ITFA initiative tackles cross-border trade finance fraud

Learn about ITFA’s Fraud Working Group and their efforts to combat cross-border fraud in trade finance.

Courtesy Trade Finance Global

The International Trade and Forfaiting Association (ITFA) has launched an initiative to address cross-border fraud in trade finance, following several cases within the financial services sector.

ITFA’s Fraud Working Group, composed of representatives from banks, fraud detection firms, technology companies, and trade finance experts, aims to raise awareness and provide solutions to combat fraud.

In March 2023, ITFA established a Fraud Working Group under the fintech committee led by Andre Casterman.

This group includes representatives from the banking sector, invoice fraud detection and prevention companies, as well as other trade finance practitioners and technology firms.

The working group’s first whitepaper, launched 27 May 2024, “Cross-Border Fraud Initiative,” addresses various types of fraud common in trade finance.

It provides a detailed list of red flags for banks to monitor, historical case studies of frauds, and a directory of tech vendors that can assist financial institutions in detecting and preventing fraud.

The whitepaper aims to consolidate industry thinking and provide guidance, particularly to smaller members with fewer resources.

Fraud in trade finance is not a new phenomenon.

Historical cases like Solo Industries in 1999 and Parmalat in 2003 highlight the persistent and evolving nature of fraud.

Solo Industries engaged in fictitious trades involving many letters of credit, resulting in losses between $500 million and $1 billion.

Similarly, Parmalat, an Italian food company, collapsed due to accounting fraud involving fictitious trade credit arrangements and off-balance sheet entities.

These cases underscore the importance of robust fraud prevention measures in the trade finance sector.

One of the most common and challenging types of fraud identified is duplicate financing.

Duplicate financing involves fraudsters manipulating trade documents to secure multiple loans for the same shipment from different lenders.

The ITFA initiative focuses on this issue by promoting verification techniques, information sharing among financial institutions, due diligence, and regulatory collaboration.

The whitepaper highlights that “duplicate trade finance fraud involves the creation of multiple financing requests for the same shipment of goods, essentially exploiting the multi-layered nature of international trade transactions”.

Common fraud typologies include:

• Falsifying documents: Misrepresenting the origin, value, or quantity of goods.

• Over-invoicing/under-invoicing: Misstating the value of goods to move money covertly.

• Phantom shipments: Creating fake shipping records for non-existent goods.

• Multiple invoicing/duplicate financing: Pledging the same invoice with multiple lenders to obtain several loans.

• Transferable LC fraud: Misusing transferable letters of credit to create layers of financing.

• Round-tripping: Creating fictitious transactions to move money across borders.

• Related party fraud: Conducting trade with related parties to obtain finance without disclosing true relationships.

To mitigate duplicate trade finance fraud, ITFA recommends several approaches.

Verification techniques, such as blockchain and AI, can enhance document verification processes and detect anomalies.

Information sharing among financial institutions can help identify potential duplicate financing requests.

Due diligence procedures for onboarding new clients and conducting risk assessments are crucial.

Additionally, regulatory collaboration is needed to establish regulations and oversight mechanisms.

The impact of duplicate trade finance fraud is significant.

It can disrupt supply chains, as goods may be seized or delayed when fraud is detected, impacting businesses’ ability to fulfil orders.

Financial institutions can suffer financial losses due to disbursing funds multiple times.

Moreover, fraud diminishes trust in international transactions, hindering economic growth.

The ITFA whitepaper states that “when fraud is detected, goods may be seized or delayed, disrupting supply chains, and impacting businesses’ ability to fulfil orders”.

The whitepaper includes several historical fraud cases to illustrate the complexity and impact of trade finance fraud.

For instance, the Saad Group’s collapse in 2009 involved fictitious trades and letters of credit issued by banks owned by Saad subsidiaries, resulting in losses in the hundreds of billions of dollars.

Similarly, the 2014 Qingdao-based Dezheng Resources defaulted on $4 billion due to duplicate financing, collateral, and falsified document frauds.

These cases highlight the need for effective fraud prevention measures and the importance of collaboration between financial institutions, governments, and technology vendors.

The ITFA initiative emphasises the importance of a collaborative approach to combating fraud in trade finance.

By sharing information, adopting verification technologies, and enhancing regulatory frameworks, the industry can better detect and prevent fraud.

The whitepaper serves as a resource for financial institutions, providing guidance on identifying and mitigating fraud risks.

ITFA’s efforts aim to protect the integrity of global trade and support the growth and stability of the international economic ecosystem.

The whitepaper concludes, “the true pathway to solving fraud involves collaboration between FIs, government agencies, regulators and FinTechs”.

The ongoing effort to combat trade finance fraud seeks to ensure that financial institutions are well-equipped to handle the complexities of international trade.

To address duplicate financing globally across borders, an inter-connected network is required. MonetaGo, for example, operates a global system called Secure Financing, using hashing and confidential computing, for the prevention of duplicate financing within and across multiple lending organisations.

This system overcomes key challenges to identifying and preventing duplicate financing fraud, such as information silos, privacy regulations, competition concerns, and inadequate information sharing mechanisms.

Other initiatives include the Trade Receivables Discounting System (TReDS) in India and the Trade Finance Registry (TFR) by the Association of Banks in Singapore (ABS).

These systems illustrate how technology can be used to prevent fraud and enhance the integrity of trade finance.

The Financial Action Task Force (FATF) and other regulatory bodies stress the need for robust systems to detect and prevent financial crime.

Common red flags include material discrepancies, illogical transactions, advance waivers, future or pre-dated bills of lading, unusual pricing patterns, mismatched trade documents, complex payment structures, shell companies, rapid movement of goods, and unusual shipping routes.

By adopting these measures and leveraging the expertise of entities like MonetaGo, the trade finance industry can better address the challenges of cross-border fraud and support the integrity of global trade.