Banks Need Banks Too! by Trade Finance Global

BANKS NEED BANKS TOO!

The emerging and developing markets issue

Foreword 1

1.1 From yurts to skyscrapers: The struggles and future of global trade finance

Last month, I found myself staying with a nomad family in a traditional yurt (‘ger’), 300km West of Ulaanbaatar, Mongolia, staring at the overwhelmingly star-filled night sky.

Far removed from the bustling trade centre of London, the fragmentation of our industry has never been more apparent. From the vast steppes of

Larger international banks are increasingly severing ties with developing and emerging economies, a phenomenon referred to as “derisking”.

De-risking has mainly been driven by Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) compliance risks, pressure on margins, and the after-effects of the 2008 financial crisis.

Mongolia to the vibrant markets of Africa, and the under-theradar ‘Stans’ of Central Asia, the reach of trade finance is truly global, creating critical linkages that underpin global trade, finance, and remittances. Yet, the very diversity and complexity that make the international trade world so fascinating also give rise to numerous challenges.

Not to add the heightened risks and increased sanctions since the Russia-Ukraine war.

The narrative behind derisking revolves around limiting potential financial risks, but there is an underlying reality.

Some studies have indicated that onboarding smaller banks, after thorough legal and due diligence checks, can cost more than $30,000.

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DEEPESH PATEL Editorial Director Trade Finance Global (TFG)

These costs act as deterrents for confirming banks, especially when the corresponding banks may only execute a few million dollars’ worth of transactions annually.

Although this might not seem profitable from a purely financial perspective, these transactions’ importance to the economies they support is enormous.

On the flip side, banks show little reservation when financing commodity transactions, despite their inherent and well-known risks, due to their profitability.

This dichotomy underlines the crucial role of multilateral institutions like EBRD’s Trade Facilitation Programme and ADB’s Trade and Supply Chain Finance Program in supporting and facilitating trade and correspondent banking relations in these regions.

This problem is precisely why TFG has partnered with BAFT and EBRD to launch our Correspondent Banking hub. This hub is designed to provide crucial information for correspondent banking across the world, with input from experts and associations.

Another major issue is the tightening regulatory environment.

After the multiple financial crises in the past two decades, international authorities sought ways to mitigate risk in the sector, leading to intensifying regulations such as Basel 3.1, which may have unintended consequences, making correspondent banking increasingly challenging.

There is a growing necessity for collaboration between public and private sectors to devise innovative solutions to these challenges.

One promising solution is to increase access to both public and private credit insurance, a topic that was central to our Tinubu webinar titled “Credit Insurance, Export Credit, and Funds: Bridging the Trade Finance Gap in Africa.”

In addition to credit insurance, sustainability efforts have proven to be an effective approach for maintaining correspondent banking relationships.

As these emerging and developing markets strive to transition from coal-based economies to cleaner energy sources, international banks play a pivotal role.

But there’s a technological aspect to this challenge as well.

The survey conducted by Banking Circle revealed that 77% of respondents had seen a rise in the number of correspondent banking partners over the past decade, leading to higher management costs and a reduction in profitability.

Furthermore, it highlighted how many banks providing correspondent banking services still rely on outdated technology and organisational structures, which aren’t fit for the modern age.

Technology is thus emerging as a key player in reshaping correspondent banking, with innovative solutions like virtual IBANs offering improved visibility and easier reconciliation.

Correspondent banking relations are indeed struggling in 2023, but this need not be a fatal trend.

If the current form of cooperation continues to slow, new and creative solutions will emerge and take its place.

Despite the stark contrast between the dark skies of the Mongolian countryside and the bustling streets of London, emerging technologies and international trade are drawing the two closer than ever before.

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 Foreword

Featured 2

Is the UK Electronic Trade Documents Bill the turning point for digital trade?

The bill should have an immediate impact. The reforms are broad, covering a full range of trade documents including BLs, promissory notes and bills of exchange, as well as various receipts and certificates.

The potential impact of the UK’s incoming Electronic Trade Documents Bill goes far beyond a boost to the country’s trade prospects. By enshrining in law that a digital document is equivalent to physical paper, the reform means that counterparties can issue and process documents electronically by default, – and with UK law acting as the basis for trade transactions across much of the world, the opportunity for transformation is unprecedented.

On paper, there is little remarkable about the Electronic Trade Documents Bill. At just seven pages long, its passage through parliament has so far been free of controversy or legal wrangling. When initially proposed, lawmakers expressed surprise at how little resistance they encountered from industry participants.

Its purpose is straightforward. Currently, English law gives special significance to “possession” of a trade-related document, such as a bill of lading (BL), but only applies that to tangible items. The bill makes electronic documents legally equivalent to physical ones,

meaning “possession” can cover digital versions too, providing certain conditions are met. Crucially, the bill explicitly states that “an electronic document has the same effect as an equivalent paper document,” and anything done in relation to the digital version carries the same legal weight as it would for physical paper.

The domestic impact of the new law is expected to be significant. The UK government estimates that globally, there are nearly 30 billion paper trade documents printed and circulated every day. According to the UK government, going digital will reduce processing times from hours or days to just 20 seconds while cutting carbon emissions by at least 10%.

A government impact assessment last year concluded that the reforms would increase trade volumes by removing barriers, lowering costs, decreasing transaction times and improving transparency. It also said the opportunity for increased participation could bring wider access to trade finance for SMEs. But the significance of the bill goes far deeper than giving a

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2.1

ENNO-BURGHARD WEITZEL Vice-President of Strategy, Digitization and Business Development Surecomp

boost to the UK’s trade prospects. A UK law facilitating electronic trade documents solves two long-standing problems at once, and has benefits far beyond the borders of the country.

Creating a global solution: Adopting trade digitisation

First, the lack of legal footing for digitisation has been a major barrier to adoption. Although numerous initiatives and innovations have been implemented to facilitate the use of electronic BLs, the absence of legislative support for this process has resulted in parties having to establish contractual agreements to govern the handling of documents.

Second, UK law is widely used today as the basis for trade agreements and transactions around the world. Instantly, any contract where parties agree on using UK law can be digital by default, rather than the result of negotiations between parties. If something goes wrong, the digital trade documents can be presented in court.

Chris Southworth, SecretaryGeneral of UK International Chamber of Commerce (ICC) said in an October 2022 article, “This is the breakthrough we have all been waiting for.”

“It is a game-changing moment, with so much of world trade operating on English law, including 80% of all bills of lading,” he wrote. “It is also the missing piece of the jigsaw in the digitalisation of trade. The legal requirement to handle commercial trade documents is holding up the implementation of new digital trade corridors, the scaling up of technology solutions and the standardisation of trade platforms, processes and

systems across both the public and private sectors.”

Even though the bill has yet to be enshrined in law, UK policymakers are already pushing for equivalent reforms in other markets. The Commonwealth group of nations is emerging as fertile ground for adoption; the 56-member bloc is aiming to boost overall trade to $2 trillion by 2030, and sees digitising trade documents as a crucial step in that journey.

The issue was top of the agenda at a London meeting of Commonwealth trade ministers in June, the first such summit since before the pandemic. Nigel Huddleston, the UK’s Minister of State for International Trade, told reporters at the meeting that “the legal backing of this is really important.”

“Digital will really help open up a lot, [not just] on basic costs relating to trading goods across borders, but it’ll help enable the opening up of services trade as well,” he said.

Ahead of the meeting, The ICC UK’s Southworth called on ministers to reach an agreement on adopting electronic trade documents, saying this is the “golden moment to reform laws and digitalise trade across the Commonwealth.”

Commonwealth SecretaryGeneral Patricia Scotland confirmed the association is already looking at models for digitisation, including that of the UK as well as Singapore.

Real-life impact of the ETDB

In practice, there could be a few wrinkles to iron out. In its response to a government call for evidence on the bill, law firm Kennedy said clear definitions of “possession”

and “exclusive control” still need to be established, and that lawmakers should consider how disruptive technologies could impact electronic trade documents in future.

But the bill should have an immediate impact. The reforms are broad, covering a full range of trade documents including BLs, promissory notes and bills of exchange, as well as various receipts and certificates.

It also requires that a “reliable system” is used to verify documents are originals rather than copies, cannot be altered by unauthorised parties, and cannot be controlled by more than one person at any given time. Thankfully, fintech providers are already offering platforms and solutions capable of meeting those requirements.

Surecomp’s RIVO solution already issues electronic trade documents that will be fully compliant with the UK law, while bringing together corporates, financial institutions and other parties onto a single platform. At the time of writing, the bill is already at an advanced stage. It has been through all stages in the House of Lords, as well as two readings in the House of Commons. It is currently under examination by a parliamentary committee; once that stage is complete, the bill will be read a third time, final amendments considered and royal assent granted.

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Featured

2.2 eUCP Version 2.1, aligning with MLETR

The International Chamber of Commerce (ICC) has unveiled eUCP Version 2.1, an alignment of the Uniform Customs and Practice for Documentary Credits for Electronic Presentation (eUCP) with the UNCITRAL Model Law on Electronic Transferable Records (MLETR).

This alignment, not a revision, emphasizes the growing significance of electronic transferable records in global trade.

Background to documentary credits

Documentary Credits, also known as Letters of Credit (LCs), are essential finance instruments used in international trade. These instruments provide a guarantee from a bank that a buyer’s payment to a seller will be received on time and for the correct amount.

If the buyer is unable to make the payment, the bank will cover the full or remaining amount. The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules governing the issuance and use of LCs. Established by the ICC, the UCP rules mitigate the uncertainties caused by individual countries promoting their own national rules on documentary credit practice.

The UCP rules provide a framework that governs these transactions, ensuring clarity and uniformity in the sector.

The UCP is utilized by bankers and commercial parties in more than 175 countries in trade finance, with some 11-15% of international trade utilizing letters of credit, totalling over a trillion dollars (US) each year.

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The alignment of eUCP with MLETR is not a revision or an update of eUCP, but an essential step towards the digitalisation of trade documents.

DEEPESH PATEL Editorial Director Trade Finance Global (TFG)

A brief history of UCP

Certainly, here’s a table that summarizes the key changes and editions of UCP and eUCP.

Year UCP/eUCP Version

1933 UCP 1st Edition

1951 UCP 82 (2nd Edition)

1962 UCP 151 (3rd Edition)

1974 UCP 222 (4th Edition)

1983 UCP 290 (5th Edition)

1993 UCP 500 (7th Edition)

2002 eUCP Version 1.0

2007 UCP 600 (8th Edition)

2007 eUCP Version 1.1

2019 eUCP Version 2.0

2020 eUCP Version 2.1

2023 eUCP Version 2.2

Key Changes

First edition of the UCP was published.

Revision of the UCP was published.

Revision of the UCP was published

First edition of the eUCP was published.

Revision of the UCP was published.

Updates to the eUCP was published.

Revision of the UCP was published

Updates to eUCP sub-article e3 (b) (iii) and the addition of a new definition as eUCP sub-article e3 (b) (v).

Updates to eUCP sub-article e3 (b) (iii) and the addition of a new definition as eUCP sub-article e3 (b) (v). The version also features an appendix with recommendations for SWIFT MT700 Field requirements for a credit subject to eUCP Version 2.2

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Featured

The eUCP rules

The eUCP rules were first introduced in March 2002 (version 1.1), with the ICC releasing an updated supplement for the electronic rules (eRules) of the Uniform Customs & Practice for Documentary Credits.

André Casterman, Head of ITFA’s Fintech Committee told TFG: “This new version of eUCP enriches the set of options for the market to digitise trade flows. It is very welcome by technology vendors and alternative lenders, and demonstrates that traditional trade instruments have a bright future in front of them. Long live the Letter of Credit.”

The eUCP Version 2.1 is largely based on the discussions held in October 2022 during the Plenary Session in Paris of the ICC Banking Commission.

The ICC has advised that version 2.1 was neither a revision nor an update of the eUCP, it was solely an alignment with MLETR with respect to electronic transferable records.

The eUCP merely acts as a supplementary and digital counterpart to UCP 600, specifically tailored for digital transactions offering a faster and safer method for financing trade, aligning with the ICC Banking Commission’s objective of promoting a paperless business environment.

The eUCP Version 2.1 marks a significant stride in advancing the documentary credit in a digital environment, ensuring its continued relevance in mitigating trade risk.

Key changes between eUCP v1 and v2.1

Key changes include: Updating eUCP sub-article e3 (b) (iii) to state, ‘Electronic record, including an electronic transferable record, means …’ Adding a new definition as eUCP sub-article e3 (b) (v) ‘Electronic transferable record means an electronic record that contains the information that would be required in the equivalent paper document, such as a negotiable bill of lading or an assignable insurance document.’

The version also features an appendix with recommendations for SWIFT MT700 Field requirements for a credit subject to eUCP Version 2.1.

The SWIFT MT700 is a type of SWIFT message used by banks to issue a letter of credit. It is sent from the issuing bank to the advising bank. It provides details about the letter of credit, including the amount, expiry date, and documents required for payment.

The appendix in eUCP Version 2.1 provides specific recommendations for using the SWIFT MT700 in the context of the eUCP.

Revision vs alignment, MLETR compatibility

The recent alignment of the International Chamber of Commerce’s (ICC) Uniform Customs and Practice for

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Documentary Credits for Electronic Presentation (eUCP)

Version 2.1 with the UNCITRAL Model Law on Electronic Transferable Records (MLETR) has been met with widespread approval from the international trade finance community, although it was endorsed by UNCITRAL in 2007.

Luca Castellani, legal officer in the Secretariat of the UNCITRAL said, “The contribution of the ICC to the development of international trade law is significant and has been recognised numerous times by UNCITRAL, including by endorsing in 2007 the UCP 600. The adoption of eUCP Version 2.1 is another welcome step as it aims to help businesses in finetuning existing business practices to take full advantage of the expected adoption of MLETR by several significant trading countries.”

Sean Edwards, Chairman of the International Trade & Forfaiting Association, told TFG: “The march of MLETR as the legislative vehicle for the digitalisation of a whole family of trade documents is rightly reflected in the latest version of eUCP and is firmly welcome.”

Eleonore Treu, Director of ICC Austria’s Trade Finance Week, also expressed her support for the changes. Speaking to TFG, she said, “The harmonisation of eUCP with the UNCITRAL’s MLETR is a significant leap forward in the realm of international trade. In line with the central theme of Trade Finance Week 2023, this update to eUCP rules underscores our global commitment to the modernisation and digitisation of trade finance. It clearly demonstrates our concerted effort to increase efficiency,

foster uniformity and reduce uncertainties in documentary credit practice, which is becoming increasingly essential in our digitally-driven global trade ecosystem.”

Geoffrey Wynne, Head of Sullivan’s Trade & Export Finance Group and the firm’s London office, echoed these sentiments, telling TFG, “It is good to see the ICC moving forward with helping to develop the use of eUCP given the ICC’s significant support of other digital initiatives like URDTT (Uniform Rules for Digital Trade Transactions) with which I was closely involved. Let’s hope this sees greater adoption of eUCP with the hoped-for passing of the Electronic Trade Documents Act in the UK and MLETR adoption elsewhere.”

Tomasch Kubiak, ICC, said, “Alignment to MLETR is essential for our eRules if we want trade finance to really go fully digital. ICC eRules needed to be ready as we are seeing further adoption of MLETR and legal processes in different jurisdictions, including the United Kingdom, France, Germany and many other.”

Dave Meynell, contributor to the ICC eRules said, “Updating eUCP to further align the rules with MLETR in respect of electronic transferable records will ensure compatibility with emerging legislation throughout the world. Of particular importance is that the eUCP is in total harmony with the forthcoming Electronic Trade Documents Bill in the UK. We are now seeing the long-awaited synchronicity between practice, rules and law.

ICC eRules were historically meant to be flexible in their update and trade finance specialists of the ICC Global Banking Commission pointed that out clearly when they decided on the update. We were able to align both eUCP and eURC with the MLETR in a record time of 8 months. It clearly shows the interest in taking every relevant step to take trade finance into the digitalized era.”

The alignment of eUCP with MLETR is not a revision or an update of eUCP, but an essential step towards the digitalisation of trade documents. As the world continues to embrace digital solutions, these changes are expected to play a crucial role in shaping the future of international trade finance.

Where to find out more about eUCP Rules

Read our resources on the UCP 600, and its 39 articles here. Watch our four-part series about UCP 600 here, in partnership with the International Institute of Banking Law & Practice (IIBLP) and ICC UAE. The series, “Demystifying UCP 600,” presents an in-depth understanding of the rules behind the letter of credit. The series addresses subjects like the advantages of using a Letter of Credit, an overview of UCP 600 rules, their historical context, their evolution, and practical advice for applying UCP 600 rules in Letters of Credit.

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Featured

2.3 Using Optical Character Recognition to streamline international trade

By digitising critical trade documents such as invoices and bills of lading using OCR technology, traders can process their documents faster, reduce errors, and save costs.

Traditional paper-based trade system

One of the difficulties related to international trade is the large volume of paper documents that make up much of the information flow between the different parties, including various documents such as invoices, bills of lading, certificates of origin, and customs declarations.

Nevertheless, relying on paper documents in international trade has drawbacks, including the cost

and time required to prepare, transmit, and check these documents by customs officials and traders. Additionally, paper documents are prone to errors and fraud due to the complexity of trade transactions and the number of parties involved. Therefore, technology needs to be employed to streamline trade by creating digital ecosystems that reduce costs and increase efficiency by replacing paper with digital data flows.

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HAITHAM ELSAID International Letters of Guarantee Manager QNB Alahli

Potential benefits of Optical Character Recognition for international trade

Optical Character Recognition (OCR) is a technology that has the potential to revolutionise the way businesses operate in the digital era. The OCR technology allows paper documents to be scanned and converted into digital formats.

OCR digitises paper documents

so that they can be electronically edited, searched for, and used in other digital processes. Documents processed with the OCR solution offer the users recognition of characters, or entire texts and the possibility to select data contained in the document based on keywords. OCR technology has been widely used in various fields, including healthcare, finance, and legal services. However, one field that has greatly benefited from OCR is international trade.

One of the main benefits of using OCR in international trade is increased efficiency and accuracy. OCR can scan large volumes of documents quickly and accurately, meaning traders can process their documents faster, reducing shipment delays and improving supply chain management. This technology also eliminates the risk of human error in data entry, resulting in more accurate and reliable information. Furthermore, by automating the data entry process, employees are free to execute more critical tasks that require human judgment. OCR can help reduce costs

associated with international trade transactions by digitising trade documents, eliminating the need for physical storage space for paper-based documents. It also reduces the printing costs of producing multiple copies of paper-based documents. Moreover, by reducing the need for manual data entry, this technology can help reduce labour costs and improve the overall cost structure for business entities.

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Featured

Use cases for Optical Character Recognition in international trade

The following represent some of the use cases of OCR technology that can streamline international trade transactions:

1. Invoice processing: OCR technology can be used to extract data from invoices, such as the invoice number, date, description of goods, and amount due. This eliminates the need for manual data entry, which is time-consuming and prone to errors. Additionally, it can be used to detect fraudulent invoices by comparing the data on the invoice with other documents such as purchase orders and shipping documents.

2. Customs clearance: OCR technology can be used to read shipping documents and customs declarations, making it easier for customs officials to process shipments quickly and accurately. This reduces the time it takes to clear goods through customs, which can help businesses save money on storage and transportation costs. Additionally, OCR technology can be used to verify the authenticity of shipping documents by comparing them against a database of known legitimate documents. This helps to prevent the use of counterfeit or forged documents in customs clearance processes.

3. Shipping labels: OCR technology can extract important information from shipping labels, such as the recipient’s name and address, package weight, and tracking number. The data extracted

from shipping labels can be automatically added to a database or shipping system for easy tracking and analysis of the packages. This streamlines the process for logistics companies to track packages, ensuring proper identification and routing of shipments and reducing the likelihood of delays or loss.

4. Compliance monitoring: OCR technology can be used to scan trade documents (such as invoices, bills of lading, and certificates of origin) for keywords or phrases that indicate noncompliance with AML and/ or customs regulations by comparing the extracted data against various watch lists and databases of sanctioned individuals or entities. The data can then be processed using AI and natural language processing technology to identify high-risk countries, individuals, or entities involved in a trade transaction.

5. Product catalogues: Businesses can use OCR to extract text from product catalogues and create searchable catalogues. This would allow customers to compare products from multiple international suppliers in terms of quality, specifications, compatibility, and pricing, helping businesses make informed decisions about their purchases and suppliers.

6. Language translation: OCR technology can assist businesses in handling trade documents in different languages by providing language translation capabilities. This usually simplifies the process of conducting trade across various countries.

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Challenges regarding the application of the OCR technology

Implementing OCR technology can come with several challenges that need to be addressed. One of the biggest challenges is ensuring that the OCR system can accurately recognise and interpret different fonts, characters, and languages. This requires the OCR system to have a high level of accuracy and be able to handle a large volume of data. It is argued that the best accuracy level reached using this technology is 85-90%. That means human intervention and manual effort may still be needed to double-check, correct and clean data.

Another challenge is dealing with image quality issues such as blurriness, distortion, and uneven lighting, which can affect the OCR system’s ability to read the text correctly. Furthermore, OCR technology may struggle with recognising handwritten or cursive text, which can be a major hurdle for certain applications.

OCR technology may also have difficulty with recognising text that is formatted in a nonstandard way, such as tables or columns. This can lead to errors in recognition and formatting issues in the final document. In addition, implementing OCR technology can be expensive, especially for small businesses involved in international trade who may not have sufficient resources to invest in this type of technology.

Overall, implementing OCR technology requires careful consideration of these challenges and finding effective solutions to overcome them.

OCR technology has the potential to transform international trade by increasing efficiency, accuracy, and cost-effectiveness. By digitising critical trade documents such as invoices and bills of lading using OCR technology, traders can process their documents faster, reduce errors, and save costs. As international trade continues to grow, it is expected that OCR technology will play an increasingly important role in the digitalisation of trade processes.

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2.4

Future of Trade: New opportunities in high growth corridors

A noteworthy shift in bank capital regulation: EU’s CRR3 receives ICC’s applause

The CRR3 builds on the international Basel III agreement’s key principles, such as reducing the excessive variability of risk-weighted assets (RWA).

The International Chamber of Commerce (ICC), the world business organisation, has publicly praised a recent accomplishment by European Union (EU) policymakersthe successful conclusion of negotiations concerning the third revision of the bank capital framework, the Capital Requirements Regulation 3 (CRR3).

Unpacking the Capital Requirements Regulation (CRR)

The journey of the CRR originates from the EU’s proactive measures to guarantee the financial health of its banks, introduced in 2013 following the 2007-2008 global financial crisis.

This regulation outlines the amount of capital banks must hold as a cushion to mitigate against potential risks associated with their assets.

However, as is the low default nature of trade finance landscape, certain problems that were identified in the aftermath of the global financial crisis remained unresolved, even under the CRR’s guidelines. This led to further refinement in the regulation, leading to the inception of CRR3.

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DEEPESH PATEL Editorial Director Trade Finance Global (TFG)

What is an output floor?

In simple terms, the Basel III “output floor” is a rule that ensures banks maintain a minimum level of capital to cover potential losses, regardless of how they calculate the riskiness of their assets.

Banks use models to calculate the amount of risk they’re exposed to, and the riskier their assets are perceived to be, the more capital they need to hold. Some large banks use their own sophisticated ‘internal models’ to do this, which can sometimes result in lower risk weightings, and hence lower capital requirements.

The “output floor” of 72.5% was introduced to prevent these banks from underestimating their risks and holding too little capital. It sets a limit to how much a bank’s capital requirements can be reduced by using internal models.

Even if a bank’s internal model says it can hold less, the bank still needs to maintain capital equal to at least 72.5% of what it would have to hold under the standardized approach.

is a simpler, one-size-fits-all method for calculating risk and capital requirements provided by regulators.

CRR3: A synthesis of Basel III principles and unique EU context

The CRR3 builds on the international Basel III agreement’s key principles, such as reducing the excessive variability of riskweighted assets (RWA).

Under Basel III, an output floor was set, determining the minimum amount of capital a bank could draw from the use of internal models to 72.5% of the capital required under the standardised approach.

CRR3 mirrors this approach while accommodating the unique features of the EU’s banking sector.

CRR3: A resilient framework

CRR3 marks a decisive step forward, introducing significant changes that include maintaining a 20% credit conversion factor (CCF) for technical guarantees and recognising effective maturity for short-term trade instruments.

Additionally, CRR3 addresses the need for sustainability in banking, making it necessary for banks to identify, disclose, and manage environmental, social and governance (ESG) risks.

This evolved regulation also introduces stronger enforcement tools—arming supervisors with more robust mechanisms to oversee EU banks—promoting financial stability and resilience.

Decoding the ICC’s perspective

John Denton, the secretary general of ICC, applauded the newly formed agreement. According to Denton, this deal represents a “great outcome for the real economy in Europe.”

Denton affirmed the importance of this balanced and proportionate framework for

trade regulation, which, in his view, successfully promotes financial stability without stifling the provision of critical financing to European businesses.

Roadmap to CRR3 implementation

Following a process of legal translation, the revised regulation will now undergo a formal voting process in the European Council and Parliament. This key milestone precedes the expected implementation of CRR3 in 2025, indicating a new phase in the EU’s banking sector.

Highlighting the larger global implications of CRR3, Tomasch Kubiak, policy manager for the ICC’s Global Banking Commission, emphasised the potential of CRR3 to influence banking regulation worldwide.

Kubiak said, “More broadly, we hope that today’s outcome will send a clear signal globally on the imperative to carefully consider the capital treatment of trade assets in a number of important respects – based on robust industry data showing the performance of the asset class.

Our hope is that the provisions secured in CRR3 will become a template for reforms in other major jurisdictions.”

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standardizedTheapproach

The ICC reiterates its commitment to fostering a collaborative dialogue with regulatory authorities, financial institutions, and businesses.

Are there unintended consequences of CRR3?

While CRR3 brings promising developments, it’s essential to be aware of potential unintended consequences.

The increased capital requirements, for instance, could inadvertently tighten banks’ ability to lend, affecting sectors such as SMEs—particularly in emerging and developing markets—that heavily rely on bank lending.

Moreover, the blanket approach of CRR3, while aimed at promoting a level playing field, could inadvertently stifle innovation and competition. Banks that have robust internal risk management systems might find themselves at

a disadvantage with the introduction of uniform regulatory norms.

Furthermore, the implementation costs of the new regulatory changes might disproportionately burden smaller banks, potentially leading to further consolidation in the banking sector and reducing competition.

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Level the CRR3 playing field

In the realm of global banking regulations, CRR3 aims to promote a more level playing field by aligning the EU’s banking norms with international standards, such as Basel III.

However, the effectiveness of this alignment will hinge heavily on the specifics of implementation within different jurisdictions.

A look ahead: CRR3 and it’s global impact

In comparison to its predecessor, CRR3 emphasises sustainability risks and introduces the Basel III ‘output floor’ into the EU regulatory framework. This output floor aims to curb the variability of RWAs across banks, thereby increasing the comparability, and ideally, the competitiveness of EU banks in the global market.

However, the ultimate success of this goal will depend heavily on the implementation details and the market participants’ reactions.

As CRR3 navigates its course towards implementation in 2025, the banking world will undoubtedly be watching closely.

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Featured

DAVID COLLINS Professor of International Economic Law City, University of London

Co-Editor in Chief International Trade Law and Regulation

2.6 In defence of Investor-State Dispute Settlement

Very few aspects of international law cause as much consternation as Investor-State Dispute Settlement (ISDS). It is probably one of the very few features of Free Trade Agreement (FTA) negotiations that generate media headlines which capture the attention of the general public; often sensationalising the ‘secret courts’ entrenching the advantages of greed-driven multinational corporations.

Despite the widespread ‘backlash’ against ISDS, originating primarily in academia, ISDS offers important procedural protections for foreign investors and should be retained in Free FTAs. On balance, it is an advantageous system that is conducive to foreign investment.

Simply put, ISDS enables legal claims to be brought by foreign firms against the states in which they do business. Such claims are typically based on rights created through international investment treaties (or the investment chapters of FTAs), such as guarantees against discrimination or full compensation in the event that the host state expropriates the investors’ assets.

The availability of ISDS remains central to many firms’ decisions to invest in particular countries, particularly those where the rule of law is, or is perceived to be, weak or where courts lack independence.

What is ISDS?

ISDS allows foreign firms to bring legal claims against host states in which they do business,

Claims are based on rights established in international investment treaties or investment chapters of Free Trade Agreements (FTAs),

ISDS provides procedural protections for rights such as guarantees against discrimination and compensation for the expropriation of investors’ assets.

Modelled on international commercial arbitration, with arbitrators chosen by the parties and rendering legally binding decisions,

ISDS offers advantages such as neutrality, cost- effectiveness, and faster resolution compared to traditional court procedures.

It also provides confidentiality, allowing firms and states to avoid unwanted media attention.

Awards are enforceable in courts around the world, enabling investors to use local legal systems to seize assets in the event of non-payment

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Modelled on international commercial arbitration, ISDS rests on the consent of the parties who choose arbitrators who render legally binding decisions. This is in contrast to conventional national courts where judges are appointed by states, in some cases lacking independence or sufficient expertise in international commerce.

ISDS has been around for more than fifty years, originally created as a tool of economic development to mitigate risks of economic activity in politically unstable countries. It gained momentum in the late 1990s and by the first decades of this century, several hundred claims had been brought against host

states by investors. ISDS appears in most of the many thousand investment treaties, although this trend appears to be reversing. Unfortunately, ISDS is now being extricated from FTAs.

Why use ISDS?

In addition to its neutrality, as with most forms of arbitration, ISDS is usually cheaper and faster than normal civil court procedures. It also offers confidentiality, enabling firms (and states) to escape some of the harsh consequences of unwanted media attention. The arbitration awards are enforceable in courts around the world, which is not always the case for civil judgments, many of which have

no legal significance in foreign courts. It is no surprise that ISDS has become so popular for internationally mobile firms.

Critics of ISDS point to the high value of awards issued by tribunals, in some cases, placing burdens on host governments which must pay them. They further assert that the legal costs of ISDS are too high, often because of the long time frames of the cases, foreclosing the ability of smaller firms to use the system. The system is regularly accused of lacking transparency, essential due to the public nature of the claims brought as a consequence of government decisions.

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This backlash against ISDS is often grounded in broader criticisms of international investment treaties themselves. These instruments historically granted rights to investors with no corresponding obligations. Protections have been based on vague standards, limiting governments’ capacity to regulate in the public interest for fear of claims adjudicated by international tribunals without any role for their own domestic courts. Many accuse ISDS tribunals of being biased against states, particularly those in the developing world.

While these assessments have some merit, many of these problems are exaggerated, or are manageable. Reforms to ISDS, instigated by UNCITRAL, ICSID and other bodies, have augmented the transparency and streamlined procedural rules with a view to reducing time frames and costs.

New codes of conduct for arbitrators should help ensure that ISDS adjudicators are impartial, helping contribute to legally sound and consistent awards. Statistically, there is no evidence that arbitrators are biased in favour of investors. On the substantial elements of investment treaties, modern instruments have pulled back on protections for investors and enlarged the policy space of host states.

Perhaps the greatest indictment of ISDS has been its one-sided nature – it is traditionally only available to investors who bring claims against states, not viceversa. This appears to represent an inherent flaw in the system – reinforcing its illegitimacy as a forum of international law.

It is important to point out that

the availability of counter-claims by host states is increasing. New treaties have the capacity to impose environmental and social governance obligations on firms which could be actionable through ISDS.

More crucially, though, is the reality that host states are already in a position of dominance over foreign investors. For many businesses, it can take decades of costly investment before profits begin to appear. This is especially true

in the extractive sector where mineral resources may not become profitable for twenty years or more, with sunk costs representing huge financial exposure.

During this time, investors are incredibly vulnerable, subject to the whims of often volatile local governments where corruption or worse, political upheaval are endemic. While ISDS’ are admittedly unequal, they are designed precisely to rectify this imbalance.

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ISDS in developing and developed countries

While these risks are not as prevalent in developed countries because of a more stable political environment and robust independent court systems, the risks still exist.

Investors may be as vulnerable to the vagaries of municipal or regional courts and governments in developed states, which may lack the rigour or integrity of their federal equivalents. Moreover, the

time and expense of civil courts, particularly in advanced Western countries with a strong culture of combative litigation, can be prohibitive for smaller firms seeking to gain a foothold against larger market incumbents. ISDS, particularly with its recent reforms designed to lower costs, is well-suited to address these challenges, levelling the playing field and encouraging risk-taking enterprise.

Time and again investors have indicated that they value ISDS,

especially in unsafe countries with untapped resources. Removing it from new FTAs, as has been the case for example in the USMCA, is likely to be a mistake.

Moving forward, it would be advantageous that countries revisit the recent antipathy towards ISDS, and instead listen to the needs of the business community upon which the economy, and by extension society at large, relies for continued prosperity.

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BRIAN CANUP Assistant Editor

2.7 FCI releases World Factoring Statistics survey, reports double-digit growth

Despite the continuation of a challenging global environment, the results of the FCI market survey for 2022 demonstrated the strength and resilience of the factoring and receivables finance industry.

FCI, the global representative body for factoring and financing of open account domestic and international trade receivables, has released their annual World Factoring Statistics report.

The report highlights that the factoring and receivables finance industry once again grew at a double digit rate. 2022’s increase of 18.3% surpasses 2021’s growth of 12.3%. It is estimated that this industry grew by €3,659 billion in 2022.

The year 2022 witnessed an unprecedented growth, setting a historical precedent as the industry experienced the largest

single-year increase in volume. The remarkable growth of more than €590 billion YOY solidifies its position as the biggest increase ever reported. This achievement can be attributed to the recovery from COVID-19, substantial government stimulus, a surge in pent-up consumer demand, and the subsequent increase in inflation.

Examining the past two decades, including the robust growth witnessed in 2022, the compounded annual growth rate reached an incredible 8.83%. Domestic and international factoring experienced substantial growth during this 20-year period.

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Trade Finance Global (TFG)

Europe

Europe, which once again was the largest contributor to the industry, represented 68% of global volume. In 2022, the European region contributed €2,499 billion, which is an increase of 18% from 2021. The five largest markets included:

1. Spain, with an increase of 30%,

2. Germany, with an increase of 20%,

3. Italy, with an increase of 14%,

4. France, with an increase of 15%,

5. United Kingdom, with an increase of 8%.

However, multiple markets exceeded growth expectations, including Ukraine (130%), Lithuania (67%), Serbia (57%), Turkey (51%), Cyprus (50%), Bulgaria (49%), Georgia (34%), Greece (33%), and Romania (31%).

Asia Pacific

The Asia Pacific region represents approximately 24% of global volume with €881 billion, which experienced an increase of 17% over 2021.

Within the region, Greater China, including Mainland China (23%), Hong Kong (2%), and Taiwan (2%), accounts for a volume of €671 billion. India demonstrated explosive growth with a growth rate of +83.4%, reaching €15.7 billion, following the implementation of a robust legal and regulatory framework.

Singapore also displayed substantial growth of 52%, reaching €44 billion. On the other hand, Japan witnessed a decrease of 2%, amounting to €57 billion.

The Americas

The Americas region continued its upward trajectory from 2021, with a remarkable growth rate of 47%. In terms of market share, the Americas represent 6% of the total world factoring volume, with an overall figure of €228 billion.

South and Central America, comprising 3% of the total world factoring volume with €124 billion, witnessed a significant increase of 44%. The top three players in this region are:

1. Mexico, with an increase of 112%

2. Chile, with an increase of 41%

3. Brazil, with an increase of 33%

North America, with a nearly 3% share of the total world factoring volume (€104 billion), demonstrated notable improvement, increasing by 7% compared to 2021. Canada witnessed a growth of 15%, while the USA experienced a 7% increase.

Africa and Middle East

Africa accounted for 1% of the total world factoring volume in 2022, amount to €41 billion, indicating a significant growth rate of 29% compared to 2021, which is consistent with the previous year’s increase.

South Africa, the largest market in the continent, contributes to over 80% of the entire volume and witnessed a staggering increase of 38%, solidifying its position as a market with strong growth prospects in the foreseeable future.

The Middle East, representing 0.3% of the global factoring volume, experienced a 2% increase compared to 2021. The most notable growth was observed in Israel, with a 5% increase.

Resilience of the factoring industry

Despite the continuation of a challenging global environment, the results of the FCI market survey for 2022 demonstrated the strength and resilience of the factoring and receivables finance industry. With an impressive growth rate of 18.3% over 2021, the industry has confirmed the expected return to normalcy. Concerns expressed a year ago, including the impact of increased credit risk in the second half of 2022 due to the withdrawal of state support, rising inflation and interest rates, the conflict in Eastern Europe, and the ongoing effects of the pandemic, particularly felt in Asia, have not been reflected in the industry’s statistics.

On the contrary, the significant increase in volume signifies the vital role played by the industry in supporting SMEs and corporates globally. It will undoubtedly be remembered as the most prosperous year of the century. As the global economy continues to recover and adapt to the changing landscape, factoring and receivables finance will remain a critical component of the financial ecosystem, offering valuable solutions for businesses of all sizes.

The collaboration between FCI members, strategic stakeholders, and industry participants worldwide will continue to shape the landscape of factoring and receivables finance, enabling businesses to thrive and succeed in an increasingly interconnected and dynamic global marketplace.

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2.8 Lighting the path for Sustainability in Georgia (Part 1)

In 2021, TBC Bank took further steps to enhance the Group’s ESG framework through the development of an ESG strategy, which reaffirms our commitment to make a long-term, sustainable contribution to the country and the region.

Following the EBRD 2023 Annual Meeting and Business Forum in Samarkand, Uzbekistan, TFG’s Brian Canup (BC) spoke with Nino Masurashvili (NM), Deputy CEO, Chief Risk Officer, TBC Bank Georgia, who was recognised with the EBRD Sustainability

Silver Award. Read part one of this two-part interview to learn more about TBC Bank Georgia, why they were awarded the EBRD Sustainability Silver Award, and their plan for continuing to support Georgian sustainability.

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NINO MASURASHVILI Chief Risk Officer JSC TBC Bank BRIAN CANUP Assistant Editor Trade Finance Global (TFG)

BC: What specific sustainability initiatives have TBC Bank Georgia implemented in recent years to promote environmental and social responsibility, and what spurred this movement?

NM: Our aspiration to contribute to sustainable development comes from our role as a leading financial institution in Georgia’s development. We are aware that we have an impact on the country’s economy, business development, employment and societal progress as a whole. With the international expansion of our operations, sustainable development approaches are incorporated into our subsidiaries, as well.

In 2021, we took further steps to enhance the Group’s ESG framework through the development of an ESG strategy, which reaffirms our commitment to make a long-term, sustainable contribution to the country and the region. The strategy defines several key areas for the coming years: a strong ESG governance structure at the board and executive level; a focus on sustainable financing, services, and products; employee diversity, equality, and inclusion (DEI); green and sustainable funding; and a system and approach for impact measurement and reporting.

list key achievements in 2022:

GEL 750 million sustainable loan portfolio target for 2022 met. Furthermore, the total volume of the sustainable portfolio reached GEL 782 million, which constitutes a growth of 15.6% in comparison with the end of 2021 (GEL 676 million).

Climate-related framework in line with the Task force on Climate-related

Financial Disclosure (TCFD) requirements established and the second TCFD report published.

Comprehensive ESG training framework covering all employees and different responsibility levels established.

DEI Policy, targets and action plan defined.

ESG strategies in all significant subsidiaries developed.

Since the environmental and climate change issues are accelerated worldwide, we are committed to managing our direct and indirect environmental and social impacts stemming from our operation by developing the continuous enhancement of TBC’s Environmental Management System (EMS).

In 2020, we further strengthened our EMS and obtained ISO 14001:2015 certificate and successfully passed the thirdyear surveillance audit of the EMS in 2022. This certificate serves as a testament to our EMS’s full compliance with international standards.

As part of our EMS, TBC Bank implemented different initiatives to reduce its direct environmental footprint.

To list some of them:

Since 2019, TBC Bank operates a green car fleet, which is comprised of electric and hybrid vehicles.

Since 2015, TBC Bank has contracted a company for paper recycling. TBC delivered more than 250 tons of paper for further processing.

In 2023, TBC Bank started collecting plastic waste and transferring it to a partner company “Polyvim” for further recycling. The goal is to

reduce plastic waste, create value-added products, and promote the development of a circular economy in Georgia. As a result of several stages of plastic processing, a high-quality fibre fabric is obtained, which can be used in other industries.

BC: Can you provide some details on what led to TBC Bank Georgia being awarded the EBRD Sustainability Silver Award?

NM: One of the features that the Silver Award considers is transactions with our customers. One of the transactions was the replacement of street lighting in Batumi City, the second-largest city in Georgia. The transaction was structured under a letter of credit product, where TBC Bank acted as an issuing bank facilitating the import of energyefficient LED lighting from Ukraine.

TBC Bank client, ADJARGANATEBA, imported energy-efficient LED lighting from its supplier, SCHREDER TOV, a lighting equipment supplier based in Ukraine.

TBC Bank issued a letter of credit with a post-import finance solution, and it was confirmed by a bank in Germany. This structure allowed the importer to re-pay for the purchased equipment within 3 years while allowing the exporter to receive funds at sight, upon installation of the lights.

Due to the ongoing conflict in Ukraine, the exporter had an urgent need for prompt payment, making smooth transactions crucial. Waiting until the end of the payment period was simply not feasible. Meanwhile, the importer had to prioritise the installation of LED lights and relied on receiving payments from the municipality on a quarterly basis.

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TBC Bank matched this payment structure for both the importer and exporter, and satisfied both companies’ requirements. The transaction was also structured under EBRD Trade Facilitation Program.

The goal and the most important focus of the project was energy efficiency. By implementing the project in Batumi:

14,555 outdated lights are being replaced with new energy-efficient LED lights of better quality,

The smart lighting system will improve night visibility, and safe movement on foot, bicycle, and car,

Switching to energy-efficient LED lighting will reduce electricity consumption by approximately 50%.

BC: How have TBC Bank Georgia’s sustainability efforts contributed to the overall development and well-being of local communities?

NM: TBC runs its multi-year initiatives that aim to sustainably empower different groups of society. TBC, as an institution with a major social and economic impact, contributes to the development of areas defined as crucial by the countries’ public sector and cooperates with the National Bank of Georgia and other government institutions in key areas like financial education, job creation, investment attraction, etc.

Apart from information gathered from external sources, TBC assesses its own strengths and competencies and chooses areas of involvement accordingly. We have several principles that guide the choice of initiatives to be implemented. Each project must:

Increase its positive impact on society and the country in the long term and have growth potential,

Be a part of TBC knowledge and expertise: Before getting involved in a certain area, TBC builds expertise in it by increasing its knowledge internally and collaborating with external stakeholders that can contribute to the process with their experience,

Aim at co-participation not just funding: TBC works with partners, supporting them not only by funding specific projects, but also by sharing expertise in communication project management and more.

Some of our priority areas are:

Accessibility and affordability of financial and non-financial services: via our platforms www.tbcbusiness.ge and www.startuperi.ge, we support MSMEs, as well as promote a startup culture.

Women’s economic empowerment: among other initiatives, the empowerment of women in information and communication technologies (ICT) is a focus area.

Educational programmes for youth: scholarships, courses in ICT area, and STEM.

BC: In what ways does TBC Bank integrate sustainable finance principles into its operations and decision-making processes?

NM: The incorporation of our sustainable finance principles started many years ago. First of all, with the introduction of the Exclusion List of activities, we avoid ethically questionable and harmful activities. The list of activities excluded from financing by TBC Bank is based on the Exclusion Lists of the EBRD, IFC, DEG and ADB.

We reject financing activities that violate local legislative requirements, international conventions and declarations of human and labour rights.

Furthermore, all our commercial lending to SME and corporate customers are screened for environmental and social risks in line with the EBRD Performance standards.

TBC strives to increase its positive impact on society and the economy by introducing new financial products and services that are designed to deliver a specific social or environmental benefit.

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Green Lending Development

– TBC is a leading partner in Georgia in local renewable energy financing with a core segment in hydropower stations. To make our contribution to the development of sustainable financing countrywide, we conducted local market research to determine how to adapt TBC’s green criteria to the Georgian reality and developed Green Lending procedure, in cooperation with the Green for Growth Fund (GGF) Technical Assistance Facility, represented by Finance in Motion GmbH and financed by the European Union under the EU4Energy Initiative.

This procedure helps the

Bank to identify green and environmentally friendly initiatives and encourages private companies to move to sustainable investments in their businesses. Furthermore, since 2023, we implemented the Green Taxonomy of the National Bank of Georgia, developed in line with the best international taxonomies and sustainability frameworks.

International Fund Raising

– Providing solutions that contribute to the sustainable development of local businesses has been an important target for TBC’s sustainability agenda. To achieve its ESG objectives, the Bank has continued to mobilise financial resources, focusing on

the country’s inclusive economic growth and sustainable development. In 2022, the Bank mobilised the wholesale portfolio of $485 million in total, from its International Financial Institutions (IFIs) partners. Attracted facilities are a testament to TBC’s strong commitment to supporting the sustainable economic growth of local businesses, thereby contributing to job creation and bringing long-lasting benefits to the country.

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2.9 Green mind-set and green financing: Overcoming sustainability challenges (Part 2)

TBC Group’s ambition is to be the leading supporter of ESG principles in Georgia and the wider region. We aspire to make our direct environmental impact net zero by 2025 and develop a plan to drive our indirect impact through financing to net zero.

This is the second of a two-part interviewing the implementation of green initiatives at TBC Bank Georgia, focusing on impacts and outcomes, which led to the EBRD Sustainability Silver Award 2023.

BC: Have there been any struggles in the implementation of green initiatives into your bank, and overall community?

NM: Customer awareness and expertise are challenging since awareness of businesses and society about climate-related risks and opportunities is very low. This influences the readiness to engage actively in the transformation process to a lowcarbon economy. Additionally, as a developing economy, shortterm objectives often are more

prioritised. We need to create a good base for research, and cross-sectoral analysis, including finance specialists, scientists and government institutions.

Data: Challenges currently exist concerning the availability of granular and comparable data and the development of metrics that adequately translate climate outcomes into financial impacts. To some extent, these challenges reflect a lack of underlying data, for instance on the exposures of different sectors to climate risks.

Affordable funding to finance mitigation and adaptation measures for different (vulnerable or relevant) sectors in Georgia are needed for the agriculture, transport, buildings, construction, energy sector.

BC: What measurable impacts or outcomes have resulted from TBC Bank Georgia’s sustainability initiatives, and how do you track and report on the progress?

NM: In 2021, we published our first TCFD report and committed to

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NINO MASURASHVILI Chief Risk Officer JSC TBC Bank BRIAN CANUP Assistant Editor Trade Finance Global (TFG)

making visible progress every year. In 2022, we advanced on climate stress scenarios and conducted the first climate stress testing exercise in Georgia. We have a dedicated team who is responsible for fostering the process, creating knowledge and engaging with partner organisations on additional technical and educational support.

We incorporated climate-related initiatives and aspirations in our ESG Strategy which follows a strategic road map, reflecting milestones of our sustainability journey for the following years up to 2030.

In 2022, the Group aligned loan portfolio growth planning with risks and opportunities in different sectors and defined relevant products on a sectoral level, thus supporting sustainable portfolio growth and the transition to

a lower-emission economy in Georgia. In order to identify products relevant for various economic sectors, separate meetings and analyses were conducted with representatives of the various business lines and the potential for greening a sector was assessed.

As of the end of 2022, the sustainable loan portfolio of TBC Bank (GEL 782 mln) includes exposures with different purposes, such as, energy-efficiency loans, electric car loans, renewable energy financing for solar panels and hydropower plants.

In this process, we closely cooperate with our partner IFIs, e.g. EBRD. Recently, TBC committed to developing a comprehensive transition plan in the near future. TBC is the first bank in the region with this commitment. However, there are a number

of challenges. TBC’s objectives are to act responsibly and manage the climate-related, environmental and social risks associated with our operations, increase the resilience of customers, employees, businesses and society towards climate change risks, and support them in pursuing climate-related opportunities.

In 2019, we started to respond to stakeholders’ demand for more information and published a GRIreferenced sustainability report. Our GRI-reference sustainability report is a full-scale report covering the areas where TBC has an impact: good governance, employee diversity and equal opportunities, environmental footprint, climate change etc.

First of all, the disclosure is proof of our commitment. It shows the company’s efforts to pursue its aspirations and

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goals. Furthermore, it creates trust in interested parties. And finally, the disclosure is a symbol of the responsibility towards all stakeholders: customers, employees, investors, partners, environment and society as a whole.

BC: Looking ahead, what future plans or goals does TBC Bank Georgia have in terms of sustainability and how do you want to build off the momentum that led to receiving the EBRD Sustainability Silver Award?

NM: This year, we are going to accomplish some challenging tasks. Two examples are: to measure the Group’s direct performance in relation to the Paris Agreement targets for GHG emissions reductions and to calculate our financed emissions.

For companies in the European Union, UK and other developed countries, this has already been done. However, for Georgia, this will be a new challenge. We need to develop and validate a methodology, data, and approach, and can consider using internationally established frameworks, such as the Partnership for Carbon Accounting Financials (PCAF).

Various initiatives and programmes to support the targets set by the ESG Strategy:

Sustainable financing I Sustainable loan portfolio growth KPIs – In 2021, ESG KPIs were linked to senior management remuneration over the medium term to reflect our mid-term strategy. In 2022, we continued to incorporate ESG-related KPIs for bank-level positions and established sustainable loan portfolio growth targets for business segments – retail, MSME and corporate: the target for green and social loans for 2023 has been set at a total volume of GEL 1 billion.

ESG awareness I ESG Academy – Our expertise is essential in driving the transition, providing relevant solutions to the economic actors and increasing knowledge about climaterelated and ESG matters. In 2023, we are taking a more structured approach and launching an ESG Academy with an extended scope for both our employees and customers. The academy will cover various topics, including green and social financing,

financial inclusion, regulatory requirements, diversity and affirmative approaches, and sustainable business models and practices.

The first training programme, ‘Green mind-set and green financing’ will include extensive training over two days for 900 employees and a one-day training for 300 retail, MSME and corporate customers. The programme will be supported by partner IFIs – the Green for Growth Fund (GGF) and the European Fund for Southeast Europe (EFSE) and will run for 22 months.

Paris alignment I Sciencebased targets – In 2022, we built internal capacity on relevant GHG emissions calculation methodologies and approaches. This was achieved via training and the use of external consultancies. As the next step, we are committed to measuring our performance in line with internationally-established standards and aligning with science-based targets.

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ESG awareness among employees and customers

– In 2022, 98% of TBC Bank employees participated in ESG-related training. In 2023, we aim to develop a framework for measuring ESG awareness among employees in order to track the results regularly and identify areas for further improvement. Furthermore, we will establish an approach for customer engagement on ESG topics.

Talent programmes for Information and Communication Technologies (ICT) – As technology is key to TBC, ICT is a priority area. In 2023, we will commence a new ICT programme, consisting of eight new training courses in programming, information security and other technologies. Our diversity targets focus on the empowerment of women, girls, and talented young

people from the regions and rural areas as well as on agediverse recruitment. Under the industry-led skills programme co-funded by USAID, around 750 people from a diverse range of backgrounds, ages and genders are expected to participate in the programme over the next 24 months. A number of the graduates will be employed by TBC and TBC’s partner companies.

ESG Strategies in significant subsidiaries – In 2023, we will have several priorities: establishment of ESG-related governance structures, implementation of ESGrelated policies and training framework, development of regular reporting, as well as internal capacity building in our subsidiaries.

Our ESG Strategy is guided by a strategic road map that outlines the key milestones for our sustainability journey through 2030. Our commitment lies in reaching an advanced level of compliance with TCFD requirements and integrating the local Green and Social Taxonomies set by the National Bank of Georgia.

And last, but not least, it is important to be transparent about work done, challenges in the process, limitations of approaches and future action plans. It is important to show that this is a consistent journey and not a completed project.

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2.10 Looking back: A review of trade finance predictions in 2023

Europe has benefitted from clement weather conditions and, to its credit, has both accelerated an improvement in the infrastructure required for alternative supplies (LNG from the US and Qatar) and the structural shift away from gas.

Just about six months ago, Trade Finance Global reached out to a variety of trade finance experts to help answer some questions we had about the industry. Like always, our friends across the industry came through and provided us with some detailed thoughts on the ins and outs of the trade finance world.

Were they right? Were they wrong? And what will happen in the remainder of 2023? We reached out to our friends again, and they generously gave a postmortem on their bold predictions.

There’s no more ducking and hiding: I am being called to account for the predictions I made to the good readers of TFG

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SEAN EDWARDS Chairman International Trade & Forfaiting Association (ITFA)

earlier this year. Like a doctor called before the Medical Review Board to defend his diagnosis, did I get it right or is the patient sicklier than expected? Worse, are they dead?

Unlike most medical practitioners, whose patients face a binary outcome, I can take comfort from a greater degree of resilience and the see-sawing volatility which allows me to be right depending on what day of the week it is.

Generally, I have been right in assuming the benign environment for trade finance, as opposed to trade itself, would remain. Trading remains solid, and there is evidence of modest, upwards increases in margins despite commodity prices coming off the boil.

Here, I was either slightly overconfident or got my timing wrong. The environment for crude oil has been less rewarding for the producers with the OPEC+ cuts

engendering only a very shortlived increase now in reverse. Metals processes have been subdued, but nowhere have they fallen off a cliff.

On gas, Europe has benefitted from clement weather conditions and, to its credit, has both accelerated an improvement in the infrastructure required for alternative supplies (LNG from the US and Qatar) and the structural shift away from gas. Although I identified this as a factor, the speed at which this is happening is a pleasant surprise.

If there was no great reset in prices and demand following what was perceived as a muted re-opening of China, neither were expectations that greater things could lie ahead. Growth in global commodities and, to a degree, goods trade is largely hooked to the Chinese chariot.

When that falters, we all take a stumble. The resolution of this issue is not just a question of economics, however, with much depending on finding a new political consensus. Given the weight of China in global GDP, even baby steps will help, and I don’t rule out political signaling through trade measures.

Demand, especially in the US, remains lacklustre as the central banks fight against inflation in the advanced economies with rate hikes.

But, as with China, this factor also gives hope for future growth with most forecasters predicting an end to hikes by Q4 2023 or Q1 2024.

So I maintain my largely benign view and will take a rain cheque on GDP whilst trade financiers remain relatively satisfied.

As before, I will finish with trade digitisation. Since I last wrote, we saw the demise of Marco Polo (which has survived as a monoproduct company and a ghost of its former self) and the end of a big vision for trade digitalisation.

Despite this, I see no loss of appetite to digitise amongst the bigger banks. The buildout is more complicated and fragmented, with far more limited choices for holistic replacement, but, conversely, smaller players are re-invigorated by the opening up of more competitive space. So, timing has taken a wobble, but the direction of travel remains as clear as before. 

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Frontier Finance: A look into Correspondent Banking and emerging markets

3.1 Credit insurance, export credit and funds: The 5 pillars to help the African trade gap

Pillar 1: Digital Infrastructure

Digital infrastructure frameworks could be a game-changer for African financial inclusion, particularly for MSMEs. Digital tools, such as Legal Entity Identifiers (LEIs) and e-invoicing, can profoundly improve information transparency, enhance credit decisionmaking, and enable remote understanding of financial transactions’ impact.

Referring to the influence of enhancing Africa’s digital infrastructure from a credit insurance perspective, Wulff identified 2 value-adding areas: information transparency and predictability. He highlighted the importance of tracking the flow of goods and payments, as this data can be used to assess the creditworthiness of buyers.

Such a systemic flow of information is quite challenging for African entities. This is where the roadmap offers a solution that assists credit insurers in their assessment processes. Wulff said,

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JÉRÔMEPEZÉ DirectorandFounder Tinubu TAMMY ALI Writer Trade Finance Global (TFG)

“The World Trade Board works together with the organisation that publishes the Legal Entity Identifier. We can see on a oneto-one basis who is the seller and buyer, and we know it’s them.”

Reinforcing the power of the digital infrastructure pillar, Pezé expressed optimism about the feasibility of using technology in Africa to enable credit insurance to thrive, adding, “With the longterm commitment in Africa to develop that infrastructure, over time the cost of the risk will reduce.”

For DFIs, Hayashida highlighted the influential impact of the decentralised identifiers in qualifying ESG and development transactions.

“We cannot check every single document ourselves, especially for international banks and entities who don’t have a local presence in every single country,” Hayashida said.

This information becomes crucial for assessing the overall effect of trade transactions, which may affect the appetite of financial institutions and investors. Besides, Wilson emphasised the role of banks as aggregators in leveraging digital infrastructure to improve trade finance for MSMEs. Since African MSMEs face challenging infrastructure environment, such as limited access to electricity, Wilson proposed utilising banks as aggregators to improve access to trade finance for MSMEs saying, “If you can use the banks as an aggregator, apply the credit insurance to their trade credit portfolios, you could directly improve those trade financiers on the continent.”

Pillar 2: Legal/Regulatory Infrastructure

Adopting efficient regulatory regimes can greatly structure a favourable environment for

reinsurers and insurers to operate in the African market. Adherence to governance standards and ethical behaviours is crucial to ensure that credit insurers’ performance aligns with industry norms.

“With a better legal environment, your asset and debt are recognised by the other country, and your ability to act legally has improved,” Pezé stated, underscoring the importance of stability and predictability in the regulatory environment to build trust and confidence among credit insurers.

Moreover, the establishment of a regulatory framework enables scalability in the African market and leverages the security levels of its participants. On that note, Adesanmi referenced the transformative potential of the African Continental Free Trade Area (AfCFTA), stating, “AfCFTA would help to dismantle the barriers within Africa, barriers

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Frontier Finance: A look into Correspondent Banking and emerging markets

around duties, free movement of goods.”

By creating a larger, scalable market, the AfCFTA fosters regional integration and encourages the production of goods within Africa, reducing dependence on imports and boosting supply chain security. This, in turn, provides insurers and reinsurers with a more stable and predictable business environment.

The sustained efforts to continuously improve the legal and regulatory infrastructure in Africa are fundamental to attracting and retaining reinsurers and insurers and promoting confidence in the continent.

“The only way it could work is with a long-term commitment,” Pezé said.

Pillar 3: Data Infrastructure

Striking a balance between providing sufficient capital to African companies, specifically MSMEs, and having enough risk information about clients is essential.

The strong correlation between transparency and the fight against corruption in Africa is validated based on the latest statistics by the Transparency International Index of Perceived Corruption, in which 34 African countries are among the lowest 80 of the 180 countries that were assessed.

“The more transparency you can provide, the less you will have the corruption problem,” Wulff noted. Recognising the potential of trade, especially for MSMEs, to reduce inequality, he called for “more transparent information not only for risk assessment but also for fighting corruption.”

Furthermore, Pezé suggested the establishment of independent organisations as repositories for shared information. He emphasised the feasibility of structuring data and the importance of collaboration among stakeholders, saying, “It’s essentially the willingness of different parties to collaborate and to feed that data.”

Pillar 4: Technical assistance

Technical assistance is of utmost significance in supporting African MSMEs and ensuring access to capital. However, Wilson pointed out the existing gap between international expectations and local African market realities, adding “If we’re expecting vast numbers of very granular individual SMEs across the continent, to seek out technical assistance so they can fit in with the expectations of the international community, I’m afraid that’s not very realistic.”

He explained that the immense scale and geographic diversity of the continent make it impractical to expect MSMEs to meet international standards.

On the other hand, Adesanmi presented a divergent view, focusing on the need for effective communication and translating technical assistance into practical actions, noting, “Let us move from talk into action, have pilot schemes so we know what needs to be improved, what we need to build on, and we can come up with a revised form of technical assistance.” Adesanmi also stressed the significance of measuring success periodically and conducting reviews to ensure that technical assistance reaches its intended beneficiaries.

Reaffirming the need for pilot programs and continuous measurement of success to refine and improve technical assistance initiatives, Hayashida shared the approach taken by the Multilateral Investment Guarantee Agency (MIGA) in identifying bottlenecks and facilitating successful pilot cases with government and subsovereign entities.

He further stressed the significance of disseminating information about successful cases to encourage similar entities to adopt and replicate those transactions, ultimately fostering the growth and development of MSMEs.

Pillar 5: New funding sources

The fifth pillar of the discussion focused on exploring new funding sources to encourage development investments in the

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African market. The goal is to inject liquidity into the African trade finance market and reduce the cost of funding over time.

Adesanmi stressed the importance of exploring alternative funding options, including digital platforms and trade funds, to inject liquidity into the African trade finance market. He emphasised the need for incentivising banks and reducing the cost of funding over time, leading to a market where participants with a track record become industry leaders, stating, “If the banks are incentivised the right way over a period of time, the cost of the funding and the cost of capital would ultimately reduce.”

In addition, Pezé proposed a pragmatic, step-by-step approach with the long-term perspective of equity and reinsurance, supported by local governments and banks,

suggesting, “Setting up an independent vehicle which will autonomously assess the risks and provide cover.”

Furthermore, a successful example of partnering with banks and factoring companies in Columbia was presented by Wulff. He added, “What we’ve seen working fairly well is partnering with banks and partnering with factoring companies. I’ve seen that work really well in Colombia.”

This case study shows the potential for credit insurance to thrive by means of private industry initiatives and government support. With the support of both private industry initiatives and government backing, credit insurance can thrive, providing protection and confidence to investors in African markets.

By leveraging digital tools, improving regulatory environments, promoting transparency, providing targeted technical assistance, and exploring alternative funding options, there are ways to use the roadmap to create a more inclusive and supportive trade finance ecosystem. Panel members identified how the collaboration of industry bodies, international stakeholders, and the commitment of local governments and banks can present a promising path forward to reshape the trajectory of trade finance in Africa, unlock the potential of MSMEs and lower the African trade finance gap.

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 Frontier Finance: A look into Correspondent Banking and emerging markets

3.2 Correspondent banking in an era of evolving international trade

Since the inception of international commerce, correspondent banking has played a vital role in facilitating the smooth flow of trade and ensuring timely settlement of payments. The search continues for a solution allowing crossborder payments to be fast, cheap, universal, and settled in real-time. This article focuses on correspondent banking, its role in international trade, and shortfalls of the traditional model that adversely affect lowerincome countries, impeding economic development and the advancement of financial inclusion.

What is Correspondent Banking?

Correspondent Banking (‘CB’) means a bank (Correspondent) in one country providing thirdparty treasury services on behalf of a bank (Respondent), typically in another country.

Correspondent banks are third-party agents acting as intermediaries between originating and receiving banks in different countries, allowing them to make payments and settle in

foreign currencies in jurisdictions where they don’t have branches or a direct license to operate.

Correspondent services generally include funds transfer, bank wires, currency exchange and settlement, and cheque clearing. This is done through accounts that Correspondents and Respondents hold for one another for the purpose of tracking transactions - debits and credits.

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There are alternative CB models coming to market this year that radically redesign correspondent banking to fit the needs of the global digital world of the 21st century.

STAN COLE

Adviser UNITE Global AS

An account held by a domestic bank, at a bank overseas is referred to as nostro (“our account at your bank”) and, conversely, the account it holds for its overseas counterpart is referred to as vostro (“your account at our bank”).

The CB model has a long history and remains the trusted method of making international trade payments in fiat currencies, as well as the primary option for wholesale settlement of crossborder payments.

A cross-border payment is a transfer of value performed by crediting an account in one country and by debiting a corresponding amount to an account in the other. No money actually moves, only nostro/ vostro balances get updated.

To execute a payment, banks exchange payment instructions using a variety of methods to message each other. Since the 1970s, international wire transfers

are executed primarily through the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network, which underpins the traditional CB model for international payments.

Banks in different countries can send wires directly to each other, on the condition that they have an established working (account) relationship. In case there isn’t a relationship with the receiving bank, the originating bank needs to seek a Correspondent that holds accounts with both banks.

More than one Correspondent may be used to complete a cross-border payment, particularly when involving minor currencies. This, however, lengthens the payment chain which adds cost and delays.

Settlement is the exchanging of funds between banks at both ends of a cross-border payment. To settle payments, banks use their account (nostro) balances

at their foreign Correspondent and/or uncommitted bilateral credit lines.

While technological advances have made messaging payment instructions practically instantaneous, the settlement of funds – and thus their availability to the ultimate recipient – can be woefully slow, taking up to 48 hours or more.

Correspondent Banking challenges

The legacy CB model is a layered network of third-party intermediaries (banks) built on multiple bilateral agreements (account relationships) between banks in different countries.

This complex global interbank relationship network operates on mutual trust. And trust can quickly evaporate in times of crises, as demonstrated during the 2008 Global Financial Crisis (GFC).

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Frontier Finance: A look into Correspondent Banking and emerging markets

Since 2008, the traditional SWIFTbased CB model has been in decline against a backdrop of rising operating, regulatory, compliance and legal costs, and a rapid rise of fintech challengers and other payment service providers (PSP).

Much of the payment processing infrastructure in use today was designed at the dawn of modern banking and created to facilitate the legacy CB model of intermediation between fragmented payment systems.

When legacy systems interact with each other across borders, their inefficiencies (frictions) are multiplied. Longer payment chains, i.e. completing payments through several intermediaries, add time and cost. A sending bank has no access to, or control over what intermediary banks in the chain charge, or why and how much their fees change.

This is more pronounced in lower volume (minor currencies) corridors. Different operating hours across time zones further exacerbate these systemic challenges.

International bank wires remain the most expensive method of sending/receiving funds across borders. They are slow (can take 2-5 days), opaque in terms of fees and FX margin, and less accessible in lower-income countries.

Legacy CB rests on multiple bilateral correspondent relationships, requiring recurring maintenance costs for periodic reviews, including:

Know Your Customer (KYC),

AML/CTF compliance,

Country and counterparty risk,

Credit management.

With rising costs and diminishing returns per correspondent account, banks start downsizing their correspondent network, pulling back from less developed, higher-risk markets to reduce the number of direct relationships.

Such downsizing, a.k.a. “derisking”, has been shrinking the global correspondent banking network for over 20 years, currently at an estimated 7% per year. Ongoing de-risking leads to further concentration of the CB business in a few global correspondent banks, resulting in their growing market share and pricing power.

As operating costs rise, banks increase fees to reflect these growing costs and pass them on to their customers, raising their costs of doing business and impeding growth.

Impact on International Trade

Correspondent banking is the main method in use for making commercial payments internationally and has a tangible impact on trade activity.

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De-risking has disproportionately affected smaller and medium banks in lower-income, higherrisk economies. As de-risked banks are cut off by their correspondents from the global correspondent network, they can no longer offer their trading customers’ cross-border payments, which negatively impacts trade volumes and economic activity, slowing a country’s development and holding back efforts to advance financial inclusion.

Is Correspondent Banking’s decline terminal?

Not yet, but there are clear signs of a transformative change to the age-old payments model is needed soon if banks are to remain relevant in enabling international trade.

Fortunately, there are alternative CB models coming to market this year that radically redesign correspondent banking to fit the needs of the global digital world of the 21st century.

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 Frontier Finance: A look into Correspondent Banking and emerging markets

3.3 Driving sustainability forward in the CEE region

Sustainability is a global challenge that requires local solutions, making regional collaboration among stakeholders familiar with business practices in the area even more crucial.

Trade finance plays a vital role in global economic activities, facilitating the movement of goods and services across borders.

However, as the world grapples with the pressing challenges of climate change and environmental degradation, the need to incorporate sustainability into trade finance practices is increasingly important.

To learn more about the complexities and efforts involved in greening trade finance, focusing on the Central and Eastern European (CEE) region, Trade Finance Global spoke with Martina Zimmerl, head of trade finance at Raiffeisen Bank International (RBI).

The need for global sustainability standards

The journey towards sustainability in trade finance is a challenging one.

One of the biggest issues in greening trade finance lies in assessing the sustainability of the multiple parties involved in a transaction. This includes evaluating the practices of suppliers and buyers, the nature

of the goods, and even the transportation route used to bring the goods to their destination.

This is a complex undertaking compounded by the fact that there are currently no global

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MARTINA ZIMMERL Head of Trade Finance Raiffeisen Bank International CARTER HOFFMAN Research Associate Trade Finance Global (TFG)

standards in place to ensure alignment with sustainability objectives.

Without global standards, the environmental impact of the many trade finance activities involving partnerships with developing countries, which may have different standards or priorities, become next to impossible to measure or manage.

For instance, many countries may not have laws in place to protect the environment, leaving the onus of responsibility on the financial institution to ensure their practices align with sustainability objectives.

Thankfully, the European Union (EU) taxonomy may be able to help.

The EU taxonomy

The EU taxonomy is a framework for supporting the green transformation of the EU that aims to identify which economic activities are environmentally sustainable and align with the EU’s green objectives.

However, compliance with the taxonomy is challenging and requires detailed data on various aspects of the transaction in question, such as labour conditions and sourcing practices. Sometimes, however, this data isn’t available.

Zimmerl said, “There is always the problem of data. Trade finance is cross-border and very often involves developing countries that may have different data

practices. How can I assess the sustainability of a trade finance transaction when I have limited access to data?”

It’s like trying to complete a puzzle without the right pieces: you might be able to make an educated guess based on what you have available, but the complete picture will always be out of reach.

In the meantime, while the industry contends with these data challenges, financial institutions can still enact a positive change by leveraging the power of incentives.

The power of incentives

Incentivisation plays a crucial role in driving sustainable trade finance, and many global financial institutions have implemented internal and external incentive practices to encourage clients to adopt sustainable practices.

By adjusting the pricing of transactions, banks can make non-sustainable transactions relatively more expensive and encourage internal sales representatives to recommend sustainable alternatives.

On the external front, they can coax clients towards greener alternatives through KPI-linked facilities that provide an incentive if the client meets a predetermined sustainability target. These KPI-linked facilities have proven to be an effective way to drive sustainable practices in trade finance.

Zimmerl said, “When we offer these KPI-linked guarantee facilities or import letter of credit facilities to companies, we really

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Frontier Finance: A look into Correspondent Banking and emerging markets

can drive the behaviour of the client towards more sustainable production.”

For example, RBI collaborates with clients like Primetals, a mining equipment manufacturer, to define KPIs related to reducing CO2 emissions.

If the client meets the agreedupon KPIs, they receive a small incentive on the margin. However, if the KPIs are not fulfilled, RBI raises the fee and donates the difference to a charity, ensuring accountability and encouraging Primetals to prioritise sustainability.

A look at Central and Eastern Europe

Sustainability is a global challenge that requires local solutions, making regional

collaboration among stakeholders familiar with business practices in the area even more crucial.

In the CEE region, there are unique challenges and opportunities for driving sustainability in trade finance. The region is characterised by a diverse mix of economies, ranging from highly developed countries to emerging markets, posing challenges in terms of prioritising and eventually harmonising sustainability standards and practices across borders.

The CEE region can leverage shared experiences and knowledge to develop localised sustainability frameworks and initiatives. This includes engaging with governments, regulatory bodies, financial institutions, corporates, and civil society

organisations to foster dialogue and cooperation.

Collaborative efforts can lead to new funding mechanisms, incentives, and regulatory frameworks supporting sustainable trade practices and can foster knowledge sharing, enabling the pooling of resources to address common challenges in the region.

Another important aspect of driving sustainability in trade finance in the CEE region is capacity building. This involves enhancing the knowledge and skills of trade finance professionals, as well as promoting awareness and understanding of sustainable practices through training programs, workshops, and industry conferences.

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Beyond capacity building, digitalisation can greatly facilitate the integration of sustainability into trade finance processes. Digital platforms and tools can enhance data and analytics, providing a sandbox to assess the environmental impact of trade transactions, track sustainability performance, and facilitate transparent communication between parties.

Greening trade finance is a complex yet crucial task in the face of global sustainability challenges.

The CEE region can contribute to sustainable trade practices by embracing initiatives, building capacity, leveraging technology, fostering collaboration, and aligning with global sustainability frameworks.

By driving sustainability forward in trade finance, the region can contribute to a more sustainable and resilient global economy while reaping the benefits of long-term environmental and social well-being.

Sustainable trade finance relies on partnerships

Trade finance can be an intimidating industry to break into, especially when entering without an established partner. It becomes even more difficult to operate in the sustainable trade finance space. As the gateway bank to CEE with 12 network banks, as well as with a strong presence in Asia and on all main financial hubs, RBI offers the coverage needed for global business.

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Frontier Finance: A look into Correspondent Banking and emerging markets

3.4 Correspondent Banking Rela- tionships (CBR): A reflection from a foreign exchange & treasury perspective

The lifeblood of any financial markets trading business is to develop a reliable, consistent and extensive network of prime liquidity providers, across the bank’s product line...

Like every aspect of the financial services industry, the correspondent banking world has changed a great deal over recent years due to technology, regulatory regimes, and risk management.

Today, banks require and rely on an effective correspondent banking network to support many of their products, from trade finance, credit, financial markets trading, fund transfers, and remittances globally.

My experience comes from managing the financial markets trading business for banks. In particular, I handled treasury products such as foreign exchange (FX), money markets, and fixed-income instruments, like short-term and long-term bonds. Having been in the business a long time I am well suited to look back and identify what the world of correspondent banking has lost and gained during its evolution into the digital age.

The traditional world of correspondent banking

Correspondent banking traditionally followed a similar approach to many other financial markets.

The lifeblood of any financial markets trading business is to develop a reliable, consistent and extensive network of prime liquidity providers, across the bank’s product line...

This strategy’s focus is to build broad, strong business relationships with a geographically diverse set of institutions that cover all markets required.

The foundation of such a correspondent network lay in extensive financial analysis to establish that each institution is financially robust and sustainable.

Layered on top is relevant information about those institutions, such as their management structure, reputation, product expertise, risk appetite, and operational capabilities.

HENRY WILKES Head of Private Clients Oku Markets

Putting such a strategy in place, however, involves developing a personal relationship with the relevant counterparts in each organisation.

I can remember many eventful business trips with the head of correspondent banking to a variety of countries to meet and greet the relevant managers to explore the potential to deepen the business relationship in the treasury and foreign exchange markets.

Although this might sound like we went on “Jollies” these trips were often proved to be the most productive source of relevant information. We would learn about the wider context of the cities and countries we visited, their economic conditions, local market intelligence, the major market players, and the evolution of products and services on offer. Over my career, I can point to many situations when these strong personal relationships became invaluable to either of the institutions at times when volatility and uncertainty created irrational market behaviour.

All these tasks would be managed by a correspondent banking team whose skills included marketing, credit analysis, general knowledge of the institution’s product suite, management structure, and business strategy.

To be effective, it needed to be an integral part of the business, and its role needed to be taken seriously since banks historically had a strong and extensive network of correspondent relationships.

It used to be extremely labourintensive, so it is easy to imagine it’s an expensive service to maintain. If it does not generate sufficient volumes of business to cover the cost of compliance,

then it often becomes a target in times of cost-cutting, which, in my opinion, is shortsighted and to the detriment of the health of the global financial markets.

Correspondent banking in the digital age

Having had a short trip down memory lane let’s turn to the state of play of correspondent banking in the digital world. The cost of correspondent banking has increased, and only some parts of the business are profitable. Many banks have been cutting off less profitable customers or regions, especially when returns do not match the investment costs, leading to a severe, negative impact on financial inclusion.

The major factor in the increase in costs of the model is regulatory compliance, particularly in relation to AML/CFT regulation.

A recent BIS review highlights that the majority of institutions are maintaining correspondent banking services only to serve their client base for cross-border payments and trade finance, to support the cross-selling of other products to respondent banks, or to preserve reciprocity in their correspondent relationships.

‘Derisking’

As a result of due diligence costs and financial crime compliance, a trend is emerging towards a reduction in risk appetite associated with correspondent banking networks. This is particularly true for tier two and three regional networks, which have resulted in some of these banks being cut off. Many such banks deal with remittances, which is a large part of the banking services in these regions and, therefore, a major contributor to the economy.

The banks that risk losing access to correspondent services tend to be the smaller institutions that are not part of an international group and are located in jurisdictions perceived to be too risky. This could lead to a fragmentation of the crossborder payments systems reducing the available options for these transactions.

Western economies dominate the international payments arena, with SWIFT being founded, headquartered, and administered by American and European entities. SWIFT is connected to 200 different territories, but 80% of the value of payments processed is denominated in USD and EUR.

Can fintech shed a silver lining?

The Western financial system has developed a set of best practices for managing risks in payment systems, which have been generally accepted and adopted globally. Banks tend to impose tighter controls on “high-risk” countries which results in more friction and higher costs.

Fintechs believe they can help resolve some of these issues where the traditional financial services industry is clearly failing. By ensuring technology is widely accessible, fintech firms will be able to offer far more comprehensive solutions than legacy players. The fintech ecosystem could reduce the risk profile and the cost of technology systems that can help correspondent banking networks survive and move forward.

One thing is clear there needs to be changed in order to tackle some of these key problems in the ever-growing global financial system.

Frontier Finance: A look into Correspondent Banking and emerging markets

3.5 Central Asia – A region under the radar?

The Central Asian saying “it all starts with a cup of tea” boils down to the very point, that business in Central Asia, probably more than in the rest of the world, is about forming strong personal relationships.

Would you be able to accurately locate Kazakhstan, Uzbekistan, Tadzhikistan, Kyrgyzstan, and Turkmenistan on a world map? If not, you are probably not alone. But why should we be paying more attention to these so-called “stan-countries”?

An influential finance magazine recently published an article with the headline “Uzbekistan may very well be the best under-theradar investment story in the world today”. But what factors justify such a headline for this double-landlocked country? And to what extent does this headline apply to its Central Asian neighbours?

A silver lining amidst global uncertainty

There is one obvious reason for this headline: amidst the turmoil surrounding Russia’s war against Ukraine, exporters have lost access to these markets, as well as Belarus. Central Asia is an obvious alternative given the common historic ties and the lingua franca, Russian. It is no surprise that Germany has seen record numbers of conferences and forums concerning Central Asia in the first half of 2023.

There is, however, another reason why Central Asia is becoming increasingly attractive to investors. It has abundant natural resources and is strategically located, leading to its reputation as a region with untapped economic potential.

Kazakhstan and Uzbekistan, the most significant economies in the region, have taken steps to modernise and open their countries in the last few years, thus attracting foreign investments contributing to further growth. The two countries have a combined population of 56 million out of 78 million in the region overall.

Uzbekistan is the most populated country with 36 million inhabitants. At the same time, Kazakhstan is by far the largest country (#9 largest country by area in the world) and has the largest economy, and most commodities in the region. Overall, the region can be characterised as commodityrich (gas, oil) with a strong agricultural base.

Both countries have managed to significantly increase their World Bank Ease-of-DoingBusiness ranking: Kazakhstan

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JOCHEN ANTON-BOICUK Team Head Correspondent Banking Emerging Markets DZ Bank

improved its ranking from #53 (2014) to #25 (2020) out of 190 countries. Uzbekistan improved from #141 (2015) to #69 (2020) –a remarkable success in just five years. During the same period, both countries have increased their OECD country ranking from #7 to #5 (Range: 1-7).

market, improving the business environment, and reducing bureaucracy and corruption.

In 2017, an extraordinary accomplishment took place as the Uzbek Sum underwent a transformation from a black box currency exchange regime to a transparent free-floating currency system. Key sectors such as agriculture, energy,

It is also worth noting that both countries are benefiting from increased foreign trade volumes, migration in line with transfer payments, and, partly, recent commodity price increases.

DZ BANK AG has been maintaining business relationships in Central Asia for more than 30 years.

As well as being the largest economy in Central Asia, Kazakhstan has been a regional leader in economic development. Historically, the country has benefited from its rich natural resources, particularly oil, gas, and minerals. President Tokayev entered office in 2019 and since then, the government has implemented market-oriented reforms which have fostered a favourable economic climate for investors. Kazakhstan has also prioritised diversification, focusing on sectors such as finance, technology, logistics, and renewable energy.

Since 2016, Uzbekistan has also implemented a series of ambitious reforms to diversify its economy and attract foreign investment. The government, particularly President Mirziyoyev, has focused on liberalising the

manufacturing, and tourism have experienced substantial growth. In the last five years, both countries have managed to attract FDI of up to 4% of their GDPs.

Economic dependencies and regional influences

How do both countries respond to current challenges resulting from Russia’s war against Ukraine? President Tokayev and President Mirziyoyev have had to perform a careful balancing act. Both countries are dependent on historical economic ties with Russia, but also aim to secure investment from Western European countries and promote business relations with them. On top of this, both presidents must contend with China’s increasing influence in the region.

It has been particularly active in providing Trade and Export Financing solutions in line with corresponding transaction management and capital market product offerings.

Therefore, do the analysis, choose respective markets of interest, chose appropriate business partners and then take your time and get to know them by, ideally, enjoying many cups of tea together. The reward is a long-lasting and reliable business relationship which pays off manyfold – especially in a surrounding world of change.

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Frontier Finance: A look into Correspondent Banking and emerging markets

BRIAN CANUP Assistant Editor

The evolution of Correspondent Banking –Building a more inclusive network to connect the world

Digital advancements, including AI and blockchain, have revolutionised banking processes, creating a favourable environment for young professionals seeking innovation and growth.

Much like the rest of the global economy, the world of correspondent banking has undergone rapid changes in recent years. Though we have started to witness the changing dynamics of correspondent banking relationships, we have yet to truly understand their longterm impacts. TFG heard from leaders at banking association BAFT, who have recently partnered with TFG for the launch of their correspondent banking hub.

To tackle the topic of the changing correspondent banking environment, best practices and what the future looks like, BAFT hosted a panel discussion with Aaron Zynczak, Vanessa Lin, Jean-Francoise Mazure, and Attia Salim at the 2023 BAFT Global Annual Meeting.

In the early days, expanding business opportunities dominated the discussions within correspondent banking. However, Jean-Francoise noted that there has been a shift in recent years. The emphasis has now pivoted towards providing high-quality

service. Ensuring customer satisfaction and maintaining impeccable service standards have taken precedence, reflecting the industry’s commitment to meeting the evolving needs of clients.

But 2015 brought about major changes.

This era brought a heightened awareness of embedded risks and the necessity to bridge gaps compared to new market entrants. To stay competitive, industry players recognised the need for change and innovation. Mandatory industry changes such as GPI (Global Payment Innovation), ISO (International Organization for Standardization), and instant payments were identified as crucial areas to address.

However, this change isn’t all bad. With technology driving change, the industry has become more appealing, promising new opportunities and positive transformations. Digital advancements, including AI and blockchain, have revolutionised

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3.6

Trade Finance Global (TFG)

banking processes, creating a favourable environment for young professionals seeking innovation and growth.

Challenges ahead

Though technological advancements are useful in many relationships, they also create some problems. Correspondent banking must now adapt to mandatory industry changes while ensuring compliance, modernising legacy architecture, and maintaining operational efficiency are key priorities.

Vanessa Lin said, “The world has become a little bit more complex. And I think it’s become more complex for a few reasons. One is the breadth of service that one could offer has actually expanded in recent years. Cross border low value, real-time payment, cross border realtime, and also a lot of these infrastructures are built on new platforms, new technologies. Connectivity is beyond what we use in terms of Swift, a lot of

these are APIs. So that adds the complexity, the breadth of service adds the complexity.”

These issues won’t be going away anytime soon either, as there will always be geopolitical strife, KYC issues, and technological advancements will always be happening.

But the problems don’t stop there, Attia Salim believes that tightening government regulation and the banking sector’s risk appetite has led to the rise of fintechs in the space, and ultimately, the changing dynamics of correspondent banking.

And these fintechs have an advantage: because they are not banks, they are not regulated. And according to Lin, something is off about this. Lin said, “If you’re a technology company or you’re a non-bank, it’s not about who you are, but the activities you do. And we’re performing the same activities. Smells and acts like a bank.”

An inclusive correspondent banking future

Lin sees that emerging markets pose challenges for banks due to high-risk jurisdictions. While commercial considerations can be addressed through digitisation and process efficiency, the main obstacle lies in risk appetite. Collaboration between regulators and the establishment of a common framework are crucial to navigating these markets. While there won’t be an answer to solve all the problems, the panellists believe increased communication can solve many of the problems faced by all parties.

In order for correspondent banking to survive, let alone thrive, into the future, governments need to increase communication and there needs to be a concerted effort to create a unified and interoperable system for bankers. SWIFT has served the community well in the past, but the panellists agreed that we need a better and more robust system to usher in a new era of correspondent banking.

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 Frontier Finance: A look into Correspondent Banking and emerging markets

3.7

Access to finance: How Mongolia

up MSME support and promoting African MSMEs with local solutions

Though international trade is a complicated industry, there is one truth that is simple: the world runs on finance. There is a mind-boggling amount of capital floating around the globe. However, access to this financing has proven difficult for many companies and countries.

This financing gap continues to be an impediment to equitable growth across all regions and will require a collective effort to alleviate it. At the International Trade Centre’s World Economic Development Forum 2023 in Mongolia, global industry leaders gathered to tackle this difficult problem.

TFG’s Deepesh Patel spoke to Degi Erdenedelger Bavlai, First Deputy Chief Executive Officer at Khan Bank and Hohete-Berhan Arefeaine, Co-Founder and Executive Board Member, African Fintech Network to review their “Access to Finance” panel.

It takes a team: Expanding access to SMEs

Finding ways to provide financing access to SMEs can be a difficult task, as there are numerous roadblocks in this process. However, it is possible to, and Khan Bank’s growth in SME market share is a prime example.

In 2019, Khan Bank’s market share for SMEs was hovering around 20%, which spurred the bank to take action. Now, as we are halfway through 2023, their market share of SME support is nearly 50%.

This expansion took a companywide shift in policies. Khan Bank underwent operational shifts, centralising credit analysis, and began funding SMEs, with a particular focus on women-led businesses. After the company targeted these priorities, they began to train 1,500 women and increased their financial support for SMEs.

Degi said, “For the SME side, a lot of collaborative approaches are needed. Strong policy support is needed, corporate guarantee

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is scaling

Approaching countries and regions with specific, individual lenses is the key to unlocking the growth potential seen across many countries

DEEPESH PATEL Editorial Director Trade Finance Global (TFG) BRIAN CANUP Assistant Editor Trade Finance Global (TFG)

funds, and equity support are needed for small and medium enterprises.”

Independent approaches: One size does not fit all

When speaking about trade finance in Africa, it is important to understand that the 54 independent countries in Africa all have different needs and requirements. Once the industry begins to approach African

trade finance with this lens, the possibilities are endless. Hohete said, “We have a burgeoning youth population that is up and coming, that are digitally native. We have expanded infrastructure, and the cost of smartphones are coming down.”

Approaching countries and regions with specific, individual lenses is the key to unlocking the growth potential seen

across many countries. The African Continental Free Trae Area (AfCTA) is one way to help support country and regional trade growth.

However, Hohete pointed out that while AfCTA is a good start, its progression will also be highly dependent on different countries’ infrastructure. Hohete said, “It will work in some countries, and there will be some countries where it’s going to take a while.”

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Frontier Finance: A look into Correspondent Banking and emerging markets

3.8 Addressing the export challenge: How Export Finance Australia can help

In recent years, Australian exporters have also been confronting new challenges. These include COVID-19 pandemic restrictions, supply chain disruptions, extreme weather events, escalating air and sea freight costs, delays in receiving stock, and lags in product delivery to buyers.

For over 65 years, Export Finance Australia (EFA) has been helping businesses take on the world. Over this long history, we have gained a unique perspective on the challenges faced by exporters, and how finance can help address them.

The benefits of exporting are significant. In the 202021 financial year, Australian companies exported to more than 230 markets. The total value of goods and services exports out of Australia in 2020-21 was $458.8 billion (Australian Bureau of Statistics (2022) International Trade: Supplementary Information, Financial Year).

In total, Australian exporters generated over $1.5 trillion in turnover, contributing approximately $650 billion to the Australian economy and providing employment for around 3 million Australians.

The most frequent challenge EFA addresses is the need for businesses to secure finance to explore export opportunities. With an explicit mandate to provide commercial finance where market gaps exist, EFA has

designed specific offerings for SME exporters, who constitute 88% of all Australian exporters. EFA also provides finance to larger corporate entities or those requiring specialist project finance.

Long-standing obstacles in the path of export opportunities and finance include breaking into new markets, setting up overseas operations, and securing customers without prior in-market experience. Some commercial finance can be challenging to secure, such as for business expansion into other countries or for working capital requirements to fulfil international orders. EFA addresses these challenges with offerings of loans, bonds, and guarantees, taking on financing challenges others may shy away from.

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KRYSTAL DOYLE Associate Director Export Finance Australia

These issues have necessitated higher levels of working capital for businesses to maintain their export operations. In response, EFA has worked with our customers to ensure our offerings are evolving as business needs change. For example, we have expanded the scope of our online Small Business Export Loan product to simplify eligibility criteria and add new financing purposes to meet the changing needs of SMEs.

How can Export Finance Australia support your export business?

Our customers span a diverse range, from individuals who’ve grown businesses from their garages into global brands, to companies needing finance to supply products to international customers, and even businesses with permanent operations overseas.

Over the past decade, we’ve provided more than $9 billion in finance, supporting almost 700 customers with exports to over 100 different countries. This has supported over $30 billion in exports and projects. We tailor our offerings to each transaction, meaning we devote time to understanding your needs and finding the right solution.

In addition to our support for SMEs, we also have a mandate to finance Indo-Pacific infrastructure projects, critical minerals projects and defence exports. For businesses and projects in these sectors, we have specific offerings.

For Indo-Pacific infrastructure, we provide project finance for overseas projects that provide a benefit to Australia – including opportunities for Australian companies to work as contractors or to supply into those projects.

For example, we provided a $30 million loan to support the rollout of an EV bus fleet and national charging network in Vietnam and are working with Austrade to connect Australian businesses to the opportunities supported by our financing.

In the critical minerals sector, we have approvals in place for over $1.6 billion in finance for Australian critical minerals projects. We have also supported Australian SMEs participating in these export projects, by providing loans and bonds, so they can benefit from this fastgrowing sector.

For the defence industry, we offer solutions that enable SMEs to become part of the supply chains of major international prime contractors and participate in key defence projects.

Case studies

Here are just a few real examples of how EFA has supported Australian exporters:

McGregor Coxall is an interdisciplinary design firm that offers a range of services,

including landscape architecture, urban design, engineering and city intelligence and design research. EFA provided a loan facility known as an export line of credit to McGregor Coxall. This enabled the business to pay for upfront business expenses such as salaries and wages before they received payment, ensuring the successful delivery of design services to an international client in the Middle East.

Easy Signs, an online signage manufacturer with 120 employees, launched its export journey in 2019. EFA provided Easy Signs with an Overseas Direct Investment Loan to set up operations in the USA, enabling it to be closer to its customers and continue its growth.

Marr Contraction (aka the Men from Marr’s) is a world leader in the design and delivery of heavy lift luffing cranes and other complex craneage solutions. Marr Contracting supports large-scale projects across the construction, infrastructure and resources sectors. We provided an export contract loan and performance bond facility that enabled Marr Contracting to purchase equipment and deliver contracting services for the highprofile 1915 Canakkale Bridge and Motorway Project in Turkey.

At EFA, we have witnessed remarkable levels of innovation and resilience across various exporting industries, with Australian businesses often leading the global stage within their sector. We look forward to continuing to support more Australian businesses on their export journey.

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3.9 Demand guarantees and URDG 758 rules - trends in Africa

Demand guarantees have gained significant traction in Africa’s trade finance landscape, particularly in the context of construction contracts and infrastructure investments.

At ICC Austria’s Trade Finance Week, Trade Finance Global spoke with Isaac Mahanke, group head for traditional trade products at Standard Bank, to shed light on the prevalence and advantages of demand guarantees in Africa.

This wide ranging conversation serves to highlight the distinct features and benefits of demand guarantees in Africa compared to other trade finance products used worldwide.

Exploring the demand guarantee landscape in Africa

Africa’s vast infrastructure investments drive have given rise to significant demand for guarantees - particularly performance and advanced payment guarantees - which are generally used to support construction contracts between employers, contractors, and subcontractors.

This preference for demand guarantees is largely unique to the continent, with other regions of the world tending towards other instruments instead.

Mahanke said, “Around the world we see a lot of standby letters of credit and suretyships. You also have letters of credit and insurance products across the world that are especially used to support commercial contracts. But in Africa, demand guarantees are the flavor of the continent, since they give more comfort to beneficiaries.”

Demand guarantees offer several key advantages that contribute to their popularity in Africa.

First and foremost, they provide an additional layer of protection for both parties involved in the transaction. If the underlying contract fails to perform, beneficiaries can access the second layer of protection by making a simple demand for payment under the guarantee.

This streamlined process ensures ease of use and offers peace of mind to both applicants and beneficiaries.

Moreover, demand guarantees are independent of the underlying performance, unlike other complex trade finance products. This independence prevents interference with the primary contract, allowing beneficiaries

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ISAAC MAHANKE Senior Trade Finance Product Manager Standard Bank Group CARTER HOFFMAN Research Associate Trade Finance Global (TFG)

and applicants an added level of security over more intricate alternatives.

The uncomplicated nature of demand guarantees makes them a favourable choice, particularly in Africa, where simplicity and clarity are valued.

Overall this confidence, reliability, and simplicity have helped make demand guarantees popular across the continent, making it even more important for practitioners to understand the rules that govern their use.

Understanding the URDG 758 rules governing demand guarantees

Several essential rules underlie demand guarantees, ensuring the rights and obligations of both applicants and beneficiaries, the most notable of which are the Uniform Rules for Demand Guarantees, known as URDG 758

These rules, which articulate the requirements for obtaining protection and the performance expectations for each party, have been implemented by many banks, including Standard Bank, to support demand guarantees effectively.

Mahanke said, “The URDG 758 are the lifeblood of commerce, as we say, because they support a lot of projects in Africa so that we can see growth and development.”

One way they help to promote this growth is by providing clarity around requirements or expectations. Although demand guarantees offer significant advantages, complexities can arise due to misunderstandings or a lack of knowledge.

Parties unfamiliar with their use might introduce conflicting clauses or terminology, leading to complications in the guarantee process. Additional factors such

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Frontier Finance: A look into Correspondent Banking and emerging markets

as sanctioned clauses and unfamiliar local laws further contribute to the complexity surrounding demand guarantees.

Education and awareness are vital to ensuring all stakeholders understand and adhere to the rules, resulting in a smoother guarantee process.

The role of education

Advanced payment guarantees are not always simple instruments to administer.

Mahanke said, “In some of the cases that come through my desk, especially around advanced payment guarantees, we see that there is a lot of confusion and understanding in terms of how the product works.”

In some instances, beneficiaries may attempt to amend clauses related to the flow and timing of payment, disregarding the need for documentary evidence proving that the payment has been made to the applicant.

Such actions generally stem from a lack of understanding regarding the documentary

requirements, rather than malicious intent, and can lead to frustrations when claims are rejected.

The importance of education and awareness becomes evident in scenarios like this. By familiarising all parties involved with the rules and processes governing demand guarantees, these complications can be minimised.

Institutions like the ICC Austria, as well as banks and trade finance global oganisations, play a crucial role in educating stakeholders about demand guarantees in Africa.

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Training programs, workshops, and informational resources can enhance understanding, ensuring that all parties involved know their rights, obligations, and the necessary documentation for a smooth guarantee process.

Demand guarantees gaining traction in Africa

Demand guarantees have gained significant traction in Africa’s trade finance landscape, particularly in the context of construction contracts and infrastructure investments.

Their simplicity, independence, and added layer of protection make them a preferred choice for both applicants and beneficiaries.

However, complexities and misunderstandings can arise, emphasising the importance of education and a sound awareness of the governing rules, such as URDG 758.

Through continuous education and innovation, demand guarantees can further contribute to the growth and

development of trade finance in Africa, promoting economic prosperity across the continent and beyond.

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 Frontier Finance: A look into Correspondent Banking and emerging markets

3.10

New

opening: trade between CEE and Africa: new financial solutions

CEE products have gained widespread recognition on a global scale, primarily due to their adherence to EU standards. Since 1989, manufacturers from the region have been competing with established Western European producers like Germans and French.

With the disruption of the global value chains stemming from COVID-19 and the war in Ukraine, Central and Eastern European (CEE) trades are finding themselves in a new business reality. While trade with East Asia is a well-established import region, new primary export destinations are emerging for exporters in Central and Eastern Europe.

With the Russian full-scale invasion of Ukraine, the main export markets outside the EU for the CEE companies, Russia, Ukraine and Belarus, were closed or significantly constrained. The events, which disrupted supply chains and in many places, redefined the existing trade relations, may paradoxically be conducive to Polish companies in winning export contracts in Africa. Fractured supply chains can open avenues to previously inaccessible markets, even if there are no historic ties between the countries.

Bank Gospodarstwa Krajowego (BGK) is the only 100% stateowned bank in Poland, and is the fourth largest development bank in the EU. Due to BGK’s legal

status, the Bank’s rating stays in line with the rating of the State Treasury (as of now “A-“ in foreign currency and “A” in domestic currency).

One of BGK’s main tasks is to organise and execute a variety of development programs established by the Polish Government, including the Governmental Program Financial Support for Exporters. Together, with Korporacja Ubezpieczeń Kredytów Eksportowych (KUKE) the Polish Export Credit Agency, we offer a variety of products for support of Polish exporters.

New opportunities in Africa

To capitalise on the opportunity presented by the new landscape, it is vital to undertake thorough preparation, particularly considering that CEE companies lack substantial experience in engaging directly with African countries. Up until now, our business dealings have predominantly relied on intermediaries.

Some African countries have strong, historic ties with Western European countries. For CEE

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HUBERT CZUPRYŃSKI Specialist in Foreign Transaction Office Bank Gospodarstwa Krajowego JANINA SZWEDO Senior Trade Finance Specialist Bank Gospodarstwa Krajowego

exporters, it may be difficult to enter such a market and compete with companies that have been present over a significant period of time. There is a potential solution for CEE exporters. Sub-Saharan Africa may be attractive, although much more geographically distant, as the diversity of countries can make it easier to find a niche for these companies.

Conversely, Polish exporters offer economically competitive products thanks to Poland’s national currency, which allows for reduced production costs compared to competitors in the Eurozone. However, due to the transition to a market economy occurring relatively recently, starting in 1989, the Polish brand may not enjoy the same level of recognition in geographically distant markets.

Challenges facing expansion with African market

In the given markets, the CEE exporters encounter numerous obstacles. Polish companies still

lack experience in cooperation with African countries, for a number of reasons, including cultural and language barriers. Added to this is the low recognition of CEE countries in Africa. Bringing the CEE countries closer to local contractors as European nations that produce high-quality goods at competitive prices is likely one of the crucial tasks for institutions and entrepreneurs.

This process is hindered by the lack of familiarity of the local customs and markets. Additional risks such as non-payment, and political and economic volatility pose additional problems for contractors. One potential solution is expanding access to trade finance solutions like Letters of Credit, however, these are also obstructed due to local banking costs, or currency restrictions.

To support local businesses in foreign expansion, financial institutions are aiding with export finance solutions.

What are potential solutions to these problems?

BGK offers a solution to many of the existing problems via the purchase of receivables. This is a type of refinancing by BGK of a trade credit granted to a foreign buyer by a Polish exporter. BGK pays the Polish exporter the funds for the exported goods and/or services, while the repayment of

subsequent tranches is made by the foreign importer directly to the Polish bank.

The importer gains easy access to attractive financing in the form of a long-term trade commitment, which is a simpler and more advantageous solution compared to a loan from a local bank.

This enables the African importers to improve their financial liquidity and improve access to goods and services from the Polish market, which is competitive regarding both price and quality. BGK does not require a guarantee from a local bank, establishing direct collateral on foreign assets and receiving support from the Polish ECA, KUKE. At the same time, BGK has the capacity to conduct negotiations and conduct transaction procedures based on documents.

Another measure to facilitate Polish exports to emerging markets involves the provision of buyer’s credit, particularly in sovereign structures. Under this scheme, the borrowing entity is the government of the target country.

Polish companies are actively pursuing infrastructure, medical, and IT/ICT contracts, which are typically commissioned directly by the Ministries or government agencies of those specific countries.

These challenges will not be solved immediately, as discussions with African countries are multifaceted. Ultimately, the goal is for Polish exporters and African companies to expand, regardless of location or industry.

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3.11

Stuck between two humps: Mongolia’s balancing act in a shifting global order

Mongolia, with its rich agricultural heritage, has a unique opportunity to transition into sustainable, organic farming practices, tapping into a near $500 billion market. But for this, a significant shift in domestic farming practices and overcoming regulatory hurdles will be needed.

Mongolia, a nation steeped in history and folklore, finds itself at a crossroads.

As a landlocked country sandwiched between Russia and China, it faces unique challenges yet possesses a strategic geographic advantage.

The legend of the Mongol Empire still resonates with many–as I was reminded when visiting Ulaanbaatar’s dominating 40m equestrian statue of Genghis Khan–but today’s Mongolia is carving a different path on the global stage, trying to manoeuvre complex geopolitics and economic dynamics while preserving its sovereignty and identity.

As an observer at the World Export Development Forum (WEDF) 2023, where Trade Finance Global (TFG) was a media partner, I had the opportunity to discuss these challenges and prospects with local and international delegates.

Mongolia trade overview

According to John Miller, Trade Data Monitor, Mongolia’s primary exports include coal, copper ores, and crude petroleum, accounting for over 40% of its total exports.

China is the principal recipient of these exports, making up 92% of the total export value. On the other hand, Mongolia’s top import partners are Russia and China, accounting for 33% and 62% of total imports, respectively.

Mongolia’s economic trajectory as a landlocked developing country (LLDC) presents certain opportunities and challenges.

According to the United Nations, LLDCs like Mongolia face particular issues due to their lack of direct territorial access to the sea and isolation from world markets, which translates to high transit costs and decreased competitiveness.

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CARTER HOFFMAN Research Associate Trade Finance Global (TFG) DEEPESH PATEL Editorial Director Trade Finance Global (TFG)

The landlocked paradigm

However, the paradigm is shifting. Rabab Fatima, Under-SecretaryGeneral and High Representative for Least Developed Countries, Landlocked Developing Countries (LLDCs) and Small Island Developing States (SIDS), noted in her opening statement at the WEDF 2023: “Digitalisation reduces many of the entry barriers to international trade facing MSMEs and startups in LDCs, LLDCs and SIDS. It significantly reduces the transit-transport costs that serve as a major hurdle for LLDCs.”

Despite the formidable economic challenges, there’s an underlying resilience and adaptability that propels Mongolia forward.

This determination was highlighted by the country’s President Khurelsukh Ukhnaa in his speech.

One Billion Trees

While acknowledging the difficulties faced by LLDCs, he emphasised the ongoing efforts to counter these challenges, including the “One Billion Trees” campaign.

The initiative aims to combat desertification and mitigate the impact of climate change in Mongolia, a testament to the nation’s commitment to a greener future.

Khurelsukh said: “I firmly believe that these national movements will not only expedite the development of the environment, food, and agriculture sectors but also support regional trade and investment. Consequently, they will yield positive outcomes in the pursuit of sustainable development goals, including employment growth, poverty reduction, and the creation of a healthy and safe living environment for our citizens.” In addition to the environmental

commitment, Mongolia’s economic endowment plays a crucial role in its strategy for growth. Nestled between economic powerhouses China and Russia, Mongolia lies at the intersection of significant global infrastructure projects such as Russia’s Trans-Eurasia railway and China’s Silk Road Economic Belt.

Mongolia’s role in OBOR and CMREC

Mongolia sits along the shortest path connecting Europe and Asia, making it a key area for China’s One Belt One Road (OBOR) initiative.

However, reliance on China and Russia carries risks of economic over-dependence, as does the potential for geopolitical conflict.

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Breakdown of Mongolian refined petroleum imports by country for 2021 Source: OEC, 2023

The rise of the China-MongoliaRussia Economic Corridor (CMREC) carries promises of economic progress but also potential pitfalls.

As of 2023, China receives 92% of Mongolia’s exports, highlighting the nation’s economic vulnerability.

In response to these geopolitical pressures, Mongolia has pursued a policy of diversifying its alliances.

Deputy Prime Minister of Mongolia, His Excellency Amarsaikhan Sainbuyan, has spoken about the nation’s

aspiration for “enhanced economic independence”.

This strategy is embodied in the Third Neighbor Policy, seeking stronger relations with global democracies, including the United States, Canada, Australia, Japan, South Korea, India, and members of the EU.

Yet, the execution of these policies remains a complex task, which calls for effective domestic strategies and international cooperation. With international support, the opportunities for economic diversification are vast, with an emphasis on sustainable growth. Mongolia’s potential lies

in various sectors, such as green and organic farming, digital services, and small and mediumsized enterprises (SMEs).

Farming and agriculturelandlocked to land-linked?

Rabab Fatima further highlighted the potential for organic farming in her speech, emphasising that “North America and Europe account for most of the sales of organic products, with 90% market share...However, LDCs, LLDCs, and SIDS are yet to tap the potentials of vibrant organic farming sector.”

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In the context of the global digital boom, Mongolia also needs to tap into the global digital services market, which reached $3.82 trillion in 2022. Again, the transition is a significant task that requires structural changes, investments in digital infrastructure, and human capital.

As Mongolia charts its path towards a sustainable, diversified economy, the phrase “landlocked” might give way to “land-linked.”

Navigating the complexities of this transformation demands wise domestic strategies, effective international collaborations, and a keen understanding of global trends.

Trade is about people, not goods and services

As President Ukhnaa said, “Trade is not about goods and services, it’s about people.” The key to Mongolia’s success lies not in its geography but in the strength, resilience, and vision of its people.

Mongolia sits in a unique and challenging position.

Its status as a landlocked developing country demands innovative approaches to trade, economic development, and regional cooperation. While the nation’s story is deeply intertwined with the fabled Mongol Empire, its future is inextricably linked to the complex geopolitical dynamics of Russia and China, and its ambitious Third Neighbor Policy.

Amid this context, the World Export Development Forum in Ulaanbaatar has showcased Mongolia’s quest for a sustainable, balanced, and inclusive economic future.

The reality of Mongolia’s situation is summed up aptly by policy analysts, stating that the country’s Third Neighbor Policy may suffice for now, but it is no guarantee of longevity.

Even as it leans into the challenges of being a landlocked nation, the reality is that Mongolia’s sovereignty and future are still tied to the “Bear” to its north and the “Dragon” to its south.

A nation of warriors and nomads, Mongolia stands at a crossroads of history and the future, at the intersection of great powers and greater ambitions.

Its path forward is uncharted and arduous, yet its journey will undoubtedly be watched by the world with keen interest.

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Guarding the gate: Compliance amid fraud and money-laundering

4.1 Cloaked in trade: Unmasking the underworld of tradebased money laundering

In an increasingly interconnected global economy, the fight against financial crimes has become more complex and critical than ever.

One form of illicit activity that poses considerable challenges to regulators, law enforcement agencies, and financial institutions is trade-based money laundering (TBML). In its simplest form, TBML is a covert technique that allows criminals to conceal illicit proceeds by exploiting the very systems of legitimate trade, making it a potent tool in illicit financial operations.

In this episode of Trade Finance Talks, Brian Canup, assistant editor at TFG, was joined by Channing Mavrellis, Director of the Illicit Trade Program at Global Financial Integrity, to delve into the world of TBML. Together, they explored the latest developments and insights surrounding tradebased money laundering (TBML) practices.

Transnational crime and illicit financial flows: Connecting the dots

The UN Convention on Transnational Organised Crime deliberately refrains from providing a precise definition of transnational crime. This flexibility allows the convention to accommodate the emergence of new types of crimes on a global, regional, and local scale.

However, an official definition does exist for organised criminal groups, which involve three or more individuals collaborating to commit at least one crime to attain a direct or indirect tangible benefit. The range of typical operations conducted by transnational criminal organisations encompasses human trafficking, arms trafficking, drug trafficking, mineral trafficking, wildlife trafficking, counterfeiting and trading of counterfeit goods, fraud, extortion, money laundering, and cybercrime.

Furthermore, transnational crime does not necessarily require the involvement of a group but can be characterised by its transnational nature.

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CHANNING MAVRELLIS Director of the Illicit Trade Program Global Financial Integrity TAMMY ALI Writer Trade Finance Global (TFG)

The connection to illicit financial flows is highly significant. Illicit funds refer to unlawfully earned, transferred, or utilised funds across different countries. Illegally earned funds can originate from activities like drug trafficking, while illegally transferred funds may result from customs fraud or trade-based money laundering (TBML).

Illegally utilised funds can be associated with terrorism financing. The main hurdle for criminal groups lies in the process of laundering criminal proceeds to make them appear legitimate, and this is where TBML becomes particularly relevant in the context of transnational crime.

Criminal groups perceive the utilisation of the international trade system as an immensely advantageous method for money laundering, capitalising on the opportunities that arise from global trade.

As Mavrellis said, “Having a method of laundering the funds that involve international trade can be very beneficial.”

Unveiling the methods of TBML

Mavrellis explained that (TBML) involves various methods, which can be categorised into document-based and nondocument-based techniques.

Document-based TBML often depends on trade misinvoicing, commonly referred to as customs fraud. This method entails purposefully altering the value of a trade transaction by falsifying details such as price, quality, or country of origin. By overvaluing or undervaluing goods during import or export processes, criminal organisations can facilitate the

movement of funds into or out of a country while presenting falsified documentation to justify the additional funds being transferred.

On the other hand, nondocument-based TBML is quite challenging to detect. One prevalent example is the Black Market Peso Exchange (BMPE), which originated in Colombia but is not exclusive to that country or narcotics trafficking. The BMPE mechanism relies on repatriating the proceeds of crime from one country to another without detection.

For instance, if criminal organisations generate cash from selling narcotics in the United States, they need to transfer the funds back to Colombia and convert them to Colombian pesos. In the BMPE, the cartel may purchase legitimate trade goods in the U.S. with the cash proceeds and export them to Colombia. The goods are then sold, thereby transforming the criminal proceeds into accessible funds in the commodity itself, bypassing formal financial systems.

Source: Global Financial Integrity, Financial Crime in Latin America and the Caribbean: Understanding Country Challenges and Designing Effective Technical Responses

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the gate: Compliance amid

and money-laundering

Guarding

fraud

Alternatively, the cartel may engage a peso broker who purchases the narcotics proceeds and facilitates their integration into the formal financial system through different means, such as individual deposits or cash-intensive businesses in exchange for a certain percentage.

Mavrellis said, “What we’ve seen before is a 10 to 15% commission for laundering $500,000. The broker says, I’m going to charge you a 10 to 15% commission for doing this. You’re accepting the risk of taking this cash.”

Recently, Chinese money laundering organisations have entered the TBML scene, seeking access to US dollars due to strict currency controls in China. These organisations offer to purchase unlawful proceeds at lower commissions compared to traditional peso brokers.

Mavrellis emphasised, “With the involvement of Chinese money laundering organisations, it gets a little bit more complicated.”

This creates a three-party transaction, where Chinese nationals acquire US dollars and simultaneously transfer an agreed-upon amount of Chinese currency (Renminbi) to the Chinese money laundering organisation’s bank account. The funds can then be used by the cartel to purchase goods in China for export to Colombia, completing the money laundering process.

On another note, traditional methods of money laundering face heightened scrutiny, leading criminals to resort to alternative tactics of TBML, to hide the illicit proceeds of their crimes. This shift raises the stakes, as TBML not only facilitates unlawful offences like narcotics trafficking, human

trafficking, and terrorist financing but also serves as a means to disguise logistical support for terrorist activities, such as the transportation of weapons.

“I think this is in large part to the fact that so much of our AML CFT framework that’s out there globally is really focused on financial institutions and this backdoor of trade”, Mavrellis explained.

Ostensibly, TBML presents numerous challenges for law enforcement and policymakers as it capitalises on the loopholes in anti-money laundering and counter-terrorism financing frameworks, which primarily focus on financial institutions rather than trade.

Trade-based money laundering: Dominant industries & countries revealed

Criminals exploit various trade transactions to conceal and launder illicit funds. “Any commodity that you can think of, they’ve done,” Mavrellis revealed.

This versatility creates market threats for legitimate businesses, as illicit activities can disrupt fair competition. Hair extensions, used cars, and even cattle are just a few examples of seemingly unrelated trade items that have been exploited in TBML schemes.

Legitimate businesses often struggle to keep up with the pricing strategies and quick liquidation methods employed by those engaged in TBML.

“It can be very difficult for legitimate businesses to compete with some of these illicit activities.” Mavrellis highlighted.

When discussing the vulnerability of countries to TBML, Mavrellis expressed an inclusive viewpoint, adding “Which countries are most vulnerable? Again, it’s all of them.”

The effective screening of each global trade transaction is a daunting task for customs departments due to the sheer volume involved. Authorities are confronted with the delicate responsibility of striking a balance between facilitating trade and combating illicit activities, ensuring both business continuity and national security are safeguarded.

China has emerged as a particular area of concern due to its extensive involvement in transnational crime and illicit financial flows. The massive volume of goods entering and leaving the country provides ample opportunities for the camouflage of illicit activities. Mavrellis said, “When you think about just the volume of goods coming in and out of the country, it’s very easy to disguise any kind of illicit activity.”

Black Market Peso Exchange

To demonstrate the intricacy and extent of trade-based money laundering (TBML) operations, Mavrellis shared a compelling case study from the 2021 Financial Crime in Latin America and the Caribbean report. The study centred on a Black Money Peso Exchange (BMPE), showcasing the sophistication of such illegitimate schemes.

According to Mavrellis, in 2019, a Black Money Peso Exchange (BMPE) network operating between Colombia and the United States was dismantled by the US authorities.

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Money brokers, also known as peso brokers, acted as intermediaries between individuals, businesses, and criminal organisations, facilitating the exchange of currencies.

The US Department of Justice alleged that six money brokers based in Colombia were involved in laundering and repatriating narcotics proceeds, specifically cash from the US back to Colombia.

Narco-traffickers would contact these brokers to inform them about the cash in the United States requiring laundering. The brokers would then create contracts detailing the pickup of US currency, delivery of roughly equivalent value in Colombian pesos, and the commission to be received. Once the contract was signed, the brokers arranged for the pickup of cash using a network of couriers located across the country.

The couriers would then deposit the collected funds into the DEA-controlled bank account, which also received wire transfers of illicit proceeds from other countries, including Mexico. Amit Agarwal, an Indian national and owner of Best Electronics USA, played a pivotal role in this network. After receiving the funds in his business account, Agarwal would export electronic goods of similar value to Colombian electronic suppliers, using a code name on the commercial invoice to link the transactions to the corresponding money broker.

Rather than paying Agarwal directly as the exporter, the Colombian electronic suppliers would pay the appropriate amount in Colombian pesos to the peso brokers, who would then deliver the funds to their clients, the narco-traffickers in Colombia.

The money brokers retained a commission for themselves and the couriers.

The case study underscores the importance of conducting thorough customer due diligence and profiling to uncover instances of trade-based money laundering. Unusual behaviour, such as businesses depositing large amounts of cash outside their standard patterns, can raise red flags for financial institutions.

Strengthening the global defence mechanism: How governments can fight against financial crime

2. Continuous and dynamic information exchange between countries. The current practice of exchanging data on a periodic basis limits the realtime identification of tradebased money laundering (TBML) and other fraud threats. The ideal scenario would involve countries sharing trade data to allow customs authorities to track and verify transactions accurately, enhancing overall transparency and security. As Mavrellis pointed out, “It’s all about data. It’s all about sharing data. Everybody needs to know what’s going on. That’s our point of view.”

3. The establishment of robust legislation and registries for beneficial ownership. Beneficial ownership refers to the identification of the ultimate owners of businesses or companies engaged in international trade.

Amid the ever-changing landscape of criminal activities, governments play an imperative role in combating these illicit practices. As policymakers seek strategic measures to address these evolving issues, Mavrellis has put forth several key messages.

1. Trade and customs records to be freely accessible to the public. While some aggregated information is available through sources like the United Nations Comtrade database and S&P Global Market Intelligence’s Panjiva, more detailed and comprehensive data is necessary to adequately verify trade transactions.

4. Implement targeted economic and financial sanctions. Directing attention towards individuals, entities, and countries involved in financial crimes and money laundering can. By denying access to the financial system, it becomes possible to disrupt the operations of these networks and diminish their influence. As Mavrellis stated, “We should focus on targeting individuals, entities, and countries that facilitate financial crimes and money laundering, and consider the application of economic and other targeted financial sanctions against those engaged in such illicit activities.”

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Guarding the gate: Compliance amid fraud and money-laundering

4.2 Correspondent Banking: Managing Financial Crime risk through data analytics

Correspondent banking is a cornerstone of international finance, offering a critical conduit for transnational transactions and financial services. But as with any large, intricate and partially opaque financial system that relies on mutual trust, it is also a prime target for illicit exploitation, particularly money laundering. Amid an increasingly complex and fluid global financial landscape, financial institutions are grappling with how to manage these inherent risks more effectively.

The complexity and vulnerability of Correspondent Banking

In recent years, high-profile cases have cast a harsh spotlight on how correspondent banking can be hijacked for money laundering purposes. Stiff financial penalties are only one of the repercussions for the institutions involved, with long-lasting reputational damage and a deep-seated loss of trust often causing more enduring harm. Major banking institutions, like Danske Bank and HSBC, have found themselves in the crosshairs of regulatory scrutiny following damaging scandals linked to correspondent relationships.

Current risk management protocols in Correspondent Banking

Risk management strategies in banking for the most part continue to depend on standard Know Your Customer (KYC) and Anti-Money Laundering (AML) processes. These mechanisms demand meticulous checks during client onboarding and regular monitoring of transactions, thereby forming the first line of defence against illicit financial activities.

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The complicated world of correspondent banking, with its many relationships and transactions, needs smarter tools that can find and manage the risks of money laundering.

MAX HEYWOOD

Head of Market Engagement Elucidate

However, these protocols are not without their challenges. The sheer volume of manual checks required can be daunting, leading to extended delay times and the occasional lapse in accuracy. Further complicating matters is the problem of ‘false positives’, where legitimate transactions are erroneously flagged as suspicious, creating an excessive backlog of investigations and draining resources.

In the context of correspondent banking, there is a specific challenge where the banks involved in the transaction chain, apart from the initial financial institution, typically lack a direct relationship with the individuals or companies initiating the payment.This challenge, sometimes referred to as “Know Your Customer’s Customer (KYCC)”, leads to banks having to put faith in the anti-money laundering and risk management systems of other banks.

Unsurprisingly, faced with these risks, a growing number of banks have decided to reduce their exposure to correspondent

banking, choosing to exit commercial relationships with particular banks and sometimes with entire countries.

As data from the Bank of International Settlements shows, in the last decade the number of correspondents has consistently been trending downwards in every region in the world. The resulting impacts include greater market concentration and reduced financial inclusion for vulnerable populations, among others.

The evolution of risk management: Embracing the future with data-driven models

Traditional risk management methods, often manual and dependent on human interpretation, are increasingly giving way to more progressive, data-driven models. Leveraging advanced technologies applied to large volumes of data, these modern methodologies allow for more targeted and scalable approaches.

Among the advantages of a technology and data-driven approach are:

Moving towards the analysis of risk patterns rather than primarily seeking to focus on individual transactions or clients that may be suspicious. By combining transactional data with data from credible open sources as well as proprietary datasets, the tools are now available to analyse large volumes of data and understand overall trends and carry out essential contextual analysis.

The ability to assess the overall risk profile of counterparty banks. For large banks that facilitate millions of cross-border payments a day on behalf of banks in their network, a core driver of risk is their reliance on the risk management systems of their counterparties. A data-driven approach allows them to understand the risk exposure, as well as the strengths and weaknesses of the controls put in place by counterparties.

Conversely, a technologydriven approach can help smaller banks to stand out from the crowd, proving to international counterparts that they have sufficiently strong risk management systems in place to manage their inherent risks.

Last but not least, lower costs: A more granular approach to risk management allows the focus of scarce human resources on the most highrisk cases that merit further investigation, reducing overall compliance and risk management costs.

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Introducing Elucidate Ratings: Transforming risk rating in Correspondent Banking

Berlin-based company Elucidate is at the forefront of this shift towards a more modern risk management strategy. With the power of data analysis, Elucidate Ratings provides an easy-to-understand, solid, and measurable risk score. To properly understand your risk appetite and that of counterparties, it is critical to have an overview of each institution’s inherent risk and control effectiveness.

Elucidate Ratings provides a wide range of benefits to managing risks in correspondent banking. In addition to running analyses to identify patterns of behaviour associated with money laundering, Elucidate Ratings works together with traditional KYC and AML processes, filling in gaps and delivering a more thorough risk assessment.

The complicated world of correspondent banking, with its many relationships and transactions, needs smarter tools that can find and manage the risks of money laundering.

Using a data-driven risk rating approach, like Elucidate Ratings, is not just a bonus, but a crucial need in today’s unpredictable financial world.

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By integrating state-of-the-art technologies, financial institutions can enhance their correspondent banking risk management, safeguarding against money laundering, terrorism financing and sanctions evasion. In a world where financial crimes and AML structures are becoming increasingly sophisticated, the integration of tools like Elucidate Ratings brings clarity to your external network and internal structures.

Guarding the gate: Compliance amid fraud and money-laundering

To further explore how Elucidate Ratings can revolutionise your correspondent banking risk management, we invite you to reach out to our team for a personalised demo. The future of correspondent banking is here, and it’s data-driven.

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RALPH DE HAAS Director of Research European Bank for Reconstruction and Development (EBRD)

4.3 Addressing compliance costs as a barrier to Correspondent Banking and Trade Finance

Facilitating integration of banks in Emerging Markets into global financial markets

RUDOLF PUTZ Deputy Director Financial Institutions Head Trade Facilitation Programme (TFP) European Bank for Reconstruction and Development (EBRD)

Over the years, the EBRD’s Trade Facilitation Programme (TFP) has helped more than 200 EBRD partner banks in Eastern Europe, the CIS and the Southern and Eastern Mediterranean to establish a track record in trade finance, facilitating their integration into global trade, and more broadly into global financial markets. Promoting such integration remains a key objective of the programme. As new markets develop, a number of new partner banks will continue to be added each year.

A particular impediment to promoting EBRD partner banks’ integration into the global financial markets is the challenge of setting up or retaining correspondent banking relationships with foreign correspondent banks. This is especially relevant for smaller banks, and banks in smaller or higher-risk EBRD countries of operation.

Many banks in EBRD countries of operation find it very difficult to obtain or retain correspondent banking relationships, which also restricts their ability to obtain trade finance facilities from foreign commercial banks. EBRD partner banks that find themselves in such situations typically have no commercial trade credit lines, which often makes EBRD’s TFP (and similar programmes of other IFIs) the only source of trade credit.

There is no immediate or simple solution to this problem. The EBRD and other IFIs showcase the feasibility of collaboration with foreign commercial banks by consistently offering financial and technical assistance to partner banks facing similar challenges. This demonstration paves the way for increased participation of foreign commercial banks in EBRD regions in the future.

The transfer of skills and knowhow plays an important role in this journey. The TFP, in close cooperation with international compliance bodies, has developed and rolls-out

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specific training and advisory programmes to promote international best practices in compliance.

Compliance costs as a barrier to Trade Finance

Many partner banks under the TFP find it increasingly difficult to obtain trade finance facilities from foreign commercial banks, in part due to the increased cost of compliance. Numerous regulatory requirements, from anti-money laundering and counter-terrorism finance regulation, to due diligence (“Know Your Customer” and “Know your Customers’ Customer”) combine to put significant pressure on financial institutions around various forms of risk, including reputational risk.

To assess the economic consequences of the reduced availability of correspondent banking, EBRD’s Office of the Chief Economist and its TFP team, conducted a survey among local respondent banks in the EBRD regions. The survey took place at the end of 2019 and covered the period 2009 to 2019. According to the findings of this survey, the countries in the EBRD regions saw, on average, a decline of active correspondent banks by 24% between 2012 and 2018.

However, strong variations exist between countries. While the number of correspondent banks decreased by less than 15% in, for instance, Croatia and Turkey (and even increased in economies like Georgia), Latvia faced a 29% decline, Tajikistan a 48% decline, and Moldova a 55% decline. Some of these economies were subject to significant money laundering concerns, which led global correspondent banks to terminate correspondent banking services.

The survey yields three main insights:

Correspondent bank networks have changed over time. While in 2013, 75% of the correspondent banks originated in the US and Germany, banks from those two countries only hold a combined share of 54% in 2019. Correspondent banks now hail from a wider variety of countries. The replacement of US correspondent banks with those from other regions may be unfavourable to the extent that it leads to longer and costlier intermediation chains.

Respondent banks report higher costs and more difficulty in accessing correspondent banking services. Local banks find it particularly difficult to access US dollars. While in 2013, only 7% of the banks found it difficult or impossible to access US dollars, this increased to 26% in 2019. Accessing various other cross-border services, such as payment transactions, currency clearing and trade finance, has also proven more difficult. The share of banks reporting difficulties in accessing or having no access to payment services was 5% in 2013 and 13% in 2019. The respective numbers for currency clearing are 20% (11%) in 2013 and 27% (19%) in 2019. About 10% of the banks mention that access to the US has been severely limited or even completely lost due to the withdrawal of correspondent banks.

Local banks state that the most important reasons for the decline in correspondent banking services are that “correspondent banking relationships do not generate sufficient business to justify

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Chart 1: Reduction in correspondent banking across the EBRD regions (2012-18)

the cost of additional customer due diligence” (67%) and that “foreign correspondent banks have terminated relationships as a consequence of the stricter enforcement of anti-moneylaundering and combattingthe-financing-of-terrorism regulations” (51%).

How has this drop in access to correspondent banking affected exports across the EBRD regions?

Recent research combines the EBRD survey data on the withdrawal of correspondent banks with bank-level data from Bankfocus; bank branch information from EBRD’s Banking Environment and Performance Survey (BEPS II); and firm-level export data from Orbis. The findings indicate that firms in towns and cities that experienced a substantial withdrawal of correspondent banks have become less likely to export and, conditional on being exporters, export less than firms in towns and cities that did not see a withdrawal of correspondent banks. This suggests that the decline in active correspondent banking across the EBRD regions has had a substantial negative effect on both local banks and their exporting clients.

Trainings and advisory services to improve regulatory compliance

To address the loss of correspondent banking relationships due to the increased challenges of compliance with financial crime legislation, the TFP –in close cooperation with international compliance bodies – has set up trainings and advisory services programmes to promote international practices in compliance:

Compliance Training: The EBRD launched an e-Learning module “Trade Based Financial Crime Compliance” jointly with the London Institute of Banking and Finance.As of March 2021, a total of 363 students and 93 Partner Banks from 19 economies have taken part.

Compliance certification. In cooperation with the International Compliance Association (“ICA”), the EBRD financed over 850 scholarships between 20182022. Partner banks also benefitted from the ICA professional certificates in, among others, KYC and customer due diligence, trade based money laundering, financial crime prevention, and AML risks in correspondent banking. EBRD and the Association of Certified Anti-Money Laundering Specialists (“ACAMS”) will has established a the ACAMS Eurasian Chapter.

Individual advisory services. The ICA and EBRD offer services to selected partner banks to identify weak areas and assist in bringing their compliance procedures up to the required international standards.

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4.4 Illuminating international trade: The role of FATF and AML/KYC in combating financial crimes

In the shadows of the interconnected world of international trade lies a pervasive threat that silently endangers the security of global markets. Financial crimes, with their detrimental effects on stability and integrity, cast a dark cloud over the world economy, threatening the trust upon which international trade relies. From money laundering to terrorist financing, illicit activities can have far-reaching consequences.

Amidst these challenges, organisations like the Financial Action Task Force (FATF) along with the policies of Anti-Money Laundering (AML) and Know Your Customer (KYC) have emerged as crucial lines of defence, protecting the global financial systems.

But what exactly is the role of FATF and AML/KYC in combating these crimes? How do they contribute to the reliability and transparency of international trade?

In partnership with the ICC UAE’s annual conference, TFG’s Editor, Deepesh Patel, had an insightful discussion with Mohammed

Daoud, Director and Industry Practice Lead at Moody’s to understand the role of FATF and KYC/AML in the relentless fight against financial crimes.

The global guardian against financial crime: The FATF mission

The Financial Action Task Force (FATF) is an intergovernmental organisation established by the G7 summit in 1989. It serves as the global watchdog for money laundering and terrorist financing, promoting the implementation of AML/CFT procedures.

The FATF encourages jurisdictions worldwide to incorporate measures combating illicit financial activities into their legislative frameworks through a set of recommendations known as the “40 plus nine” recommendations. By advocating for updated laws, the FATF facilitates a country’s ability to freeze assets, close accounts, and conduct thorough investigations.

Moreover, every few years, the FATF conducts a mutual evaluation, which is a review

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In today’s global economy, the banking and corporate sectors are intricately interconnected, forming a symbiotic relationship that significantly impacts financial stability and regulatory compliance.

MOHAMED DAOUD Director and Industry Practice Lead Moody’s TAMMY ALI Writer Trade Finance Global (TFG)

process to assess if a country has effectively implemented new legislation, policies, and supervision against those crimes. Based on this evaluation, a country may pass, or be placed on a scrutiny or grey list in a bid to help the country improve its efforts in fighting money laundering and terrorist financing.

According to Daoud, the enforcement of FATF regulations has evolved over the years. Initially, the focus was primarily on tier-one banks and large financial institutions. However, Daoud clarified that this approach has gradually changed and expanded to encompass cross-border remittances due to their perceived high risk.

Establishing KYC guidelines and customer due diligence has been instrumental in mitigating these risks. Subsequently, the insurance sector and capital markets were also impacted by enforcement measures. Most recently, the nonfinancial sector has come under scrutiny, with countries facing more stringent evaluations.

The interdependence of banking and corporate sector compliance: Defying the cascading risks

In today’s global economy, the banking and corporate sectors are intricately interconnected, forming a symbiotic relationship that significantly impacts financial stability and regulatory compliance. This close interdependence between these two sectors creates a delicate balance, where the failure to uphold compliance standards in one sector can trigger a cascading effect of risks throughout the entire financial system.

Compliance within the financial landscape is driven not only by local and international regulators but also by the inherent connectivity of the banking system. When banks engage in cross-border transactions with counterparties in other countries, they are bound to adhere to the regulations of those counterparties’ jurisdictions, particularly in emerging markets that heavily rely on third-party transactions and international currencies like the US dollar.

As Daoud explained, this principle of reciprocity, along with the expectation of shared values and guidelines among business partners, creates a complex compliance network.

While there was once a misconception that banks alone were solely responsible for transaction integrity, regulatory authorities have clarified that the corporate sector also holds liability to adhere to AML principles and KYC. Shifting the focus to the corporate sector recognises the potential misuse of shell companies for illicit activities, prompting the need for thorough due diligence and scrutiny.

Aggregators: Empowering effective compliance screening

Compliance screening plays an indispensable role in safeguarding the integrity of transactions and mitigating risks associated with illicit activities. The utilisation of external sanctions data, not only influences the effectiveness of compliance programs but also determines their ease of implementation. As Daoud highlighted, “There is a lot of external sanctions data that has a significant impact on the easiness and effectiveness of compliance.”

With over 300 lists issued by international regulatory bodies, each with its own set of criteria, navigating the vast array of sanctions lists can be troublesome. This challenge is further compounded by the diverse formats employed by different regulatory bodies such as the OFAC 50% sanctions rule, which extends sanctions to corporate entities with more than 50% ownership by a sanctioned party.

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To address the complexity of diverse sanctions lists, aggregators, such as Moody’s, act as intermediaries, curating, standardising, and simplifying the data. Furthermore, aggregator databases not only include sanctions information but also cover the three compliance screening levels: sanctions, politically exposed persons (PEPs), and enhanced due diligence (EDD).

In addition, Daoud emphasised that it is equally essential to consider the impact of compliance regulations on other key actors within the industry. This includes verifying the identity of import-export clients, examining vessels and carriers, and assessing the role of agents, customs, and transport companies.

The complexity of trading operations makes trade-based money laundering a considerable concern, particularly during periods of geopolitical tensions. Instances of shell companies being used to evade sanctions

and circumvent scrutiny have been observed, calling for increased diligence and monitoring in the threat finance domain.

Unleashing the power of technology for robust trade finance compliance

Trade finance compliance has undergone a remarkable transformation with the aid of technology, revolutionising processes and elevating compliance standards.

Daoud presented the transformative impact of technology in trade finance, shedding light on the following key applications and the tangible benefits they bring to all stakeholders involved:

KYC and Due Diligence Solutions: Technology-driven solutions streamline customer onboarding and ongoing monitoring, by verifying identities, assessing risk profiles, and ensuring AML/ CFT compliance.

Document Comparison and Reconciliation: Advanced technologies can swiftly scan and analyse complex trade documents, reducing errors and ensuring compliance with documentary credit requirements.

Tracking and Monitoring Systems: Technology empowers institutions to track threat finance over time, identifying patterns, profiling transactions, and uncovering suspicious activities related to dual-use goods or sanctions evasion.

With an abundance of technology-driven solutions, it is apparent that the integration of technology in trade finance heralds a new era of compliance, where streamlined processes and enhanced monitoring capabilities facilitate secure and transparent trade transactions.

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4.5 Addressing the container deposit problem to promote intra-African trade

Container deposits tie up a significant amount of cash flow and hinder SMEs from using that liquidity to invest in other areas, and they may also make SMEs reluctant to take on new business opportunities that require container deposits, leading to lost opportunities and constrained growth.

In international trade, shipping containers are vital for transporting goods safely and securely.

To use them, however, many shipping lines require traders to put down deposits - known as container deposits - to safeguard against possible liabilities such as damage, demurrage, or total loss of the container.

While these deposits do provide a form of financial security for the shipping lines they can be a major issue for importers and exporters, estimated to cost $1.6 billion annually in East Africa alone, creating trade barriers and significantly impacting SMEs.

To learn more about this issue and explore a new container guarantee solution seeking to serve as an alternative to traditional deposits and help promote trade in East Africa, Trade Finance Global (TFG) spoke with Morgan Lépinoy, Managing Director of Viatrans.

Challenges caused by container deposits

Lépinoy said: “The deposit ranges from hundreds to upwards of a couple of thousand US dollars per container depending on their type and destination and can tie up a significant amount of cash for SMEs, particularly if they need to pay deposits for multiple containers.”

Particularly when compared to larger competitors, the high cost, administrative complexities, and lack of standardisation surrounding container deposits create an expensive, timeconsuming, and burdensome process that puts SMEs at a competitive disadvantage.

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MORGAN LÉPINOY Managing Director & Global Head of Trade Facilitation ViaTrans CARTER HOFFMAN Research Associate Trade Finance Global (TFG)

To combat this, Viaservice has developed a container guarantee solution In East Africa that addresses these challenges and promotes trade efficiency in the region.

Lépinoy said: “The solution simplifies the payment process, making it easier, more efficient, and cost-effective for shippers to manage their finances. This, in turn, reduces the administrative burden on SMEs and frees up critical working capital that can be used for other important business activities and operations.”

While developing their offering, Viaservice collaborated with key institutional stakeholders, including shipping lines, clearing and forwarding agents, regulators, and trade facilitation agencies in East Africa.

As a result, SMEs can pursue and win new business opportunities that were previously out of reach, fueling their growth and expansion.

About the container guarantee program

Viaservice’s container guarantee solution maintains the liability chain while enhancing compliance and safeguarding commercial relationships.

Lépinoy said: “For SMEs, the solution provides a cost-effective and reliable way to access containers without tying up significant cash flow. For shipping lines, the solution provides a risk-mitigating alternative that does more than deposit towards securing payment, and removing bad debt”

Each guarantee issued is unique and applicable to a specific bill of lading, ensuring accountability, and customers must comply with prior obligations to remain eligible for future guarantees, reinforcing a culture of accountability in the logistics sector.

By acting as a trusted intermediary for advancing charges on behalf of customers, the solution does not remove any obligations from clients but rather enhances the liability chain and promotes compliance.

Numerous SMEs have made use of Viaservice’s container guarantee solution.

For example, a Tanzanian clearing agent was competing to win a large shipment requiring more than 100 containers. The shipping line was asking for a deposit of $1000 per container but the clearing agent could not afford to have $100,000 simply sit idle as a deposit.

Lépinoy said: “Thanks to our container guarantee solution, they did not have to and were able to secure this large business, all while increasing cash flow. They have since levelled the playing field for the company and are now competing for more and more cargo than before.”

This and other success stories demonstrate how the solution provides an alternative allowing SMEs to compete on equal footing with larger companies, seize new business opportunities, and contribute to the growth of intra-African trade.

Future opportunities for container guarantees expansion

Viaservice’s container guarantee solution has already demonstrated effectiveness in East Africa, but its potential extends beyond the region.

As the model gains recognition and success, there is an opportunity to replicate and expand the solution to other regions in Africa facing similar challenges.

By forming partnerships with local stakeholders, governments, and trade facilitation agencies, Viaservice can extend its reach and enable SMEs across the continent to thrive in international trade.

Furthermore, the success of the container guarantee solution opens doors for collaboration with global shipping lines and logistics providers.

By demonstrating the positive impact on SMEs and the overall trade ecosystem, Viaservice can foster partnerships with international players interested in promoting inclusive and efficient trade practices. This collaboration can contribute to the development of standardised container deposit systems that reduce barriers to trade and further facilitate global commerce.

As the solution expands its footprint and gains recognition, it has the potential to shape trade practices not only in East Africa but also across the African continent, fostering inclusive and sustainable economic growth.

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4.6

Good compliance starts at the top

Alex Gray, Head of Trade and Transaction Banking at The London Institute of Banking & Finance, explains why good, fair and responsive staff management is the bedrock of excellent compliance in trade finance

In trade finance compliance, getting the details right matters. Regulators around the world, the financial institutions involved and, of course, bank clients, have a keen interest in ensuring that trade transactions do what they are designed to do: ensure timely payment and prevent fraud, all in line with constantly changing international regulations. As that suggests, there is always the potential for a mistake to cost the bank a great deal of money and put a major dent in its reputation. That threat, in turn, can put a lot of pressure on staff.

There are many tools that banks can use to improve their compliance procedures – not least technological fixes. And, yes, trade banks have digitalised many workflows, and will digitalise many more, but manual data processing is still needed. And, as digitalisation progresses, the work that is left for trade staff to do will involve careful judgement. That means that the individual decisions to be made – say on sanctions or if a transaction is fraudulent – could carry more weight than they would have done in the past. So, still plenty of pressure on staff.

Sharing the load – and the learnings

In the drive to digitalise and to optimise the complex business of trade finance compliance, what can be overlooked is the importance of easing pressure on staff with the right culture and the right management approach. Staff in trade banks who have been correctly trained understand they have to get things right. But it’s not always the case that managers understand how to help them get things right.

The first issue for trade finance teams is that intense pressure to avoid mistakes can, itself, trigger problems. Staff on the frontline are rightly worried about missing things. It’s easily done. The phone rings with a client query, or a colleague asks for something and, when you turn back to your screen, you’ve lost your original train of thought – and something slips through. If you are working in a blame culture, where managers want to have someone to criticise for every error, the focus of a team quickly shifts away from doing your best for clients to doing your best to dodge flack.

Of course, banks don’t rely on a single check. There is also

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ALEX GRAY Head of Trade and Transaction Banking The London Institute of Banking & Finance

the second line of defence. But no-one wants the second line of defence to find fault with their work. The instinct is to try to cover up a slip. The reality is, though, that errors are actually an opportunity for everyone to learn how to do things better. That includes the people who make up the second line. If the group regularly sits down to talk through errors – without any naming and shaming – everyone gets the chance to improve their awareness of potential pitfalls and to learn from others’ experience. That also boosts job satisfaction. Further, any weaknesses that need specific training can be picked up because staff will also be much more likely to flag up problems, rather than hide them.

in environments where people have quickly covered up errors in the hope that they will just go away. Even when it’s explained to them that this is like leaving an open wound untreated, they can struggle to be more forthcoming about what they perceive as a personal failing. What to do?

You can’t change the culture of a country, but you can have some control over the culture of your firm. First, you need to find out whether people fear that the firm will use mistakes against its staff – say as a lever to get rid of people, or as a way to cut bonuses. That sort of anxiety is more than a problem for an individual – it affects the team as a whole. If people fear retribution for mistakes, they’ll keep them quiet. If people don’t feel they really belong, they work less hard.

while the other one gets grapes does not respond well. Clearly, bank staff won’t be as frank about their annoyance as the monkey if they feel they’ve been treated unfairly, but that doesn’t mean it won’t be a problem if you want to build a truly co-operative team. What’s more, it won’t be just the underpaid staff who feel that things are wrong. Those who benefit can also feel the sting of the unfairness and see their performance decline. [The odd thing that happens when injustice benefits you - BBC Future].

The bottom line is: if you want really good compliance in trade finance – and that is the backbone of the business – there are a few questions you need to ask.

First, can everyone trust the manager to do what is right for the firm in a fair and professional way? Second, will the manager put mistakes into context and treat honest errors as an opportunity for everyone to learn? Third, will all contributions be respected and rewarded with room for training and progression?

If that list sounds like utopia, it shouldn’t.

Compliance is too important to allow anything except the highest standards and those standards start at the top, with management.

Trust and transparency across cultures

But what about collaborating with other institutions, or people in other cultures? Trade banks, by definition, work across borders and there are cultures in which making a mistake is not seen as an opportunity to learn and improve but as a personal failing best hidden. I’ve worked

Then, you need to look at remuneration. If you want everyone to work together to make the team as good as it can be, everyone should be rewarded in a way that is considered fair. There’s an entertaining TED talk by Frans de Waal, a Dutch primatologist, called ‘Two monkeys are paid unequally’. It’s not a spoiler to say that the monkey that gets cucumber

If nothing else, it’s also just common sense that people who are in a good place and being treated fairly and properly, who are well-trained and supported, work better. And facilitating better work is what leaders are there to do.

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