ITFA AFRICA REGIONAL COMMITTEE NEWSLETTER – ISSUE 1, APRIL 2018



CHAIRMAN’S MESSAGE – Duarte Pedreira, ITFA ARC Chairman / Head of Trade Finance at Crown Agents Bank

Dear Members and Friends,

It is with great joy that I write to you to introduce the ITFA Africa Regional Committee’s first newsletter.

When you kindly elected me to join the ITFA Board during last year’s conference in Edinburgh, I was given a mandate to grow the Association’s reach and influence in Africa. The set up of the Africa Regional Committee (ARC) formally initiated this process and when the members of this new venture first met on the 15th November 2017, we set out an ambitious agenda that will see a significant number of new Africa-related trade finance initiatives being undertaken over the next few months. These will be focused on fulfilling the ARC’s five strategic vectors: increase of ITFA’s African membership, delivery of training and education initiatives in Africa, discussing and lobbying with African regulators for ITFA related issues on behalf of members, communication and provision of information, and Africa-focused networking.

2018 is the year of Africa within ITFA as we proudly welcome the legendary ITFA conference to the continent in September for the first time in our history. As such, the ARC and ITFA are engaged in significantly increasing our membership in Africa as we aim to get at least 20 new members joining the Association’s ranks from the African continent. This is being spearheaded by Afreximbank who have sent out letters inviting hundreds of African institutions to attend the conference, with all the other ARC members being heavily involved in following up on these invitations and effectively delivering towards our common goal. So far we have onboarded some new names, including banks from Sierra Leone, Liberia and Malawi, which again are taking the lead in showing the world that it is precisely those countries that are considered to be the most challenging from a trade finance point of view, that are taking the initiative and embracing the opportunity to claim their place in the centre stage of the global trade finance industry.

We have also started working on delivering relevant training and education initiatives for our expanding African membership. The first of these initiatives will be a landmark training session being held in Nairobi on the 23rd May in the afternoon, linked to the Global Trade Review’s East Africa Trade & Commodity Finance conference. During this session, we will have ARC members delivering training on topics such as forfaiting/distribution, the MRPA, IFRS9, insurance solutions and other contemporaneous trade finance matters of interest. We are also hoping to use this training session as a vehicle to capture the attention of the many local banks in attendance, so that they understand what ITFA is and the value it provides to its members.

The main goal for this newsletter is to keep you up to date with our activities and provide our modest contribution towards your increased awareness and interest around African trade finance topics. As such, I am delighted to have in our first issue Louis Du Plessis from RMB telling us more on why we should all be excited with the forthcoming conference in Cape Town, Christian Karam from Africa Trade Finance sharing with us how international trade financiers returned to Nigeria, and Alastair McLeod from JLT discussing risk and reward in Ramaphosa’s South Africa. We are also delighted to include an article from one of the Mentees in the ITFA Martin Ashurst Trade Finance Mentorship Programme, Klisman Murati, who is a director for the boutique consultancy firm Pangea Wire, addressing terrorist financing in Africa.

Rest assured that our other ARC members (the Afreximbank Forfaiting Working Group, Marieme Kamara from Wilben Trade, Simon Cook from Sullivan and Worcester and Ian Henderson from GIB UK) are already lining up their contributions for the second issue, which will be due in 3 months time. As part of that second issue, just before the conference in Cape Town, we will be reporting on our inaugural event – the educational seminar in Nairobi. We want to be as relevant as possible, so if there is a topic you would particularly like to see covered here, do let us know and we will do our best to accommodate.

Enjoy your reading!
Duarte

PS – have you registered for the Cape Town Conference yet?

2018 ITFA CONFERENCE IN CAPE TOWN – Louis du Plessis, ITFA ARC Member / Head of FI Trade & Distribution at Rand Merchant Bank

The 45thinstalment of the International Trade and Forfaiting Association (ITFA) annual conference will be held in Cape Town, South Africa. This is a very exciting development as it will be the first of hopefully many ITFA annual conferences to be hosted on the African continent.

Dating as far back as the mid 1600’s South Africa and specifically Cape Town formed an integral part of international trade environment where the Dutch East India Company (the first large global trader!) set up a trading post to support shipping companies traveling around the tip of Africa in the Euro/Asian corridor.

ITFA has branded 2017/2018 “the year of Africa” and in the same vein established a regional committee dedicated to driving initiatives related to Africa on behalf of the association. One of the main objectives of the African Regional Committee (ARC) is to drive new membership from African banks and in doing so support the development of trade finance on the continent. With more than 1.2bln people and over USD 6 Trillion in GDP the continent represents a massive opportunity for international investors in trade finance. Hosting the event in Cape Town provides the perfect opportunity for ITFA members to catch up with existing members in one of the best locations in the world as well as to interact with banks, insurers and funds from all over Africa.

Our hope is that this year’s event in Cape Town will be the catalyst for the expansion of ITFA driven objectives on the continent which the ARC believes will add significant value to trade finance development in Africa and globally.

Cape Town has successfully hosted many international events and the location will certainly not disappoint in living up to the high standards that ITFA members have come accustomed to over many years! The African Regional Committee is looking forward to welcoming everyone to the 2018 ITFA Conference.

10 (or 13) Things you may not have known about South Africa

1. The Cape Floral Kingdom is one of the world’s six floral kingdoms – and the only one which is wholly contained within a single country.

2. The oldest remains of modern humans were found in South Africa and are well over 160,000 years old.

3.Two Nobel Peace Prize winners lived on the same street. Both Nelson Mandela and Archbishop Desmond Tutu had houses on Vilakazi Street in Soweto.

4. The Bloukrans Bridge, Western Cape, is the highest commercial natural bungee jump in the world. The 216m (709ft) jump off the Bloukrans Bridge, Africa’s highest bridge, falls over the Bloukrans river valley. The world’s oldest bungee jumper, South African Mohr Keet, jumped from the bridge when he was 96.

5. It’s been estimated there are around 3,000 shipwrecks along the 3,000km coastline of South Africa. At some stage Lloyds of London stopped providing cover for shipping companies traveling to or around the Cape of Good Hope.

6. South Africa has hosted the football (2010), cricket (2003) and rugby (1995) world cups – it is the only country in the world other than England to have done so.

7. South Africa boasts 90% of the platinum group metals reserves on earth.

8. There are about 900 different bird species in South Africa, which represents around 10% of the bird species of the world.

9. The Tugela Falls in Kwazulu Natal are the second-highest on the globe, measuring some 850 metres (or 2,789 feet).

10. Dr Christiaan Barnard performed the first heart transplant in the world in 1967. This took place at the renowned Groote Schuur Hospital in Cape Town.

11. South Africa host the largest individually-timed cycling race in the world, the Cape Argus, and the world’s largest ultra-marathon, the Comrades.

12. Incredibly, South Africa is home to the largest bird (ostrich), largest land mammal (elephant), tallest animal (giraffe), smallest succulent (10 millimetres), largest tree (baobab), fastest land mammal (cheetah), largest reptile (leatherback turtle), and smallest mammal (lesser dwarf shrew) amongst other animal records.

13. South Africa has the longest wine route in the world. The R62 which is approximately 1000km takes you through some of the most beautiful winelands where you are able to visit over 500 wineries.

APPETITE RETURNS TO NIGERIA WITH NEW TRADE FINANCE SYNDICATED LOANS – Christian Karam, ITFA ARC Member / Director at Africa Trade Finance

Nigeria’s United Bank for Africa (UBA) has raised a US$160mn syndicated trade finance facility, which experts say is a sign that appetite is returning for the financially beleaguered country.

Initially an amount of US$100mn was sought, but this amount increased as the transaction was heavily oversubscribed.

Nine lenders participated in the one-year deal, which was disbursed in December last year.

Bookrunners and co-ordinators on the deal were Africa Trade Finance and Mashreqbank.

On the other hand Access Bank Plc is currently at the advanced stages of a US$ 100 million syndicated trade finance facility. Bookrunners and co-ordinators on the deal are also Africa Trade Finance and Mashreqbank. The syndication is expected to close in April and will most likely be oversubscribed.

Over the last couple of years, the Nigerian economy has suffered from the scarcity of hard currency due to the significant drop of the country’s oil proceeds. As a result some of the Nigerian banks have delayed in repaying their outstanding with international lenders.

However the improved domestic environment and the financials of Nigerian banks today creates the appropriate opportunity for lenders to borrow.

Similar transactions are currently being contemplated in the neighbouring country Ghana whose banking sector is facing reforms and challenges.

RISK AND REWARD IN RAMAPHOSA’S SOUTH AFRICA – Alastair McLeod, ITFA ARC Member / Partner at JLT Specialty Limited

As Africa’s third largest and most diversified economy, South Africa accounts for the vast majority of all insurance premiums on the continent. South Africa boasts sophisticated financial markets and an abundant natural resource base, while also serving as a gateway to Africa’s expanding insurance market. According to BMI Research, sub-Saharan Africa is forecast to be the world’s second fastest economic growth region after Asia for the period 2017-2022, and the region is forecasted to grow by 3.5% in 2018. Yet South Africa’s complex business environment and on-going political tensions underscore the risks associated with doing business in the country. South Africa therefore produces a large amount of enquiries across the Credit & Political spectrum.

Risk Insight

Cyril Ramaphosa was sworn in as South Africa’s president on 15 February 2018, and is expected to pursue a business-friendly reform agenda. However, the economic outlook will remain weak in 2018, as corruption investigations continue to deter foreign investment. Water infrastructure will be prioritised for investment as the Western Cape water crisis continues.

Trading Environment

President Jacob Zuma resigned on 14 February 2018 following a leadership struggle in the ruling African National Congress (ANC). Zuma’s deputy, Cyril Ramaphosa, was sworn in as the country’s president on 15 February 2018. As president, Ramaphosa is expected to progress with business-friendly economic reforms. In a move likely to improve investor confidence, he removed a number of Zuma loyalists during a cabinet reshuffle in February 2018. Since becoming ANC leader in December 2017, Ramaphosa has pursued a number of reforms, including replacing the board of state-owned utility company Eskom. Ramaphosa intends to create a million jobs in 5 years, introducing tax reform and creating special economic zones.

However, Ramaphosa’s ability to restore investor confidence in South Africa will be limited by the country’s otherwise weak economic outlook. The South African economy is currently forecasted to grow by 1.3% in 2018, and a Ramaphosa presidency is unlikely to have an immediate impact on this outlook. The ANC remains divided on key policy areas, with a significant wing of the party continuing to support expansionary fiscal policies. This will make it difficult for Ramaphosa to enact reform measures, and many are likely to be watered down. In addition, Ramaphosa must balance the need to please investors with pressure to rebuild public confidence in the ANC ahead of 2019’s general election.

The on-going water crisis affecting Western Cape poses a further risk to South Africa’s economy. Severe dry-weather is likely to impact the region’s wine industry, with yields estimated to fall by 20% this year. Given that Western Cape accounts for 13.6% of GDP, a prolonged water crisis has the potential to weigh on South Africa’s weak growth outlook in 2018.

Investment Environment

In light of the Western Cape water crisis, the government will prioritise investment into water infrastructure. In November 2017, Cape Town’s city authorities allocated USD 140 million for 7 additional water projects, temporarily halting progress on any non-water projects. Moreover, in February 2018 the deputy mayor revealed plans for 2 temporary desalination plants in Cape Town, which are currently at tender stage. The plants are expected to be operational in May 2018.

Foreign investors may be deterred from entering South Africa’s infrastructure sector by a challenging business environment. Allegations of ‘state capture’, in which Zuma is accused of facilitating Gupta family influence over state institutions, raise reputational risks for foreign firms. For example, major international firms have been implicated in malpractice accusations after working for companies linked to the Gupta family. In late 2017, the corporate registry filed criminal complaints against McKinsey, KPMG South Africa and SAP over the companies’ work for Gupta-linked companies. McKinsey was accused of fraud and collusion after ignoring staff warnings about the legitimacy of firms linked to the Guptas. In January 2018, state prosecutors indicated that they would enforce an order to seize McKinsey assets over fees the company earned from working with Eskom. McKinsey is reportedly seeking guidance from the South African government over returning the money.

Country

CEND Risk Pricing Range Sovereign Credit Risk Pricing Range Full Political Violence Terrorism & Sabotage Only
South Africa* 0.6% – 1.5% p.a. 1.0% – 2.25% p.a. 0.05% p.a. 0.03% p.a.

* Given political uncertainty in the country, the range in pricing reflects the diverging outlooks of underwriters.

WHAT YOU NEED TO KNOW ABOUT TERRORIST FINANCING IN AFRICA – Klisman Murati, Director at Pangea Wire (www.pangaeawire.com) and a mentee on the ITFA Martin Ashurst Trade Finance Mentorship Programme

One need not look too far to find evidence that terrorism has become a major threat in the world. The growing verity of ways in which terrorist acts can be executed and deployed, including the use of explosives, hostage taking, cyber acts on critical infrastructure etc, has been of growing importance to governments and financial institutions around the world.

Banks and those involved in financial services, including trade finance professionals, play a crucial role in providing a vitally important line of defence in spotting and stopping the financing of terrorist groups.

The regional and potentially global impacts of terrorism, highlights the importance of the international community taking all necessary steps to find ways to deprive terrorist organisations of their funding.

Terrorist financing in the African context

The issue of TF becomes ever more complex especially in the African context as the continent faces unique vulnerabilities and contextual factors, including;

• A reliance on cash and use of money value transfer systems – according to World Bank statistics in 2014 66% of Africans remain unbanked. The high use of cash transactions means transfers cannot be monitored by banks and Financial Intelligence Units. Furthermore, the high propensity of cash means that certain sectors and industries are particularly vulnerable and exposed to TF including charities and money service businesses like Bureaux De Changes (more on this later).

• Porous borders exacerbating the circulation of money & goods – In western & central Africa, jurisdictional boundaries often do not coincide with “natural” or ethnic boundaries and are difficult to control and police. Criminal and terrorist groups take advantage of these porous borders to move funds as well as legal and illegal goods through informal border crossings.

• Corruption and wilfully complicit actors – Another major issue and one that is not unique to the African continent is that the Risk Based Approach which is considered the gold standard in AML and Customer Due Diligence practices is not carried out to its full potential. The facilitation of TF by officials and business professionals is carried out at times with impunity, thus further weakening already struggling CTF infrastructure.

Sources of funding

The Financial Action Task Force (FATF) have identified several “funding sources of terrorist organisations in West and Central Africa which have been supported by information or case studies provided by government sources.” These include; extortion, the robbery & looting of banks and small businesses, cattle/livestock rustling, kidnapping for ransom, abuse of Non-Profit Organisations NPOs and funding of local businesses/commercial enterprises. The latter two are perhaps more relevant to a financial services audience and therefore deserve a more comprehensive explanation.

NPOs can be exploited by terrorist organisations to collect money and raise funds, spread propaganda, recruit members and hide a number of illegal activities. For the reasons mentioned in the previous section, NPO’s are considered high risk customers and therefore enhanced due diligence (EDD) must be performed to assess the legitimacy of said NPO.

The following case study is a pertinent case of a time where appropriate EDD lead to the successful identification and shutting down of a trade-based terrorist financing scheme. This case was initiated by an STR submitted by a bank to the Niger FIU. The NPO received USD 6 million in illicit transactions over a two-year period from two affiliated religious associations based in Europe.

Its directors were originally from a Middle East jurisdiction. The NPO listed well-drilling for water and general trade as its main activities. To facilitate the illicit transaction, the directors created a shell import/export company in Nigeria. More than 80 per cent of the funds received by the NGO were transferred to account belonging to the shell company as payment for products/services provided, where in-fact no real commerce took place.

Terrorist groups like Boko Haram of Nigeria have found innovative and entrepreneurial ways to finance their operations. Nigerian authorities have reported that BH provides microfinance to SMEs, in turn creating an investment network and increasing the organisations financial stability.

Furthermore, it has been reported by FATF that BH are also suspected of operating Bureaux de Change services around the country.

They have successfully imbedded themselves into the fabric of trade and commerce making it extremely difficult for banks and financial institutions to discern who are BH operatives and who are legitimate law-abiding customers.

Recommendations for banks & financial institutions.

There are four key precautions that banks and financial institutions can take to protect themselves against TF attempts. These include;

1.) Working closely with international community – There is a clear need for countries in the region to work together and with the broader international community to conduct financial investigations, to share information with other agencies and countries, as well as the private sector, and to work with intelligence agencies in order to further identify and disrupt terrorism financing within the region.

2.) Filling Suspicions Activity Reports (SARs) – Employees must have a vigilant eye to spot and report on suspicious activity and suspicious transactions as soon as there is reasonable cause to believe that there is an attempt to finance terrorism.

3.) Appropriately screening customers, shareholders and directors for terrorist affiliations – This is especially important for Politically Exposed Persons (PEPs) who due to their position require EDD to avoid reputational damage to the bank and financial institution. Counties like Sudan are also on the US’s list of State sponsors of Terrorism; therefore, it is recommended that banks closely monitor financial activity of neighbouring counties and also screen individuals who may have connections to PEPs in Sudan.

4.) Adopting a robust Risk Based Approach – As mentioned above, the RBA is considered the gold standard in AML & CTF compliance. It is important that the approach is followed properly and that those responsible for adhering to it are not proven to be professionally negligent, wilfully blind or actively complicit.