Trade Financing Challenges 2018: Bangladesh Context
(Published in the Financial Express in 2018)
Dr. Shah Md Ahsan Habib[1]
Fraudulent activities on the part of clients affected banks of the country and trade facilitation in several instances. It is well recognized that identifying right clients is the most critical challenge of banking and wrong selection might affect trade facilitation greatly. For example, there are a few cases when more than one commercial Import Registration Certificates (IRCs) were being issued for a single importer violating the law; and importers behaved improperly for evading taxes. There are also cases when Authorized Dealers (ADs) have opened new LCs against overdue bill of entry (which is violation of domestic regulation). Practically, in such situations, importers managed to have new IRCs from Chief Controller of Import and Export (CCI&E) to dodge regulation. In some instances, a few importers used legal protection in the form of injunction for taking undue advantages and thus caused harm.
Irrelevant and inconsistent terms and conditions are always concerning in LC operation. Globally, Bangladesh is among the top five countries that imported the most using SWIFT LCs as observed in the most recent ICC publication. In recent time, experts of documentary credit raises serious concerns about some poorly drafted and inappropriate clauses in LCs issued from Bangladesh. For example, commercial invoice excessively requires certifying origin of the goods, whereas credit specifically asked for certificate of origin. Inappropriate uses of incoterms are also causing concern to different quarters. For example, despite a clear warning message in Incoterms 2010 that the usage of trade terms like Free on Board (FOB) and Cost and Freight (CFR) are inappropriate for container shipment, documentary credit practitioners have continued to use FOB and CFR trade term frequently.
As a whole, data indicate very low NPL in trade financing in the global and in Bangladesh context. However, sometimes these data could mislead. The classified data are commonly shown as the term loans. In several instances banks had to create forced LIM and LTR due to the non-compliance of the importers. By issuing back-to-back LC, banks finance exporters. Non-compliance on the part of exporters resulted in NPL in some cases. In many instances, non-performance on the part of client, fund diversion, cancellation of the contacts are causing NPL. Still cases are found where, in spite of compliant documents, the applicants requested the banks to lodge discrepancy notices to halt the payments momentarily on the grounds such as goods had not arrived or goods were of inferior quality. In spite of improvement, delay in payment by banks in certain instances remained a challenge.
In the context of Bangladesh, among the four basic techniques of trade based money laundering i.e. over and under invoicing of goods and services, over and under shipment of goods and services, multiple invoicing and falsely described goods and services, first and fourth techniques are commonly in use. Though the main motive behind the TBML is to hide the proceeds of crime but in some cases government subsidies and tax/duty evasion instigate perpetrator to engage in money laundering. To hide or profitable use of the proceeds of crime through illicit outflows of funds from Bangladesh the criminals use over pricing in import, generally low duty item like capital machineries, raw materials and spare parts and underpricing of export. For gaining government benefit like cash incentives, subsidies there are tendencies of over pricing of exported items. Mismatches between import and export payments indicate toward the incidences of TBML. In recent time, several instances of smuggling money through phantom shipment and falsification of import document; remitting money abroad through over invoicing and false documents; and capital flight through multiple encashment certificates were unearthed by BFIU.
Correspondent banking became a critical challenge of some banks of the country. Some multi-national banks have undergone severe regulatory pressure in recent years. Banks are to comply with their own banks’ internal operational procedures as well as their countries’ domestic regulations. To comply with those regulations, it has been observed that some banks are terminating correspondent banking relationships with some local banks. This brings a challenge to local banks in creating credit lines with different foreign banks to satisfy customers’ needs of local banks. Such development has huge impact on trade finance and confirmation and discounting lines. In response to the scenario given, correspondent banking has now made a paradigm shift. In several instances correspondent banking is now become a regional banks product instead of global bank’s portfolio. There are now more regional banks in Bangladesh market who are actively engaged in trade finance business of the country. Sanctions have notable implications for trade and trade financing activities and in a number of instances, sanction results sending back goods or difficulties for banks. In addition to that, recently, few third parties are also playing very important role through intermediate between banks and earning fees and commission.
As in other countries, the regulatory and compliance requirements impacted banks in the country. Moreover, in several instances banks do feel regulatory pressure due to the compliance on the part of the traders. The changing regulatory requirement brought notable changes in the monitoring and reporting arrangement of Bangladesh Bank (BB).There is no doubt that the online report arrangement to BB brought notable changes in the monitoring arrangement and reporting efficiency in trade transactions. The new on-line reporting of BB has emerged as a great achievement in banking system which helps monitoring and supervising day-to-day trade transactions. This is also a great tool for data validation. In spite of improvement and several achievements, cases of non-reporting and misreporting are concerning.
In some instances, amendment in transport arrangement and terms of payment resulted in inappropriate pricing. In some cases, documentary credits were asked for air shipment (say under CPT basis) then importer asked for amendment to change the means of transportation from air to road. Though amended was effected, applicant did not provide any revised proforma invoice and did not show any reduction in the freight amount. Price is also expected to be reduced in case of say change from usance to sight payment. Moreover, in some instances, local LCs were issued in foreign currencies for local transactions by some local banks that are clear violation of the BB guidelines (other than local back to back and for local supply against international tender), as observed by BB. The payments were however made in local currency. This could be due to avoiding higher tax rates applicable for local currency transactions.
Growing financial crime, especially trade based money laundering, brought higher risks for trade service providers and results higher compliance requirements for banks. Now not only importers, exporters must also be equally considered by banks for Know Your Customer (KYC) to avoid risks. This is applicable for all forms of trade payment methods. To handle the risks by banks, it is very important to obtain information both for exporters and importers. In this connection, information to open bank account does not serve. It is crucial to have information on their business trends and involvements in other activities to avoid crime and money laundering risks. KYC for traders is yet to get due attention in all banks of the country.
Some other external factors also causing harm to the trade facilitation.For example, putting Bangladesh in the list of high risk countries by a number of developed countries and country-group is causing damage to the trade related country risks and affecting trade transactions and thus facilitation notably. The EU recently put Bangladesh as one of the high risk countries in terms of operating cargo services. In 2016, Australia, the UK and Germany termed Bangladesh a high risk country and imposed ban on direct cargo flights citing poor security in the country’s airports. It means the businesses now require re-screening of goods at a third airport before entering to these countries. Double checking of the cargo of the country will push the cost and lead time. This would affect the competitiveness of the country’s exportable with that of the key competitors like China and India.
Addressing the challenges effectively is the crucial need of the time to be in the international banking business today. Especially, banks need to be more serious regarding legal compliance and identifying right prices for the exportable and importable products on the way to address TBML. Compliance is already the greatest concerns for the banks, and greater compliance requirements are affecting operational costs of trade financing. However it is essential and compliance of AML rules should be a collective concern where active roles of all key stakeholders are essential.
[1] Professor and Director (Training), BIBM ([email protected]).
