August 2018

Supply chain finance has contributed a vital injection of liquidity into supply chains that might otherwise have struggled for liquidity. But what do lenders do about customer on-boarding and checking out customer’s customers (KYC and KYCC)? Christian Hausherr shares how the ICC and the Wolfsberg Group are providing support

In the ICC Banking Commission’s 2017 ICC Trade Register Report, Deputy Executive Committee Head Alexander Malaket makes the point that the Register needs to expand its product coverage and data collection to the Supply Chain Finance (SCF).

To reflect the changing nature of trade, SCF will be included in the scope of the 2018 Trade Register Report as part of its continued role as providing crucial credit risk and default data in trade and export finance.

This is very good news. Client onboarding and adoption is one of the most critical functions for banks and trade finance brings its own complexities with counterparties all over the world in what can be very challenging geographies.

The rise of supply chain finance – in particular payables finance and receivables discounting – over the past years has brought the issue of to what extent counterparties under these sorts of programmes should be checked. Should they be treated similarly as clients, or should they not be looked at at all? While the first option would be to substantially inflate banks’ Know Your Customer (KYC) operations without much benefit, the latter also does not seem to reflect the idea of the KYC principle at all.

Scope extension

It was in 2017, alongside the annual ICC Banking Commission meeting in Jakarta, that the Wolfsberg Group the ICC and BAFT released an updated version of the Trade Finance Principles, replacing the 2011 Wolfsberg Group Trade Finance paper, and including a reflection of the 40 recommendations from the Financial Action Task Force (FATF) published in 2010. The FATF is an inter-governmental body established in 1989 to set standards and promote effective implementation of anti-financial crime measures.

The Wolfsberg Group is an association of 13 global banks which aims to develop frameworks and guidance for the management of financial crime risks, particularly with respect to know your customer (KYC), anti-money laundering (AML) and counter terrorist financing policies. It does this to promote the overall effectiveness of the financial crime compliance regime, to tackle the issue of de-risking, to respond to cybercrime threats and address ongoing financial crime risks associated with innovation, digital platforms and crypto assets while assessing how regtech and fintech developments impact the financial services industry.

The Trade Finance Principles outline the standards for the control of financial crime risks (FCRs) associated with trade finance activities. The interpretation of financial crime for the purposes of the principles refers to (according to page 6 of the downloadable document):

  • Money laundering (all crimes including but not limited to fraud, tax evasion, human trafficking);
  • Bribery and corruption;
  • Terrorist financing; and
  • Financing of proliferation of weapons of mass destruction and other elated threats to the integrity of the international financial system.

Trade finance is defined as “the provision of finance and services by FIs for the movement of goods and services between two points, either within a country or cross border”.

One difficulty has been a perception that the the Wolfsberg Principles are mainly relevant to large global banks and not smaller local ones. To address this, a joint ICC-Wolfsberg Trade Finance Principles Drafting Group was formed in April 2014 including members from the ICC and BAFT, with a remit to redraft and update.

By end of 2016, the document had already been released in an updated form, covering traditional trade finance techniques such as letters of credit, collections and guarantees. While the Principles provide much-needed support to the industry, it was unanimously agreed that more techniques should be added, in particular FI trade loans as well as a section called ‘open account’.

What was actually meant by ‘open account’ was supply chain finance, and the question of how due diligence for clients and their counterparties should be dealt with.

Best of both worlds

Fortunately, the Standard Definitions for Supply Chain Finance had been released in March 2016, offering a clear framework on eight financing techniques, falling into two main categories:

  • Receivables purchase; and
  • Loan-based techniques.

The Standard Definitions offer a set of commonly agreed definitions for both SCF and the individual SCF techniques. They provide clear guidance on how each individual technique works, the legal parties involved, their contractual relationships, as well as the implied risks and how the involved parties can mitigate them. The document also compares the techniques against a range of commercial, financial and legal characteristics – for further discussion of its implications see Deutsche Bank’s white paper, Payables Finance: a guide to working capital optimisation.

For the purpose of the review of how the Wolfsberg Trade Finance Principles needed to cover broader ground, the receivables purchase techniques, and within that category, payables finance and receivables discounting were of particular interest.

Over the past 18 months, the Wolfsberg Drafting Group held several in-person sessions and calls where both sections (FI trade loans and open account) were intensively discussed and refined. This effort was supported by all involved member banks, including SMEs from both the business as well as compliance departments. As of now, both appendices are in a final draft mode and about to be presented to the industry for a public consultation. Depending on the feedback from other stakeholders in the industry as well as the relevant regulators, the group intends to publish the final version by Q4 2018 or Q1 2019, and an updated version of this article will be published shortly afterwards.

Christian Hausherr is the European Product Head of Supply Chain Finance for Deutsche Bank’s Payables Finance solution. He is an active member of the Global Supply Chain Finance Forum, the ICC Financial Crime & Risk Policy Group and acts as the technical adviser for the forthcoming Supply chain finance section of the ICC Trade Register. In March 2017, he had been nominated take forward the supply chain finance section of the Wolfsberg Trade Finance Principles.

Christian Hausherr

European Product Head of Supply Chain Finance | Deutsche Bank

Christian Hausherr

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