I have, of late, been hearing customers complain bitterly about banks refusing to finance third-country trade, citing risk. They say “local” business is safer — something which the recent spate of frauds in the scrap and foodstuff businesses seems to militate against.
I will venture to say that third-country trade financing has become more complex and certainly more risky, for reasons that clients do not fully understand. A little history leading up to recent events might put things in perspective for irate clients.
When I first came to Dubai over 20 years ago, there was a rare, privileged trade finance product that select clients of banks used to be favoured with. This was called ‘third-port financing’. This basically was the financing of trade in which goods traded by firms here never touched the shores of the UAE. It was a great alignment of the business models of traders here taking full advantage of Dubai as an entrepot port and a gateway to the West, Middle East and Africa.
The international banks were particularly adept at this, with global branch networks, with local knowledge all over the world.
Trade flowed in all directions — bitumen from Iran to Myanmar, clinker from India to Djibouti, textiles from Korea to Poland, teak from Indonesia to India, electronics from Hong Kong to Africa and so on. The goods and countries involved were exotic and it was exciting to witness true global trade flow across boundaries.
Banking was simpler then. Banks were clear that they ‘dealt in documents, not goods’. The obvious risks were addressed, mitigated and trade, financed. The risks were plenty — but less complex and more visible.
The primary risks were the quality of supplier, quality of banks at the either or both ends of the transaction; the ability of imports and exporters to perfect documentation involved; quality of the ports involved; and — last but certainly not the least — the reputation and integrity of the banks’ borrowing clients in the UAE.
Banks worried more about ‘control over goods’ — so the port of discharge, for example, was of paramount importance; for instance, Rotterdam was superior to say Djibouti, because the rule of law in the former was inviolable.
And then 9/11 happened and the world changed. And has been changing ever since.
How does this affect a form of trade that is so vital to the economy of Dubai, to the lending policies of banks here, to a vast number of traders who congregate in Dubai to do business in difficult and far away places?
Have events had an impact on third-port trade conducted at Dubai? How will this affect traders and banks in the future?
The sad answer is that for a set of reasons that is quite far removed from the risks faced in the old days, third-port trade financing has been negatively affected, with the situation expected to worsen as the world becomes a riskier and more dangerous place.
Here’s why banks are being increasingly restricted in this business and why this will increasingly affect traders in the UAE.
Firstly, trade has become a huge conduit for money laundering, putting enormous pressure on banks. Fake goods, over- and under-invoicing, trade with no underlying goods exchanging hands and all kinds of permutations and combinations have been created to launder money and/or export capital illegally from countries, evading tax and currency controls.
This has resulted in massive KYC (know your customer) and compliance requirements and transactions have become extremely difficult. Not only are banks expected to conduct KYC exercises on their clients, but also on the counterparties of their borrowers (suppliers and buyers).
Compliance departments of banks now rule and client servicing has become a nightmare.
Banks are also expected to conduct checks against a multitude of lists — from various countries and organisations. This is expensive and time consuming.
Secondly, checks have to be done to ensure there are no embargoes being breached and sanctioned countries being dealt with. Third, detailed checks have to be done to ensure a fraud is not being perpetrated and that terrorism financing is not being done.
Actually the list is long and after a point it is impossible for banks to check against all the various lists and negatives that US regulators are so adept at creating. The onerous part of this matter is that the onus of proving any transaction is not in violation of any of the above, is completely on the bank, which has to check not only on their borrowers but also on their counterparties.
Basically, all counterparties and all transactions are guilty unless proven innocent.
This puts the banks in an impossible situation and they are constantly taking calls on clients and transactions. This is basically why third-country financing has become difficult now.
This is only going to worsen. So, what is to be done?
Clients can do a few things to make life easier for their banks. First, they should plan in advance and give their banks a list of counterparties (buyers and suppliers) they intend dealing with, their websites, and banks’ names (and branch).
Second, they should obtain, to the extent possible, credit reports from the same. Thirdly, they should try and obtain names of some of the counterparties of their suppliers/buyers (yes, how far will this go?).
Fourthly, taking a credit insurance policy on their buyers can be very useful, primarily to protect against credit risk but also to demonstrate to banks that international insurers have carried out due diligence on these parties.
Lastly, if a transaction is with a new party and/or high-risk country (not necessarily sanctioned), check with the bank before sending the transaction, as, if funds are involved, it could get blocked (together with your funds) somewhere in cyber space.
Banks can also try and make life easier — guidebooks, leaflets or seminars on the subject to educate clients. Relationship managers should be trained to train clients.
Compliance officers should be retrained — their job is to assist business heads to conduct safe business and mitigate risks to the extent possible. Risk cannot be avoided — banks are in the business of taking risk, but risks should be identified and mitigated.
Too often does one hear about compliance departments sitting in ivory towers, saying “no” to even slightly opaque, not necessarily bad, deals.
In an increasingly dangerous and risky world, both clients and banks have to do a lot of work in this area. We are constantly hearing nightmarish stories of clients landing in trouble because of compliance, revealing huge information gaps on both sides.
In the interests of preserving this form of trade financing, there is an urgent need to bridge this gap.
The writer is the Managing Director of Vianta, which works with SMEs in raising bank finance.