International trade financing activities are commonly regulated and guided by both domestic and international regulations. Because of the potentially strong and broad negative externalities associated with bank failures and widespread fear they ignite, bank safety is a major public policy concern that appears to be pursued through strong domestic regulation. Adoption of international rules and guidelines are particularly relevant for facilitation of cross-border banking services for harmonising banking regulations among different countries. Regulations and their enforcement are particularly crucial for handling the challenges of uniform interpretations, disputes and arbitrations of trade and financing parties, and for prevention of malpractices associated with trade financing. The most recent survey of the International Chamber of Commerce (ICC) has provided us encouraging data on increasing trade financing by banks. It also reported increasing legal and regulatory hurdles for trade finance business by banks and financial institutions, especially in the developing countries. Actually, with increasing volume of products and introduction of newer products in trade financing markets, complexities increased and various forms of malpractices were unearthed. A critical challenge of trade financing i.e. malpractices that take the form of non-compliance of regulations and fraudulent activities like trade-based money laundering has become a crucial concern of the entire globe. Regulatory requirements designed to mitigate these malpractices have resulted in unintended consequences particularly in emerging markets. In several global surveys in recent times, banks reported that Anti-Money Laundering/Know Your Client (AML/KYC) due diligence requirements were significant impediments to their provision of lines of credit. Globally, Asia and Africa were said to be most negatively impacted. There are opinions that implementation of Basel III regulations is to some extent or a large extent affecting the cost of funds and liquidity for trade finance. Failure to take account of the risk-mitigating features of trade financing is held by the industry to be likely to raise capital requirements for, and thus costs of, trade finance for all but highly rated borrowers – from developed and developing countries. In addition to regulators, the inter-governmental Financial Action Task Force (FATF) set up in 1989, the Wolfsberg Group – an anti-money laundering (AML) initiative set up by major international private banks – and the Joint Money Laundering Steering Group (JMLSG) have all drawn attention to potential misuse of international trade finance as a means by which criminal organisations and terrorist financiers can disguise movement of money. In addition, sanctions imposed by the United Nations, the EU Council or individual countries to achieve political and economic ends are affecting trade financing by banks. Stringent and tougher regulation and compliance requirements may also contribute to widening of trade finance gap. In the context of Bangladesh, facilitation of trade financing to traders is at the heart of international banking. In all countries including Bangladesh, trade financing operations of banks are subject to special regulations and restrictions. Alongside ensuring satisfaction of the clients, the efficiency level of bankers in trade financing is connected with the compliance of these regulations and restrictions. Compliance of these regulations by banks is also connected with restricting trade- based money laundering in the country. 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, the first and the fourth techniques are relatively popular. Though the main motive behind the trade-based money laundering is to hide the proceeds of crime, in some cases, government subsidies and tax/duty evasion instigate perpetrators to engage in money laundering. The Bangladesh Bank (BB) is the regulatory authority for regulating and supervising all trade services activities. Banks are required to follow both a set of domestic regulations and international rules/guidelines while offering trade services. In this connection, our exchange control regulation i.e., Foreign Exchange Regulations Act 1947 is the key domestic regulation for regulating cross-border banking transactions. Banks are also required to follow the trade policies formulated by the Ministry of Commerce. Among the international rules and guidelines, the International Chamber of Commerce publications are the most relevant. Over the years, several provisions of domestic regulations were made stringent and a number of new reporting requirements were introduced. Compliances of the anti-money laundering rules are huge and relatively recent additions. As part of formulating the anti-money laundering regulatory framework, the Bangladesh Bank has undertaken several initiatives. Bangladesh already enacted the Money Laundering Prevention Act, 2012, Anti-Terrorism (Amendment) Act, 2009 and Mutual Legal Assistance in Criminal Matters Act, 2012. Bangladesh is the founder-member of the Asia/Pacific Group on Money Laundering (APG). One of the key achievements of being a member of the APG was the establishment of the Bangladesh Financial Intelligence Unit (BFIU), which is an autonomous body. It is true that enforcement of the continuously increasing regulatory and reporting requirements is essential. However, it is also a fact that compliance of these by banks and trade financing practitioners are burdensome and costly. In several instances, banks even feel regulatory pressures due to non-compliance on the part of traders. It is well-known that Basel III has been made available for enforcement and 2013-2019 is the probable implementation period of the framework. In Bangladesh, the process is on for implementing Basel III which is likely to result in tighter access to documentary credit. In a number of instances, sanction resulted in sending back goods or caused difficulties for banks in the country. Sanction clause is commonly found in the LCs received from abroad. Now-a-days, local banks have also started inserting sanction clause in their LCs issued from Bangladesh. Avoidance of regulatory compliance has brought paradigm shift in correspondent banking. In a number of instances, major global banks were heavily fined in the recent past on the ground of avoidance of regulations and compliance. Consequently, global banks have started to revisit its correspondent banking relationships and invest enormously on compliance. A number of global banks took decisions to cut down correspondent relationship. There are also instances when one global bank withdrew its correspondent relationship from a country. Correspondent banking is now become a product of regional banks instead of global banks’ portfolio. There are now more regional banks in Bangladesh market that are actively engaged in trade finance business of the country. In addition to that, recently, a few third parties are also playing very important roles through intermediation between banks and earning fees and commission. Some local banks, especially the newly established banks, are suffering the most. There is no doubt that regulatory changes, improved enforcement, and modern reporting arrangements have brought noteworthy advancement in the regulatory and supervisory arrangement of the Bangladesh Bank. The new on-line reporting of the BB has emerged as a great achievement in banking system which helps monitor and supervise day-to-day trade transactions. However, regulatory compliance and extensive monitoring and reporting, and at the same time promoting trade financing to minimise trade finance gap are a critical challenge to the policy-makers of all developing countries including Bangladesh. Dr. Shah Md Ahsan Habib is Professor and Director [Training], Bangladesh Institute of Bank Management (BIBM).
