Fraudsters love trade and trade finance is particularly exposed to their attentions. They take advantage of the trade industry’s reliance on document-based processes, using techniques such as fake invoices, fake or cloned bills of lading, collateral fraud, and duplicate financing to get the better of banks and their clients.
What are the tell-tale signs to look out for, and what more can be done as we digitalise trade finance to make it harder for fraudsters to penetrate daily transactions?
Our guests in this episode discuss examples of trade-related fraud and available measures to stay one step ahead of the criminals. As Deutsche Bank’s Claudia Hussy puts it, “Trade finance is very heavy on paper, so we are dealing with unstructured data and have limited insight into the complex value chain of the transaction – and there are many parties involved.” Chris Southworth of ICC United Kingdom recounts a US$500m steel trading business fraud involving 20 different trade finance requests that “should not have happened”. Legal expert Geoffrey Wynne helpfully explains that frauds are ultimately about “falsifying documents, bills of lading, warehouse receipts”, and convincing others that a commodity exists when it does not.
Tune in to hear more about the scale of the problem and potential solutions. See also the flow article, Fighting trade-related fraud.
- Claudia Hussy, Head of Trade Finance Unfunded Product Management & Automation Lead, Deutsche Bank
- Geoff Wynne, Partner and Head of Trade & Export Finance, Sullivan &Worcester
- Chris Southworth, Secretary General ICC United Kingdom
- Clarissa Dann, Editorial Director, Deutsche Bank
Transcript of Interview:
Clarissa Dann: Welcome to Trade Finance TV.
Our guests in this episode discuss trade related fraud and what can be done to keep ahead of the criminals.
So why do fraudsters target trade finance? Claudia, do you want to take it away?
Claudia Hussy, Deutsche Bank: Trade finance is still very heavy on paper, so we are dealing with unstructured data, have limited insight into the complex value chain of the transaction, and there are many parties involved in a transaction where the supplier of the exporter, our distributors, buyers and the importer agents and each of those parties require financing and want to optimize the working capital. So likelihood is very high that more than one bank is involved. However, each of those banks has only a fragmented piece of information off the whole chain. Fraudsters can take advantage of that to misuse that system.
Clarissa Dann: Chris, the examples of fraud that you’ve seen at the ICC, you’ve shared some of those quite widely in various conferences. She won’t come back to us on that.
Chris Southworth, ICC: ICC can be a useful, neutral convener, and I think it was blindingly obvious with the Steelcase fraud of £500 million, 20 different trade finance requests, That should not have happened. How can you go to 20 banks and ask for 20 forms of finance from 20 different stakeholders and not be aware that that is going on? The cost is passed on down the economy, it’s the businesses that pay and the consumers that pay in the end. And it’s an unnecessary cost to the economy when we’re trying to drive economic growth overall. So this is a problem that’s large enough to deserve some attention and some intervention, I think, and certainly some coordination from the likes of ICC.
Geoffrey Wynne, Sullivan & Worcester: The frauds are very, very simple in trade. Ultimately, they are about falsifying documents, bills of lading, warehouse receipts. It’s generally selling, pretending that commodity exists when it doesn’t, or taking a bit of commodity and then saying it exists 20 times.
Double invoicing in the sense that you take an invoice, you sell it more than once. You say, please don’t contact the buyer, I’ll do the collecting for you, it’s a classic Ponzi scheme. The simple answer requires due diligence. The fraudster assumes that people won’t talk to each other, they won’t share the information. And actually the wonderful lemming effect, if one bank is there, oh that must be okay. All go in. Solo Industries took five years before he cashed in, and in the five years nobody went seriously to kick the tires. There was always one true transaction that was around. Somebody said, ‘can I see the documents for the transaction?’ ‘Oh yeah, here you are.’ Somebody else says it, ‘Oh yeah, here you are.’
Clarissa Dann: Claudia. Any comments on all that?
Claudia Hussy, Deutsche Bank: In partiuclar I think if a company is facing difficult times and gap in liquidity, the likelihood of fraudulent behavior increases and the vicious cycle starts. I think one relatively recent fraudulence case was in Lyon, who was forging documents on the massive scale just simply to keep repaying earlier debts. And ultimately the company sold more cargo than it actually had. When the founder revealed to his investors losses of $800 million.
With more collaboration across banks, fraudsters can be circumvented much, much easier.
Geoffrey Wynne, Sullivan & Worcester: There’s a regulatory problem about information sharing. Banks have duties of secrecy, GDPR, the data protection means that data can’t be shared. If the regulators and the legislators help banks in particular, that will help cut this down.
Chris Southworth, ICC: I think there’s some good examples of this in open banking where there is clearly data being shared between the banks. It’s a fantastic system. In the UK we’re all used to it as consumers. Why aren’t we applying exactly those principles into trade? It’s just about being very focused with the regulator of exactly what data needs to be shared and in what way it needs to be shared. So that it is about all of us benefiting, including the economy and government and the regulators, because we’re talking about shutting fraudsters out of trade here.
Between all of us; the banks, government and other stakeholders, we have a lot of information and insight on who the fraudsters are, but I have a consistent criticism of the regulators that they’re just not engaging enough. In my eight years at ICC, we’re the self-regulater in a way for trade finance rules and payment rules. We haven’t been called once by the regulator on any of these issues, whereas you would think we would be first port of call. So I just think there’s a lot of scope for more collaboration, more dialogue, but we do need all players to play a part.
Geoffrey Wynne, Sullivan & Worcester: The regulator says to banks, ‘I expect you to do diligence everybody in the transaction, but yet I will not allow you to share that data.’ So we’ve got the concept of the legal entity identifier which could solve true identity. But each time I talk to my bank clients, the greater worry is the regulator and my customer might be able to challenge my sharing of information. Let that information be shared. It is not revealing the business of your customer. It’s just saying, ‘this is the cargo that I financed. Has anybody else financed it?’
The big warehouse frauds are so obvious when you play them back. You know, if a warehouse issues warehouse receipts for more than ten times its capacity, it’s a bit obvious that nine out of ten of the people holding those bits of paper do not have commodities supporting it. And people get fooled. I mean, Trafigura was fooled. An empty container supposedly had in it hundreds of tons. Come on, we can stop this.
Claudia Hussy, Deutsche Bank: Yes a digitized and particular structured data and data standards, I think are key for a lot of still unstructured fields. Automatic control is just not possible. Using standardized codes for goods, right. How many countries have introduced or forced the utilization of the harmonized customs coach? Hardly any. For the future, if we really want to leverage on those innovation, I think we need a much stronger push on structured data.
Chris Southworth, ICC: Yeah, I think structured data and data standards is absolutely vital, not just to make sure that the information is machine-readable across the banks, but also machine-readable across to governments. You know, you’ve got enforcement officers in the ports, 40,000 containers needing to know which one am I looking in? If that information is in a standardized format, I can get to the portal, the mobile device, and then obviously they’re going to get to that box more efficiently.
So I think the structured data, the data standard is absolutely vital. It’s absolutely fundamental to the piece of what we’re doing with the banks at the moment on E invoices and having that standardized approach where the banks can aggregate into one registry, invoice numbers. And then of course, that will help detect duplicate invoicing, duplicate numbers as long as the numbers are all in the same format, of course. We just have to go piece at a time, I think that’s the way we’re going about it. We can’t solve everything in one go, but let’s pick off slices of it. Be invoice forward. I don’t see why we can’t solve that relatively smoothly and quickly.
Geoffrey Wynne, Sullivan & Worcester: Wherever we get to on technology, wherever we get to on AI, the human is going to be there, because the KYC bit ,the know your customer, know the transaction. When I talk to the people who didn’t get caught in Jindau, which was, say, totally simple, lots and lots of warehouse receipts for what wasn’t there, the guy said, ‘Oh, that was a suspicious warehouse. We did not go to that warehouse.’ That means a lot of people knew not to go there, but some did. And that’s going to be the case all the way along the line. So the more we share the data, the more we do all of this, the better it will be.
Clarissa Dann: For our other episodes do visit TRADEFINANCETV.NET and Spotify. Have a lovely summer and we’ll see you all in September.