Trade Services in banks : A Complex web of Compliance

Trade Services in banks : A Complex web of Compliance

Jayan Menon, Country Head – India at Traydstream



Traditionally, banks facilitated trade of a country through financing of the importers and exporters, handling of the documents and enabling payments and receipts of the consideration. Gradually, over a period of time, banks have become more of arms of the law making and enforcement agencies of a country rather than enablers of trade and helping the economy through movement of documents and money.

Impact of Regulations and Compliance

The ICC Survey of 2017 states that one of the biggest component of cost in trade is regulation and compliance. Apart from the cost, the adherence to the regulations and compliances puts a tremendous pressure on the banks for adherence to the turnaround times for customers as well as training its staff. The bankers are not only required to know the regulations of their home country, but also of regulations and compliances of the countries with whom the transaction is entered into. The challenges in training become multi-fold, when one looks into the frequent changes in the regulations.

A simple Import Transaction – or is it so?

In order to gauge the complexity of compliance, I tried to break down the egregious number of items of compliance and regulations that a banker need to be aware of in order to complete one simple import transaction of a customer. I was astounded, to say the least.

For starters, the Master Circular for Imports by the Reserve Bank of India, states that the imports have to be accordance with:

  1. Foreign Trade Policy
  2. FEMA guidelines
  3. Uniform Customs and Procedures for Documentary Credit (UCPDC)
  4. Research and Development Cess Act
  5. Foreign Trade Development and Regulation Act
  6. KYC norms
  7. Anti-Money Laundering Guidelines

As if the above were not enough, if an import document is being sent or a payment being in US Dollars or to a US bank then the OFAC sanction guidelines, Anti-boycott rules and Export controls of the US needs to be adhered to.

The Master Circular on Imports has more than 140 line items of instructions. In these I have not included the instructions pertaining to IDPMS, follow up and record keeping. I have also not considered the laws pertaining to the issuance of guarantees in India and the country in which the beneficiary is located. Each of these may have its own set of complexity like identification of a merchanting trade transaction. The latest UCPDC has about 39 articles, which is subject to varied interpretation. There are case laws pertaining to the interpretation of these clauses. In addition the Document Examiner has to be thorough about the International Standard Banking Practice (ISBP), which adds about a further 200 set of line items.

The complexity involved in understanding, interpreting and applying these 400-500 line items is anybody’s guess. The challenges in training of the bank officials, who do not necessarily have the skill or the inclination for such job, are humongous. It does not end here. Banks need to train the risk controllers also in these areas.

If the operations of banks continues as it is, the time is not be very far off, when banks need to employ the best of the lawyers, specialising in trade laws, for handling an import document.

Looking Ahead

The complexity is here to stay. With the trade wars being in the offing, the number of compliances is only expected to go up, atleast in the near future. The money laundering and fraud issues that have surfaced in recent times, will lead to a further tightening of the regulations.

The management of the banks will also be made accountable for regulatory and compliance lapses, if any. I am sure that concurrent auditors, regulatory auditors as well as RBI inspectors will look at compliance with a fine tooth comb. The cost of compliance is only expected to go up.

Banks have been reluctant to adopt and invest in technology for trade services and the oft-quoted “excuse” is that trade is very document intensive and the documents are too varied for any standardisation. Apart from this, the rules and regulations are subject to interpretation and hence necessarily require human intervention.

There is a need for a paradigm shift. Banks need to invest in total digitisation of documents, auto-examination of documents, auto-compliance and anti-money laundering checking guidelines, coupled with blockchain. The initiative in these areas by banks, till now, has been disparate and devoid of a holistic solution. Only an investment in an integrated technology solution will increase efficiency, reduce turn-around times, increase compliance and above all mitigate the legal risk of personal and joint management accountability. Of course, the reduced compliance costs and hence the increased businesses are the natural fall outs.

Some of the banks have started taking baby steps in that direction. The early adopters of such technology will have a significant advantage and will have the shortest payback period, apart from the huge increase in customer satisfaction and stickiness.



Recent Posts

Five in Five Interview – Sanjukta Chatterjee

Five in Five Interview – Sanjukta Chatterjee

Can you describe a typical day at Traydstream? What tasks do you handle regularly? A typical day in Traydstream always starts with a definite excitement given the pathbreaking nature of our business. I get up constantly getting up looking forward to it, with an...

Unleashing the Power of AI and ML: A Game-Changer for Businesses

Unleashing the Power of AI and ML: A Game-Changer for Businesses

  In the rapidly evolving landscape of technology, Artificial Intelligence (AI) and Machine Learning (ML) have emerged as transformative tools for enterprises seeking to achieve their business goals. According to a recent statistic from Yahoo Finance, a...