Manipulation and risk in global trade is by no means a new phenomenon. However, in recent years, the threat it presents to organisations carrying out legitimate transactions has seen it rise up the boardroom agenda and become a talking point at virtually every industry conference where international banks are present.
In particular, banks and regulatory authorities are looking for ways to reduce exposure to risk, including better reporting on transactions that are subject to letters of indemnity (LOIs). The challenge they face comes in ensuring that all the proper checks are carried out in accordance with regulation, without slowing down or disrupting key transactions and processes.
In 2013, a thematic review by the Financial Conduct Authority (FCA) into the control of financial crime risks in trade finance highlighted concern for processes both in the UK and internationally. One important area related to the authenticity and originality of the key documents needed to conduct transactions.
In this respect, replacing paper-based processes with digitised documents offers real value. Specifically, if a bank or other trading counterparties switch from sending key documents manually to using an electronic process (i.e. over a multi-party trade finance platform), there is far less risk of these documents being duplicated. Likewise, both the sender and receiver can confidently rely on the authenticity and originality of the electronic document (in so far as it is not possible to tamper with it in transit) something which is a significant vulnerability with paper documents.
The FCA report also emphasised the fact that ‘significant discrepancies could appear between the description of the goods on the bill of lading and the actual goods shipped’. The challenge for the person with responsibility for checking is that, if they physically do not have the bill of lading in their hand, they have no way of making a comparison.
Unlike a standard invoice, a (paper) bill of lading generally involves collusion between different parties. Those that attempt fraudulent B/L activity often rely on the fact that banks are accustomed to not having the original documents in their possession. This lack of visibility and authentication consequently makes it difficult to carry out the high level of checks needed to guarantee absolute certainty.
Another area where the use of technology in place of paper-driven processes offers significant advantage is in creating a more systematic approach to screening trade documents. By configuring and applying the technology to pick up and highlight pre-determined warning signs, it is possible to highlight potential fakes that could easily be missed by people tasked with processing a lot of documents on a day-to-day basis.
The fact that the electronic trade finance platform is underpinned by a database to control the legal holding rights to the documents, known as the title registry, automatically ensures documents are delivered to the right party at the right time. This also makes it more apparent when someone is attempting to manipulate or circumvent a transaction.
This is where technology can go some way to level the playing field. For example, in the case of a recent suspected metal finance fraud in China, there was uncertainty over how many ‘original’ paper warehouse receipts were in circulation. Using a secure, legally-binding system to send these types of documents electronically guarantees their originality, as well as the authenticity of the sender. Those equipped with the system are also better placed to show regulators that proper controls have been applied.
Now that the use of back-to-back letters of credit has become more commonplace, along with other documentary forms of credit, the value of digitised trade documents such as electronic bills of lading (eBLs) is increasingly being recognised. In response to the high-profile review by the FCA and financially damaging incidents such as the metal financing scandal at ports in Qingdao, banks have undoubtedly become more aware of the need to put more focus on applying controls over their trade finance processes.
The more organisations use this technology, the less opportunity exists for criminals to use fake or duplicated paperwork, reducing the risk from criminal activity.
By Ian Kerr, CEO Bolero International