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ICC UK urges action on digitisation in “wake-up call” over fraud

The International Chamber of Commerce United Kingdom (ICC UK) is pushing banks and authorities to accelerate adoption of digital tools for fighting trade finance fraud, estimating that illicit activity such as double financing could cost the industry up to US$5bn per year. 

Trade finance lenders have invested heavily in tools to fight fraud but are being hampered by a lack of electronic transferable documents and cross-industry data sharing, the ICC’s UK-based affiliate says in a paper published by its Centre for Digital Trade and Innovation on October 19. It is co-authored by MonetaGo, a financial technology company that specialises in fraud prevention. 

“Legacy systems, poor market co-ordination, regulators not being proactive enough to enable banks to share data and governments being too passive are all part of the problem in preventing fraud,” says Chris Southworth, secretary general of the ICC UK. 

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“The economic opportunity is huge at national and international level and the solutions are available. This report should be a wake-up call to business and government alike to act now.” 

The paper warns that fraudulent traders are currently able to exploit gaps in banks’ knowledge to obtain finance illicitly, for example by applying for financing from multiple banks for a single transaction, or using fake documents or companies to generate working capital without any real underlying activity. 

The true cost of trade finance fraud is difficult to calculate, the paper says. Fraud tends to lead to losses only when the fraudster’s business is disrupted, for example due to commodity price shocks or geopolitical volatility.  

At the same time, fraud losses “are often (mis)-classified or (mis)-reported as general operational or credit losses but actually ‘hide’ common types of fraud-driven activities and losses”. 

However, if even 1% of the US$5tn global trade financing market is susceptible to fraud, and assuming only 10% of those transactions will actually lead to losses, the paper notes that this still amounts to a realised annual cost of US$5bn across the industry. 

The paper refers to several scandals that emerged in 2020, including the collapses of Singapore-based traders Hin Leong and Agritrade, and the demise of Dubai-based Phoenix Commodities. 

In each case, allegations have since arisen that documents were forged in order to raise financing or that the same documents were presented multiple times to different banks. The trio left banks with a total exposure of over US$5bn. 

Beyond individual high-profile scandals, fraud has a wider negative impact on the availability of trade finance facilities to legitimate companies, the ICC UK adds. 

After the Hin Leong, Agritrade and Phoenix scandals, several banks scaled back their trade and commodity finance offerings, or in some cases exited the market completely. ABN Amro’s withdrawal from financing commodities alone left an estimated US$21bn financing gap, it says. 

At the same time, safeguards put in place to prevent financial crime “have increased costs and resource requirements for financiers seeking to serve this market”. The growing cost of funding and a reduction in lenders’ risk appetites could push investors to favour more traditional asset classes, the paper warns. 

The trade finance gap, measured as the gap between the demand for and supply of credit, widened to US$1.7tn between 2018 and 2020, according to research by the Asian Development Bank. 

“With the current macroeconomic headwinds, it’s important that legitimate businesses gain access to every available dollar within the trade finance ecosystem,” says Peter Mulroy, secretary general of factoring and receivables finance association FCI. 

Robert Parson, partner at Squire Patton Boggs, adds that “incidents of fraud – while a relatively small problem in economic terms given the overall value of global trade – have a disproportionate effect on market sentiment and the steps outlined in this paper would go a long way to changing perceptions”. 

“I would wholeheartedly endorse them,” he tells GTR. 

 

Digital systems 

The paper makes a series of recommendations to banks, trade associations, governments and regulators on how technology could be used to strengthen the fight against trade finance fraud. 

It says the industry should make use of “ecosystem-bridging platforms and services to detect fraudulent activities being perpetrated against multiple banks simultaneously”. 

This should be underpinned by wider adoption of authenticated data sources such as the legal entity identifier (LEI) initiative, which assigns companies with a standardised electronic code they can use to passport their identities across networks. 

Banks should also capture metadata from commercial invoices and title documents such as bills of lading, including from PDFs, in line with standards highlighted by the ICC and World Trade Organization. 

Currently, regulatory restrictions on data sharing “come with the unintended consequence of enabling fraudsters to finance the same trade with multiple banks in multiple jurisdictions since banks cannot share information with one another that would alert them to a trade already financed”, the paper says. 

Governments and regulators should remove restrictions on sharing information between banks, facilitated through “systems built on privacy-preserving technologies such as secure encryption, cryptographic hashing and confidential computing”, it says. 

Square Patton Boggs’ Parson says following those steps “would make the fraudster’s work much harder and – of equal importance – would boost confidence in paperless trade”. 

“Availability of quality information flow to and from bona fide participants in international trade is the key to reducing illicit transactions,” he says. 

The paper also makes recommendations to trade associations within the banking industry, including to develop best practice guidelines for verifying documents such as invoices, bills of lading and warehouse receipts. 

They should also support banks’ work in creating a global ecosystem for transparent payments, including by integrating the LEI into cross-border transactions. 

“This is not about more regulation or rules, but rather a recognition of the value trade associations have in sharing best practices to enable the banking community to thrive,” Sean Edwards, chairman of the International Trade and Forfaiting Association, tells GTR. 

Tod Burwell, president and chief executive of the Bankers Association for Finance and Trade, adds: “Mitigating duplicate invoice fraud has been a valuable use case for digitisation of trade. The industry can and must do more to raise awareness of how investments in digitising trade can also reduce fraud risk in trade.” 

Neil Shonhard, MonetaGo’s chief executive, says the paper should help “elevate the conversation across the trade finance ecosystem and give the community guidance on how to continue shutting fraudsters out of trade”. 

“Fraud prevention is a force for good,” he tells GTR. “We experience its impact daily at MonetaGo with the millions of transactions we validate globally.” 

 

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Published 23 November 2022