Contact Us

Usance

Table of Contents

Usance- Quick Summary

  • Usance refers to a deferred payment structure where the buyer pays the seller for goods after a specific agreed period of time.
  • The best practice to reduce the risk of usance trade finance includes EDD for high-risk counterparties, verification of trade documents, independent validation of goods pricing, and screening of parties.
  • Key challenges include over-reliance on documents, insufficient inspection of pricing anomalies, and cross-border involvement.
  • AML Consultants UK helps with usance AML risk management through its risk assessment, AML audits, and drafting policies and procedures.

What Is Usance in UK Trade Finance and AML Context?

In the UK, trade finance usance refers to a deferred payment arrangement in which buyers and sellers agree upon a time for payment after a set period of time by using things like a bill of exchange, letter of credit, or documentary collection.

Usance payments cover includes structures like:

  • Acceptance credits: when the bank guarantees the payments at the deferred date, once the buyer accepts the bill.
  • Deferred payment arrangements: the banks pay the amount to the seller immediately, but collect it later from the buyer at the agreed date.

The difference between sight payment and usance payment is that sight payment requires immediate payment upon presentation of documents, whereas usance allows deferred payment for an agreed period of time.

Deferred payment increases AML and sanctions risks because the delayed payments create a risk of funds moving through multiple jurisdictions, and the gap between the shipment and payment increases the chances of a change in counterparties. The UK banks are required to screen counterparties and transaction flows to prevent ML/TF risks.

How Usance Arrangements Create AML Risk in Practice

The practical examples of how usance arrangements create AML risks include:

  • Suppose a UK bank is issuing a usance letter of credit for overseas goods, it commits to settling payment at a future date; in the meantime, the counterparties may become riskier and increase the risk of financial crime.
  • Deferred payment is often exploited and used to disguise trade-based money laundering by inflating invoices.
  • Usance payments with longer timelines allow the funds to move through multiple jurisdictions before the final settlement, which increases the chances of layering and sanctions evasion.
  • The delayed settlement also obscures the beneficial ownership, as during the usance period, the buyer or seller might change, making it difficult for banks to identify the true owner and the economic purpose of the funds.
  • Over/under invoicing in deferred payment structures poses ML/TF risks, as over-invoicing can be used for moving extra funds across borders, and under-invoicing can be used to hide the original value or evade taxes.
  • The documentation gaps weaken the transaction monitoring, which enables banks to detect unusual changes before the final payment settlement.

UK Legal and Regulatory Framework Governing Usance Transactions

The regulatory framework governing usance transactions is as follows:

  • The expect financial institutions to implement customer due diligence, enhance due diligence in high-risk, and ongoing monitoring to prevent the risks associated with usance.
  • Under the Proceeds of Crime Act (POCA)2002, dealing with criminal property is considered a criminal offence for the firms.
  • The supervisory expectations from the Financial Conduct Authority (FCA) for firms providing trade finance are to understand the risks linked with usance and apply a risk-based approach to mitigate the risks.
  • The Joint Money Laundering Steering Group (JMLSG)provides guidance on trade finance risk to closely monitor the deferred payments and check that they are not misused by using inflated invoices or obscuring beneficial ownership.
  • The firms are required to implement a risk-based approach for high-risk jurisdictions, as they pose higher risks to money laundering or sanctions breaches.

Best Practice AML Controls for Usance Trade Finance

AML best practices for usance trade finance are as follows:

  • The banks are required to implement enhanced due diligence for the customers, especially if they are linked with high-risk jurisdictions.
  • The banks should also verify the underlying trade documentation, including invoices or bills of lading, to ensure that they are not exploited and match with real shipments.
  • If feasible, the banks should also independently verify the pricing of goods to identify the signs of abnormal pricing and conduct screening against sanctions and adverse media.
  • The transaction monitoring controls should be implemented, designed to defer the payment maturity date, and if any suspicious transactions are detected, they should be escalated or reported immediately.
  • The trade finance, AML, and sanctions compliance teams should work together in coordination so that no risk goes unnoticed, helping to prevent money laundering risks.

Key Compliance Challenges in Monitoring Usance Transactions

The key compliance challenges in monitoring usance transactions are as follows:

  • The common weaknesses that are identified in supervisory reviews include: over-reliance on documentation (invoices or bills of lading) rather than assessing economic rationale.
  • Pricing anomalies are core TBML indicators, including over/under invoicing. Banks should properly check the transactions to reduce the risk of TBML.
  • Poor integration between trade operations and the AML monitoring system results in risks being missed due to a lack of information.
  • The operational challenges arise because usance transactions usually include cross-border transactions, which makes the verification hard.
  • Some trades usually involve multiple jurisdictions, which can facilitate the layering of trade flows and make illegal activity appear as legitimate trade activity.
  • Difficulties in identifying TBML within legitimate trade structures, as the transaction may look normal, uses original goods and documents, but the illicit intent is often hidden behind complex trade patterns and pricing manipulations.

How AML Consultants UK Can Help with Usance AML Risk Management

AML Consultants UK helps with usance AML risk management through its firm-wide risk assessment covering trade finance activities, which enables institutions to identify risk associated with usance structures.

It’s independent compliance audits of trade and implementation of transaction monitoring controls to identify anomalies and unusual patterns in trade activities.

AML Consultants UK helps in drafting clear AML policies and procedures for trade-based money laundering risks, and provides staff training focused on TBML typologies and deferred payment structures.

AML Consultants UK is experienced in regulatory remediation and supporting institutions in strengthening controls to meet regulatory expectations and ensure compliance with supervisory reviews.

FAQs

The difference between sight and usance payment terms is that sight terms require immediate payment, whereas usance payment allows deferred payment after a specific credit period.

The usance transactions increase the money laundering risk because of deferred payment and complex trade structures, making it easier to disguise the illegal funds.

Yes, usance letters of credit are considered higher risk under UK AML law due to the deferred payment system, which can be misused for TBML.

The firms should monitor deferred trade finance payments by checking for unusual pricing or reviewing trade patterns that indicate ML/TF risks.

Stay AML/CTF/CPF Compliant, Stay Protected

Let AML Consultants UK be your partner in the fight against financial crimes

Contact us now