Dear Trade Finance Firms – The FCA Wants You To Do More

Dear Trade Finance Firms – The FCA Wants You To Do More

The recent Dear CEO letter shared by the FCA & PRA has sent a stern warning to businesses operating in trade finance – more needs to be done.

The letter was addressed directly to the CEOs of firms carrying out trade finance business and has caught the full attention of the industry due to its direct nature. It outlines a clear need for change but includes a marked shift in tone from traditionally sanitary messages of “advice” or guidance, instead laying out staunch requests for businesses to improve their oversight of their current position.

After a number of significant, high profile losses within the commodity trading industry in recent years, trade finance and credit risk analysis has hardly ever been in the spotlight so often.

The position of the FCA & PRA is made clear from the start, their hands have been forced to respond after overwhelming recent evidence pointed to insufficient due diligence. 

“Our recent assessments of individual firms have highlighted several significant issues relating to both credit risk analysis and financial crime controls. These issues have exposed firms to unnecessary risks that are material in both a conduct and prudential context.”

In response to this, they are demanding more from firms when it comes to risk assessment, counterparty analysis and transaction monitoring.


Reacting to an uncertain market

The letter addresses the uncertainty of the market and the prolonged, increased opportunities for fraud and non-compliance. They make clear that the existing framework adopted by many firms is not fit for purpose, especially in this changeable market. 

A post-pandemic wave of financial crime has been threatened for some time, with KPMG forecasting that a tsunami of fraud was en route in 2021 and beyond. While the warnings have been public and plain to see, it’s surprising that firms aren’t already embracing additional risk management considering the uncertainty we all currently face.

The letter highlights the “focus and assessment of financial crime risk factors” as just one of the insufficiencies commonly displayed in recent assessments. Others include poorly evidenced decision making, notably when it comes to residual risk. 


The Right Tool For The Job

There is a warning of how failing to properly address risks can lead to exposure to financial crime, to non-compliance, to suspicious activity and to the consequences that may come as a result.

The expectation continues to be that some deals inherently require a greater degree of diligence than others, on both sides of the transaction. It is the duty of the transacting firms to comply with the expected levels of diligence required. 

Amongst the tools suggested in the letter, there is an explicit directive to consider where enhanced due diligence and non-financial risk evaluation should be required. Many of the “red flags” listed in the letter including money laundering, adverse media and more are typically discovered as part of open source EDD, like we provide at Neotas. 

We wrote previously of how non-financial risk identification could be the difference maker when it comes to credit risk and the same principles apply across the industry.

As counterparty networks become ever-more complex, the importance of full network analysis is highlighted in the letter with a clear directive that all parties related to a transaction should be appropriately considered. 

Network analysis remains at the core of many of our investigations, particularly for clients working in trade finance. In these cases the front-facing counterparty often displays little to be concerned about, only to find risks hidden within their network. 

Discoveries of networks including undisclosed PEPs, directors and relationships are common – a recent case also uncovered terrorist financing linked to a seemingly “clean” subject. Without diving into the network of the counterparty, you cannot fully understand the risks.


An Example: Network Analysis Uncovers Fraudulent Activity

A recent case of enhanced due diligence for Channel Capital uncovered a host of suspicious behaviours associated with the network of a subject in a European company.

While reviewing the company and its director, full network analysis uncovered evidence linking the subject to a number of bankrupted companies.

Uncovering the details of the bankrupted businesses allowed us to discover suspicious payments made between the European company and the newly discovered entities. Payments that were being made in an effort to manipulate the subject company’s books in order to appeal to investors.

The insights uncovered informed Channel’s decision making, who eventually halted the deal and alerted the authorities of the fraudulent payments. 

Download the full case study here


Not-knowing is not good enough

While not knowing or being unaware of non-compliance has never been a defensible argument, the tone from the regulators in the letter is stark:

“This letter has reiterated our expectations of firms when undertaking trade finance activity.”

The message could not be clearer and should come as a stern warning. Our discussions with clients often center around the idea that “if the information is out there, wouldn’t you want to know about it?”. The message from the FCA and PRA seems to have shifted to a more definitive:

“If the information is out there, you should know about it”.


Supplementing Existing Guidance

“The expectations set out in this letter are not exhaustive and should be considered alongside relevant rules and guidance such as Joint Money Laundering Steering Group guidance, the PRA Rulebook and the FCA’s Financial Crime Guide.

While it’s made clear that the new recommendations aren’t exhaustive, the instruction here is to apply additional scrutiny to transactions, particularly when there is a need for a deeper dive.

Firms have been instructed to be reactive and responsible for the deals they are a part of, evidencing transparent, informed decision-making along the way. 

A gauntlet has been laid down by the regulators in no uncertain terms. Firms should continue to apply traditional due diligence while embracing new technologies, such as EDD, to help protect all parties and maintain compliance. It will be interesting to see who rises to the challenge.

How Social Media Due Diligence Can Improve Investment Decisions

How Social Media Due Diligence Can Improve Investment Decisions

When assessing non-financial risk data as part of M&A due diligence, traditional checks currently pay little attention to investigating the online footprint of a target company. An organisation’s online activity, and indeed the online activity of its management teams, can provide valuable insight into reputation, culture, management personas and more.  

With post-pandemic financial data difficult to trust, non-financial risks are likely to become increasingly significant as private equity and investment firms seek additional data points to supplement decision making.

Social media due diligence tools can be used to interrogate vast quantities of public online data, helping to identify potential business or personnel risks within the target company. 


What social media due diligence tools can uncover 

Contained within online public data is a wealth of previously untapped resources relating to both risk and opportunity. By combining natural language processing, AI and expert human analysis, risks can be identified that would not be uncovered using traditional due diligence processes.

When harnessed properly, this data can be used to provide a new dimension of analysis into non-financial risks and goes beyond the depth of insight provided by typical brand sentiment analysis. 


Consumer Voice

Public perception can have a significant impact on the overall reputational health of an organisation, with online reviews granting consumers a previously unheard tool to provide feedback, evaluation and criticism.  

Consistently poor consumer feedback of a product or service could be considered a red flag in terms of company reputation, and possibly even operational flexibility if the organisation has shown no willingness to improve over time.  

Monitoring and evaluating consumer feedback can serve as a reflection, at least in part, of the “voice” of a company’s customer base.  


Worker Voice

Similarly to consumer voice, public employee feedback can act as a barometer for company performance and culture.   

While websites such as Glassdoor have paved the way for employees to review workplaces, by interrogating all online public online data we can uncover a multitude of potential risks hidden from traditional feedback platforms. 


Management Review

Social media due diligence checks should also be used to help build a more complete picture of the character and attitude of management teams ahead of any deal. 

Reviewing a management team’s online footprint can help highlight potential risks including damaging behaviours and misconduct – all of which can negatively impact the reputation and value of the target company in the present and future if left unchecked.  

One previous example includes damning allegations of sexism and derogatory behaviour from staff towards their company’s CEO. Upon reviewing the report, our client decided not to continue with the deal – a decision that was reaffirmed when the CEO of the target company hit the press a year later. 


The impact of public online reputation on businesses and value 

Significant behavioural issues of staff should also be considered particularly seriously considering the damaging impact that “cancel culture” can have on an organisation’s value. 

In what is now a renewed age of social activism, amplified by movements like Black Lives Matter and Me Too, it’s imperative that a potential buyer pays attention to what’s being said about a target company on social media. 

The mass withdrawal of support for a person or company due to their public or online behaviour, whether labelled “cancel culture” or not, will have clear implications for the reputation and value of a business. The reputational impact of this type of activism can also spread beyond the subject entity, proving damaging to investors and parent companies also if left unchecked. 


Understanding all of the risks 

Social media due diligence can clearly uncover pertinent information to aid traditional checks, when harnessed correctly. The vast quantities of associated data combined with the need for objectivity means that the right third party tools should always be used. 

Neotas’ proprietary open source due diligence tools combined with extensive experience can be used to provide deeper insights to help inform investment decisions. Our checks process 100% of publicly available data in over 200 languages, leaving no stone unturned when investigating relevant investment risks. 

It is crucial that appropriate care and context is given to risks uncovered during social media due diligence checks, especially considering the natural negativity bias of online reviews. Neotas reports provide zero false positives, enabling resources to be committed to reviewing real risks only. 

For global acquisitions and investment activities, particular care should be taken when considering international data privacy legislation and as such, an ISO-certified third party provider like Neotas should always be used.  

Get in touch with our team today to discuss supplementing your investment due diligence with social media and online checks.