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Transforming Financial Systems: A Dialogue on Receivables Recording, Fraud Prevention, and Regulatory Solutions

Published in FCI’s In-Sight newsletter, February 2024, available here.

To foster a healthy business and financial environment, governments and regulators are pivotal in reducing fraud and financial crime risks. Prioritising economic stability and growth, governments minimise fraud to boost investor confidence, attract foreign investment, and stimulate economic development. Moreover, reducing financial crime enhances tax revenues by ensuring trade transaction legitimacy and preventing revenue leakage. For regulators, reducing fraud and financial crime risks safeguards the financial system’s stability and integrity. Effective regulatory frameworks and oversight mechanisms mitigate systemic risks, protect consumers, and maintain market confidence. Enhancing transparency, accountability, and compliance with regulatory requirements ensures effective oversight, contributing to a clean, reliable, and secure global trade and financial landscape. 

Industry associations like ours serve as pivotal pillars within the global business community, especially during times of transformation. We fulfil a multifaceted role by raising awareness of significant challenges confronting businesses worldwide. Through research, collaboration, and communication, FCI sheds light on emerging trends, risks, and opportunities that shape the landscape of various industries. Moreover, We also establish guidelines, rules, and frameworks that provide a roadmap for navigating change and fostering innovation. By setting standards and best practices, We enable businesses to streamline operations, enhance efficiency, and maintain competitiveness in dynamic markets. 

Additionally, We advocate for adopting principles and technological solutions to improve industry standards and sustainability. Advocacy efforts promote dialogue, cooperation, and knowledge sharing among stakeholders, driving positive change and facilitating collective growth. Industry associations like FCI serve as catalysts for progress, facilitating collaboration, innovation, and continuous improvement within the global business community. 

I am speaking with Ms. Filiz Unal (FU) is the Deputy Secretary General of Turkey’s Association of Financial Institutions and Mr. Neil Shonhard (NS), Chief Executive Officer MonetaGo

BK: What are the current and expected future regulations on receivables recording center in the factoring sector, and how do they impact the industry in Turkey? 

FU: “Receivables Recording Center” (RRC) was introduced in 2015 for the first time in the World, mandatory depending on the Law on Leasing, Factoring and Financing Companies by the Association of Financial Institutions. The sub-Regulation on Procedures and Principles for Factoring Transactions was also published in the same year by the Banking Regulation and Supervision Agency (BRSA) in cooperation with our Association. According to those regulations, all factoring companies and banks must control and record all the assigned receivables to the RRC to prevent multiple assignments and financing of the same invoice or any receivable. The system also includes payment information on the receivables and payment instruments, such as postdated cheques related to the invoices, if any. Since its inception, 2.5 million double assignments have already been prevented and as the Law assigned the duty of managing RRC and the implementation of the sub-regulations to the Association of Financial Institutions, we also published several circulars and technical documents for the users, who are currently 49 factoring companies and 30 banks. 

As a semi-governmental umbrella organisation, we integrated the RRC System with the E-Document System of Revenue Administration at the Ministry of Treasury and Finance, where e-invoices are created and stored. The e-invoice ratio increased from 23% to 98% within nine years. 

Other integrations with RRC include the Credit Guarantee Fund, Islamic Banking Invoice System, Export Development Co, Movable Pledge Registry under the Ministry of Commerce, and Trade Chain Finance Platform launched by our Association. 

These integrations have established a digital Ecosystem for Receivable Finance in Turkey. 

Post-COVID-19, Technology Regulations were issued for both banking and non-banking financial institutions, allowing them to provide services through digital platforms using e-signatures or digital methods determined by the BRSA for contracts and other necessary documents. 

In the future, we expect the BRSA to implement the Legal Entities (companies) to the Regulation on Remote Identification Methods by Financial Leasing, Factoring, Financing and Saving Financing Companies and Establishment of Contract Relationships in an Electronic Environment, which is valid only for Natural Person currently. 

Overall, these kinds of IT regulations are essential for risk management and credit protection in the finance sector, as they provide access to critical information and serve as an early warning system for potential risks. 

BK: How does technology play a role in the factoring sector, specifically in e-signatures, e-invoicing, and IT solutions? E-signatures, e-invoicing, and IT solutions? 

FU: Technology has greatly transformed the factoring sector, allowing faster, safer, and more cost-effective financing options. E-signatures and e-invoicing have become essential tools for streamlining the factoring process, reducing paperwork, and increasing efficiency. 

IT solutions like the Receivables Recording Center (RRC) and the Trade Chain Finance System (TCFS) have facilitated information exchange among factoring companies, banks, and other financial institutions, establishing a digital ecosystem for receivable finance. This has led to the development of new products, such as supply chain finance and distributor chain finance, along with the integration of Islamic banking products. Technology also enables the assignment of future receivables, prevents multiple tasks, and ensures the control and recording of assigned receivables. The regulation on Principles for the Establishment and Operations of Financial Leasing, Factoring, and Financing Companies, issued by the Banking Regulation and Supervision Agency (BRSA), delineates guidelines for utilising technology in the factoring sector. 

BK: How do local authorities, governmental organisations, and entities strengthen collaboration with international and domestic stakeholders to detect and prevent fraudulent activities like duplicate financing and documents? 

NS: It is vital to avoid building and utilising disparate systems within a jurisdiction, for example, to have a system used by banks only and a separate system used by factoring companies only, or to have separate systems used for different types of financing, e.g. one for factoring and another for documentary trade. The reason is that a financing applicant can avail of duplicate funding through different types of lenders and different financing methods. 

Given that some supply chains are cross-border, it needs to be recognised that the financing applicant can avail duplicate financing for the same underlying transaction in multiple jurisdictions, e.g. the supplier may avail financing from the buyer’s bank under a foreign supply chain finance programme and concurrently obtain financing from a bank or factor in its own country. 

Local authorities, governmental organisations, and entities can collaborate with FCI and MonetaGo to prevent duplicate financing across jurisdictions by implementing global fraud prevention measures established by MonetaGo with Swift and the International Chamber of Commerce. MonetaGo’s system, built for interoperability, uses Swift’s publicly available API specifications and ISO 20022 data structures. 

BK: Financial institutions and regulatory authorities must employ technologies like confidential cloud computing, to ensure effective data aggregation and analysis while safeguarding privacy and sensitive information to detect anomalies and patterns indicative of fraudulent behavior? 

NS: Managing fraud risk should be prioritised, with FCI emphasising that it’s a solvable problem requiring political will from regulators and financial institutions. The initiative can be industry-led, regulator-led, or a joint effort, focusing on preserving financial confidentiality while promoting regulatory compliance.This is possible with extant technology, such as the use of confidential cloud computing deployed in MonetaGo’s solutions. 

Efforts to enhance trust among trading partners and mitigate risks in financial transactions are underway, focusing on ensuring the reliability and security of digital identities, mainly through unique identifiers like the Legal Entity Identifier (LEI). With the increasing prevalence of digital documents in trade, international efforts to digitalise trade are accelerating, with jurisdictions like Turkiye leading in mainstreaming e-invoicing for domestic trade. 

While local identities suffice for domestic trade, a global standard such as the Legal Entity Identifier (LEI) would benefit international trade. The emerging use of the vLEI (verifiable LEI) allows for automated and decentralised validation of business identities, fostering trust among trading partners. 

Additional measures include enhanced transparency and audibility through traceable and tamper-evident digital records, automation of compliance processes, and integration of regulatory requirements into digital platforms and workflows. These steps aim to mitigate risks and strengthen the market’s integrity for trade and financing activities. 

BK: Can you explain how MonetaGo’s Secure Financing system uses data processing techniques to identify duplicate financing requests? 

NS: Yes, the Secure Financing system combines hash matching, string comparison and decision tree logic to detect the re-use of the same documents in financing requests. 

MonetaGo’s system detects matches not only of invoices but of multiple documents, including purchase orders, warehouse receipts and transport documents such as bills of lading, airwaybills and delivery orders, commonly used in trade finance transactions. 

Through advanced data processing techniques to perform similarity analyses of partial matches, the system provides the financier with a risk classification for suspiciously similar transactions. The use of the MonetaGo Global Hash Registry (which stores only hashes of document data) allows for the most efficient detection of duplicate use of the same documents, not only within a jurisdiction but also across jurisdictions, helping to prevent not only domestic but cross-border identical financing fraud which is known to happen. 

BK: If any country or Financial institution decides to build an in-house solution for a Receivables recording system or partner with fintech, what are your thoughts on both solutions? What is the right solution? 

NS: The right solution should collaborate with others to prevent duplicate financing since it relies on data pooling for comparison. Countries like Turkiye, which established a domestic RRC years ago, can now expand its use to international transactions in partnership with MonetaGo. MonetaGo’s system deduplicates across borders using privacy-preserving technologies. 

Effectiveness in preventing duplicate financing relies on avoiding fragmentation, which diminishes the effectiveness of all solutions. Unawareness of international standards or global systems can lead to disjointed or limited solutions. 

An international industry association like FCI is crucial in disseminating information about global systems and standards to avoid ineffective, isolated attempts to solve problems. While jurisdictions may have unique needs, adopting international standards enables interoperability while addressing specific requirements. Building an in-house solution offers control and customisation but is costly and time-consuming. Partnering with fintech companies like MonetaGo provides a more efficient, cost-effective, and widespread solution, as they have developed and tested their Secure Financing system 

across various locations. It’s also vital for the solution to be interoperable with other financial institutions or countries. Access to data from other markets and institutions enhances confidence, so building the network on common standards accessible to many participants is crucial for its success. 

BK: If any country or financial institution decides to develop an in-house solution for a receivable recording system or partner with fintech, it’s essential to consider various factors. Both solutions have merits and drawbacks? 

FU: An in-house solution offers the advantage of tailor-made functionality, potentially meeting specific institutional needs precisely. It provides greater control over the development process, customisation, and integration with existing systems. However, building an in-house solution requires significant time, resources, and expertise. Maintenance, updates, and compliance with evolving regulations can pose ongoing challenges. 

On the other hand, partnering with fintech firms can offer access to cutting-edge technology, rapid deployment, and scalability. Fintech solutions often leverage innovative approaches such as artificial intelligence, machine learning, and blockchain, which may enhance efficiency and accuracy. Moreover, fintech partnerships can distribute costs and risks while fostering a culture of innovation within the institution. However, reliance on third-party providers may raise concerns regarding data security, regulatory compliance, and long-term sustainability. 

In Turkey, the model implemented by the Association of Financial Institutions serves as a noteworthy example. The current regulations mandate the control and recording of assigned receivables to the Receivable Recording Center (RRC), which the Association manages. This centralised approach helps prevent multiple assignments and ensures efficient receivables management within the factoring and banking sectors. By leveraging the expertise and infrastructure of the Association, financial institutions can benefit from standardised practices, streamlined processes, and enhanced data security. 

Ultimately, the right solution depends on various factors, including the institution’s requirements, resources, and risk appetite. In many cases, a balanced approach that combines in-house capabilities with strategic partnerships with fintech firms can yield optimal results, enabling institutions to leverage innovation while mitigating risks and ensuring regulatory compliance.