Trade finance: closing the responsibility gap

The information available to banks in trade finance transactions rarely provides complete visibility of the underlying supply chain. Firms therefore need to determine what information is necessary to make the financing decision and whether any gaps need to be resolved.

Transactions should be considered as a whole. The parties, goods, payment arrangements and physical movement may each appear reasonable when reviewed separately, but together they may raise questions that require further investigation. For example, the stated origin of the goods may be difficult to substantiate, payment may be directed to an apparently unconnected third party, or the goods or intended end use may be subject to restrictions.

Obtaining more documents may not resolve such issues. A customer may rely on information provided by its supplier, the supplier on a certificate, and the logistics provider on information about the movement of the shipment. Firms need to understand the source of the information, what it establishes, and whether further evidence is required.

A responsibility gap arises when an issue that could affect the decision to finance a trade remains unresolved without clear ownership. Firms need to establish what needs to be resolved, who is responsible for resolving it, and who has the authority to make the final decision. The extent of the inquiry will depend on the transaction, the risks involved, and the significance of the unresolved issue.

This article considers how firms can address these questions in practice, including the evidence they should rely on, the use of customer attestations, responsibility for unresolved issues, the role of technology and how firms determine when an inquiry is complete.

Scope of the inquiry

The Trade Finance Principles^[1]The Wolfsberg Group, International Chamber of Commerce and Bankers Association for Finance and Trade, Trade Finance Principles, 2019, https://wolfsberg-group.org/resources/200/54.

recognise the limits of banks’ visibility over the physical supply chain, including differences between documentary trade, open account trade and bank-to-bank trade loans. The appropriate scope of inquiry should therefore reflect the product, the applicable legal and regulatory requirements, and any issue that could affect the financing decision.

What is relevant will also vary by transaction. A payment, a purchased receivable and a financed shipment may present different evidence and different risks. The inquiry may also need to extend beyond the customer, where the role of an intermediary, supplier, vessel, or other party could affect the legality of the transaction, the commercial explanation, or the firm’s ability to recover its funds.

A practical way to bring the information together is through a concise transaction map. This should focus on the information needed to understand the transaction and identify material gaps or inconsistencies.

When are customer attestations reliable evidence?

Customer assurances have a place in trade finance, but their value depends on what the customer actually knows and can substantiate. An attestation regarding origin, end use, or an extended supplier network may reflect the customer’s own knowledge, its contractual expectations, or information provided by another party. The firm should understand which of these it is relying on.

Before requesting an attestation, the firm should identify the specific fact it is seeking to establish and whether the customer is in a position to confirm it. Where appropriate, the attestation should identify the records or other information supporting the statement. For example, where origin is relevant, the firm may need to understand which records support the stated origin, who issued them, and whether they are consistent with other available information. A customer letter repeating information from a supplier certificate does not provide independent corroboration.

Where a customer cannot substantiate what it is being asked to confirm, requesting a more definitive attestation does not resolve the underlying gap. The firm should consider whether other evidence is required and what the absence of such evidence would mean for the decision.

A complete file can still contain an incomplete decision

Trade finance brings together credit, operations, financial crime, sanctions and, where relevant, export-control expertise. Separate reviews can lead to different conclusions, so there needs to be clear responsibility for bringing unresolved material issues together.

An accountable case owner can coordinate the inquiry without displacing the authority of the relevant specialists or decision makers. The first line should provide the commercial explanation; specialists should consider the relevant risk and legal issues; and the appropriate decision-maker should determine whether the transaction can proceed.

When an issue is escalated, the decision-maker should be given enough information to understand it and reach a decision. This should include the relevant discrepancy or concern, the evidence considered, the enquiries already undertaken, what remains unresolved and the decision required. The final record should distinguish between a legal restriction, an unresolved financial crime concern and a decision based on the firm’s risk appetite.

Using technology in trade finance controls

Technology can support the review of individual trade transactions by extracting information from documents and identifying inconsistencies. Firms should be clear about what the technology has established. Accurate extraction confirms that information has been captured correctly, while consistency across documents shows that the information agrees. Neither necessarily establishes that the underlying information is correct or independently corroborated.

Technology can also help firms look across transactions. Trade finance controls are often applied on a transaction-by-transaction basis, which can make patterns across multiple trades more difficult to identify. Analysis across transactions may help identify recurring counterparties, payment arrangements, routes, goods or discrepancies that warrant further review. This wider view can complement the assessment of the individual transaction and help firms identify issues that may not be apparent from a single trade.

Technology should be tested against the decisions and analysis it supports, including cases where information is incomplete or inconsistent. Firms should understand the limitations of the technology, where specialist review is required and how issues identified through the analysis are investigated and escalated.

When should a trade finance inquiry stop?

There is no fixed number of documents, counterparties or investigative steps that makes a trade safe. The appropriate stopping point depends on the applicable requirements, the significance of the remaining uncertainty and the institution’s approved risk appetite. It is also specific to the stage of the transaction: a conclusion reached before commitment may need to be revisited when documents are presented, payment instructions change or the transaction is amended.

An inquiry may close when the issues capable of changing the financing decision have been addressed with evidence proportionate to their significance and an authorised decision-maker has accepted any remaining uncertainty. It may also close with a refusal if the required assessment cannot be completed or the risk cannot be managed. The record should explain the rationale, the evidence considered, any remaining uncertainty and the circumstances that would require the transaction to be reconsidered.

Actions to strengthen trade finance decision-making

1. Test real decisions. Review a risk-based sample of approved, declined and delayed cases to establish what issues arose, what evidence was considered, who owned unresolved issues and who made the final decision.
2. Set evidence standards. Define what evidence is required for common issues, when a customer explanation is sufficient and when corroboration or specialist input is needed.
3. Clarify decision ownership. Establish who is responsible for coordinating unresolved issues and who has authority to decide whether the transaction can proceed.
4. Record the basis for the decision. Make clear whether an outcome results from a legal restriction, an unresolved financial crime concern, or the firm’s risk appetite.
5. Use technology to test individual transactions and wider patterns. Test whether technology identifies inconsistencies within transactions and use analysis across trades to identify recurring patterns that may warrant further review.
6. Test how the framework works in practice. Use realistic trade finance scenarios to test how business, operations, credit, legal and compliance identify, escalate and resolve the same issue.

How HKA can help

HKA helps financial institutions strengthen trade finance controls, governance and decision-making. We test how the framework works in practice, including whether relevant evidence is identified and assessed, unresolved issues are properly escalated, and decisions are made at the appropriate level.

Our work can include targeted reviews of trade finance cases and controls, development of evidence and escalation standards, scenario testing and independent assurance over technology used to support trade finance decisions.

About the author

Noémi Klein is a Director in HKA’s Financial Crime Investigations & Compliance practice, with more than a decade of international experience across banking, consulting and payments. She advises financial institutions and senior leaders on sanctions, anti-money laundering and wider financial crime compliance, and has led complex regulatory investigations and reviews, risk assessments, remediation initiatives and major transformation programmes across multiple jurisdictions. Her experience combines strategic advisory expertise with a practical understanding of how evolving legal requirements, regulatory expectations and geopolitical developments translate into effective governance, controls and commercial decision-making. Noémi helps organisations identify emerging exposure, strengthen their financial crime frameworks and develop proportionate, operationally workable responses as sanctions regimes evolve and regulatory requirements diverge.