Managing money laundering risks in commercial letters of credit. Are banks in danger of non-compliance? A case study of the United Kingdom
| Published date | 03 May 2016 |
| Pages | 158-168 |
| DOI | https://doi.org/10.1108/JMLC-05-2015-0019 |
| Date | 03 May 2016 |
| Author | Ramandeep Kaur Chhina |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
Managing money laundering
risks in commercial letters
of credit
Are banks in danger of non-compliance?
A case study of the United Kingdom
Ramandeep Kaur Chhina
School of Management and Languages, Heriot-Watt University,
Edinburgh, UK
Abstract
Purpose – The purpose of this paper is to critically examine the role of banks in detecting and
mitigating money laundering risks in trade nance activities, especially in commercial letters of credit,
and to answer the central question: do banks comply with regulations that are inadequate (if so, is more
stringent regulation compatible with the commercial world of trade nance?), or are banks are in danger
of non-compliance?
Design/methodology/approach – The relevant principles promulgated by international
organisations as well as the law enacted in UK to prevent money laundering risks in commercial letters
of credit was examined to assess banks’ compliance with their anti-money laundering (AML)
obligations. The key provisions of the Money Laundering Regulations 2007, Proceeds of Crime Act 2002
and the Wolfsberg Trade Finance Principles were discussed, and the extent of banks’ compliance with
these provisions was highlighted by carefully analysing the steps a bank might take at various stages
of the operation of a commercial letter of credit and what the banks in fact do. The paper relies heavily
on the ndings of the recent study conducted by the Financial Conduct Authority (UK) to analyse the
actual practice followed by UK banks in controlling money laundering risks in transactions involving
commercial letters of credit.
Findings – The paper establishes that considering the formal nature of commercial letters of credit
(which makes them independent from the underlying transaction), any stringent measures to regulate
trade nance activities of a bank may destroy the effectiveness of commercial letters of credit as a tool
for promoting international trade. The current law and regulations together with the Joint Money
Laundering Steering Group Sectoral Guidance and the Wolfsberg Principles provide the requisite legal
and regulatory framework to control money laundering risks in commercial letters of credit. The paper
however establishes that the majority of banks in UK currently appear to be in danger of
non-compliance with the UK AML regime and certainly need to meet their AML obligations in a more
serious way.
Practical implications – The ndings may inuence banks to adopt a more vigilant approach in
their trade nance activities and to undertake more responsibility in ensuring compliance with the
current AML law and regulations, while highlighting that their current practice may put them in danger
of non-compliance.
Originality/value – The paper demonstrates in an exceptional way the legal and regulatory
requirements for banks to prevent money laundering risks in their trade nance activities and where, in
practice, the banks are falling short of compliance with these requirements. By adopting a step-by-step
approach in evaluating banks’ “current-and-must have” approach to controlling money laundering
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
JMLC
19,2
158
Journalof Money Laundering
Control
Vol.19 No. 2, 2016
pp.158-168
©Emerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-05-2015-0019
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