Compliance in trade finance due diligence relates to:
Know your customer (KYC): Verifying counterparties (corporations and banks) as part of “know your customer” regulations.
International Sanctions: Ensuring that all parties to a transaction undergo a “sanction screening”, using complex matching algorithms against official sanction lists, including the Office of Foreign Assets Control (OFAC), the European Union (EU), and the United Nations (UN).
Anti-money-laundering (AML) and Counterterrorist Financing (CTF): Detecting and preventing money laundering and terrorist financing by using “red flags” and IT supported behavioral profiling techniques, and reporting suspicious activities to the authorities.
Dual Use Goods: Preventing transactions from including weapons of mass destruction and dual-use goods (dual-use software, technology, documents, and diagrams) which can be used for civil and military purpose by using “red flags” and IT supported screening methods, and reporting suspicious activities to the authorities.
Compliance regulations have a very real effect on how trade finance transactions happen. At the forefront of international compliance regulations are the rules known as Know Your Customer or KYC.
Before a trade finance provider can proceed with a transaction, it must obtain a lengthy list of documents from its customer, investigate its legal structure, screen for politically exposed persons (Peps), score and classify risk, and archive the reviewed documents. Getting hold of the required documents can be challenging.
Transactions also undergo anti-money laundering (AML) scans in real time for sanctions violations and suspected money laundering, with many parties investigating alerts and reporting to the relevant authorities.