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By Daniel Schmand,Global Head of TradeFinance, Deutsche Bank

M anaging risk and uncertainty– whether created by market volatility,geopolitical events, regulatory change or lack of economic confidence –dominated 2016, with 2017 looking set to deliver more of the same. With

diverse pressures and potentially competing priorities, how can treasurers makesense of the diverse set of issues that they are forced to contend with? DeutscheBank recently commissioned the Economist Intelligence Unit (EIU) to produce acomprehensive whitepaper, Managing Risk in Challenging Economic Times, tounderstand treasurers’ issues in more detail. In a series of articles that will follow inTMI, experts from Deutsche Bank explore some of the concerns and priorities thatarose from the study in more detail, and illustrate how leading companies areovercoming them. In the first of these articles, Daniel Schmand, Global Head ofTrade Finance, Deutsche Bank, discusses regulatory risk, which has emergedstrongly as a key priority over the past year.

AddressingComplianceChallenges:Regulatory Risk in Practice

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A growing regulatory burdenManaging the impact of regulatory changeis not a new phenomenon for treasurers,but over the past eighteen months, theburden of compliance has grown, with thisset to continue or even increase in thefuture. Indeed, according to the EIU study,treasurers now identify regulatory and taxrisk as the second most significant risk afterglobal economic growth. There are avariety of reasons for this:Firstly, as corporations of all sizes

expand internationally, they are subject todomestic financial regulations in a largernumber of jurisdictions, as well as globalregulations.Secondly, corporate treasurers are not

only subject to regulations that are directlytargeted at their activities, but there arealso indirect consequences of regulationsto consider. Basel III, for example, aims tobuild resilience and transparency in thebanking sector, but as banks adapt theircapital structures and liquidity ratios tocomply with these requirements, theircorporate clients are inevitably affected asthe solutions and pricing that banks areable to offer will change. Some treasurersare also concerned that banks maybecome more selective in their corporaterelationships.Thirdly, in the case of requirements

such as know your customer (KYC), asmost corporations operatinginternationally work with multiple banks,their compliance obligations are replicatedacross banks. Although banks are subjectto the same regulations, theirinterpretation may differ slightly:

consequently, while their policies andprocedures may be similar, they are notidentical, which inevitably adds tocorporate clients’ compliance burden.Similarly, KYC requirements in eachcountry will often differ, furtherexacerbating the compliance burden.Sanctions screening is another area

fraught with complexity. For example,while sanctions may have been eased onbusiness with counterparties in Iran,volumes remain low as there is still a highdegree of scrutiny and the rules that applycan be complex, so banks tend to take aconservative view.

Addressing compliance riskManaging regulatory risk requires a verydifferent approach to managing financialand credit risks. For example, treasurerscan hedge FX and interest rate risk, andinsure for, and limit credit risk according toa counterparty’s risk profile. Regulationcannot be avoided or hedged: the focus is

therefore on ensuring compliance toreduce the risk of financial andreputational damage. The regulatoryburden can therefore only be reduced bysimplifying and streamlining thecompliance process. Consequently,treasurers are looking to their banks tostandardise KYC procedures across bothbanks and markets as far as possible. Thisis challenging in practice, not least asbanks are ultimately responsible for theirown compliance, so they are unlikely to bewilling to cede control over the process.Secondly, as documentation requirementscan differ across jurisdictions, it is difficultto know which to use as a template. Inreality, the tightest would have to apply,which inevitably creates additional,unnecessary compliance requirements insome situations, whether markets orproducts.Despite the challenges, it is in

everybody’s interests to ease thecompliance burden, and compliance offersno competitive advantage to banks. In fact,

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KYC requirements in each country will often differ, further exacerbating the

compliance burden.

In September 2016, the Economist Intelligence Unit (EIU) published its whitepaper, Managing Risk in Challenging Economic Timeswhichwas commissioned by Deutsche Bank. The report was based on a survey of 150 senior corporate treasury executives and 150 CFOs fromaround the world, representing companies of above $2bn in turnover, to find out how they are managing risk in challenging economictimes.

Key findings included:� Uncertainty about economic growth is treasurers’ top concern worldwide;� Low or even negative interest rates are triggering significant policy changes in cash management; however, respondents continue to

maintain large surplus cash balances;� Regulatory developments continue to be a priority – and significant overhead – for treasurers;� Treasurers recognise the importance of technology innovation, but adoption can be more challenging;� Treasury functions continue to expand their range of responsibilities, particularly in the areas of risk management and capital

allocation.

The report can be accessed at http://tiny.cc/ntcdiy

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as the EIU study reveals, an overly onerouscompliance process can damage bank –corporate relationships. At Deutsche Bank,for example, we have compiled a detailed,105-point questionnaire to cover the largemajority of information requests anddocumentation requirements. We prefillthis questionnaire as completely aspossible, using publicly availableinformation or data we already hold. Wethen only need to ask our clients to validatethe majority of the questionnaire, andprovide limited data for the information wedon’t have internally. For example, thebank cannot make assumptions about theamount of business a company does in aparticular market, so we need a discussionabout these issues.

Identifying complianceopportunitiesOne of the contributors to the study,François Masquelier, Head of CorporateFinance and Treasury at RTL Group, notedthat regulatory compliance should notalways be considered negatively: rather, itis an opportunity to review policies,processes and controls. For example, if atreasurer lacks oversight of cash,counterparty risk and controls in a highrisk jurisdiction, there needs to be astrategic decision made about whetherthere is sufficient value of working in thatmarket. We are also seeing far moreawareness and action on issues such asbribery which in turn drives policies,processes and behaviours. Advising onbest practices, enforcement and reportingis a key area in which a bank such as

Deutsche Bank can add value; similarly, wehelp treasurers and finance managers todevelop procedures to help avoid andhighlight problem counterparties.

Compliance innovationOver the coming months, as the complianceburden for banks and corporates alikecontinues to grow, we would expect to seefurther innovations to help alleviate thisburden through greater automation andbetter, more consistent use of data. Forexample, we are warmly supportive ofSWIFT’s KYC Registry which provides bankswith an efficient, shared platform formanaging and exchanging standardised,SWIFT-validated KYC data on theircorrespondent banking relationshipsglobally. We would also welcome a similarregistry for corporate information, but thisneeds to be driven by the corporatecommunity, just as SWIFT’s registry wasmotivated by banks. The use of the LEI(legal entity identifier) is also a valuable wayof validating a counterparty to a transaction,including their business activities andultimate ownership. We expect this conceptto extend further with a significant impacton automating the validation of tradingcounterparties and streamliningcommercial and financial flows.KYC and KY3P (know your third party)

are only two of the areas of regulation withwhich banks and corporations need tocomply: FATCA requirements also create asubstantial documentary burden, forexample. Similarly, treasurers are taskedwith a wide range of accounting, tax andreporting obligations that add complexityand put pressure on processes. Workingwith a bank that has the depth ofknowledge of both domestic andinternational regulations, and can sharebest practices of working with globalcorporations can be a valuable way ofprioritising compliance tasks and refiningprocesses and reporting. Complianceobligations cannot be avoided ormitigated, and treasurers are oftenunderstandably frustrated that dedicatingadditional resources and implementingnew technologies may not deliver tangiblebenefits. However, by collaborating toshare best practices and commonplatforms, there is the potential to reducethe burden and ultimately increasetransparency and trust between financialand commercial counterparties, andfacilitate global relationships. �

Regulatorycompliance

should not alwaysbe considered

negatively: rather,it is an

opportunity toreview policies,processes and

controls.

Daniel Schmand

Global Head of Trade Finance, Deutsche Bank

Daniel Schmand is Deutsche Bank’s Global Head of TradeFinance and located in Frankfurt. He drives the TradeFinance business and is responsible for the global TradeFinance strategy, encompassing Financial Supply Chain andStructured Trade and Commodity Finance products.Additionally he is the chairman of the InternationalChamber of Commerce (ICC) Banking Commission.Daniel joined Deutsche Bank in 1987 as a trainee. He

holds a Bachelor’s degree in Business Administration as well as having executiveeducation at INSEAD and the International Leadership Program at Ashridge, IMD andDuke.

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