk and also linked to credit reference agencies. And if this could be enabled cross border, that will be a great win. And the last one really is about, you know, the government leading the way. It's the role of public procurement. With any transformation, or with any innovation exercise, adoption at scale is met, is kind of necessary to reap the benefits of that transformation. So the recommendation here is to encourage the government to set an example by applying these anti fraud measures, but also, for example, mandating the list the requirement of digital identities across their supply chain, so that the scale up and adoption of the Lai takes place and helps really accelerate the benefits from the data sharing and integration that we're recommending. So that in a nutshell, Shannon is the four key recommendations we put forward.

Nice, thanks, Jaya. And it really sounds some like some important work that you guys are doing. Tell me is that paper publicly available for any of our listeners that might want to take a closer look at it?

Absolutely, it's on the ICC website. The paper is called the preventing fraud and trade recommendations paper. If anyone searches it up on the internet, they should have access to the report.

Excellent. And we'll include a link down below as well. Now, Nadia coming to you. You're the head of financial crime tell us, in the in the sort of broader context of financial crime, what's the scale of the problem that the trade industry is dealing with. And you know, what are some of the more pressing challenges that both corporates and banks are currently facing in this space? Thanks.

Shannon, so I think, like, we'll be aware that over recent years, financial crime and trade finance has become more evolved significantly, and that's really due to things like complexity of sanctions, more complex supply chain flows, and then we have a continued regulatory focus in this space, as an industry, from a sanctions perspective, we've seen, you know, a lot more targeted focus on specific goods and services. So we're seeing a lot more guidance recently, in the last few months, in regards to the technology sector and also the defense sector. There's also a continued focus on things like dual use goods, such as semiconductors, and then the expectation that there is a more detailed assessment of goods for their own use and the users of those goods, and what that's really meant is that the risk of inadvertently violation of sanctions due to their nuanced restrictions has become more and more apparent. With that it becomes difficult for firms to like operationalize the screening and review involving multiple parties and jurisdictions in a world where we are trying to use more technology to support the review process. On the other side, we are seeing people who are trying to evade sanctions become more sophisticated by the use of things like complex trade routes. So sanctioned entities are, you know, rooting trade free jurisdictions that are not necessarily targeted by sanctions or often have weaker controls in this space, therefore, it becomes more difficult, from an industry perspective, to verify shipping documents. And again, there's greater reliance on the due diligence process to validate movement of goods and to identify things like red flags. And then, last you know, we are seeing a lot of like, like I said, you know, trade finance is seen as higher risk from the financial crime perspective. That's not necessarily new, but we see this as a continued area of focus from our regulators. So as noted, you know, above, like due to sanctions, things like fraud becoming more complex in the trade finance space, a lot of the controls that you know need to be implemented quickly. Sometimes require manual intervention, rather than being able to, you know, be deployed by technologies quickly enough. Therefore, FIS are seeing an increase in cost to implement some of these requirements for transactions and the due diligence and screening processes around there.

Yeah, that's really interesting, and the areas of financial crime and fraud and sanctions are generally some of them, the most well read stories on the GTR side. So, yeah, this is an area that we focus on and we follow very, very closely. Now, having said that, do you think that there's now therefore a greater opportunity for the improvement of processes? Where do you see the opportunities for streamlining Financial Crime Prevention processes, and are there any kind of gaps in the in the current system that you think could be addressed with things like better collaboration between parties?

Yes, look, I'll jump in, and then Jay, I do just jump. And if I've missed anything, from your perspective, but better data and sharing of data will always help, like from my perspective, for being more informed and wider than just trade finance, right? We're seeing new frameworks like the economic crime plan, which is promotes cross sector collaboration for trade finance. Specifically, if we can find ways to share information, such as transactional data, with peers and regulators that will definitely help in terms of identifying things like red flags and discrepancies. Collaboration is also key with companies such as logistical companies. Logistics companies sorry to verify information, and again, that helps with detection of red flags within a transaction. Jaya touched on the standardization of, you know, data and processes where possible. You know, we will know, from a broader perspective, that is data is not formatted correctly. It impacts things like monitoring. So if we can move where appropriate to standardize data, that would definitely help from a detection side of things. And then, you know, developing consistent standards for trade for documentation, eg, things like invoices or bills of lading, that can also help to reduce things like fraud. And then, you know, something that we really champion is like the public private partnership, so collaboration between the authorities and the private sector can help bridge gaps in things like knowledge sharing, but also sharing of things like typologies and red flags and a better understanding of some of the issues on both sides. So for example, you know some of the regulatory requirements versus the challenges to implement those. So I think, you know, these are things that we can definitely, as an industry continue to, kind of like enhance, but I don't know, Jay, if you think from your perspective, if I've missed anything.

Absolutely Nadia, I think that the collaboration, the public private partnership, is key. Indeed, standardization of data is definitely important. And I guess the only thing I'd add is if we can develop technologies that can enable banks to move away from the more traditional checks to which are quite manual and time consuming today, to more holistic patterns and tracking red flags and suspicious activity across kind of all parties in the ecosystem, that would be really beneficial. So I'm thinking, for example, if we could have scores across transactions that would require further diligence based on internal and external intelligence or anomaly detections resistance like, you know, Swift, which are interbank channels. And swift are thinking about this as well, so more developing and going ahead, from the current, traditional, you know, itemized checklist to holistic transaction checking, I said that would be really beneficial for banks as well.

Barclays is doing with the ICC UK on the task force. I mean, digitization of trade is is a massive topic, and it has been for some time. Jay, you know, we've touched on this already, a little bit into talking about things like data sharing, etc. Do you think that with the evolution of the digitalization of trade, we're going to see a transformation in terms of automating financial crime processes, specifically, what's going to move the dial and what areas do you think stand to benefit the most?

Thanks, Shannon, absolutely, close to my heart, and you know, with the task force, we've really been trying to tackle this challenge around digitalization of trade. As you know, it's an international challenge to solve for. No one country or one organization can solve for it alone, but it's important to recognize that there's a lot of change happening. Legal frameworks are changing, with the UK having landed the electronic trade documentation Act last year, but it is a truly a long term program. If we were to look at look at this across the globe, it's probably a five to 10 year transformation program. What we've done as part of the task force is we were looking forward to launching a roadmap for international trade, recommending some key first steps that organizations, especially corporates, need to take, along with some impetus from the government, where we can start that journey of digitalizing trade. There is really good work being done by the ICC as well around identifying the key trade documents that need to be digitalized, but also the standards and the kind of structure and formats for those documents and how they could be made consistent across organizations like corporate banks, etc, and logistics providers in the ecosystem. Now, if you take say a step forward to say that trade now starts getting digitalized. What you then have is the benefit of structured data in consistent formats being captured by financial institutions, which will then enable that fi to leverage the new technology available today to start at least screening so you could have list based. Screening automated. You could have sanctions screening further automated. You could have red flags checks automated. There are technologies in the market that are aiming to solve for this. The key hindrance at the moment still continues to be the paper based documents and the manual nature of tasks. And accuracy rates are improving, I would say, across some of those technology providers. But it still is a challenge, considering the plethora of documents we get from different countries and different providers. So I think, I think the digitalization of trade is critical to achieving efficiencies in the financial crime processes, but we also need to, as I mentioned earlier, think about as we are digitalizing trade, how could we harness the benefits of that data and evolve our financial crime detection technology a little better through that collaboration and through some through an indicator, the holistic assessment based approach, rather than some of the traditional checks, which will still result in false positives? That is, that is an issue we see. Even when we deploy technology, they will have a high false positive rate. So how do we make the system more intelligent to detect financial crime and allow banks to make more informed decisions? I think that's that's a key challenge to solve for excellent

Thanks. Joy. Now sticking with the sort of future thinking outlook. Nadia, given your role, I'm really keen to hear what you have to say with regards to emerging technologies and things like AI. Certainly from what we've seen, it's increasingly AI is increasingly being used to combat financial crime. Do you have any insights on its on how it's helping to automate processes and maybe, are there any other technologies that you think are going to be game changers in the space?

Thanks, Shannon, so as you've noted, there are some great tools out there now to support the fight on financial crime, but sadly, there are also tools out there to counter that as well, and we've especially seen that in the fraud space. You know, we've seen from a from a trade perspective, tools to identify suspicious patterns and trade in trade finance transactions, use of transaction monitoring systems to help identify suspicious on trade patterns such as excessive trans shipments. And you know, technology that allows you to screen all parties in the transaction, including ubos and intermediaries for greater transparency. As we know, one of the concerns within, you know, one of the emerging risks within trade finance, is some of the use of entities that are not transparent or set up for, specifically shell companies and things like this. And then, you know, platforms that enable greater visibility of the trade transaction itself. So all of these add, you know, further controls in the trade finance space. But there are a couple of things, you know, machine learning, AI being the buzz birds. There are a couple of things people need to consider when they're looking at some deploying some of these tools, and it's really asking yourself, like, what are you using the tool for? And can it be fully operationalized or just partially? So a lot of you know, what I see is content generation, not necessarily detection. So there's still always a human in the loop undertaking the actual assessment of the risk to come to a conclusion. Sometimes, you know, people don't focus on the data element of it good underlying data quality is essential for effectiveness. This is sometimes overlooked. It's not just about quality and accuracy, but also the structure of that data and it can it be ingested into your systems. Poor data, you know, we know, will have less accurate outcomes. And the key, I would say, is really, really important for those of you that are looking at machine learning or AI programs to you know, incorporate into your broader financial crime programs is a regulatory pillar. We've seen a lot of focus from regulators wanting to understand the journey that firms are taking, how that also all kind of comes into model risk and also the broader financial crime program within firms. So making sure that you're taking your regulators on that journey is really key when you're looking at the deployment of, you know, new tools, or machine learning or AI,

Yeah, thanks. Thanks, Nadia, suddenly an increase in sophistication across across the board. And, yeah, I think what you've outlined really helps to illustrate the importance of getting in front of of the challenges that we've talked about today. I think this was a really relevant discussion for inclusion in GTR, very first GTR plus risk publication. So yeah, really appreciate you taking the time to share your views.