Trade finance fraud has claimed some high-profile victims, including major Chinese banks. However, the elimination of paper-based documentation should reduce the ability of the scammers to strike.
For those involved in trade finance, tampering with paper documents remains the most common type of fraud; either to legitimise a fraudulent transaction or to use bogus information to raise funding.
Two of the most notorious examples date from a year ago, when a US$147m bill finance fraud was revealed at China Citic Bank, part of China’s biggest investment conglomerate and the country’s ninth-largest bank by assets. According to reports, an employee at the bank’s Lanzhou city branch allegedly conspired with others to fake trade finance bills.
These were then used as collateral to obtain a banker’s acceptance – for cash to invest in the then booming stock market – which was later sold several times at discounted prices, leading to the massive loss.
The fraud followed hard on the heels of a similar fraud, possibly around four times bigger at US$578m, suffered by the Agricultural Bank of China. It prompted AgBank’s head of trade service to observe that its prevalence was due largely to the fact that in the past, Chinese banks did not care about fraud, “just the paperwork”. The problem with this statement is that it is the paperwork that is the problem.
However, to date the most infamous was a US$3bn loss arising from the 2014 Qingdao port scandal. This involved the use of fake warehouse receipts to obtain multiple loans totalling many hundreds of millions of dollars, creating turmoil in the operations of metals exporters and impacting banks ranging from Citic to Standard Chartered. The incident persuaded banks and warehouses to review how they conducted commodity financing business in China, while the London Metal Exchange (LME) sped up the extension of its electronic method of tracking metal in warehouses.
Spotting the scams
Of course, fraud is not restricted to any one region, market or modus operandi. One of the most frequently-encountered types of fraud, which occurs around the world, is double financing. This results when the importer and exporter collaborate to create false turnover to obtain credit for the same trade before vanishing. Fraudulent paper documents are also often used to order goods in the name of a third party with a good credit risk rating, but for delivery to a different address.
In 2015, the marine indemnity insurance provider International Transport Intermediaries Club, aka ITIC, issued a warning to shipping intermediaries to check bills of lading and associated documentation after a Belgian shipping agent released six containers of castor oil valued at US$270,000 against a fraudulent bill of lading. The containers were to be shipped from India to Belgium and although the bill of lading against which the ship agent released the cargo to the consignee appeared to be genuine, it turned out to be a forgery.
Yet it is not just individual companies that suffer losses from fraud. The mechanisms of international trade are also employed for the illicit or illegal transfer of billions of dollars from developing or emerging countries, particularly through over or under-invoicing. Global Financial Integrity, the Washington DC-based research and advocacy organisation, calculates that between 2004 and 2013, US$7.8 trillion was lost in this way to such economies, with more than 80% transferred through over or under-invoicing.
Paper documents can be copied, forged, altered or lost. On a digital platform, however, tampering becomes extremely difficult, as authentication and traceability through an audit trail is integral to the technology. Only the legal holder can access the document and whatever is done is automatically logged. In addition, thanks to a high degree of automation, every participant is also relieved of the burdens of know your customer (KYC) protocols, vastly increasing the likelihood of compliance with anti-money laundering (AML) requirements around the globe. Using paper processes on the other hand, it is not possible to extract information quickly and simply to conduct sanctions, white or black-listing tests; all of which leaves an organisation highly exposed.
Digital processes also have stronger workflows with clear legally bound responsibilities. Whereas paper processes require laborious cross-checking of each party, transactions conducted over a digital platform are underpinned by compulsory subscription to a legally-enforceable rulebook, which – in the case of a trade finance solutions specialist such as Bolero – is based on English common law. The requirements mean that any party signing a document will have done so under the authority of known companies with established credentials.
The absence of physical documents to forge or alter means a digital platform also makes it much harder for fraudsters. While paper has to be couriered around the globe, wasting time at every turn and all the while remaining invisible to those at risk, electronic trade documents or bank guarantees are instantly visible, with participating banks distributing them across a well-established and secure network.
Access to the platform for those involved in the transaction is through secure name, password and location controls that have to be used on a specific PC; providing far greater security against unauthorised interference than is the case with the majority of networks.
Of course, fraud is constantly developing and mutating, so different regions and countries can suddenly emerge as hotspots. The advantage of digital platforms is that they can be updated much faster, to take into account new and emerging threats.
Moving from paper to digital processes will not only reduce operational risk, but also deliver major operational efficiencies; addressing not only the symptoms, but also the main cause of fraud – paper.