Estimated reading time: 5 minutes

International trade is the lifeblood of the global economy serving as a vital catalyst for economic growth, innovation, and prosperity across nations, including in the MENA region. It enables countries to yield returns from their comparative advantages, fostering efficiency in production and consumption. 

The efficient flow of trade relies heavily on established frameworks such as the Uniform and Practice for Documentary Credits (UCP) and International Standard Banking Practice (ISBP). These guidelines, established by the International Chamber of Commerce (ICC), standardise documentary credit processes and ensure fairness and efficiency. While acknowledging the value of these frameworks in securing trade financial transactions worldwide, global trade is still significantly susceptible to criminal exploitation Trade-Based Finance Crime (TBFC). 

TBFC poses significant risks and challenges to the integrity of international trade transactions with trade finance instruments used to disguise illicit activities such as money laundering, terrorist financing, and fraud only to name a few. 

The MENA region carries unique TBFC risks driven by geopolitical instability, including conflict-prone areas affecting neighbouring countries. Iran and Syria continue to face international sanctions, leading to increased exploitation of trade to evade sanctions and combating proliferation financing programmes. 

Financial institutions operating in MENA need to formulate proper responses to these risks while also keeping pace with evolving compliance standards under UCP and ISBP articles. From a trade perspective, a bank “complies” if the presentation is in accordance with all the terms and conditions of the credit, the applicable provisions of these rules, and international standard banking practices. 

However, a bank must also have in place an effective program to identify and mitigate underlying intrinsic TBFC risks. In implementing this program while also complying with trade standards, banks face a number of challenges, including: 

1. Lack of standardised trade documentation 

One of the key challenges is the lack of a standardised approach to trade documentation, including Transport Documents such as the Forwarder’s Certificate of Receipt (FCR). The FCR was developed by the International Federation of Freight Forwarders Associations (FIATA) in 1955 to facilitate settlements for goods under the forwarder’s control by offering shippers the ability to advance receipt of payment. 

Despite its widespread use and value in unravelling TBFC, FCR remains an auxiliary document that is not regulated in many jurisdictions. Significantly, the intrinsic deficiencies of the FCR can lead to abusive and even fraudulent business practices resulting in a wide array of risks where the FCR only indicates the delivery of goods without actual goods description. Examples of illicit practices include issuing the FCR based on shipment declarations without actually possessing the goods, issuing several FCRs for the same cargo or issuing FCRs for non-compliant goods or for goods that are not cleared for export.

Conversely, ISBP declared that some documents commonly used in the transportation of goods including FCR, Delivery Note, Delivery Order, Cargo Receipt, etc. are not “transport” documents as defined in UCP 600 articles (19-25). These documents are examined only to the extent expressly stated in the credit, otherwise, they are examined according to UCP 600 sub-article 14-f.

As such, banks need to navigate conflicting requirements by performing a comparison against the actual shipping details within a limited timeframe until receipt of original transport documents, such as a bill of lading (B/L). This includes verifying and cross-referencing shipping information accurately and promptly before finalising trade transactions. The risk can further escalate when the FCR is used in open account trade transactions where the goods are shipped and delivered before payment is due. 

2. Documents accepted as presented

Separately, ISBP article “Expressions not defined under UCP 600 – Documents accepted as presented”, introduces additional complexities requiring heightened vigilance by trade operations processing units. Many letters of credit (LCs) are issued under the condition “Documents accepted as presented”, making the transactions even more vulnerable to TBFC.

Financial institutions are required to check presented documents against the issued LC rather than merely passing the documents to the applicant. At times, LC applicants do not provide any justification for using this condition within the LC documentation. In such cases, financial institutions are required to contact their customer to add some protective exceptions to the LC. In essence, “Documents accepted as presented” conditions present significant TBFC risks, including sanctions evasion that need to be diligently tackled. 

3. Recognition of a sanctions clause

Complying with international sanctions is a major challenge for banks involved in international trade. Several banks have been subject to draconian fines including from US Authorities for breaching sanctions regulations. Once a new sanctions regulation is issued, a bank must determine whether it is obliged to comply with the regulations by ceasing business with companies or individuals designated under the regulations. 

To mitigate the risk of conducting business with a sanctionable entity or individual, many banks have introduced a sanctions clause within their documentary credits, standby letters of credit and demand guarantees. 

However, complexities arise as many banks and beneficiaries refuse the inclusion of a sanctions clause depending on the text’s complexity. In addition, in some countries like Germany, banks often reject including a sanctions clause in any trade instrument. 

Additionally, while the ICC rules have not addressed sanctions clauses, the ICC guidelines of 2022 (Consolidated ICC Guidance on the Use of Sanctions Clauses) recommended that banks refrain from issuing trade finance instruments incorporating sanctions clauses as it deemed they are restricting banks’ ability to perform their role under ICC rules. 

Criminal organisations rely on an interconnected and international financial system to support their illegal schemes; they exploit various means to move their ill-gotten gains without detection. Recognising the size of the challenge, in January 2024, the American University of Beirut (AUB) launched the Combating TBFC Certificate program in collaboration with the MENA FCCG and the Global Coalition to Fight Financial Crime (GCFFC) – MENA Chapter. 

The programme is comprised of two levels: Level I Understanding International Trade and Level II Combating TBFC. Upon completion of Level II, participants will earn a professional Certificate in TBFC from AUB and will be eligible to take the MENA FCCG – GCFFC endorsed certification exam to earn the designation Certified TBFC Specialist.