Wolfsberg Group Trade Finance Principles
Executive Summary: Trade Finance Principles (2019)
The Trade Finance Principles, updated in 2019 by the Wolfsberg Group, International Chamber of Commerce (ICC), and BAFT, establish the global standard for controlling financial crime risks (FCR) associated with trade finance. The document serves as a comprehensive guide for financial institutions (FIs) to manage risks related to money laundering, terrorist financing, bribery, and the proliferation of weapons of mass destruction (WMD).
1. Core Objectives and Scope
Financial Crime Definition: Includes money laundering (fraud, tax evasion, human trafficking), bribery, corruption, and the financing of terrorism and WMD.
- Purpose: To outline the role of FIs in addressing financial crime risks and aiding compliance with national and regional sanctions and embargoes.
- Applicability: These principles apply to all banks regardless of size and do not require significant electronic systems to implement.
- Key Products Covered: Documentary Credits (DCs), Bills for Collection (BCs), Guarantees, Standby Letters of Credit (SBLCs), Open Account Trade, and FI Trade Loans.
2. Risk Management Framework
The principles emphasize a Risk-Based Approach (RBA), where FIs analyze risks based on the parties involved, transaction type, and monetary value.
The Three Lines of Defence FIs are expected to implement a structured oversight model:
- First Line (Business Operations): Responsible for establishing a risk and control environment during day-to-day operations.
- Second Line (Oversight): Drafts policies, provides guidance, and monitors the execution of controls.
- Third Line (Internal Audit): Provides independent, objective assurance on the effectiveness of risk management and governance.
3. Key Control Mechanisms
- Customer Due Diligence (CDD): FIs must understand the customer's business model, principal counterparties, and expected transaction flows.
- Name Screening: Automated or manual processes to match transaction data against UN or local sanctions lists.
- Document Review: In documentary trade, FIs must check documents for consistency with the terms of the transaction.
- Escalation Procedures: FIs must have clear processes to record decisions and escalate unusual activity to the Money Laundering Reporting Officer (MLRO).
4. Industry Challenges and Limitations
The document candidly addresses the practical hurdles FIs face in trade finance:
- Open Account Visibility: Approximately 80% of world trade is "Open Account," where FIs have no visibility of underlying trade documents, limiting them to clean payment screening.
- Price Verification: FIs generally cannot determine the legitimacy of unit pricing due to a lack of public market data and complex business terms like volume discounting.
- Dual-Use Goods: Identifying items with both civil and military applications is challenging due to technical complexity; FIs often lack the specialized knowledge required.
- Data Protection: Cross-border data restrictions can impede the exchange of information required for effective due diligence.
5. Principal Recommendations
The Wolfsberg Group, ICC, and BAFT recommend that governments and trade bodies cooperate with FIs to:
- Provide standardized, up-to-date sanctions lists with clear data points.
- Publish "Dual-Use" goods details in a manner that can be integrated into electronic systems.
- Create "Help Desks" within government authorities to respond to technical queries on sanctions and goods.
- Ensure data privacy laws do not prevent the exchange of information necessary to manage financial crime risk.
