Digitisation will help delete the fraudsters from the trade finance system
By Simon Streat, VP of Product Strategy at Bolero International.
Tampering with paper documents remains the most common type of fraud, either to legitimise a fraudulent transaction or to use completely false information to raise finance. Earlier this year, for example, it was reported that an employee at China Citic Bank’s Lanzhou city branch allegedly conspired with others to fake trade finance bills that were used as collateral to obtain a bankers’ acceptance, which was later sold several times at discounted prices, leading to a $147 million problem.
The prevalence of fraud prompted the head of trade service at the Agricultural Bank of China to say in Beijing last year 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.
Most infamously, the 2014 Qingdao scandal 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.
Of course, fraud is not restricted to any particular region, market or modus operandi. One of the most frequently-encountered types of fraud around the world, for example, is double financing where the importer and exporter collaborate, either 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 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 $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. 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, $7.8 trillion was lost in this way to such economies, with more than 80 per cent 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 protocols, vastly increasing the likelihood of compliance with anti-money laundering 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 Bolero’s case, 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 so much harder for fraudsters. Whereas 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 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.
Simon Streats’ bio:
Simon Streat joined Bolero International as VP Product Strategy in March 2015. With over 25 years of experience in general management, sales, marketing and product leadership positions in a range of organisations including BT Group Plc, Experian and Alcatel. Prior to Bolero, Simon was Director of Global Channel Sales at Truphone and before that he was Managing Director of Experian’s UK & I SME business.