Increasing Compliance and Regulatory Issues
IN THE WORLD OF BANKING AND FINANCE
By John Grieco
As a member
of AFI you probably know the feeling of spending a significant amount of time
and effort to develop relationships with suppliers and customers. You’ve
contacted your counterpart and exchanged numerous calls and emails and maybe
even had a couple of in-person meetings to do what’s needed to obtain or sell a
product or number of food items. All of the negotiating has been finalized for
price, quantity, quality etc. and a contract has been signed for completion of
the transaction. The product has been shipped, all documentation seems to be in
order, it has passed FDA, so many weeks or months have gone by.
It’s now time for the buyer to effect payment to the supplier, who may be located in any number of countries around the globe. As we can all see from the extensive list of AFI Overseas Members, these countries are in a range of areas including Europe, Asia, Africa and the Middle East. Instructions are given to your local bank to make the payment via direct money transfer, cash against documents or even under a letter of credit. The satisfaction and new business from this deal are the reasons you are in this business. Suddenly, you receive an urgent phone call or email from your bank that the payment cannot be completed because the bank’s compliance department has “Flagged” the payment and is either holding it up for more information or will not make the payment at all because either the company, individual owner or the country it is coming from is on some kind of “high risk” list.
The world of banking and finance changed dramatically after Sept. 11, 2001. In an attempt to thwart terrorism, the U.S. government instituted the “Patriot Act”, which produced a tremendous amount of new regulations and compliance requirements; the goal was to track down the source of terrorist financing. These regulations have negatively affected foreign suppliers to the U.S., as well as U.S. companies importing or exporting product. They cause relationships to be more difficult as the banks require from importers additional, detailed information about suppliers. In many instances it requires the importer to contact the supplier to obtain detailed ownership information, i.e. “Beneficial Owners”, where the funds are eventually going to wind up (for example, it used to be acceptable to pay into an individual’s account even if the shipment comes from a company; this is no longer acceptable). In the case of firms exporting from the United States, when funds are coming in they may be blocked for the same kinds of additional information and details.
One may wonder, “why can’t my account officer just deal with this quickly so either my supplier or I can get our payments and move on to other, profitable business for both of us?” The answer lies with the way banks must respond to regulators. Gone are the days where the relationship manager had any authority to make decisions and provide the type of customer service which could facilitate business. This is especially true of financial institutions which are large, conservative or are U.S. branches of foreign banks, with even more regulations imposed by the head office of that institution. The unfortunate result of all of this is frustration. Although the U.S. government is now trying to reduce regulations across the board, these changes, even if put into law, will take time to implement - just as the addition of regulations took time to come into place after Sept. 11. In effect, the compliance departments within financial institutions have been the fastest-growing and most-well-paid departments in banks. Most importantly, these departments have the most authority in the banks (even more than the CEO).
The best way to handle these requests is to get out in front of them, since they most likely will not go away anytime soon. The banks themselves now have a procedure called “Know Your Customer” or “KYC “. If you have opened a bank account anytime over the last several years, you have probably encountered the numerous detailed questions and requests for many documents you need to provide to the bank just to put your own money with the bank. Why you ask? Because if the bank does not comply with these requirements imposed by the regulators, they will be cited for fines or even worse. Therefore, the next time your relationship manager is asking for all of this information, be aware they are under extreme pressure to fill the file with it or they may not be in that business going forward.
John Grieco is a seasoned banker with many years of experience in the financial services field.
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