Proposed European anti-money-laundering (AML) standards could place a “significant operational burden” on banks by potentially requiring customer due diligence checks on counterparties that are not traditional bank clients, a trade finance industry body has warned.

The International Trade and Forfaiting Association (ITFA) raised the issue in its response to the European Anti-Money Laundering Authority’s (AMLA) consultation on draft regulatory technical standards, which are intended to harmonize AML rules across the European Union. The association flagged concerns over how the definition of “business relationship” would be applied to counterparties in supply-chain finance structures, such as reverse factoring and receivables discounting programs.

Under the draft, a business relationship is defined as one “connected with the professional activities of an obliged entity, which is set up between an obliged entity and a customer.” ITFA argued this definition fails to account for the nuanced reality of trade finance, where banks routinely interact with external parties, including beneficiaries of letters of credit or guarantees, warehouses holding pledged inventory, and sellers or buyers in supply chain finance arrangements, who do not hold accounts or credit facilities with the bank and “may not fully qualify as customers.”

In reverse factoring arrangements specifically, ITFA’s consultation response noted that suppliers cannot assign receivables without the debtor’s approval, making it “questionable” whether a formal business relationship exists between the bank and such counterparties at all. The association estimated that business relationships between European obliged entities and counterparties in reverse factoring contexts alone could exceed one million.

The ITFA’s consultation response was previously reported by Global Trade Review. 

Christian Hausherr, chair of the Global Supply Chain Finance Forum and the author of ITFA’s submission, told Global Trade Review that while his organization fully supports AMLA’s goal of introducing controls for business relationships, it is pressing for greater recognition of the distinctions between customer and non-customer relationships within the standards.

“The current draft standards would potentially force banks executing reverse factoring programs to apply customer due diligence measures for counterparties that are not typical clients of these banks and do not even fall into the client scope of the respective business division of the banks,” Hausherr told GTR.

ITFA proposed that non-customer counterparties be subject to a lighter, risk-based set of minimum checks rather than full customer due diligence. 

Read ITFA’s consultation response here