BSA/AML Examination Manual - ffiec

Risk Mitigation
Trade Finance Activities — Overview
Sound customer due diligence (CDD) procedures are needed to gain a thorough
understanding of the customer’s underlying business and locations served. The banks in
the letter of credit process need to undertake varying degrees of due diligence depending
upon their role in the transaction. For example, Issuing Banks should conduct sufficient
due diligence on prospective import or export customers before establishing the letter of
credit. The due diligence should include gathering sufficient information on Applicants
and Beneficiaries, including their identities, nature of business, and sources of funding.
This may require the use of background checks or investigations, particularly in higherrisk
jurisdictions. As such, banks should conduct a thorough review and reasonably
know their customers prior to facilitating trade-related activity and should have a
thorough understanding of trade finance documentation. Refer to the core overview
section, “Customer Due Diligence,” page 56, for additional guidance. Likewise,
guidance provided by the Financial Action Task Force on Money Laundering (FATF) has
helped set important industry standards and is a resource for banks that provide trade
finance services. 196
Banks taking other roles in the letter of credit process should complete due diligence that
is commensurate with their roles in each transaction. Banks need to be aware that
because of the frequency of transactions in which multiple banks are involved, Issuing
Banks may not always have correspondent relationships with the Advising or Confirming
Bank.
To the extent feasible, banks should review documentation, not only for compliance with
the terms of the letter of credit, but also for anomalies or red flags that could indicate
unusual or suspicious activity. Reliable documentation is critical in identifying
potentially suspicious activity. When analyzing applicable trade transactions, banks
should consider obtaining copies of official U.S. or foreign government import and
export forms to assess the reliability of documentation provided. 197 These anomalies
could appear in shipping documentation, obvious under- or over-invoicing, government
licenses (when required), or discrepancies in the description of goods on various
documents. Identification of these elements may not, in itself, require the filing of a
Suspicious Activity Report (SAR), but may suggest the need for further research and
verification. In circumstances where a SAR is warranted, the bank is not expected to stop
trade or discontinue processing the transaction. However, stopping the trade may be
required to avoid a potential violation of an OFAC sanction.
196 Refer to Trade Based Money Laundering, June 23, 2006, at
www.fatf-gafi.org/dataoecd/60/25/37038272.pdf.
197
For instance, U.S. Customs and Border Protection Form 7501 (Entry Summary)
(www.cbp.gov/linkhandler/cgov/toolbox/forms/7501.ctt/7501.pdf) and U.S. Department of Commerce
Form 7525-V (Shipper’s Export Declaration) (www.census.gov/foreign-trade/regulations/forms/new­
7525v.pdf) classify all U.S. imports and exports by 10-digit harmonized codes. (Refer to
www.census.gov/foreign-trade/faq/sb/sb0008.html for additional guidance.)
FFIEC BSA/AML Examination Manual 243 8/24/2007