Trade Finance Risk

Trade finance covers products such as letters of credit, documentary collections and bank guarantees. In these, the bank promises or arranges payment against documents: invoices, bills of lading, insurance certificates. It almost never sees the goods themselves, so false or recycled paperwork can pass through. That opens several risks at once. Prices or quantities may be misstated to move value across borders. Goods or ports may breach sanctions or export controls. A shipment may never have existed. Several banks often touch one deal, and each sees only its slice. Staff look for prices far from market, odd routes, unrelated parties and amendments that make little commercial sense. Reviewers who read only the documents tend to approve the very deals that need a second look; those who compare price, route and parties tend to catch them.

Two small trading firms ask a bank for a letter of credit covering 500 tonnes of copper wire. The invoice price is well above the market rate, the vessel takes a long detour through a free trade zone, and the buyer asks to change the destination after issue. The trade finance team holds the payment and refers the file to financial crime compliance.