Your Trade Credit Risk policy and your AML policy – Poles apart or 2 sides of the same coin ?

29 October 2014
Knowledge Base

It is a well-worn phrase “we need to do more with less”! Or in other words, can we ensure that more than one task we have to do in our day jobs can be incorporated in a single effort to ‘gain efficiencies’ or, in real speak, ultimately save money ? So I thought I would look at a typical AML and typical Trade Credit policy and see just how different or similar they were. Now, I do not profess to be a compliance officer nor have I had the stress of being a CFO so I will accept that the devil is always in the detail. However, here are just a few areas I thought seemed to have a very real sense of similarity. Here are just five examples.

Risk Based Approach

Let’s start by taking one of the guiding principles of AML. Your firm’s AML program should be “risk-based.” That means that the program’s AML policies, procedures and internal controls should be designed to address the risk of money laundering specific to your firm. Your firm can identify that risk by looking at the type of customers it serves, where its customers are located and the types of services it offers. Now would a trade credit risk policy start from a similar angle? What type of customers do I have? Where are my customers located (domestic or exports)? How relevant is the type of product and service I offer based on the level of risk I wish to accept? Whilst the risk of not doing AML is potentially large fines, the risk of not assessing your customers from a trade credit perspective is just as damaging from a cash flow perspective.

Customer Identification Program

In AML, organisations are required to have and follow reasonable procedures to document and verify the identity of their customers. These procedures dictate the types of information that is collected from a customer and how it will verify the customer’s identity. These procedures must enable the firm to form a reasonable belief that it knows the true identity. So is this so very different for credit risk or even supply risk? CFO’s or CCO’s need to ensure their organisations know who they are doing business with. Moreover, understanding the right legal name, registered office, trading address, directors and shareholders and financial strength are core fundamentals for both areas of the business regardless of whether they are concerned that the customer has cash, or does not have the cash to pay for the service offered! And the more complicated your supply chain or the greater your exposure to complicated organisation structures, the more this becomes relevant on a global scale.
Independently verifying the customer’s identity through the comparison of information provided by the customer with information obtained from a reporting agency like Dun & Bradstreet is at the heart of both AML and Trade Credit Policies.

Risk Assessment

It goes without saying that a trade credit risk policy will essentially be made up of a series of guidelines, rules and circumstances where the risk of doing business (whether as a single transaction or over multiple events) is derived and credit provided (or not) based on the rules and the interpretation of those rules (using the internal, external and customer data available). Risk assessment forms a fundamental part of AML. Whilst the rules and variables may be different, the concepts of identifying signals for risk, applying consistent rules for assessment of customers fairly and accurately and looking to ‘automate’ those assessments that pose minimal risk and escalating and spending time on those cases that could potential pose a higher risk to the organisation, seem almost identical. And of course, things change, constantly! So for both polices, time needs to be spent understanding how they will do on-going assessment.


Today, in AML, monitoring accounts for suspicious activity is something that must be established and must be able to detect and report suspicious transactions. So what is the purpose for monitoring in trade credit risk? From a pure ‘protect’ position (rather than an opportunity to grow accounts) CFOs are looking for activities that may lead to ‘suspicious’ or fraudulent activity on an account or to ensure that the financial strength of the company has not changed thereby enabling them to maintain the same credit lines.

The Culture of Risk Assessment

Finally, I wanted to touch briefly on the cultural aspect to AML and Trade Credit. It is very easy to fall into the trap of looking at AML as a policy that has a series of processes that if followed to the letter and the right content captured and referenced then compliance is assured. For many years that was how Credit Management was perceived. However, finance teams have worked very hard in the last few years to be seen as part of the overall culture for growth in an organisation. When sales leaders see the benefit of maintaining good accounts, growing and nurturing the strong ones and ensuring the ‘bad deals’ never get signed, whilst at first it seems to stifle short terms sales it actually enables stronger long term cash flows, reduces fraudulent activity and generates sustainable and ethical growth.  Potentially AML has to move in the same direction. The business needs to see it as a “way of being” in the business and something that all stakeholders need to buy into for it to be a successful driver of habits and turn a necessary evil into something that supports sustainable and ethical growth.

So, perhaps the ultimate drivers are the same and both policies can learn from each other. There will always be differences, but maybe doing more with less is possible in this regard.

Leave a Reply

Your email address will not be published. Required fields are marked *