Trade finance woes in emerging Myanmar - Part 1

“Moving forward in unity to a peaceful and prosperous community,” the Myanmar slogan echoed as it chaired the 2014 ASEAN summit. This was the first time Myanmar has chaired ASEAN since joining in 1997 and the latest step in a series of events that Myanmar has taken to join the international community.

Many would see the recent democratisation of the Myanmar government, by shifting from a military junta to a quasi-civilian led one and the lifting of various sanctions, as an opportunity to invest in the country. GDP growth is accelerating, driven by increasing foreign direct investment and local entrepreneurship in various industries from tourism and hospitality to telecommunications.

As can be the case with rapid economic growth, this growth is coming with risks. Conducting business in Myanmar is currently a balancing act with the allure of abundant natural resources, a young labor force and an emerging consumer class weighted against poor infrastructure, tricky international regulations, endemic corruption and an antiquated banking system.

According to the US Central Intelligence Agency’s World Factbook, foreign direct investment in the country grew from $1.9 billion USD in 2011 to $2.7 billion USD in 2012,¹ within key industries such as garment, energy, information technology, and food and beverage.

With this accelerating growth in key industries comes a need for raw materials and supplies to flow into the country from overseas and on the export side, natural resources such as timber flow out of the country. A Letter of Credit is used to facilitate inflows and outflows while ensuring both buyer and seller are financially compensated.

Thus, trade finance will continue to grow, backed by the allure of one of Asia’s youngest emerging market. Banks are increasingly called upon by their corporate clients to assist them in their Myanmar journey.

The Letter of Credit, as a trade finance tool, is not without risks and Myanmar is a tricky jurisdiction to navigate. Letters of Credit are paper-based which typically involves a manual process.

Within this process, the required documentation can be forged and buyers/sellers could be working in collusion to defraud and launder illicit funds. Banks with well established trade financing operations may have specialised task forces trained to spot risks within their trade finance operations.

Other banks might solely rely on their trade finance operations group, who are trained to spot documentary discrepancy against Uniform Customs and Practice 600 standards but not necessarily trained to identify serious red flags. Even with trained experts, banks do not physically receive goods but only receive hardcopy documents, so red flags can only be spotted manually.

Without robust systems in place, operations staff must rely on their own training to spot risks like over and under invoicing of goods, suspicious modes of transportation, or needless involvement of third parties. This leads to gaps in the process that can be manipulated by those familiar with trade finance, which may explain why some in the regulator camp view trade financing as high risk.

Compounding this operational risk is the financial infrastructure in Myanmar. Even though an anti-corruption law was passed in 2013, Myanmar continues to rank high today in the corruption scale, according to Transparency International and is also on the Financial Action Task Forces’ list of Deficient Jurisdictions.

This means Myanmar has a higher degree of corruption in relation to the global community with lacking systematic means to identify and stop corruption from proliferating. Other regulations such as the USA Patriot Act Section 311 has certain restrictions for US financial institutions engaging in correspondence relationships with Myanmar banks, citing a serious lack of Anti-Money Laundering controls, and Section 312 of the USA Patriot Act still calls for enhanced scrutiny.

¹https://www.cia.gov/library/publications/the-world-factbook/geos/bm.html - under economic overview