As the conflict in Ukraine has completed a year, with no end in sight, it has become clear that implementing trade finance document checking technology is now a necessity, and not a luxury for banks. 

 

Looking at the situation on the ground, however, financial institutions in the Middle East are still dealing with cumbersome processes when it comes to compliance checks. Could automation provide an answer? Conpend’s Marc Smith, Founder and Director, and Mike Rondaij, Senior Solution Architect, explain the issues for our readers:

 

Since Russia’s invasion of Ukraine, several countries in the Middle East have increasingly found themselves between a rock and a hard place, eventually opting to remain neutral while Western governments reacted by imposing what are regarded as some of the most complex sanctions packages ever seen. 

 

This is not to say that financial institutions (FIs) in the Middle East have had an easy journey with respect to the sanctions landscape of the past year. Given that 80-90% of cross-border trade is reliant on trade finance, any international sanctions imposition subsequently has widespread consequences on the trade finance industry at large. Indeed, with standard trade transactions going through numerous compliance checks during its lifecycle, alignment with the latest sanctions and regulations is imperative. Sanctions therefore know no geography limits. And since FIs are responsible for the flow of money and documentation that facilitate trade, it is their responsibility to catch and mitigate any occurring infringements – or face severe repercussions. 

 

This creates an exceptional regulatory risk for banks and other FIs across the globe. What’s more, given the number of intermediaries involved in trade, as well as the jurisdictional complexity of supply chains, detecting sanctions breaches and related illegal activities can be gruelling at a bank level. 

 

Banks feeling the strain

In an attempt to traverse this high-risk, high-stakes environment, banks have had to adapt and strengthen their internal processes for screening trade finance documentation. Many have responded to this new scenario by “self-sanctioning”, with the expectations for further controls and public support for Ukraine pushing many to take a stronger stance than legally required in order to avoid reputational damage. Indeed, a number of banks – including lenders in the Middle East – have chosen to cut ties with Russian companies to mitigate the risk of harm to their reputation and potential loss of market share, despite not facing sanctions in their own countries. 

 

Another compliance complication that banks face is the new array of sophisticated tactics used by fraudsters to try to undermine the sanctions imposed, making detection even more challenging and burdensome. These tactics include falsified bills of lading and certificates of origin; front companies concealing a beneficiary; ship-to-ship (STS) transfers; laundering of international maritime organisation (IMO) numbers, and the manipulation of automatic identification system (AIS) transponders, which are used to show a ship’s location.

 

As part of this, “know your vessel” (KYV) has been put in the spotlight. Following the developments with Russian sanctions, some vessels, realising that the Russian (or Russian-related) flag would prevent them from docking, changed their flags overnight as they attempted to evade the restrictions. Such “flag hopping” on a vessel can take place on a regular basis, as criminals adopt false flags and “flags of convenience” in order to carry out illegal activity in various parts of the world. As such, determining which vessels banks are or aren’t allowed to finance is adding more red tape to an already arduous workload for compliance teams.

 

Further compounding the significant sanctions strain on FIs is that, due to the historical paper-based nature of trade finance, manual checks still underpin compliance related tasks. Indeed, the modern supply chain comprises many stakeholders, between which traditional paper documents continue to be exchanged – documents that can often consist of in excess of 100 pages. 

Clearly, undertaking manual checks in such a demanding compliance environment is not only impractical, but it poses the risk of manual error. 

 

The growing need to meet the highest level of compliance in an operationally efficient way has therefore seen banks increasingly exploring methods in which to make sanctions checks – and all forms of trade finance documentary checks – more efficient, cost-effective and less strenuous. 

 

Automation in action

The good news is that technology solutions can accommodate this, while being flexible enough to work with documents of all formats – all while satisfying the rigorous compliance standards of regulators. Indeed, if there are efficiencies to be made, they must take into account the fact that, while trade finance will inevitably become increasingly digital, paper is likely to endure in the process for some time to come. 

 

Here is where artificial intelligence (AI) comes in: digital solutions that use AI and analytics to detect criminal activity and that are centred upon quality, up-to-date data. For banks, opting to invest in such capabilities can massively enhance existing compliance processes.

 

Contrary to manually monitoring and implementing sanctions updates, AI software enables these tedious – but essential – tasks to be performed automatically. 

 

In addition, AI is capable of extending compliance checks and adding multiple dimensions beyond the straightforward sanctions checks. For instance, storing and making use of historical data from previous transactions enables the possibility of detecting certain patterns, or deviations from such. AI also enables more complex anti-money laundering (AML) checks on over and/or under-pricing and is able to detect multiple presentations of identical invoices and/or transport documents. 

 

The need for manual intervention only needs to come into play when the system spots an anomaly and further investigation is required. And, with the software programmed to add new rules to screening and evaluation processes in line with the very latest sanctions requirements, FIs can rest assured that the right checks are being conducted. 

 

These capabilities not only relieve compliance teams of the bane of carrying out the bulk of this work – at a time when finding experienced compliance professionals to support increased demand is becoming more challenging – but they also remove the responsibility and pressure placed on individuals to maintain vigilance and not let anything fall through the cracks. In turn, staff are freed up to dedicate time to more value-added tasks, including providing effective support to clients, as well as interpreting, handling and classifying any alerts raised by the software.

 

Greater opportunities

Even more positive, the potential application and uses cases within compliance are extensive. Take know your customer (KYC) compliance for instance. What can typically be slow, monotonous, error-prone manual processes of onboarding customers and suppliers are instead carried out by the AI application, with automation simplifying the sanctions and AML screening, identity verification, document authentication and due diligence analysis. By delegating these processes to technology, compliance officers and relationship managers are freed up to focus on more value-added, client-focused functions and resolving any identified discrepancies. 

 

Enhancing KYC methods presents an opportunity for many smaller businesses in the Middle East, where SMEs are the foundation of the economy, to scale their trade operations effectively, while ensuring full compliance with complex regulatory changes.

 

AI-powered automation is a great step towards fully-automised compliance check processes. This is the future – and whether a supply chain is still paper-based or fully digital is irrelevant, as the AI software can transition seamlessly between the two. As for the Middle East, it’s a hopeful outlook for the growth of automation, as the trade finance compliance industry continues to evolve, with real, tangible solutions that can transform existing processes and relieve the compliance burden on banks. - TradeArabia News Serice