Financial crime is an ever-present risk in trade-related activities. Identifying the sources and weak points in processes and mitigating theses is key to operating successfully in this sector.
Fraud is a wide-ranging crime. It can be as simple as falsified documentation or failure to disclose relevant information, as well as more complicated schemes involving multiple parties and circular trades.
Much has been written recently about an uptick in fraud cases. This may be driven by economic conditions, ongoing challenges in supply chains or other reasons. Regardless of the causes, it is the responsibility of those in the market to ensure they are aware of the size of the risk in monetary and reputational terms. Crucially, any market participant will want knowledge of the tools which may help to address fraud and minimize its impact.
The impact on businesses when something goes wrong can be substantial. With the value of global trade reaching somewhere in the region of USD 5 trillion, a 2020 report from MonetaGo and the ICC suggests that its reasonable to assume that at least 1% (i.e. USD 50 billion) of that total may be susceptible to fraud. They further estimate that the realised cost of fraud on financed activities could be as much as 10% of that amount, or USD 5 billion annually. The impact of fraud in particular markets can also build up to eye-watering levels over time. Bloomberg estimates that in the six years between 2014 and 2020, more than USD 9 billion of losses arose from trade-related fraud in Singapore alone. Staying ahead of the criminals is an uphill battle, and not always a straightforward one.
Falsified documentation is one of the most obvious sources of fraud risk. Baldev Bhinder, writing in the July 2023 edition of the ICISA Insider, noted that while it is rare to use copied Bills of Lading (BL), this does happen occasionally for valid operational reasons. This can then open the door for fraud to occur: “Copy BLs carry the danger of giving rise to mirror trades, where a photocopy of a BL can be used to create the appearance of a trade that mirrors the actual trade but involved completely different parties”.
This risk can balloon further when the BL is used as part of complicated circular or synthetic trade structures. Verification and assurance of the necessary documentation then can become less important to the parties involved as these trades wheel their way through different hands that are not financially interested in the successful conclusion of the transaction. As Baldev notes, “The clear risk with [such trades] …is that the parties involved have no interest in the physical trade, and there can be little incentive to verify their actual involvement in the trade, the documents related to the trade, …or for that matter, even if the trade existed”.
So, how can companies (manufacturers, traders, financial institutions) respond to what seems like such an amorphous risk? Well, new technologies seem to offer one such path towards mitigation. AI, Machine Learning and so on are certainly buzzwords today, but the technology has been around for a while now to identify duplicated invoices or other examples where fraud may have occurred. And simpler technologies play a role too. As discussed in our recent overview of regulatory developments in 2023, the UK’s new Electronic Trade Document Act (ETDA) shows one path forward. Creating a means for the use and acceptance of digital originals should reduce a source of fraud while also making processes more efficient. Not only does electronic storage and verification give one source of truth, but it also makes the process more time- and cost-efficient, thereby eliminating the need for copies.
ICISA is also supporting the ICC Digital Standards Initiative which has similar goals in mind to the ETDA initiative in the UK. Ensuring a standardised approach to the digitalisation of trade documents and the process for identifying and using these on a wide basis around the world could be a game-changer in the battle against fraud.
Acceptance is one of the big challenges here as many involved in the trade world simply trust a physical original more than a digital version. The development of the Model Law on Electronic Transferable Records (MLETR) by the United Nations Commission on International Trade Law (UNCITRAL) also plays an important role here. MLETR also seeks to promote the acceptance of electronic documents in trade and ensure that these are accepted as “functionally equivalent to a transferable document”.
ICISA members work hard to stay on top of these risks. This not only includes the use of technology to identify fraud, but other practices which can help to root it out. The starting point for our sector is staying close to the transaction throughout its life cycle. Maintaining close relations with the parties involved is critical to this. Close collaboration with financial institutions also ensures that underwriters understand the risks presented to them, so that all relevant data is available when needed. Having access to information you can rely on is key. As Sascha Dear of R+V Re also highlighted in our July Insider edition about non-traditional risks, even where information is available, “…it is of paramount importance to approach such figures with the utmost diligence and caution, irrespective of the transaction structure”.
We are seeing the continued growth of insurers’ capabilities and experience in different aspects of the trade and financing environment. This includes hiring people with specific backgrounds in these topics, as well as investing in training for staff. As trade evolves and practices change, so must the insurers who provide cover for the credit risks involved. ICISA’s committees regularly discuss developments and share best practices in fraud identification. As an association, we are firmly committed to addressing these risks and supporting our members as they do that within their own business too. That is ultimately to the benefit of the insured seller. Nobody wants to be defrauded and credit insurance companies can help to avoid the nasty (monetary) consequences and that nagging feeling of having been taken for a ride.
