Trade finance transactions are fundamental to global commerce and economic growth, ensuring the smooth flow of goods and services across borders. It’s estimated that between 80 and 90%[1] of international trade depends on these financial arrangements. However, the Asian Development Bank[2] has noted a significant expansion in the global trade finance gap, which reached $2.5 trillion in 2022.
There are several issues contributing to this widening gap. Approximately 20% of banks surveyed indicated that they had rejected some trade finance applications due to perceived country risks, a lack of sufficient collateral, poorly presented documentation and issues related to Know Your Customer (KYC) compliance.
While law firms specialising in trade finance transactions have limited influence over some of these hurdles, they can concentrate on the aspects within their control, such as enhancing their Know Your Business (KYB), Know Your Customer (KYC), and Ultimate Beneficial Ownership (UBO) processes.
The importance of world-class KYB, KYC and UBO compliance in trade finance
Trade finance transactions are increasingly being exploited as mechanisms for fraud, money laundering and other illicit activities when the businesses involved aren’t properly vetted. Several factors create vulnerabilities to financial crime in this landscape, threatening the integrity of these deals and the organisations involved. The participation of numerous entities, along with the speed of transactions, the physical and operational distance of stakeholders, and the vast amount of paperwork and data all make it easier for fraudulent activities to go undetected.
“Given the diversity of tradable goods and services, the involvement of multiple parties, and the speed of trade transactions, trade based money laundering remains a profound and significant risk.” – Financial Action Task Force
When advising on trade finance deals, law firms face significant pressure to implement robust KYB, KYC, and UBO processes. Inadequate practices can restrict their clients’ access to trade finance and result in substantial financial, regulatory, and reputational consequences for both their clients and their firm. However, achieving this requires overcoming several challenges that can affect the quality, accuracy, and speed of KYB, KYC, and UBO checks.
Key challenges that create compliance gaps
- Manual approaches: Trade finance deals are often manually processed and are largely paper based. With the vast quantity and complexity of information to review, compliance becomes ever more challenging.
- Complexity: There are many entities to identify and verify, including payment providers, e-commerce platforms, banks, telecoms organisations, law firms and international advisory firms. This information is not static and over the course of a transaction could change multiple times, creating the need for up-to-date KYB, KYC and UBO data.
- Time pressures: Shipment timings are often set in advance and this lack of flexibility, along with the competitive nature of the trade finance market can put pressure on law firms to rush compliance tasks, creating more room for blind spots and human error.
- Onboarding pressures: Slow KYB, KYC and UBO response times can delay the onboarding process for new trade finance clients. This is a significant obstacle for legal teams who are expected to attract and onboard new business at speed.
- Language barriers and lack of local expertise: Cross-border transactions often result in legal teams having to manage data and documents in multiple languages. Identifying and verifying businesses, clients and beneficial owners in unfamiliar jurisdictions can also be very complicated if firms don’t have on-the-ground knowledge of regulatory and data environments. These issues add layers of complexity and risk.
Strategies for addressing these issues
These challenges, while significant, are not insurmountable. To effectively overcome them, lawyers need an innovative approach that harnesses advanced technology, live data access and local expertise.
- Advanced technology: Automation and artificial intelligence streamline and enhance the accuracy of compliance processes. Technology speeds up data processing and reduces human error, making it easier to manage and analyse large volumes of information.
- Live data: Access to real-time data from authoritative sources is the most effective way to ensure that the information used in KYB, KYC and UBO checks is current, comprehensive and valid.
- Local expertise: Working with compliance experts who have in-depth knowledge of a specific market’s legal framework, regulatory authorities, data landscape, systems and networks can help firms understand all their obligations and access information more efficiently.
How AsiaVerify can assist
AsiaVerify offers all these capabilities and more. With a deep understanding of local regulatory and compliance landscapes, AsiaVerify’s verification and monitoring platform is specifically designed to streamline and expedite KYB, KYC, UBO and ongoing monitoring processes in the APAC region, featuring:
- Access to 344 million entities and 2.9 billion individuals across 13 APAC jurisdictions.
- Quality coverage through live integration with registries from these jurisdictions.
- Real-time updates to ensure 100% accuracy and provide up-to-date, auditable data.
- Accurate UBO insights derived directly from real-time, trusted registry data.
- Source-verified and translated legal documents.
If you think your firm would benefit from these capabilities in your trade finance practice, our team is at hand to answer any questions you may have. Please email us at [email protected] or leave us a message here and we’ll get back to you soon.
[1] https://www.business.hsbc.co.id/en-gb/insights/raising-finance/trade-finance-how-to-support-your-business-success-in-the-era-of-globalization
[2] https://www.adb.org/publications/2023-trade-finance-gaps-growth-jobs-survey
