The Latest Banking Challenges

This article was originally published in the Bankers Association for Finance and Trade (BAFT) magazine.

If the average linguist was to drop in unannounced at the Bankers Association for Finance and Trade (BAFT) Annual Meeting, Investment and Financial Services Association (IFSA) Trade Finance Conference or the Florida International Bankers Association (FIBA) Annual Anti-Money Laundering Compliance Conference, they would hear acronyms like UCP 600, BSA/AML, TSU or OFAC and believe they had discovered a new language. While that assumption would be incorrect, these common acronyms were very much on the collective mind of the attendees at all of these events this year.

Having exhibited at both the 2007 BAFT Annual Meeting and the IFSA Trade Finance Conference earlier this year, we had a chance to talk to banking institutions and find out what issues were keeping them awake at night.

Compliance, Compliance, Compliance

The overwhelming majority of attendees that we spoke to at these conference events agreed that whether they like it or not, their attention is being focused on compliance regulation or more specifically, how and when to deal with it all. Whether it is the Bank Secrecy Act/Anti-Money Laundering, the USA PATRIOT Act, the Gramm-Leach Bliley Act or Sarbanes-Oxley, the heat is on to know your customers, protect them and your financial institution.

The FIBA Annual AML Compliance Conference in February this year hosted 64 speakers that included members from the Office of Foreign Assets Control (OFAC), Federal Reserve Board of Governors, Office of the Comptroller of the Currency (OCC) and Financial Crimes Enforcement Network (FinCEN). One of the key topics for discussion was the importance of fortifying the ‘last anti-money laundering (AML) frontier’ – trade finance.

The consensus was that trade finance is an area were great AML strides still need to be made. As globalisation increases, knowing your customer becomes paramount. Few things can cripple a bank’s reputation faster than a public mea culpa after unwanted exposure in the local or national news. Don’t believe us? Take a lesson from the airline industry and ask the former CEO of JetBlue Airlines, David Neeleman, about his sudden career change after the airline’s much publicised customer service debacle last year.

UCP 600

On 25 October 2006, the International Chamber of Commerce (ICC) announced the adoption of new rules for commercial letters of credit: the Uniform Customs and Practices for Documentary Credits (2007 Revision), International Chamber of Commerce Publication No. 600 (UCP 600). These new rules became effective on 1 July 2007 and replace the existing ICC rules for commercial letters of credit, known as Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (UCP 500). Some of the changes include the following:

• UCP 600 will establish an absolute deadline of five calendar days to review documents and pay or decline a draw, as distinguished from the existing UCP 500 rule that an issuing bank has a reasonable period of time to make the decision.
• A new rule regarding when the address of applicant and beneficiary in documents must be the same address as stated in the credit.
• The issuer is allowed to refuse documents and then release them upon obtaining waiver of discrepancies.
• When the issuer decides to refuse to honour a draw, it must give a single notice to that effect to the presenter. UCP 600 now specifies in detail what the notice must contain.
• New rules for determining enforceability of issuer-proposed amendments.
• A new interpretations section to replace many ‘Miscellaneous Provisions’ in UCP 500.
• A new rule liberalizes the ‘consistency’ requirement of UCP 500 by providing that data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.
• Article 35 appears to expand the risks of liability of the issuer of a credit for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any messages or delivery of letters or documents. It does this by narrowing the circumstances in which its limitation of liability applies.
• It details when an issuer is entitled to treat documents as ‘original’ where original documents are required under the credit or applicable rules.¹

Customer Service

The mission statement for all financial institutions is similar – how to serve their customers better today than they did last year, last week or even yesterday. Banks are now in the ‘brand management’ business with institutions such as Citi and HSBC ranking in the upper echelon of the world’s most recognised brands. The big players have learned to combine technology with people and processes, while leveraging their market expertise to solidify their long-term partnership with their clients.

Technology

It is hard to say for certain which technology will thrive and which will fall by the wayside, but we have plenty of evidence about how technology has increased efficiency in the marketplace. Transactions that used to require a couple of days to reconcile are now completed the same day. Information that could only be obtained at days’ end is readily available at a moments notice.

In the world of international trade finance, letters of credit have given way to open account trading. Banks are keenly interested in how new technology solutions will help them avoid disintermediation and remain a valuable link in the global supply chain. With the commercial availability of SWIFTNet Trade Services Utility (TSU), that transition has begun. If open account trading has led to financial institutions risking being left on the sidelines with respect to trade services, then the promise of the TSU is that institutions that can leverage this technology will be better positioned to provide competitive advantages to their corporate customers. And, with the emergence of Java Enterprise Edition (J2EE) and service oriented architecture (SOA), new applications built around these standards will help banks maximise the return on their technology investment while minimising their cost of ownership and time to market.