ITFA’S FRAUD PREVENTION WORKING GROUP RELEASES FIRST WHITE PAPER, May 2024

Written by ITFA Fraud Working Group (ITFFWG)

ITFA’s fraud prevention working group has published its first whitepaper aimed at helping the trade finance market tackle the perpetual challenge of cross-border fraud. 

ITFA’s fraud prevention working group has published its first whitepaper aimed at helping the trade finance market tackle the perpetual challenge of cross-border fraud. 

The paper outlines the different types of fraud common to the trade finance market while also listing tech vendors that might be able to support financial institutions in addressing various fraud activities. It provides a list of common red flags for banks to watch out for and historic case studies of high-profile frauds.

“It is meant to be a mix of best practice guidelines, but also a helpful guide to things you can look out for. We even have a specific section on commodity finance as there are nuances in that sector that are different from generic trade finance,” explains Ian Milne, executive director of sales at the tech firm MonetaGo and co-chair of the working group. 

“It is the first time that as an industry we have brought together a cross-sector of participants from fintechs and financial institutions to work on a whitepaper on this subject. It is a real collaborative effort. We can’t raise awareness enough and we need fraud prevention to be at the forefront of everyone’s minds,” says Graham Baldock, Head of Fraud Risk Management, Trade Finance and Physical Commodities at Standard Chartered Bank and fellow co-chair of the working group.

The report should prove particularly useful to smaller institutions that lack the resources to do their own research into fraud, Milne says.

“If you look at the bigger banks, they have the resources to devote to solving the problem, whereas local or regionally focused banks and even the non-bank liquidity providers – they often do not have the same access to resources or the ability to evaluate every tech solution available,” he explains, noting that banks in emerging markets in Africa and Eastern Europe have already expressed interest in the report as a tool to support internal training and education.

Fraud has always been a challenge for international trade finance, as it is for many financial sectors. While trade and trade finance fuel economic growth and prosperity, the cross-border nature of the business can be exploited by criminals to conceal and transfer funds through the use of fraudulent documents. Financial downturns and liquidity pressures can also pressure otherwise legitimate companies into fraudulent activity.

“It is hard to quantify the extent of the problem as banks don’t typically like to talk about the issue. But if you just look at what is in the public domain, the numbers are staggering. For example, if you look at what happened in Singapore in 2020, you are looking at four to five billion dollars of losses,” Milne notes.

Singapore saw a string of commodity traders default on their trade debt in 2020 amid accusations of fraud. 

Such large-scale fraud cases can have a detrimental impact on confidence in a market and diminish banks’ appetites to lend to certain sectors or clients. They can further exacerbate the already large US$2.5tn gap in global trade finance availability, Milne explains.

The problem persists in European markets as well, he says, referencing the Lenvi Riskfactor’s 2023 European Fraud Readiness report, which shows how fraud is affecting receivables finance in France, Germany, Spain and the UK.

The report notes that 81% of survey respondents across the four countries see fraud levels increasing in the coming financial year. Almost one in three respondents believed their company detected no more than half the attempts to defraud their business.

Given the prevalence of fraudulent activity, the ITFA whitepaper is a “call to action” for the entire industry, Milne says.

While the paper may be most useful for smaller financial institutions, Milne adds that larger banks “almost have a duty to act for the broader community”, to help improve access to trade finance and prevent criminal activity undermining the reputation of the market. 

The ITFA report pays particular attention to a type of fraud known as duplicate financing, which occurs when companies secure multiple financings from different institutions to finance the same shipment of goods.

Detecting duplicate financing attempts will require a high degree of collaboration and the adoption of new technology, the report finds. Solutions will need to allow financial institutions to pool data on what transactions they are financing and share it with other banks in order to spot potential duplicates.

Tech solutions will need to be interoperable to allow ease of access, but also ensure there are sufficient data protection and privacy settings, the report says.

To date, there have already been some steps forward in terms of implementing technology and pooling trade transaction data.

Towards the end of 2022, Swift launched its Trade Financing Validation Service, which provides checks on transactions to detect whether they are duplicate financing frauds. The service is powered by MonetaGo’s secure financing system, and it is interoperable between different markets and accessible via Swift’s application programming interface.

Elsewhere, in 2023, the Association of Banks in Singapore launched the Singapore Trade Finance Registry, a centralised record of trade finance transactions that aims to identify duplicate financings.

Looking to the future, Milne sees multilaterals becoming increasingly keen to tackle the problem of duplicate financing as a way of plugging the trade finance gap.

“The only way to solve that gap in trade finance provision is to increase lender confidence in small and medium-sized businesses. The only way to do that is to ensure risk controls and mitigants are in place,” he says.

The ITFA fraud prevention working group was first set up in March 2023 under the fintech committee headed by Andre Casterman, and is tasked with increasing awareness around fraud risk in trade finance.

The paper outlines the different types of fraud common to the trade finance market while also listing tech vendors that might be able to support financial institutions in addressing various fraud activities. It provides a list of common red flags for banks to watch out for and historic case studies of high-profile frauds.

“It is meant to be a mix of best practice guidelines, but also a helpful guide to things you can look out for. We even have a specific section on commodity finance as there are nuances in that sector that are different from generic trade finance,” explains Ian Milne, executive director of sales at the tech firm MonetaGo and co-chair of the working group. 

“It is the first time that as an industry we have brought together a cross-sector of participants from fintechs and financial institutions to work on a whitepaper on this subject. It is a real collaborative effort. We can’t raise awareness enough and we need fraud to be at the forefront of everyone’s minds,” says Graham Baldock, head of fraud for trade finance and physical commodities at Standard Chartered Bank and fellow co-chair of the working group.

The report should prove particularly useful to smaller institutions that lack the resources to do their own research into fraud, Milne says.

“If you look at the bigger banks, they have the resources to devote to solving the problem, whereas local or regionally focused banks and even the non-bank liquidity providers – they often do not have the same access to resources or the ability to evaluate every tech solution available,” he explains, noting that banks in emerging markets in Africa and Eastern Europe have already expressed interest in the report as a tool to support internal training and education.

Fraud has always been a challenge for international trade finance, as it is for many financial sectors. While trade and trade finance fuel economic growth and prosperity, the cross-border nature of the business can be exploited by criminals to conceal and transfer funds through the use of fraudulent documents. Financial downturns and liquidity pressures can also pressure otherwise legitimate companies into fraudulent activity.

“It is hard to quantify the extent of the problem as banks don’t typically like to talk about the issue. But if you just look at what is in the public domain, the numbers are staggering. For example, if you look at what happened in Singapore in 2020, you are looking at four to five billion dollars of losses,” Milne notes.

Singapore saw a string of commodity traders default on their trade debt in 2020 amid accusations of fraud. 

Such large-scale fraud cases can have a detrimental impact on confidence in a market and diminish banks’ appetites to lend to certain sectors or clients. They can further exacerbate the already large US$2.5tn gap in global trade finance availability, Milne explains.

The problem persists in European markets as well, he says, referencing the Lenvi Riskfactor’s 2023 European Fraud Readiness report, which shows how fraud is affecting receivables finance in France, Germany, Spain and the UK.

The report notes that 81% of survey respondents across the four countries see fraud levels increasing in the coming financial year. Almost one in three respondents believed their company detected no more than half the attempts to defraud their business.

Given the prevalence of fraudulent activity, the ITFA whitepaper is a “call to action” for the entire industry, Milne says.

While the paper may be most useful for smaller financial institutions, Milne adds that larger banks “almost have a duty to act for the broader community”, to help improve access to trade finance and prevent criminal activity undermining the reputation of the market. 

The ITFA report pays particular attention to a type of fraud known as duplicate financing, which occurs when companies secure multiple financings from different institutions to finance the same shipment of goods.

Detecting duplicate financing attempts will require a high degree of collaboration and the adoption of new technology, the report finds. Solutions will need to allow financial institutions to pool data on what transactions they are financing and share it with other banks in order to spot potential duplicates.

Tech solutions will need to be interoperable to allow ease of access, but also ensure there are sufficient data protection and privacy settings, the report says.

To date, there have already been some steps forward in terms of implementing technology and pooling trade transaction data.

Towards the end of 2022, Swift launched its Trade Financing Validation Service, which provides checks on transactions to detect whether they are duplicate financing frauds. The service is powered by MonetaGo’s secure financing system, and it is interoperable between different markets and accessible via Swift’s application programming interface.

Elsewhere, in 2023, the Association of Banks in Singapore launched the Singapore Trade Finance Registry, acentralised record of trade finance transactions that aims to identify duplicate financings.

Looking to the future, Milne sees multilaterals becoming increasingly keen to tackle the problem of duplicate financing as a way of plugging the trade finance gap.

“The only way to solve that gap in trade finance provision is to increase lender confidence in small and medium-sized businesses. The only way to do that is to ensure risk controls and mitigants are in place – rather than relying on multilaterals just to guarantee financing to SMEs, which is not a long-term solution,” he says.

The ITFA fraud prevention working group was first set up in March 2023 under the fintech committee headed by Andre Casterman, and is tasked with increasing awareness around fraud risk in trade finance.

Read the full ‘Cross-border fraud initiative’ whitepaper here.