Trade finance and the compliance challenge A showcase of international cooperation Disclaimer This publication and any opinions reflected therein are the sole responsibility of the World Trade Organization Secretariat and of International Finance Corporation staff. The opinions expressed and arguments employed herein do not necessarily reflect the official views of International Finance Corporation or its partners, nor of the World Trade Organization or its members. © International Finance Corporation/World Trade Organization 2019. Contents Foreword by Roberto Azevêdo, WTO Director-General, and Philippe Le Houérou, IFC Chief Executive Officer 3 Co-publishers and contributing institutions 5 Acknowledgements 6 Executive summary  7 Introduction  9 Chapter 1 Reasons for persistent trade finance gaps 13 Chapter 2 De-risking and inter-institutional responses  17 Chapter 3 Showcasing capacity-building in trade finance and regulatory compliance 23 IFC’s CASE STUDY 1  AML/CFT guidance for trade finance (International Finance Corporation) 28 Joint CASE STUDY 2  IFC/World Bank AML/CFT capacity-building programmes (International Finance Corporation, World Bank) 30 Joint CASE STUDY 3  IFC/IMF outreach initiatives (International Finance Corporation, International Monetary Fund) 32 Joint CASE STUDY 4  IFC/BAFT capacity-building programme (International Finance Corporation, Bankers Association for Finance and Trade) 33 |1 EBRD CASE STUDY 5  framework to build capacity in trade finance compliance (European Bank for Reconstruction and Development) 34 CASE STUDY 6  DB’s Trade Finance Program and AML/CFT initiative A (Asian Development Bank) 37 CASE STUDY 7 I  TFC trade finance technical assistance event in Tashkent, Uzbekistan (The International Islamic Trade Finance Corporation) 41 Conclusions 43 Bibliography 44 Abbreviations 46 Foreword  hilippe Le Houérou, P Roberto Azevêdo, IFC Chief Executive Officer WTO Director-General In 2017, an IFC report1 pinpointed the reductions in the network of correspondent banks in emerging markets. In emerging markets, correspondent banking stress and compliance challenges drove some respondent banks to retrench their own businesses. At the time, the trade finance gap was estimated at around US$1.5 trillion.2  It has likely widened since. Global correspondent banks are reassessing their emerging market strategies. In recent years, both compliance costs and potential regulatory risks have grown exponentially, making it more challenging to stay engaged. Smaller countries, with lower business potential, are particularly vulnerable. Trade finance shortages have been chronic and persistent in the developing world. Stepping up cooperation in this area is vital to boost global trade, lift economic activity, create jobs and achieve the UN’s Sustainable Development Goals. WTO, IFC, other development banks and the Financial Stability Board (FSB) have come together to mobilize resources to enhance trade finance programmes and develop risk sharing frameworks. 1 International Finance Corporation, 2017. 2 Asian Development Bank, 2017. |3 We also have started an unprecedented technical assistance effort to train a new generation of trade finance specialists and to build capacity on anti- money laundering and combating the financing of terrorism in developing countries. We have created a network to disseminate international best practice among the global trade community. In addition, the WTO, IFC and FSB are working together to inform trade finance providers about relevant regulatory requirements, promote tools to make compliance more effective and less costly for local banks, and help them attract new correspondents. This publication, “Trade finance and the compliance challenge: A showcase of international cooperation”, presents the efforts made so far. It provides an explanation of the current global trade finance gaps amid market failures as well as perceived regulatory risk. The publication presents an analysis of the recent trends of de-risking and the reasons for falling correspondent banking relationships. It shows how WTO, IFC and FSB have started working together to respond to this issue since the end of 2017. Finally, this publication shares real-life experiences in building capacity on trade finance and compliance through a range of illustrative case studies. We have a long way to go, but we have already made some significant progress. Together, we can ensure that trade finance availability is no longer a barrier but a springboard to trade, economic growth and development.  Philippe Le Houérou Roberto Azevêdo IFC Chief Executive Officer WTO Director-General 4 | Trade finance and the compliance challenge Co-publishers The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. The International Finance Corporation (IFC), a sister organization of the World Bank and member of the World Bank Group, is a global development finance institution focused exclusively on the private sector in developing countries. Contributing institutions The Asian Development Bank (ADB) is an international development financial institution dedicated to reducing poverty and fostering development in Asia and the Pacific through loans and expertise. The European Bank for Reconstruction and Development (EBRD) is an international development finance institution that invests in projects, mostly in the private sector, and in work on policy reform and provides technical advice to promote sustainable growth. The International Islamic Trade Finance Corporation (ITFC) is a specialized institution that promotes the trade of the member countries of the Organization of Islamic Conference by providing trade finance and engaging in activities, including investment and advisory, that facilitate intra-trade and international trade. |5 Acknowledgements Many people have contributed to this publication, either directly by providing written contributions or by participating in the design, editing and reviewing process, or more indirectly by actually reporting on the capacity-building activities that they have been organizing in the field. Special acknowledgment should go to the WTO team including, in alphabetical order, Marc Auboin, Anthony Martin, Heather Sapey-Pertin, Helen Swain and David Tinline; the IFC team, including Hyung Ahn, Kuntay Celik (World Bank), Emmanuel Mathias (IMF), Samantha Pelosi (BAFT), Susan Starnes, Alexei Timofti, and Makiko Toyoda; and the EBRD (Kamola Makhmudova, Rudolf Putz), ADB (Steven Beck, Maria Clarissa A. Laysa, Pinky Rose Lustre, Can Sutken) and ITFC (Anisse Terai). 6 | Trade finance and the compliance challenge Executive summary • Up to 80 per cent of trade is financed by credit or credit insurance but availability of finance varies across regions. A lack of trade finance is a significant barrier to trade, particularly (but not exclusively) in developing countries. • Small and medium-sized enterprises (SMEs) face the greatest hurdles in accessing affordable financing. The poorer the country in which they are based, the greater the challenges SMEs face in accessing trade finance. Seventy-five per cent of rejected requests for trade finance relate to SMEs. The number of international banks involved in trade finance continues to decline. • The estimated value of unmet demand for trade finance is US$ 1.5 trillion annually. About 40 per cent of this unmet demand is in developing Asia, and 10 per cent is in Africa. Bridging this gap would unlock the trading potential of many thousands of individuals and small businesses around the world. • Gaps in trade finance provision are widest in developing countries, where opportunities to trade are increasing as global production patterns evolve. • The reluctance of the global financial sector to invest in developing countries after the 2008-09 financial crisis compounds the problem of gaps in trade finance in certain countries because local banks require trade finance transactions to be settled in the currency of the transaction, which requires the participation of banks in the country which issues that currency. Local banks need international correspondent banks to confirm their letters of credit, engage with them in supply chain finance and clear trade-related payments in foreign currency. • Some 200,000 correspondent banking relationships, over about a million in total, have disappeared since the end of the financial crisis. Africa, the Caribbean, Central and Eastern Europe and the Pacific Islands are the regions most affected by the termination of correspondent banking relationships. Flows of trade finance are particularly affected. • In developed countries, there has been a heightened perception of the regulatory risk of operating in developing countries since the adoption of new anti-money-laundering and countering the financing of terrorism (AML/CFT) regulations and other regulations involving sanctions (particularly regulations pertaining to trade and financial sanctions). The adoption of these regulations has played a significant role in the decisions taken by many global banks to terminate certain correspondent banking relationships. |7 • Local banks, in turn, have found themselves faced with varying levels of demand from foreign jurisdictions in terms of complying with regulations, and they are often hard- pressed to comply with all of the new requirements. They risk being marginalized within the financial system, with consequences for the economic development of the countries in which they are based. • The international trade, development and financial communities have realised that they must address the challenges facing trade finance. For this reason, the WTO Director-General Roberto Azevêdo and IFC Chief Executive Officer Philippe Le Houérou joined forces with the Chair of the Financial Stability Board (FSB) on an incremental strategy, involving improving local capacity-building, promoting tools to reduce the cost of due diligence, and improving the process for identifying trade finance entities. The WTO and IFC have given strong support to the efforts of multilateral development banks to develop their own repositories of information on customers. • Joint missions in countries affected by trade finance gaps have involved experts from IFC, the WTO, the FSB and multilateral development banks, providing guidance on trade finance and regulatory compliance requirements. The dissemination of such knowledge is key to reconnecting local trade finance providers to the rest of the world’s network of trade finance distribution. • At the annual meetings of the International Monetary Fund and World Bank in October 2018 in Bali, Indonesia, DG Azevêdo and CEO Philippe Le Houérou co-hosted a session on “Financial Inclusion in Trade”, aimed at discussing future inter-institutional steps to reduce the US$ 1.5 trillion global trade finance gap and address the regulatory compliance challenges. Heads or senior officials of the IMF, the EBRD, the Islamic Development Bank, the African Export-Import Bank and the FSB also participated in this event. • More inter-institutional cooperation is needed to address the shortages of trade finance which are hindering the trade opportunities of many developing countries. DG Azevêdo and CEO Le Houérou have supported the publication of this report, which includes a number of case studies on how best to address regulatory compliance in trade finance. Introduction The availability of trade finance has banks across over 90 countries become an increasingly important reported declines in relationships with issue in the past few years. For correspondent banks, reducing their merchandise trade flows of over ability to serve customers (IFC, 2017). US$ 18 trillion annually to flow The Financial Stability Board (FSB) smoothly, there needs to be a well- established a work programme in functioning trade finance market 2015 to address the reduction of serving the needs of global traders. correspondent banking relationships. However, the supply of trade finance According to the FSB, 200,000 does not meet demand in many correspondent banking relationships regions. Even before the 2008-09 were terminated from 2011 to 2017, global financial crisis, a significant out of a pre-crisis total of roughly gap existed between the demand 1 million. and supply of trade finance in “ emerging markets; since the crisis, this gap has grown, with some regions affected more than others. The supply of trade finance does not meet demand in many regions. A 2014 study by the Bank of   International Settlements (BIS, 2014) revealed that a large share of international trade finance The Asian Development Bank (ADB) was supplied by a relatively small estimated the global trade finance group of about 40 international gap to be close to US$ 1.5 trillion banks. This group accounted for in 2017. This gap represents the some 30 per cent of trade finance amount of trade finance requests intermediated by banks, with local that are rejected. In many developing and regional banks supplying the countries, the alternatives to bank remainder. Since the global financial financing are scarce. Consequently, crisis, many of these banks have when trade transactions are been downsizing their balance sheets rejected by banks, most of them are and reducing the network of their abandoned. A little less than half of correspondent banking relationships the US$ 1.5 trillion trade finance with other banks in the world, gap concerns developing countries particularly in developing countries, in Asia. A significant share of the a phenomenon called “de-risking”. gap occurs in Africa: the estimated gap of about US$ 100 billion a year The International Finance Corporation accounts for about one third of the (IFC) found that over one quarter of trade finance market in the continent. the more than 300 emerging market |9  EO Le Houérou and DG Azevêdo co-hosted a session on financial inclusion in trade at the IMF/World Bank C Group Annual Meeting in Bali, Indonesia in October 2018. Globally, 60 per cent of all trade lack of trade finance is among the finance requests by small and top three exporting obstacles for medium-sized enterprises (SMEs) are half of the countries in the world. rejected, against only 7 per cent for multinational companies. According Since 2017, WTO Director-General to the 2016 Global Enabling Trade Roberto Azevêdo and IFC Chief Report of the World Economic Forum, Executive Officer Philippe Le Houérou have worked with other multilateral institutions, meeting on “ several occasions to discuss this topic and identified effective remedial The ADB estimated the global actions. Further dialogue with the trade finance gap to be close FSB should help to clarify regulatory to US$ 1.5 trillion in 2017.  expectations, reduce the cost of regulatory compliance, build capacity 10 | Trade finance and the compliance challenge in smaller local respondent banks challenges in emerging markets, and encourage larger correspondent the work that remains to be done, banks to return to markets from and the lessons to be learned. which they had withdrawn. Chapter 1 provides background on Joint technical assistance is needed the persistent trade finance gaps to build knowledge on both trade in developing countries. Chapter 2 finance and compliance requirements. looks at how trade finance has been Trade finance support offered by vulnerable to international banks multilateral development banks helps reducing their exposure to trade local companies which are having finance, known as de-risking, which difficulties accessing trade finance has led international organizations and provides risk mitigation for local in the trade, development and banks. However, training is required financial fields (the WTO, IFC and to meet the compliance challenges FSB in particular) to engage in encountered by financial institutions dialogue and cooperation. Chapter 3 when supplying trade finance, features a number of case studies notably in developing countries. provided by several international institutions, highlighting examples Looking at best practices in capacity- of trade finance and compliance building, this publication examines capacity-building endeavours in many current strategies to respond to these countries affected by de-risking.  | 11 Chapter 1  Reasons for persistent trade finance gaps • Trade finance is a particularly safe form of finance but it is commonly perceived to be subject to high risks. • Smaller traders dependent on trade finance are more likely to see their requests for trade finance rejected than any other category of firm. • In two-thirds of cases, traders whose requests for trade finance have been rejected do not attempt to seek alternative financing, simply because it is not available. The disconnect between by credit operations, tends to have perceived and actual risk relatively short tenors, and is often There are various causes for self-liquidating. The low-risk nature of the existing trade finance gaps. short-term trade finance is supported Among them are the failures of by data collated by the International operators to recognize the low risk Chamber of Commerce’s (ICC) associated with trade finance (Asian Trade Register Report, established Development Bank Institute, 2017). in 2011. According to the reports from 2013 to 2017, the average While the commercial risks involved transaction default rate on short-term in an international trade transaction international trade finance (credit seem in principle to be larger than and guarantees) was no more than those involved in a domestic trade 0.46 per cent, with a recovery rate transaction – e.g. non-payment, loss of 52 per cent, mostly through the re- or alteration of the merchandise sale of the collateral, the merchandise. during shipment, fluctuating exchange rates – trade finance is Table 1 (see page 14) provides a particularly safe form of finance, more detailed data across as it is underwritten by strong specific categories of short-term collateral, is carefully documented trade finance instruments. CHAPTER 1  Reasons for persistent trade finance gaps | 13 Table 1: Risk characteristics of short-term trade finance products, 2008-17 Implied Category Default rate maturity (days) Recovery rate Import and export 0.22% 80 71% letters of credit Loans for import/export 0.8% 120 45% Performance guarantees 0.36% 110 18% Total 0.46% 90 52% SOURCE : W TO, based on the ICC Trade Register Report averages, from 2013 to 2017.  As evidenced in ADB’s 2017 Trade worth a total of US$ 11 trillion Finance Gaps, Growth, and Jobs in trade transactions/flows. Survey, one of the main reasons for the rejection of trade finance, when it is requested in certain regions, is the Small and medium-sized perception of high risk. Yet, as shown enterprises (SMEs) in by the Trade Register Reports, the developing countries underlying transaction default rates for Trade in low-income countries is more transactions are very small (0.39 per likely to be undertaken by SMEs, cent in Africa compared to 0.38 per as the size of trading companies cent in Europe and 0.5 per cent in is by and large proportionate to Latin America) (ICC, 2016). The gap the size of their economies. As between the perception and actual reflected in ADB (2017), trade- level of risk of the transactions is lending to SMEs in developing clearly one of the main causes for the countries is severely constrained lack of trade finance in certain regions. by their lack of credit history, limited knowledge and experience of trade One way to reduce the “confidence” finance, and absence of collateral. gap is to continue disseminating SMEs are also likely to be subject information regarding the low risk of to greater selectivity from local trade finance and to work at maintaining banks when providing finance a strong database supporting this. and more reliant on local currency The latest ICC Trade Register financing to finance their trade. Report (ICC, 2017) is based on data collected from 25 global banks on As highlighted by the African 20 million trade finance transactions, Development Bank’s survey on trade 14 | Trade finance and the compliance challenge finance in Africa (AfDB, 2017), bank- The most recent ADB trade finance intermediated finance is concentrated gap surveys (ADB, 2016; 2017) in customers with whom they have confirmed that smaller traders’ a long history. SMEs account for requests for trade finance were only 15 per cent of banks’ total trade more likely to be rejected than any finance portfolio. The relatively low other category of firm. While about share is attributed to the higher risk half of their requests for trade perception associated with these finance were rejected by banks, clients, despite a default rate on in two-thirds of cases they sought SME loans of less than 3 per cent no alternative financing, simply across the continent. The ADB survey because it was not available. Thus, reveals similar findings in Asia. As persistent gaps in trade finance shown by Figure 1, only a limited could mean the exclusion of such share of SMEs uses banking services. firms from the trading system. This Moreover, according to ADB (2017), is of concern because SMEs are the companies whose requests for trade backbone of many economies and finance were rejected were likely, in act as major employers. As outlined a quarter of such cases, to resort to above, there is no question that the informal sector, suggesting that access to trade finance represents a the transaction has sufficient potential significant obstacle to the economies value for the firm to be willing to of developing countries.  borrow expensively or/and informally.  ow bank density and low SME coverage in selected developing countries, 2014-16 Figure 1: L (per cent) Cambodia Viet Nam Percentage of firms with a bank loan/ Myanmar line of credit Percentage of firms Indonesia with a cheque or savings account India 0 20 40 60 80 100 NOTE : The share of small enterprises that have financial accounts varies by country but only a very small share obtains loans.   SOURCE : World Bank Enterprise Survey.  CHAPTER 1  Reasons for persistent trade finance gaps | 15 Chapter 2  De-risking and inter-institutional responses • Since the global financial crisis, many international banks have been reducing their trade finance activities, particularly in developing countries. • “De-risking” is driven partly by concerns over complying with regulations related to money-laundering and terrorism financing, but it is also motivated by concerns related to compliance costs. • The WTO, IFC and the Financial Stability Board, along with multilateral development banks, are working with the trade finance community to improve awareness of compliance requirements. Trade finance is vulnerable finance instruments, intermediated to de-risking by commercial banks, are premised Since the 2008-09 global financial on an existing credit relationship crisis, a number of international between counterparty banks. banks have been de-risking, i.e. International banks, which are, for reducing their guarantees to banks example, required to “confirm” the in developing countries in particular. future payment to the exporter, take Several publications have debated on the reimbursement risk related the extent of the role of retrenchment to local emerging market banks. of correspondent banking and other Thus, for goods to be shipped, a post-crisis downsizing in limiting confirming bank must be willing to access to trade finance for traders take the payment risk of the local (see BIS, 2014; ICC, 2017). bank. This may not be possible if the trade finance transaction causes Trade finance is particularly vulnerable that international confirming bank to to de-risking, despite its very small loss exceed its client or country exposure history and high recovery rate. Trade limits. In many cases, a letter of credit CHAPTER 2  De-risking and inter-institutional responses | 17 may not be confirmed because the over possible sanctions relating to potential return on this exposure anti-money-laundering and countering does not merit the risk taken. the financing of terrorism (AML/ CFT) but also recognized that the As indicated above, the trade finance withdrawal of international banks was market is relatively concentrated motivated by concerns about costs. (BIS, 2014), although very large banks have been recalibrating their The FSB designed a four-point global network as a result of needing action plan to address the decline to comply with various regulatory and in correspondent banking: better business parameters. These include understanding this decline, clarifying the new Basel III standards (an regulatory expectations on M­ L/CFT internationally agreed set of measures obligations, increasing domestic developed by the Basel Committee capacity-building in countries that on Banking Supervision in response host local respondent banks, and to the 2007-09 financial crisis, which strengthening the tools for customer aims to strengthen the regulation, due diligence. Since 2016, the supervision and risk management FSB has reported regularly to G20 of banks) and KYC (i.e. “Know Your finance ministers on its progress Customer”, a process of regularly in implementing this plan. verifying a customer’s identity with a view to eliminating bribery, corruption and other illegal financial activities – High perception of regulatory a requirement of the international anti- risk hinders trade finance money-laundering (AML) regulations). Robust regulation of international banking and financial flows is needed In the compliance process, some to prevent criminals from abusing business models have been more the financial system. Since the affected than others. The claim that tightening of international guidelines the termination of correspondent and the imposition of high fines by banking relationships has been linked national authorities to banks for to compliance costs was examined non-compliance, there has been a by multilateral institutions following a heightened perception of the A ­ ML/ request by the G20. The BIS (2015) CFT risk affecting trade finance. and the World Bank Group (2015) Requirements or perceptions of delivered reports to the G20 Summit requirements related to AML/CFT in Antalya, revealing nuanced views as are said to compound the global to what was driving the reduction in unmet demand for trade finance, correspondent banking relationships. reducing financial inclusion in regions They acknowledged the concerns and markets that need it most. 18 | Trade finance and the compliance challenge Part of the problem is that perceived and related payments are subject regulatory requirements may lead to significant amounts of fraud. banks to exceed guidance provided by international and national regulatory bodies, with the effect of The FSB-WTO-IFC dialogue reducing access to trade finance. and action plan Instances of over-compliance The dialogue between the FSB, the with regulation by banks, either by WTO and IFC seeks to address the choice or due to misinterpretation, issues highlighted above. The FSB’s can be minimized by enhancing the correspondent banking relations group clarity of regulatory requirements, made a commitment to the G20 to talking to regulatory authorities, consider how its work could be adapted developing “tools” and compliance or expanded to better address the trade “utilities”, and disseminating finance component of correspondent best compliance practices. banking. Its correspondent banking progress report, delivered to the Also, in some jurisdictions, there G20 in March 2018, stated that: may have been a perception that “the reduction in correspondent trade finance was a high-risk area banking relationships may affect for money laundering. Early reports trade finance transactions that on “trade-based money laundering” rely on correspondent banking (FATF, 2006) highlighting the arrangements to be processed and risks that trade might be used as a may thereby impact some countries, channel for criminal activities (the especially those that depend on drugs and arms trade, for example), trade for their development or the may have bolstered the idea that access to basic supplies. The FSB, trade activities carried high and with inputs from the World Trade specific risks. Several more recent Organization and the International reports by international regulatory Financial Corporation, will therefore bodies (FATF, 2017) have offered a explore whether and how some of more detailed, nuanced and mature the solutions already developed risk approach. For example, it is can be further elaborated to better acknowledged that trade finance capture the trade finance components transactions are highly documented. of correspondent banking”. The trade documentation (customs, transport and insurance documents) In concrete terms, this means that provides for substantial visibility and the three organizations, along with transparency of the related payment. other multilateral development banks, There is no evidence that the are working to improve awareness US$ 18 trillion in trade transactions by the trade finance community CHAPTER 2  De-risking and inter-institutional responses | 19 of the new AML/CFT contexts the effectiveness of such revised and clarifications, in a more cost- guidance. The surveys revealed that effective and decentralized way. a large proportion of private sector entities had received communication One of the key issues is related to from their regulators/supervisors, how the standards for AML, CFT and although some correspondent banks KYC are adapted and implemented did not receive any communication at the national level. The emergence from supervisors and were not aware of a decentralized standard-setting of any of the revised 2017 guidance process across jurisdictions has documents. Also, some large providers generated significant variance of correspondent banking services did in implementation, often leaving not observe changes in the supervisory financial institutions to interpret approach following the communication application and ultimately to “over- of the guidance. This was a sign that comply”. The lack of harmonization, some national authorities needed to the complexity, the additional scrutiny do more. Clarification of regulatory and the risk of significant potential AML/CFT requirements and their penalties for violations has made the effective implementation remain financial effects of “compliance risk” crucial elements for addressing the material for banks for the first time. concentration of correspondent banking relationships. Accordingly, in 2017 the Financial Action Task Force (FATF – an At the country level, the FSB is intergovernmental body whose looking at how the above-mentioned objectives are to set standards and clarifications have been embodied in promote effective implementation national approaches in the context of legal, regulatory and operational of trade finance. It is also identifying measures for combating money any remaining implementation issues. laundering, terrorist financing and As a preliminary step, the FSB other related threats to the integrity of Secretariat is working with multilateral the international financial system), in institutions and relevant industry cooperation with the Basel Committee bodies to seek a description of the on Banking Supervision’s (BCBS) potential issues related to the clarity AML/CFT Expert Groups, issued of regulatory expectations specific revised guidance (FATF, 2017). The to trade finance in correspondent FATF and BCBS conducted follow-up banking that they identify (if any).1  surveys of their membership to assess 1 Relevant bodies would include the Wolfsberg Group, the International Chamber of Commerce (ICC) and the Banking Association for Finance and Trade (BAFT). 20 | Trade finance and the compliance challenge In the meantime, multilateral contribute to improved AML/CFT in institutions have been stepping developing countries, given its ability up capacity-building activities, for to reach relevant banking participants instance, by identifying jurisdictions directly. Some large banks, traditionally where a reduction in the number of very active in trade, have also organized correspondent banks has a potential local respondent bank training to impact on trade, notably in poor help these banks in developing countries (e.g. Africa, developing countries better understand and apply Asia, the Caribbean, etc.) or in heavily existing AML/CFT requirements. trade-dependent countries (e.g. which rely on imports for critical goods and In 2018, IFC published a guidebook infrastructure development or exports (IFC, 2018a): “Navigating Essential for GDP and foreign exchange). Anti-Money Laundering and Combating the Financing of Terrorism Capacity-building activities include Requirements in Trade Finance: A actions specific to trade finance, or Guide for Respondent Banks”. This which target a trade finance audience, guide is intended to help clients such as outreach events and industry identify the proper references for dialogues. There is a significant guidance, provide an overview of appetite from the industry to conduct this guidance and begin to consider outreach activities that specifically how to give effect to this guidance target a trade finance audience, for in their businesses and countries. instance to disseminate the Wolfsberg The guide provides an overview Due Diligence Questionnaire, which of regulatory guidance on AML/ aims to establish an enhanced, CFT, including information and reasonable standard for cross-border updates from the FATF as well as correspondent banking due diligence the BCBS and other institutions. in order to simplify and clarify data A separate overview on trade-based requirements. IFC and the WTO money laundering is included. support such activities, combined The guide presents global banks’ with the dissemination of recent perspectives related to a customer’s guidance by FATF and BCBS. due diligence considerations in onboarding and maintaining bank As part of its trade finance institutional customers in higher-risk jurisdictions. capacity-building activities, IFC has Finally, the guide considers third- executed many training events that party technology solutions that focus on promoting improved AML/ have arisen in response to the need CFT compliance in its network of to better manage the problem of emerging market banks. IFC can rising AML/CFT-related costs.  CHAPTER 2  De-risking and inter-institutional responses | 21 Chapter 3  Showcasing capacity- building in trade finance and regulatory compliance • IFC and the multilateral development banks have undertaken a number of capacity-building activities for banks involved in trade finance. • Training programmes are intended to bring banks up to speed with new regulations and with how to comply with these regulations. This chapter describes recent professionals. The 2016 WTO capacity-building activities publication Trade finance and SMEs: undertaken by IFC and multilateral bridging the gaps in provision development banks, designed to (WTO, 2016) highlighted that more provide guidance to banks on new needed to be done to improve regulatory requirements for anti- the awareness of trade finance money-laundering and countering the instruments, to enhance the ability financing of terrorism (AML/CFT) to select the best products and and to introduce tools that facilitate to train trade finance specialists. compliance with these requirements. Over the past two years, multilateral The efforts that have been made by development banks have boosted multilateral institutions are significant, their trade finance capacity-building and have entailed the participation of work in collaboration with the many players, including professional WTO and ICC. Collectively, these associations, and of course the local institutions trained more than 4,000 financial institutions receiving the professionals from 85 countries training. in 2017 and 2018, far exceeding the initial objective of training Multilateral development banks and 1,000 trade financiers annually. the WTO have, for some years, been increasing their efforts in training Per chapters 1 and 2, capacity- a new generation of trade finance building in trade finance has CHAPTER 3  Showcasing capacity-building in trade finance and regulatory compliance | 23 increasingly had to address programmes undertaken with regulatory compliance challenges the World Bank, the International and to focus not only on front-office Monetary Fund and the Bankers professionals, who deal with exporters Association for Finance and Trade. and importers, but also on back- Three further case studies spotlight office professionals, who must deal programmes led by the European with compliance with international Bank for Reconstruction and standards such as AML/CFT and Development, the Asian Development “Know Your Customer” (KYC). Bank and the International Islamic The case studies presented in this Trade Finance Corporation. chapter highlight the significant IFC’s approach to de-risking “ IFC surveyed over 300 private- sector bank clients across 92 Multilateral development countries, adding their voice to the global dialogue on correspondent banks and the WTO have, for bank de-risking (IFC, 2017). IFC’s some years, been increasing survey examined the relationship their efforts in training a new between correspondent bank de- risking, correspondent banking generation of trade finance stress and compliance challenges, professionals. among other external challenges, and banks’ abilities to serve their customers. The survey also efforts by international agencies identified what emerging market active in trade finance facilitation banks would find most helpful as and capacity-building to design and they navigate these new challenges. implement training programmes The resulting publication has been focused on compliance with complemented by several notes trade finance regulations. These (IFC, 2018a; 2018b; 2018c). programmes focus on questions such as what AML and CFT standards Along with their global peers, are, how to implement a risk-based emerging market banks are approach to AML/CFT and KYC, tackling multiple AML/CFT what the country-specific risks are, compliance challenges including: how to join customer due diligence • expensive implementation of information-sharing or shared software or system upgrades; service platforms, and where to get • lack of harmonization and clarity information on sanction regulations. in global, regional and local regulatory requirements; The first four case studies focus on • varied data requests from multiple an IFC programme and collaborative cross-border correspondent banks; 24 | Trade finance and the compliance challenge • limited local client information; IFC has designed its contribution • resources and expertise required to a de-risking solution strategically, for implementing AML/CFT; and prioritizing activities that support banking clients as they address the • challenges in updating client challenges discussed above. IFC’s information needs and training. clients play an invaluable role in their countries’ stability and development. IFC’s survey results offered an IFC has identified specific preliminary in-depth perspective on which actions that can help them, based actions to address de-risking on its global private sector footprint would be most valued by private- with financial institutions (over sector financial institutions in 1,700 financial institutions and emerging markets. An organized, their subsidiaries worldwide). In focused response is necessary addition, IFC’s established advisory to address de-risking challenges services delivery channel, expertise effectively. There are a number with correspondent banking of actions that the international challenges and financial institution community might consider to help risk management best practices emerging market banks address innovation capacity provide for a de-risking challenges. Each unique contribution. While multiple participant in this global solution solutions are under consideration, can identify areas where it will be IFC prioritized its initial efforts based most effective in its contribution. on what clients said they needed most, as presented in Figure 2.  anks identify compliance-related solutions that could help Figure 2: B Advocacy for harmonized requirements 76% Central KYC registry 64% Guidance on systems alignment 59% Training on basic AML-CFT-KYC rules 52% Guidance on technology-based solutions 50% Guidance on interpreting regulations 48% Briefings on global banks’ requirements 42% Introductions to new correspondent banks 42% Direct provision of correspondent banking 29% 0% 10% 20% 30% 40% 50% 60% 70% 80% SOURCE : International Finance Corporation.  CHAPTER 3  Showcasing capacity-building in trade finance and regulatory compliance | 25 IFC’s survey found that emerging analyzing larger or less organized sets market banks require assistance of sometimes incomplete or otherwise in understanding basic AML/ complex data in more effective ways. CFT concepts, interpreting and These innovations are also facilitating implementing regulatory guidance, technologies for joint KYC utilities, correspondent bank reporting and potentially reducing KYC costs and systems alignment, interpreting US/ improving due diligence for AML/CFT EU regulatory requirements, and efforts. There is great potential in the technology-based solutions. In AML/CFT field for the deployment addition, 64 per cent of respondents of more advanced analytics and seek ways to share data and automatic learning capability (such mutualize their efforts, with a view as artificial intelligence), which can to making AML/CFT compliance provide more information and a clearer more efficient for both emerging signal. markets respondents and cross- border correspondents, along Successful systemic applications of with upgrading the consistency of this technology could help financial information quality. These results institutions and countries know informed IFC’s first set of efforts, more about activities in their market which focused on five solutions faster, and potentially for less cost. channels. These were capacity- IFC has an opportunity to invest building in AML/CFT standards and heavily in knowledge and carefully trade compliance, tangible guidance structure its approach to master for AML/CFT risk management, these areas, partner with industry AML/CFT technology applications, winners, and systematically deploy extended financial support, and a investments and advice to help both solutions marketplace implemented clients and countries improve. through partnerships with a multitude of stakeholders with case examples. IFC sees opportunities to invest in and connect markets (both banks and regulators) to competent providers IFC’s future engagement of full service, end-to-end data Beyond tangible guidance and management, customer due diligence, technical assistance processes, transaction monitoring, suspicious the majority of IFC’s client survey transaction reporting and other respondents recognized the relevant customer and transactional importance of employing technology- data. There are best practice players in based solutions, e.g. a shared “Know this field, and banks around the world Your Customer” (KYC) utility. Multiple recognize the potential for both cost recent achievements in technology efficiency and risk management quality have contributed to improving the that is created by the mutualization of capacity for transmitting, storing and information and services. Connecting 26 | Trade finance and the compliance challenge consortiums of private sector banks or an increasing need, IFC intends to other bodies to these players suggests implement new initiatives, including value, and IFC is potentially capable a joint investment and advisory of both convening and financially programme called the Trade Inclusion supporting such connections. Platform. The need for IFC’s core investment Finally, IFC continues to build on business is  emphasized by the collaboration opportunities for multitude of clients that have stakeholders to optimize areas of expressed a need for capital, foreign expertise and feasibility across currency liquidity or additional trade multiple institutions. IFC continues to finance support. IFC’s core business support, enhance and augment the is investment. Since 1956, IFC work that correspondent banks are has provided capital and liquidity already doing. IFC will also continue to private sector firms in emerging to identify additional private sector markets. IFC continues to augment partners capable of and interested trade finance volume and liquidity in bolstering existing networks, in through existing network channels, some cases by providing alternatives, and to support the emergence of particularly where limited cross-border new ones. With its global coverage, network bandwidth creates significant IFC is playing a leadership role in gaps. supporting global trade flows to emerging markets, including the De-risking solutions will continue to poorest and most fragile countries, at evolve. The way forward will require a time when trade finance corridors that all stakeholders – multilaterals, are under significant pressure. regulators and bankers alike – are responsible for working together To date, IFC has supported close to toward a comprehensive solution. IFC US$ 160 ­ billion in global trade since continues to study market intelligence, the inception of its trade department identify opportunities and assess in 2004, which makes IFC the additional alternatives. It continues largest trade finance provider of all to consolidate both the challenges the multilateral development banks. and opportunities that remain in the IFC’s Global Trade Finance Program emerging market private financial (GTFP), which has executed over sector. By being consistently present US$ 65 billion in trade guarantees, and active in multilateral discussions booked US$ 6.5 billion transactions regarding de-risking and compliance, in 2018, which was one of the highest IFC will continue to engage in this levels in its 15-year history. As the space, given its footprint, expertise de-risking trend endures, the need for and investment capacity.  IFC’s emerging market trade finance support increases. In response to CHAPTER 3  Showcasing capacity-building in trade finance and regulatory compliance | 27 International Finance Corporation   Case study 1  IFC’s AML/CFT guidance for trade finance I n May 2019, IFC and the World Bank launched a workshop in Zimbabwe, which was funded by the Government of Japan.  Training publications respondent banks that issue trade finance produced by IFC instruments, such as letters of credit, and correspondent banks that confirm those In 2018, IFC developed a training instruments. It updates the core KYC guidebook for emerging market banks requirements common to a strategically selected called “Navigating Essential Anti-Money set of international banks, representative of the Laundering and Combating the Financing of industry’s best practices, after the interviews Terrorism Requirements in Trade Finance: with respondent and correspondent banks. A Guide for Respondent Banks” (IFC, 2018a, hereafter called “the Guide”). The Guide also develops and delivers a best practice reporting package IFC’s Global Trade Finance Program connects that participating emerging markets’ a broad network of correspondent banks with respondent banks can use for information- emerging markets’ respondent banks. For these sharing with correspondent banks. banks to benefit fully from this network, their “Know Your Customer” (KYC) compliance IFC is preparing a “know-your-customer” information should be ready, updated and package to accompany the Guide’s training available to confirming banks around the module, which can be delivered to respondent world with which they would like to transact banks in emerging markets, supporting their trade and develop wider relationships. efforts to draft internal AML/CFT manuals. The Guide provides an analysis of KYC Efforts also include the publication of IFC’s compliance issues and offers recommendations Good Practice Note, entitled “Anti-Money to help expedite compliance information Laundering and Countering Financing of exchanges between emerging market Terrorism Risk Management in Emerging Market 28 | 28 Banks”, along with IFC’s “Navigating Essential IFC has also launched multiple training Anti-Money Laundering and Combating the events, embedding relevant material Financing of Terrorism Requirements in Trade into existing emerging markets’ Finance: A Guide for Respondent Banks”. respondent bank training channels. The Note seeks to assist banks in emerging markets with compliance with AML/CFT IFC’s capacity-building international standards. The Note presents programmes an in-depth guide for banks in emerging IFC has supported capacity-building in markets, including information on: trade finance by training more than 6,400 professionals from 71 countries in recent years. (i)  the emergence of AML/CFT requirements; (ii)  the importance of a strong risk In 2018 alone, IFC provided 10 training management framework; programmes in countries such as Cambodia, Côte d’Ivoire, Haiti, the Lebanese Republic, detailed elements of a sound (iii)  Pakistan, Rwanda, Senegal and Tanzania, AML/CFT programme; and in 2019, it has already provided working with cross-border (iv)  training in the Democratic Republic correspondent banks; and of the Congo, Madagascar, Tanzania, (v)  a framework for self-assessment. Uganda, Zambia and Zimbabwe. In the rest of 2019, IFC plans to conduct It summarizes multilateral regulatory up to 20 programmes in countries including developments for AML/CFT, initiatives Cameroon, Ethiopia, Ghana, Guinea undertaken by international institutions, Conakry, Liberia, Malawi and Mauritania. and the most relevant regulatory documents, among other material. Together with partners including the World Bank (WB), International Monetary Fund (IMF), To complement this Note, IFC is piloting the and Bankers Association for Finance and development of a diagnostic assessment Trade (BAFT), and with participation from the tool to help clients assess their AML/ World Trade Organization, IFC plans to expand CFT capacity, and to chart a course for the capacity-building programmes in the field improvement. This tool includes a detailed of AML/CFT compliance in trade finance, set of questionnaires and instructions, as demonstrated in the following cases. as well as relevant guidance memos for information on specific topics. The tool’s Case study provided by International Finance outputs would help banks identify strengths, Corporation. weaknesses and steps for improvement to achieve a higher level of compliance. Collectively, these products are intended to help banks in emerging markets to improve AML/CFT compliance and to address effects unique to emerging markets’ respondents. | 29 International Finance Corporation, World Bank   Case study 2  Joint IFC/World Bank AML/CFT capacity-building programmes n November 2018, IFC and the World Bank launched a pilot workshop in Rwanda, which was partnered by the National Bank of Rwanda and I local private sector banks and funded by the Government of Japan. Joint IFC and World Bank training in anti- country risks as well. Country risk is assessed money-laundering and countering the via a “mutual evaluation”  1 of that country’s financing of terrorism (AML/CFT) has adherence to FATF’s recommendations. The proved effective at the country level, where World Bank’s Financial Market Integrity Unit both regulators and private sector financial has engaged with many countries to support institutions interact and learn together. central banks and national regulators to better prepare for mutual evaluations, including national risk assessments, a key component of the Capacity-building in Rwanda FATF risk-based approach. Mutual evaluations In November 2018, the IFC and the World Bank’s cover both regulatory requirements and Finance, Competitiveness and Innovation Global implementation of AML/CFT practices by local Practice worked together to build capacity on respondent banks, and provides information for AML/CFT associated with trade finance to banks to build and refine their own risk-based launch a pilot workshop in Rwanda. The National approach to AML/CFT policies and practices. Bank of Rwanda and local private sector banks partnered the initiative that was funded by the To both educate and support collaboration Government of Japan. The WTO and FSB between emerging markets regulators and participated in the event by video-conference. financial institutions, IFC and the World Bank designed a workshop in Rwanda. While the Financial Action Task Force’s (FATF) The primary idea was to build on synergies recommendations are well accepted and between the World Bank’s support of recognized, correspondent banks have to be emerging market regulators and IFC’s support cognizant of and manage institutional and 1  The FATF conducts peer reviews of its 38 members on an ongoing basis to assess levels of implementation of its recommendations and analyses of each member’s system for preventing criminal abuse of the financial system. 30 of individual financial institutions. The joint were also presented, including responsibilities effort helped key participants in Rwanda’s on institutional risk assessments, customer due financial system to understand what they can diligence and suspicious transaction reporting. do to reduce their de-risking probability. The course included specific information on trade-based money laundering, including In preparing for its first mutual evaluation, examples of the types of trade transactions that Rwandan officials noted the need for thorough have been used for money laundering purposes. preparation, and ways to improve their approach to AML/CFT. The country will go through the Eastern Finally, the workshop incorporated input from and Southern Africa Anti-Money Laundering outside companies with services that are designed Group’s AML/CFT Mutual Evaluation in 2021. to support more efficient, accurate and cost- effective customer due diligence through “KYC The workshop served as a kick-off for future [i.e. “Know Your Customer”] utilities”. There was collaboration between the National Bank of a session by SWIFT (the Society for Worldwide Rwanda and the financial sector. Participants Interbank Financial Telecommunications), included compliance and risk management explaining their KYC Registry, which is specific staff, trade and credit officers from private to correspondent banking relationships. There sector banks as well as from a state-owned was another session by Thompson Reuters bank, and representatives from the National covering their KYC utility for corporates and Bank of Rwanda and regulatory agencies, banks currently in operation in South Africa. including the national risk assessment process coordinator. The workshop modules included Participants from both the banking sector and an overview of global de-risking trends and regulatory authorities noted that this first joint management evaluation processes, including workshop in Rwanda was extremely valuable. the consequences for countries with a poor Representatives from the National Bank of rating, relative effectiveness of addressing Rwanda indicated that it was very helpful to potential deficiencies proactively and prior to the understand the risks from the business side, and management evaluation, which would ultimately banks appreciated the need for clearer guiding result in higher ratings. World Trade Organization principles from the National Bank of Rwanda (WTO) and Financial Stability Board (FSB) as they develop their own institutional risk experts were part of the training faculty. assessments. Attendees expressed interest in organizing periodic and regular meetings between It was noted that poor compliance ratings tend to the National Bank of Rwanda and compliance increase the risk of losing correspondent banking officers going forward. The banks requested relationships. The agenda covered information further elaboration of the AML/CFT obligations on the importance of partnerships between the of financial institutions, as well as more case National Bank of Rwanda and the private sector examples on trade-based money laundering. through the development of the National Bank They also expressed interest in a deeper and of Rwanda and subsequent guidance from the more thorough overview of KYC utilities, which central bank to inform risk assessments carried had been introduced to them for the first time. out by private sector financial institutions. It also covered the role of the financial institutions during mutual evaluations, given the increased Other capacity-building importance of effectiveness and outcome programmes measures (reliant on the quality of implementation Based on the positive feedback of all of AML/CFT by the bank). Obligations of attendees, the joint IFC and World Bank financial institutions with respect to AML/CFT team delivered a similar training programme 31 in the Democratic Republic of Congo and Case study provided by International Finance in Madagascar and are currently planning to Corporation and the World Bank. deliver the programme in several countries in Sub-Saharan Africa and beyond. International Finance Corporation, International Monetary Fund   Case study 3  Joint IFC/IMF outreach initiatives IFC and the International Monetary Fund Factors leading to global banks’ withdrawal of (IMF) are conducting joint outreach initiatives CBRs generally reflect correspondent banks’ to facilitate the dialogue on anti-money- assessment of the profitability and risk of the laundering and countering the financing of relationships. In this regard, the IMF Board terrorism (AML/CFT) between regulatory has endorsed, and staff is implementing, a bodies and private sector banks. multi-pronged approach to address CBR pressures, the primary pillars being: IMF webinar initiative (i) to monitor trends to understand and assess The pilot, a global webinar, attracted over the trend of issues on CBR; 90 participants from all over the world. Country- (ii) to monitor risks and drivers; specific local outreach is also scheduled to facilitate dialogue. Due to lack of good (iii)  to take place in the summer of 2019. communication between global banks and The objective of the session was to explore respondent banks, IMF staff introduced the IMF’s AML/CFT-related initiatives, which regional roundtables on CBR where high aim to address correspondent banking level representatives of global banks and relationship (CBR) challenges, including correspondent banks deliberate to understand market analysis, technical assistance and issues better and find practical solutions; public-private sector dialogue. After the WTO tailored capacity development, including by (iv)  Secretariat provided an overview of the global building capacity on AML/CFT; and trade finance gap, the session was followed by to engage in cases involving tail-risk (v)  a module on the IMF’s AML/CFT assistance scenarios when a country is financially cut off framework, challenges in correspondent from the international network, which has not banking relationships (CBR), the importance materialized yet. of AML/CFT for financial stability, financial integrity, and the relevance of effective AML/ CFT frameworks. The IMF also shared details IMF regional initiatives of its work in supporting countries’ capacity The IMF’s regional initiatives started with the development in designing solutions to address Caribbean, and were expanded to other regions: correspondent banking relationship pressures. Africa, Central Asia, the Middle East and the 32 Pacific. The nature and diversity of the risks and internal controls for the Central Bank and reasons for pressures on correspondent banking revisions to AML/CFT law and regulations. relationships vary across different regions. In • Jamaica: The sector of “cambios” (money the Caribbean, challenges may relate to the service businesses) was affected due to the ability to mitigate risks from off-shore financial termination/restriction of services offered sectors. On the other hand, in the Pacific Island by commercial banks. The IMF-supported countries, the lack of identification documents capacity development on risk-based creates challenges to monitoring small-scale supervision of the central bank for deposit- transactions originating with seasonal workers, taking institutions/cambios was strengthened. and such remittance could involve high risk. The IMF provides capacity development assistance to central banks, authorities and Country-specific initiatives regulators. Within their respective mandates, Two examples of country-specific capacity IMF and IFC can further collaborate and arrange development are summarized below: outreach activities jointly to strengthen the • Guinea: Since the Central Bank of Guinea dialogues between the public and private sector. (Banque Centrale de la République de Guinée) has experienced correspondent Case study provided by International Finance banking relationship pressure, IMF staff are Corporation and the International Monetary Fund. helping develop compliance policies and procedures by strengthening AML/CFT International Finance Corporation, Bankers Association for Finance and Trade   Case study 4  Joint IFC/BAFT capacity-building programme IFC and the Bankers Association for Finance and Best practices for respondent Trade (BAFT) are working together to build the banks capacity of local private sector banks in Sub- BAFT’s “Respondent’s Playbook” explains the Saharan Africa. The goal is to help these banks challenges associated with correspondent obtain and maintain correspondent banking banking relationships and provides related relationships through further development and best practices for consideration and demonstration of AML/CFT capacity. BAFT adoption by respondent banks. The Playbook is the leading global trade association for outlines the actions that may be taken by the transaction banking industry and has just respondent banks that are ultimately unable published the “Respondent’s Playbook”. to obtain or maintain a relationship. Special considerations for money services businesses and fintech1 companies are also provided. 1 i.e. financial technology. 33 The Playbook concludes with a series of The two-day workshop begins with a discussion helpful answers to questions frequently asked of a correspondent bank’s considerations when by respondent banks. Within this context, establishing a new correspondent banking IFC and BAFT are hosting joint workshops, relationship. The programme continues with a designed to build on the synergies between detailed description of a correspondent bank’s BAFT’s expertise in correspondent banking assessment of the financial crime exposure and financial crime compliance, and IFC’s and compliance risk associated with a potential efforts to support local private sector banks in respondent. The presentation includes an in-depth emerging markets, to reduce the probability of a discussion of a correspondent’s risk assessment, decline in correspondent banking relationships, initial and refreshed due diligence, and transaction so that those banks can continue to support monitoring and screening process. Best practices the trade finance needs of their markets. for respondents are discussed in each section. The workshop concludes with special IFC/BAFT workshop considerations for money service businesses IFC and BAFT have developed a replicable and fintech companies. The workshop also workshop structure to train respondent banks incorporates short video segments from external on international anti-money-laundering and companies with services that are designed to countering the financing of terrorism (AML/ support more efficient, accurate, and cost-effective CFT) standards and recommended actions customer due diligence. IFC and BAFT plan to that may improve their ability to obtain and roll out this joint workshop in Cameroon, Ethiopia, maintain correspondent banking relationships Ghana, Guinea Conakry and Malawi in 2019. by using the BAFT “Respondent’s Playbook”. The workshops are geared toward private Case study provided by International Finance sector banks, primarily toward compliance, Corporation and the Bankers Association for risk management, and transaction banking Finance and Trade. business line (trade finance and cross-border payments) staff, as well as credit officers. European Bank for Reconstruction and Development   Case study 5  EBRD framework to build capacity in trade finance compliance The European Bank for Reconstruction and trade finance. It is available for all EBRD partner Development (EBRD) has launched its new banks and will address underlying drivers for capacity development programme with the aim reduced correspondent banking activities. This new of promoting international standards in financial three-year programme will enable EBRD partner crime prevention, trade-based AML, “Know Your banks to access financial services and facilitate Customer” (KYC) and customer due diligence in trade in the economies where the EBRD invests. 34  n October 2018, in Ukraine, workshops were organized jointly by the EBRD and the International Compliance Association and hosted by I the National Bank of Ukraine. EBRD partner banks have lost a great number comprehensive data and innovative software of correspondent banking relationships in the to control risks in compliance operations. past years, which hinders international trade Joint training courses will be launched with in the EBRD regions of operation. Smaller SWIFT and Accuity to help EBRD partner banks are particularly dependent on such banks create strong profiles on KYC and relationships to be able to offer payment and AML utilities and implement good practice in clearing services in foreign currencies. global standards compliance operations. The EBRD will support local banks in the EBRD regions to create KYC profiles and documents, Training courses For the first time, the EBRD and the International collaborating with KYC utility providers such as Compliance Association (ICA) have joined SWIFT,1 Accuity2 and the Wolfsberg Group.3 forces to develop an enhanced training course The EBRD offers specialist training in trade on compliance, with the EBRD joining the ICA finance, compliance, sales and risk management Technical Advisory Board and ICA’s investment in its partner banks. All training is extended to in the EBRD’s compliance capacity development local regulators. through the launching of a jointly funded first pilot qualification in 2018 on: The training is delivered online, face-to-face 1) “Trade-based money laundering”; and in examination, as well as certified format. “Know Your Customer and customer due 2)  diligence” foundation course. Two hundred Introducing KYC and AML utilities trade finance professionals in EBRD partner The EBRD has started to engage with SWIFT banks and regulators/supervisors in Belarus, and Accuity to encourage EBRD partner banks Morocco, Ukraine and Uzbekistan have been to establish KYC profiles on the only database trained and certified. There are plans to roll provided by these two institutions. This initiative out the training in Egypt, Georgia, Greece and supports EBRD partner banks in standardizing the Republic of North Macedonia in 2019. and reducing the costs of compliance, reporting and monitoring. In addition it gives access to 1 SWIFT is the Society for Worldwide Interbank Financial Telecommunications. 2 Accuity offers solutions for payments and compliance professionals – see https://accuity.com/what-we-do/overview 3 The Wolfsberg Group is an association of 13 global banks with the aim of helping to manage financial crime risks – see https://www.wolfsberg-principles.com 35 Two more joint training courses with ICA on: In October 2018, in Ukraine, KYC/CDD and 1) “Financial crime prevention” and TBML workshops were organized and arranged jointly by the EBRD and International Compliance “Correspondent banking” will be launched 2)  Association and hosted by the National Bank of in 2019. Ukraine. There were 50 attendees in total from Ukrainian EBRD partner banks and regulators. The EBRD launched an e-learning module, “Trade-based financial crime compliance”, In November 2018, in Uzbekistan, KYC/CDD and jointly with the London Institute of Banking and TBML workshops were organized and arranged Finance. Two hundred and fifty scholarships are jointly by the EBRD and International Compliance now available for EBRD partner banks in all the Association. There were 50 attendees in total economies in which the EBRD invests. As of from Uzbek EBRD partner banks and regulators. February 2019, a total of 121 students and 33 banks from 10 countries had been registered. Customized advisory services The EBRD will be engaging with the The EBRD will offer individual correspondent Wolfsberg Group and the ICA to develop two banking advisory services to its partner banks comprehensive training workshops for the new as part of the Compliance Services Framework. Wolfsberg Due Diligence Questionnaire (DDQ). The goal of the programme is to help partner These two-day workshops will be launched banks to optimize and standardize required KYC in 2019 for all partner banks active in trade documents and enhance their correspondent finance and respective regulators. In addition, banking relationships with the EBRD trade the EBRD plans to work with the Bankers finance facilitation networking platform of over Association for Finance and Trade (BAFT) and 800 confirming banks. The EBRD will help the International Chamber of Commerce (ICC) to design and implement new improved compliance develop a handbook/manual for correspondent functions and processes in accordance with banks to improve the quality of due diligence in international standards such as ISO 19 600.4   those countries where the EBRD operates. At a glance (as of February 2019) Compliance workshops held in 2018 In September 2018, in Morocco, KYC/ Training courses customer due diligence (CDD) and trade-based • ICA Certificate in KYC and CDD money laundering (TBML) workshops were • ICA Specialist Certificate in Trade organized and arranged jointly by the EBRD and Based Money Laundering (TBML) International Compliance Association and hosted • ICA financial crime prevention by Banque Centrale Populaire (BCP). There were 50 attendees in total from BCP, Morocco. • Trade-based financial crime compliance • ICA correspondent banking In September 2018, in Belarus, KYC/CDD and TBML workshops were organized and arranged • Training on the Wolfsberg Questionnaire jointly by the EBRD and International Compliance Association. There were 50 attendees in total from Belarusian EBRD partner banks. 4 ISO 19600 provides guidance for establishing, developing, implementing, evaluating, maintaining and improving organizational compliance management systems – see https:/www.iso.org/standard/62342.html 36 Collaborating institutions • Bankers Association for Finance • International Chamber of Commerce (ICC) and Trade (BAFT) • International Compliance Association (ICA) • Accuity • SWIFT KYC Registry Case study provided by the European Bank for • The Wolfsberg Group Reconstruction and Development. Asian Development Bank   Case study 6  ADB’s Trade Finance Program and AML/CFT initiative I n November 2018, ADB’s Trade Finance Program held a workshop as part of the annual meeting of the Association of Development Financing Institutions in Asia and the Pacific in Suva, Fiji. This case study describes the Asian in the financial system can unintentionally Development Bank’s (ADB) Trade Finance undermine financing to small and medium-sized Program, an effort to address money laundering businesses (SMEs), especially in developing and the financing of terrorism in the financial countries. These unintended consequences system, while ensuring that companies, can create market gaps that dent developing particularly smaller ones in vulnerable markets’ ability to generate the growth economies, have access to finance. This effort and jobs that lift people out of poverty. was funded by the Government of Australia. ADB’s “Trade Finance Gaps, Growth, and Jobs” survey confirmed the existence of a Background significant global trade finance gap in the Preventing criminals and terrorists from range of US$ 1.5 trillion annually. Unmet exploiting the global financial system is critically demand for trade financing is particularly important. However, measures to prevent crime acute for SMEs and is especially persistent in 37 developing and emerging markets. The United are essential conduits for money flows. Nations’ (UN) Addis Ababa Action Agenda Without them, remittances are more difficult of the Third International Conference on to process and the costs of moving money Financing for Development identifies sufficient in and out of the region are high, depriving trade finance as critical to achieving the UN’s families, especially those in remote and poor Sustainable Development Goals (SDGs). areas, of an essential financial lifeline. Creating, implementing, and complying with On average, remittances represent 10 per cent global measures to prevent illegal activity in of the gross domestic product in the Pacific. In the financial system is challenging. While Tonga and Samoa, the figure is more than 20 bankers can determine relatively easily that a per cent. Today, remittance costs in the Pacific large company is not involved in crime, getting average more than 8 per cent, against the 3 the same assurances from small and medium- per cent recommended by the United Nations sized businesses, particularly in developing Sustainable Development Goals. If remittance countries, can be difficult and costly.  costs climb any higher, the finances of poor households will come under further strain. In addition to banks’ reluctance to finance SMEs, banks are increasingly reluctant to The ability of trade finance to help small support each other due to similar concerns. companies grow and create jobs is also This trend, wherein banks sever relationships compromised by a lack of relationships with each other, is commonly referred as “de- with overseas financial institutions. risking”. There is widespread concern that entire countries may be shut out of the global In deciding whether to maintain or cut their financial system due to de-risking, leaving relationships, correspondent banks evaluate countries without banks capable of transferring respondent banks according to how well they money abroad or clearing currencies, due to a follow the Financial Action Task Force (FATF) lack of correspondent banking relationships. risk-based approach and their customer due diligence requirements. Correspondent banks Recent data show that global international consider country-level risks related to AML/ banks continue to reduce their correspondent CFT, which are assessed via the mutual banking relationships with the jurisdictions evaluation process, measuring compliance and financial institutions that have weaker with FATF’s 40 recommendations. anti-money-laundering and countering the financing of terrorism (AML/CFT) controls. Stopping crime in the financial system while The Pacific region is among those most prudently financing SMEs in developing impacted by this de-risking trend. These countries is a big challenge. There is room important and well-intentioned regulations to improve efforts on both fronts: stopping designed to stop crime in the financial system crime and closing market gaps. This two- have made it more expensive and onerous pronged effort is at the heart of the ADB Trade for financial institutions outside the Pacific Finance Program’s AML/CFT initiatives. to maintain relationships within the region, particularly with lesser-known entities such Workshop 1: Roundtables in as money transfer operators and small banks. Australia and New Zealand Many of these relationships have been lost. ADB, together with the International Monetary Fund, held roundtables in Sydney on 5 February This hurts Pacific nations in multiple ways. 2018 and in Auckland on 7-8 February 2018 Relationships between financial institutions 38 to identify practical solutions to address the volumes among banks in small Pacific countries costs and risks of transferring remittances to are negligible, which makes it difficult to attract countries in the Pacific region and difficulties correspondent banks. Pooling trade finance in undertaking cross-border trade transactions. business, such as the issuing of letters of The events were financially supported by the credit, from several small banks into one would governments of Australia and New Zealand. ease profitability challenges that have ended The roundtables brought together banks, relationships between banks and led to de- money transfer operators and regulators from risking. As business functions are aggregated, Australia, New Zealand and the Pacific, senior issues around “Know Your Customer” rules officials from international financial institutions, will need to be addressed so that transparency and training providers to discuss the issue is maintained. For this reason, national and and focus on practical solutions. The Financial international bank regulators need to be consulted Stability Board (FSB) also attended. Finding and involved in implementing such a model. solutions will require concerted action by all parties. Participants agreed that the roundtables Finally, money transfer operators should form were a first step to addressing issues. an association to set industry standards and make representations to governments and The meetings reached four conclusions. regulators. Currently the industry seems to lack a single voice, which complicates efforts First, Pacific banks, bank regulators and money to build scale and introduce efficiencies. transfer operators would benefit from more Tighter regulation of money transfer operators training in due diligence to uncover financial should also be considered. This would boost crimes. This would spur confidence among confidence and underpin stronger relationships international banks and encourage a higher with banks. As industry-led regulations are level of compliance among institutions in the often the most potent, sustainable and relevant, Pacific. A coordinated and targeted programme the money transfer operators’ community as of peer-to-peer training has proved most well as Pacific banks would benefit from the effective in the past and should be expanded. development of common positions on issues. Second, there is a need for clearer regulations and regulatory expectations. Regulators can be Workshop 2 in Fiji more explicit about what they expect from financial To discuss implementing one of the key institutions on matters such as what constitutes conclusions of Workshop 1 – pooling of compliance with due diligence and monitoring trade finance business – ADB’s Trade to prevent financial crimes. Regulatory harmony Finance Program held a one-and-a-half-day is also lacking. International bodies such as the workshop as part of the annual meeting of FSB and the Financial Action Task Force develop the Association of Development Financing guidance for national regulators. But this is often Institutions in Asia and the Pacific in not followed, resulting in different regulatory Suva, Fiji, on 20-21 November 2018. requirements in different countries and confusion among financial institutions, making compliance The main theme of the workshop was the costlier and riskier. Coordinated efforts to ensure amalgamation and pooling of Pacific banks’ trade greater regulatory harmony would help in the finance business to create economies of scale. fight against crime and in closing market gaps. While trade finance volumes in the Pacific are very low, this initiative could be a pilot, which Third, consolidation of business in the Pacific if successful could expand to other forms of would help to bolster trade finance. Business finance dependent on correspondent banking. 39 Numerous banks were keen on the idea and one Three key takeaways; next steps among them, a Fijian bank, volunteered to be a ADB’s Trade Finance Program is continuing its “amalgamating/pooling bank”. The workshop AML/CFT initiative in 2019 to strengthen the concluded with agreement to proceed with the fight against crime and reduce market gaps. concept. To move forward, one of the many It will undertake three initiatives this year. issues that need to be addressed concerns “nesting”, whereby a pooling bank has a role in First, as agreed with Pacific banks in relaying letters of credit messages issued by 2018, the trade finance pooling concept Pacific banks to other financial institutions. is being developed and implemented by ADB. The first pilot transactions are Nesting refers to when a respondent bank anticipated by the third quarter of 2019. provides downstream correspondent services to other financial institutions and Second, ADB’s Trade Finance Program processes these transactions through its own convened a workshop in Singapore in March correspondent account. The correspondent 2019. The aim was to develop concrete bank is thus processing transactions for solutions to persistent AML/CFT challenges: for financial institutions on which it has not example, standardization of Suspicious Activity conducted due diligence. How can a bank Reporting (SAR) and to develop solutions to know that the transaction it is supporting, on verify the identity of parties. A broad range of behalf of a different bank’s client, is legitimate? participants was present including regulators, the While this is a normal part of correspondent Financial Stability Board (FSB), the World Trade banking, it requires the correspondent bank to Organization (WTO), and commercial banks. ensure that the bank it is representing in the transaction has in fact conducted appropriate Third, ADB’s Trade Finance Program will due diligence on its customer to ensure that undertake AML/CFT technical assistance and crime or terrorism are not being supported. training initiatives for banks and bank supervisors. Coordination with the regulatory community By working together, banks and regulators will be critical to managing these issues and can find cost-effective and efficient ways – to exploring the full potential of this initiative. In including with use of technology – to ensure parallel, participants in the workshop agreed that the global financial system is not facilitating to conduct enhanced AML/CFT training, and crime, while providing support to legitimate to consider potential technology solutions to businesses to fuel growth and job creation. help ensure transparency throughout the entire chain of transactions among the banks. Case study provided by the Asian Development Bank. 40 International Islamic Trade Finance Corporation   Case study 7  ITFC trade finance technical assistance event in Tashkent, Uzbekistan I n January 2019, in partnership with the Uzbekistan Banking Association and the Uzbek Industrial and Construction Bank, the ITFC organized an Islamic trade finance training course for financial institutions in Uzbekistan. The International Islamic Trade Finance have been difficult for them to bear. In this Corporation (ITFC), a member of the Islamic context, and while reinforcing the compliance Development Bank (IsDB) Group, is active in functions of the CIS financial institutions, the member states of the Organisation of Islamic it is imperative to diversify partnerships Cooperation, in policy advancement, trade and sources of financing. In this regard, finance and trade development. In January 2019, with almost US$ 3 trillion in annual global as part of its trade finance technical assistance transactions, Islamic finance is a valuable and programme, the ITFC organized, in partnership new source of financing for CIS countries. with the Uzbekistan Banking Association and the Uzbek Industrial and Construction Bank, a four- Uzbekistan is a good case study of how the day intensive Islamic trade finance training course, ITFC has deployed its expertise to accompany covering all relevant topics, including compliance the local financial sector both technically and issues, for financial institutions in Uzbekistan. financially. Starting in 2018, the ITFC has been conducting a series of workshops on international trade and trade finance, in order to Background build the necessary capacity to ensure proper The Commonwealth of Independent States due diligence and participation in the financing (CIS) has been impacted, as have many of international trade, including for SMEs. countries, to different degrees, by the reduction of correspondent banking relationships. This A first workshop was conducted in May has impacted mainly the smallest financial 2018 in partnership with the United Nations institutions, as the costs and operations to Development Programme (UNDP) to highlight run the required anti-money-laundering and the importance of international trade, create countering the financing of terrorism (AML/CFT) the right incentives and set expectations in this and “Know Your Customer” (KYC) processes sector for financial institutions, and explain why 41 the subsequent workshops on trade finance activities and functions related to Islamic finance, and related compliance matters were crucial. including credit analysis, compliance, back office activities, risk management, middle office activities, and other specifically Islamic finance topics. Workshop in Uzbekistan The objective of the four-day workshop (22 to 25 January 2019) was to train participants in: Key takeaways and next steps (i) Islamic finance Thirty-seven participants successfully completed the workshop and were awarded completion (ii) trade finance instruments certificates. The feedback received from them related documentation and compliance issues. (iii)  was very positive, as the trade finance technical assistance programmes initiated by the ITFC The workshop was delivered in English in 2018 had been the first of their kind in with simultaneous translation into Uzbekistan to tackle Islamic finance and related Russian to ensure that all participants topics, including compliance, credit and risk benefited equally from the training. management. The Central Bank of Uzbekistan Over the four-day workshop, the beneficiaries was very thankful; it has been looking forward to were instructed on the main principles of deepening the partnership with ITFC on technical Islamic finance applied to international trade assistance and financing. Following the delivery transactions. They were trained to analyse of various workshops and the approval of lines of traditional collection and documentary credits. financing, the Government of Uzbekistan decided They were taught how to examine the compliance to reinforce its participation in the ITFC capital. of the documentation and how to ensure it After the successful implementation of the throughout the credit cycle. Furthermore, they technical assistance programme on trade were exposed to the structures of Islamic trade finance in Uzbekistan, other CIS countries have finance instruments, such as Murabaha letters expressed their interest in benefitting from similar of credit and like instruments.1 Finally, they had programmes. In this regard, ITFC is adopting a the opportunity to learn, through case studies dual operational approach through country-focused and concrete examples, about Islamic finance programmes to offer both basic information and applied to pre-export finance, export finance, a CIS regional programme for advanced content. manufacturing and shipping guarantees. The ITFC is contemplating delivering the CIS A total of 43 banking and financial services regional programme in cooperation with partner professionals attended the workshop, with a institutions, to ensure that the delivery of the majority of women and young professionals. They advanced programme is realized with the best represented 16 different institutions, including experts in each field and for the benefit of a wide the Central Bank of Uzbekistan, 12 commercial audience from within the CIS region. Similar banks, two leasing companies and Islamic programmes are already under implementation Development Bank representatives, as well as in other countries of the Organisation of Islamic representatives of the Uzbek State Committee Cooperation, notably in Sub-Saharan Africa, Asia, for Investments. The strongest participation was and the Middle East and North Africa regions. credited to the six staff of the Central Bank of Case study provided by the International Islamic Uzbekistan. The programme was delivered by an Trade Finance Corporation. international expert as well as by senior staff of the ITFC. Collectively, they covered all of the relevant 1 Murabaha letters of credit are letters of credit issued by a bank in favour of an exporter on behalf of an importer, in which the bank’s creditworthiness replaces that of the applicant. 42 | 42 Conclusions Since the heads of multilateral for these courses provided by the institutions met at the 2018 Annual WTO, IMF and International Chamber Meeting of the International Monetary of Commerce. This mobilization is Fund (IMF) and the World Bank, necessary to help traders and their shared efforts to resolve the financial institutions to respond to challenges of the trade finance gap current trends and challenges in anti- have been increased significantly money-laundering (AML), compliance – particularly through capacity and know-your-customer (KYC) building. This publication presents regulations, and to outline possible best practices, as well as a “return solutions to support the free flow from experience” from training of trade in developing countries. already provided by IFC, the EBRD, ADB and the ITFC on the topic of Adapting to the new regulatory trade finance and compliance. environment improves the ability of trade finance providers to create new Over 300 professionals took part in correspondent banking relationships the seminars described in the case and promote trade through these studies, which took place between channels. Sustained efforts will be the end of 2018 and the beginning necessary for some time to ensure of 2019. The 2019 programme of that the trade finance flow will on-site seminars and online training return to countries which have been for multilateral development banks deserted, or de-risked, in recent is likely to reach close to 1,500 years. International institutions participants in priority countries, with will continue to cooperate in this the human and/or financial resources field in the months to come. | 43 Bibliography • African Development Bank (AfDB) (2017), “Trade Finance in Africa: Overcoming Challenges”, Survey Report, Abidjan: African Development Bank. • Asian Development Bank (ADB) (2017), “2017 Trade Finance Gaps, Growth, and Jobs Survey”, ADB Brief no. 83, Manila: Asian Development Bank. • Auboin, Marc and Alisa DiCaprio (2017), “Why Do Trade Finance Gaps Persist: Does it Matter for Trade and Development”, Asian Development Bank Institute Working Paper no. 702, Tokyo: Asian Development Bank Institute. • Bank for International Settlements (BIS) (2014), “Trade finance: Developments and issues”, Committee on the Global Financial System (CGFS), Basel: BIS. • Bank of International Settlements (BIS) (2015), “Correspondent Banking, Consultative Report”, Committee on Payments and Market Infrastructures (CPMI), October, Basel: BIS. • Financial Action Task Force (FATF) (2006), “Trade-Based Money Laundering”, OECD, Paris. • Financial Action Task Force (FATF) (2008), “Best Practices Paper: Best Practices on Trade-Based Money Laundering”, OECD, Paris. • Financial Action Task Force (FATF) (2017), “FATF Guidance on AML/CFT measures and financial inclusion, with a supplement on customer due diligence”, OECD, Paris. • International Chamber of Commerce (ICC) (2016), “Trade Register Report 2016” Paris: ICC Banking Commission. • International Chamber of Commerce (ICC) (2017), “Trade Register Report 2017”, Paris: ICC Banking Commission. • International Chamber of Commerce (ICC) (2018), “ICC Global Survey 2018: Securing future growth”, Paris: ICC Banking Commission. 44 | Trade finance and the compliance challenge • International Finance Corporation (2017), “De-risking and Other Challenges in the Emerging Market Financial Sector: Findings from IFC’s Survey on Correspondent Banking”, Washington DC: IFC. • International Finance Corporation (IFC) (2018a), “Navigating Essential Anti-Money Laundering and Combating the Financing of Terrorism Requirements in Trade Finance: A Guide for Respondent Banks”, September 2018, Washington DC: IFC. • International Finance Corporation (IFC) (2018b), “Emerging Market Compass. Increased Regulation and De-risking are Impeding Cross- Border Financing in Emerging Markets”, Note 48, Washington DC. • International Finance Corporation (IFC) (2018c), “Emerging Market Compass. How a Know-Your-Customer Utility Could Increase Access to Financial Services in Emerging Markets”, Note 59, Washington DC. • World Bank (2015), “Withdrawal from Correspondent Banking; Where, Why, and What to Do About It”, Washington DC: World Bank Group. • World Economic Forum (2016), “Global Enabling Trade Report 2016, Geneva: World Economic Forum”. • World Trade Organization (2016), “Trade Finance and SMEs: Bridging the Gap in Provision”, Geneva: WTO. • WTO (2018), news Item of 8 June 2018, “Azevêdo highlights ‘significant progress’ on trade finance, outlines further actions”, available at www.wto.org. • WTO (2018), news Item of 9 October 2018, “WTO joins with IFC, regional development banks and IMF to boost financial inclusion in trade”, available at www.wto.org. | 45 Abbreviations AML anti-money-laundering ACP African, Caribbean and Pacific group of states ADB Asian Development Bank AfDB African Development Bank BAFT Bankers Association for Finance and Trade BCBS Basel Committee on Banking Supervision BIS Bank of International Settlements CBR correspondent banking relationship CIS Commonwealth of Independent States CFT Combating the Financing of Terrorism EBRD European Bank for Reconstruction and Development FATF Financial Action Task Force (OECD) FSB Financial Stability Board GDP gross domestic product ICC International Chamber of Commerce IDB Islamic Development Bank IFC International Finance Corporation ITFC International Islamic Trade Finance Corporation IMF International Monetary Fund KYC know-your-customer(s) LIC low-income country MDBs multilateral development banks OECD Organisation for Economic Co-operation and Development SME small and medium-sized enterprise SWIFT Society for Worldwide Interbank Financial Telecommunications WTO World Trade Organization 46 | Trade finance and the compliance challenge World Trade Organization Rue de Lausanne 154 CH-1211 Geneva 21 WTO ISBN 978-92-870-5008-3 (print) WTO ISBN 978-92-870-5009-0 (web) Switzerland Tel. +41 (0)22 739 51 11 A publication of the World Trade Organization Fax +41 (0)22 731 42 06 and the International Finance Corporation. enquiries@wto.org Designed by L’Atelier Schnegg+, Geneva. publications@wto.org www.wto.org Printed by the WTO Secretariat. © International Finance Corporation/ World Trade Organization 2019. Photo credits: Cover: © Monkey Business Images/Shutterstock. Page 3: © International Finance Corporation and © WTO/Cuika Foto. page 10: © International Monetary Fund and © World Bank. International Finance Corporation Page 12: © vdhya/Shutterstock. 2121 Pennsylvania Avenue, N.W. Page 16: © Sony Herdiana/Shutterstock. Page 22: © Sunshine Seeds/Shutterstock. Washington, D.C. 20433 Page 28: © International Finance Corporation. U.S.A. Page 30: © International Finance Corporation. Tel. +1 (202) 473-1000 Page 35: © European Bank for Reconstruction and Development. Page 37: © Asian Development Bank. www.ifc.org Page 41: © International Islamic Trade Finance Corporation. Trade finance and the compliance challenge A showcase of international cooperation The availability of trade finance has become an increasingly important issue in the past few years. As international banks have become less willing to provide trade finance guarantees, particularly in developing countries, this has reduced the capacity of local banks to provide credit to businesses wishing to trade, leading to a significant gap between the demand and supply of trade finance. Small and medium-sized enterprises have been especially hard-hit by this trade finance gap. This publication delves into the global trade finance gap and the reasons for the growing reluctance of the global financial sector to engage in this form of financing. It examines the challenges of regulatory compliance and describes the efforts of international organizations, such as the World Trade Organization and the International Finance Corporation, to respond to this issue. It also presents case studies of the capacity-building programmes organized by multilateral development banks which aim to improve the availability of trade finance.