Trade Finance — often referred to as TradeFi — refers to the various financial tools and products used to facilitate international trade transactions. Some of the areas covered by TradeFi solutions include financing options, risk mitigation, and handling import and export logistics. TradeFi serves as a crucial component of global commerce, enabling businesses to access capital and expand their reach in foreign markets.
Some common TradeFi products include letters of credit, trade credit insurance, and factoring services. These products can help protect against default, political risk, and currency fluctuations — common issues when dealing with international trade counterparts, vendors and customers. In addition, TradeFi can also assist with supply chain management, such as handling and tracking shipments, and managing inventory levels.
By leveraging TradeFi products and services, businesses can better manage the risks and complexities of international trade, while also accessing new growth opportunities.
International TradeFi Regulations
Due to the international scope and areas of operation that TradeFi companies deal with, they need to comply with complex, diverse and often-overlapping national and global financial regulations, including Anti-Money Laundering (AML) regimes.
For instance, in the US, TradeFi companies must comply with a number of federal and state regulations to operate legally. Companies must register their products with the Financial Industry Regulatory Authority (FINRA) before they can offer services. Additionally, TradeFi entities are subject to the Bank Secrecy Act (BSA), which requires Know Your Customer (KYC), customer due diligence (CDD), recordkeeping, reporting requirements, and various other AML programs.
Furthermore, TradeFi companies need to be aware of applicable consumer protection laws such as the Truth in Lending Act (TILA) and the Electronic Fund Transfer Act (EFTA). These laws regulate how financial institutions interact with customers when offering loans or taking deposits.
It is important for companies operating within this space to stay up-to-date on all relevant legislation so that they can continue providing compliant services — and avoid the risk of facilitating financial crimes and facing regulatory sanctions as a result.
It’s also essential for TradeFi entities to maintain adequate cyber security and data protection measures given the sensitive nature of customer data that is stored in their systems. TradeFi providers should have robust policies surrounding employee access control, passwords standards and encryption protocols in order to keep information secure from potential threats or breaches. This is particularly true if they are carrying out their compliance processes in-house.
In addition, regular risk assessments should be conducted as part of an effective compliance strategy for any TradeFi organization looking to protect its assets and customers’ funds.
In the European Union (EU), TradeFi companies are subject to a number of regulations aimed at promoting fairness, transparency, and accountability in the financial sector. One such regulation is the Markets in Financial Instruments Directive II (MiFID II), which came into effect on January 3, 2018. MiFID II sets out requirements for the protection of investors, including the obligation to provide clients with a detailed pre-trade disclosure, the requirement to obtain adequate information about clients to fulfill their KYC obligations, and the need to ensure that products and services offered to clients are suitable for them.
Additionally, TradeFi companies operating in the EU must comply with the General Data Protection Regulation (GDPR), which is a comprehensive set of data privacy laws designed to protect the personal data of EU citizens. The GDPR imposes strict requirements on firms collecting, processing, and storing personal data, including the obligation to obtain explicit consent from customers, the obligation to provide customers with access to their data, and the requirement to report data breaches to the relevant authorities within 72 hours.
TradeFi companies operating in the EU are also subject to the Anti-Money Laundering Directive (AMLD), which sets out requirements for the prevention of money laundering and terrorist financing. The AMLD — now in its sixth iteration, AMLD 6 — requires firms to maintain adequate systems and controls to detect and prevent money laundering, to conduct risk assessments, to monitor and report suspicious transactions, and to appoint a person responsible for ensuring compliance with the regulations.
KYC for TradeFi Companies
In today’s increasingly interconnected world, financial institutions are subject to a growing number of regulations and compliance requirements.
One such requirement for TradeFi companies is the implementation of KYC practices on their customers. KYC is a critical aspect of any business that engages in financial transactions, as it helps mitigate the risks associated with money laundering, terrorist financing, and other forms of financial crimes.
By verifying the identity and background of their customers, TradeFi companies can reduce the likelihood of fraudulent activity, protect against reputational damage, and ensure the integrity of the financial system. Additionally, KYC practices can help companies build stronger relationships with their customers by demonstrating their commitment to transparency and compliance with regulatory requirements.
To remain compliant with regulations, TradeFi companies need to implement robust KYC processes that are backed by advanced technologies and supported by skilled professionals. These processes should include customer identification, CDD, risk assessment, and ongoing monitoring of customer activities.
Customer identification involves verifying the identity of the customer by collecting their personal and financial data such as
- Date of birth
- National ID
- And other related documents
CDD involves gathering additional information about the customer’s background, including their financial history, affiliations, and the source of their funds. More enhanced due diligence (EDD) processes can include searches of references to a potential customer in adverse media, as well as in international watchlists and sanctions lists.
A key component of any robust KYC/AML program is risk assessment. This involves evaluating the risks associated with the customer’s transaction based on their profile and history. By accurately determining a customer’s risk profile, onboarding companies can use a risk-based approach in their KYC process, applying more stringent checks on higher risk customers while processing low risk customers through more simple onboarding processes.
KYC and AML processes should not end once a customer has been onboarded, as their risk profile may change over time. Ongoing monitoring involves reviewing the customer’s transactions over time and detecting any unusual or suspicious activity that could indicate financial crimes. It can also include carrying out periodic checks to ensure they have not been the subject of adverse media or featured in lists of regulated individuals or entities.
TradeFi companies need to implement a complex and ever-changing suite of KYC and AML processes on their customers and counterparties in order to remain compliant with fast-evolving global regulations. By using advanced Automated KYC solutions such as KYC-Chain — which leverage advanced technologies such as biometrics, artificial intelligence, and machine learning — TradeFi companies can strengthen their KYC processes and simplify their path to meeting regulatory requirements.
Are you looking for a KYC solution that will allow your TradeFi company to focus on its core business while operating internationally and in full compliance? Get in touch to find out how KYC-Chain can make it happen.