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UK regulator directs banks to improve trade finance supervision

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Financial Conduct Authority UK Update

After a series of scandals that cost hundreds of millions of dollars in losses and allowed criminals to abuse the financial system, UK regulators have warned Britain’s top banks to improve oversight of their trade finance businesses.

An unusually blunt “Dear CEO” letter from the Financial Conduct Authority and Prudential Regulation Authority on Thursday addressed recipients of a full financial crime against money laundering, sanctions evasion, terrorist financing and processes to detect fraud. ordered to conduct a risk assessment. Client.

The FCA and PRA said they had “several high-profile bankruptcies in the past 18 months that have resulted in significant financial losses in commodities and trade finance companies.” “The assessment of individual companies highlighted several important issues related to credit risk analysis and financial crime control.”

Regulators said they could ask to confirm the assessment and follow-up actions taken.

In recent years, the commodity trading industry has been shaken by a series of scandals that have caused significant losses to lenders including HSBC and Credit Suisse.

The case highlighted a wide range of issues related to trade finance, where banks provide credit to companies that buy and sell commodities around the world, such as aggressive lending practices and outdated paper-based systems that are vulnerable to abuse and counterfeiting.

In April 2020, Hin Leong Trading, an oil trader owned by one of Singapore’s richest people, went bankrupt with over $3 billion in debt to 20 lenders. The founders have admitted to hiding losses from futures market transactions and selling promised oil stocks as collateral for loans.

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It was followed by the collapse of Greensill Capital in March, which led to further scrutiny of trade finance. The Financial Times reported in April that a loan from a British financial firm to Sanjeev Gupta’s commodities trading business was based on suspicious invoices that could indicate fraud.

The UK’s Serious Fraud Office has since launched an investigation into suspected fraud and money laundering in the metal empire of Gupta. The steel conglomerate’s GFG Alliance group has denied wrongdoing and pledged to fully cooperate with the SFO investigation.

In addition to GFG, Greensill has provided loans to several commodities trading companies that went bankrupt in 2020 on fraud charges, including Phoenix Commodities and Agritrade.

Some of the most common shortcomings listed by the FCA and PRA in their letter were over-general customer risk assessments and limited credit analysis due to the lack of oversight of dual-use products (those that could be used for both military and business purposes).

“It has been found that companies have not fully assessed these risks, have not been able to substantiate the checks they have performed, or in some cases have discounted them improperly,” the regulator said. “Given the industry of the jurisdiction or other parties involved, we have identified instances where the entity facilitated a transaction without a reasonable business rationale.”

Some European banks have lost their desire to finance commodity transactions. ABN Amro went out of business and BNP Paribas, historically one of the most active lenders in the region, drastically cut its exposure.

The French bank’s professional division suffered losses from several commodity trading companies, including Coex Coffee in the United States, GP Global Group and Phoenix Commodities in the Middle East.

This comes after US authorities imposed a $8.9 billion fine in 2014 for conspiring to violate sanctions banning business with Sudan and other regimes.

Additional report by Robert Smith

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2/ https://www.ft.com/content/6a08659d-623f-49ad-abb5-057b7defc152

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