UK banks to take action on trade finance fraud in new ICC-led project

From Global Trade Review (GTR)

The UK’s trade finance banks are joining forces with the International Chamber of Commerce United Kingdom (ICC UK) in a new initiative to stamp out duplicate financing fraud, a practice that the business organisation says has siphoned “billions of dollars” from the global financial services industry.

Spearheaded by the Centre for Digital Innovation (C4DTI), the initiative will see the ICC UK bring together bank and non-bank financiers to deliver on recommendations laid out in a 2022 Whitepaper, including the adoption of digital tools to shut fraudsters out of trade.

As part of the project, ICC UK has partnered with financial technology provider MonetaGo, the developer of the Secure Financing system that powers the Trade Financing Validation Service across the global Swift network and the Association of Banks in Singapore’s Trade Finance Registry.

First launched in India, MonetaGo’s service has been in live production since 2018, since which time the company says it has processed over 4 million transactions, preventing double financing fraud across all types of trade finance.

Duplicate financing fraud, in which a borrower exploits the inability of banks to share information in order to obtain finance multiple times for the same cargo, has rocked the trade finance industry in recent years. High-profile scandals, such as the frauds uncovered by the 2020 collapses of Singapore-based traders Hin Leong, Agritrade and Zenrock have left banks battling – often in vain – to recoup multi-million dollar losses. This has led some to withdraw from trade finance entirely, or limit their lending to only the top end of the market, leaving smaller companies scrambling for funding.

Despite banks’ assertions – backed up by ICC Trade Register data – that trade finance is, by and large, a low-risk activity, a near-constant stream of headline-grabbing cases is doing little to inspire confidence in the industry. Just last week, for example, in a case brought by the UK’s Serious Fraud Office, two former executives of Balli Steel were convicted of providing banks with “misleading information, false shipping documents and forged signatures on fake sales contracts” in order to obtain trade finance facilities, resulting in losses totalling US$150mn.

Because trade finance fraud often goes unnoticed until a company defaults on its financial obligations, these cases potentially represent just the tip of the iceberg. As a gloomy macroeconomic outlook weighs on the financial health of a growing number of companies worldwide, the likelihood of more fraud cases coming to light is increasing by the day – driving the ICC UK to take action.

“This is a problem that has been around for a long time, and it is businesses that are picking up the bill,” Chris Southworth, secretary general of the ICC UK, tells GTR. “We recognise that banks have put in a lot of hard work towards tackling trade finance fraud, but they are hampered by the current regulatory environment that does not allow them to share information on deals they have financed. Change is possible, as we’ve seen by the imminent passing of the Electronic Trade Documents Bill will enable the digitalisation of the insecure paper-based trade system. We now have new technology we didn’t have before, and now is the moment to address this problem.”

MonetaGo’s service overcomes the information-sharing barrier by enabling financiers to hash certain elements of a trade document to create electronic fingerprints that are then pushed to its secure data repository without revealing any of the information held on the document. The financier can then apply different states to the document, such as whether it has been registered or financed, enabling other lenders to check if a transaction has already been funded.

However, its success as a utility depends on the network effect – unless a majority of potential financiers of an invoice or purchase order are using the service, it cannot detect all possible frauds.

The C4DTI-led project, in which the ICC UK says the majority of the country’s trade finance banks are participating, seeks to solve for this.

“Not all innovations require years to deliver value, and eliminating duplicate financing fraud, in partnership with MonetaGo, is a great example of an existing solution that will have a significant impact in the short term,” says Southworth. “The problem isn’t that we don’t have a solution. We do have a solution; we just don’t have the necessary co-ordination in the market. What we can do is help convene. The banks are supportive, and we are now formalising those discussions into a full-blown work plan.”

Neil Shonhard, CEO of MonetaGo, tells GTR that the work plan will “ensure that UK’s banks and non-bank lenders, irrespective of where they are in their digitisation journeys, will be able to leverage the Secure Financing system to make their financing safer, regardless of which platforms, booking systems and workflow tools they use to provide financing to customers”.

“Prevention of duplicate financing through the use of privacy-preserving technology is something that MonetaGo has created, and is available to lenders to stop duplicate financing fraud today. In collaboration with the ICC UK, C4DTI and the UK’s trade finance community, we can all increase confidence to lend by shutting fraudsters out of the ecosystem, enabling more financing to be extended to boost trade and promote economic growth in the UK,” he adds.

The C4DTI says in a statement that the project will be delivered by the end of 2023, making the UK the first G7 economy to implement this issue and saving “hundreds of millions of pounds” in lost funding that can be better spent facilitating real trade transactions.