Do KYC (CDD) demands hinder trade financing?

The high stakes of KYC (CDD) are choking off financing and banking services for legal trade and export services, according to a new report by the International Chamber of Commerce (ICC).

The recent crackdown and threat of heavy fines for alleged violations of U.S. AML/CTF regulations has especially affected financial institutions’ willingness to provide correspondent banking relationships in emerging markets, according to the ICC. The multi-billion-dollar fines that some banks are facing has other institutions pulling back from this type of business and leaving legal enterprises without financing they could otherwise access, according to a report in the Financial Times.

Financial institutions can mitigate their risk in correspondent and other banking relationships through increased KYC (CDD), but the level of due diligence required and the higher and higher stakes attached to KYC (CDD) on-boarding efficacy can outweigh the benefits of this line of business for many institutions.

According to the Financial Times report, Kah Chye Tan of the ICC asserts that low default rates for trade finance products show them to be good investments for banks and that regulators need to take this into account when considering capital requirements and regulations.

As longtime AML consultants and designers of KYC (CDD) on-boarding software, AML Partners works with institutions on challenges such as these. CEO Frank Cummings said that KYC (CDD) efficiency and efficacy is achievable through software solutions, but challenges remain.

“We are certainly big proponents of software solutions for KYC on-boarding,” Cummings said. “Excellent software is a game-changer in terms of efficiency of on-boarding and efficacy of the risk assessments and data analysis. But even with great KYC software, there are a lot of challenges with identifying Ultimate Beneficial Owners and with weighing the amount of risk that institutions want to take on. This is a tough situation because that financing can be the lifeblood of businesses that need it, but correspondent banking in emerging markets can present considerable risk-mitigation work for financial institutions.”

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