Dual-Use Goods Presenting Increasing Trade-Finance Compliance Challenges, Law Firm Says
A recently issued paper from the International Chamber of Commerce highlights the “great challenge” facing financial institutions in providing trade finance to businesses, especially those involved in dual-use goods, Stephenson Harwood said in an Aug. 29 client alert.
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The paper, which covers dual-use goods and proliferation financing, said banks face difficulties interpreting descriptions of dual-use goods provided by governments and may lack the expertise to assess the “technical nature” of those goods to determine if they are subject to restrictions. “In our view, these challenges could be further traced back to a single root -- insufficient knowledge, information and standards for practitioners to identify [dual-use goods] effectively and efficiently,” Stephenson Harwood said.
The firm said the “technically-detailed control lists” issued by governments make it almost “impossible to understand the varying applications” of dual-use goods without “the necessary technical qualifications and knowledge across a wide range of products and goods.” Those goods can sometimes be described by businesses in generic terms, such as “pumps,” or in very specific terms, such as certain pharmaceutical ingredients, which Stephenson Harwood said can lead to “excessive counts of false positives” as banks screen for those dual-use goods.
“The absence of detail or, at times, too much detail makes complex analytics or simple matching logic very difficult to productively achieve -- not to mention that bad actors may deliberately misdescribe the DUG to confuse financial institutions,” the firm said.
The firm also pointed to a set of best practices outlined by the ICC, adding that financial institutions involved in trade financing should have in place a “manual review based on a risk-based approach.” The institutions should also keep their employees trained on the risks associated with dual-use goods, which will help “build a solid foundation for screening efforts.”
The firm also said list-based screening and name screening are “common,” and added that third-party vendors that provide automated screening solutions are “expected to be a driver of new screening approaches.”
Stephenson Harwood noted these challenges are not new ones for parties in the trade finance industry. “While a one-size-fits-all solution has not been found, it would be prudent for financial [institutions] to review their risk-control mechanisms regularly,” the firm said. “Excessive information creates no less problem than the lack of information, and deliberately manipulated and misleading information remains an ever-present risk.”