Cumbersome, labour-intensive, expensive. These are just a few of the epithets levelled at paper trade documents in the push to modernise centuries-old trade finance practices. While the focus has been on adopting digital methods, what attention has been paid to the potential side effects of doing away with paper? Jacob Atkins examines what risks might lurk in the future of digital trade, and what is being done to address them.
There is near-universal agreement in the trade sector that a move to digital trade and the use of electronic versions of critical documents such as bills of lading is an overwhelmingly positive step that should be taken sooner rather than later.
But while the benefits are widely acknowledged, discussion of the potential pitfalls has been muted.
Currently, paper documents are created at a port and tucked away on the vessel carrying the goods, ready to be handed over to the receiver at the destination port. Depending on how the trade is being financed, the documents may also be couriered to and from banks, which maintain large middle offices to manage the reams of paper that accompany traditional trade finance.
A fully-fledged digital trade environment is likely still many years away, because beyond bills of lading, letters of credit and invoices, many documents and processes– particularly those mandated by customs authorities – are only in the foothills of digitisation.
But at some point in the medium term (almost no one in the trade finance world is willing to nominate a timeframe), most electronic bills of lading (eBLs) between major economies will be conducted on digital trade platforms that conform to laws on electronic transferable records that are slowly being rolled out across the globe.
Like any online business, these platforms will be vulnerable to the well-known dangers of cyberspace: ransom attacks, where hackers seize control of IT systems and demand eye-watering sums of money to hand them back; technical gremlins, such as those that occasionally take out bank payment systems and airline booking databases; and even sudden bankruptcies – not an unrealistic concern in a sector that has seen a swathe of platforms shut down after burning through their cash piles.
In a future where these platforms handle huge volumes of eBLs, covering trade flows all over the world, such outages could quickly snarl the movement of goods.
“You can imagine that if a platform is one of the big successful ones, and it goes down, at best, it’s going to cause delay to some of those cargo operations, and it could do much more than that,” says Adam Richardson, a trade and commodities partner with law firm HFW.
“I do think that’s something we’ll probably see over the next few years,” Singapore-based Richardson says. “On the whole, I’m absolutely a fan of digitalisation; I think it really does solve a lot of what we’ve seen over the last few years. But then you’re reliant on technology. It’s going to be interesting to see what happens if and when one of those platforms gets hit.”
A platform that commands a big share of international trade movements could present an enticing target for professional hacking gangs, or even rogue governments like North Korea, who have previously held to ransom organisations as diverse as an oil pipeline, the government of Costa Rica and meat giant JBS.
Perhaps the biggest alarm bell for digital trade was the 2017 attack against Danish shipping giant Maersk, which immediately stopped operations at 76 ports operated by one of its subsidiaries. The company had to switch off several digital systems and revert to paper while it tried to contain the attack, which ultimately caused around US$300mn in losses.
Tat Yeen Yap, head of supply chain solutions at Maybank Singapore, describes the potential impact of a cyberattack or outage: “If an electronic bill of lading system was disrupted and users cannot access the service, when the goods arrive at ports, they may have to be held from being delivered to the consignee because the electronic bill of lading was not available for surrender to the carrier.”
If the eBLs are inaccessible, goods could still be released under a letter of indemnity – one of the legally troublesome instruments digitisation is supposed to do away with. “That’s one way that carriers might be willing to release the goods without the surrender of the original bill of lading,” says Yap. “There would have to be workarounds, and if no workaround was possible, then it’s just a case of continuing disruption until the system is restored.”
Existing scrutiny
The primary risks of a digital trade platform outage for shipowners, charterers and traders are logistical disruptions and potential costs. For trade finance lenders, the biggest worry in that scenario is the fate of the documents. Bills of lading serve as documents of title and, in sectors like oil trading and mining, they act as security for hefty short-term loans that can stretch well into the tens of millions of US dollars.
Therefore, digital trade platforms have already been made to grapple with questions of cybersecurity, thanks in part to the immense scrutiny banks subject them to during the onboarding process.
Regulations in some countries require outsourcing service providers to comply with cybersecurity rules, and banks may pile on further requirements.
The UNCITRAL Model Law on Electronic Transferable Records, used globally as the basis for laws allowing the use of digital versions of paper trade documents, also requires that such documents be created and handled by a “reliable system”.
The passage of the UK’s Electronic Trade Documents Act – which mandated the use of a reliable system but did not define it – has intensified industry discussions over what constitutes reliability.
The International Chamber of Commerce’s (ICC’s) Digital Standards Initiative took the first step earlier this year towards establishing a global benchmark for reliability. In May, it circulated a proposed questionnaire to digital trade platforms, allowing them to show the processes and safeguards they have in place to protect both trade documents and their product.
“Given the industry we’re serving, there are quite high requirements on us,” says Patrik Zekkar, CEO of digital trade platform Enigio. “I think it’s taken seriously, and maybe taken more seriously than [business-to-consumer],” because of the importance of eBLs as documents of title, he adds.
The vulnerability of a trade platform also depends on the technology they use. Some utilise private or public blockchain, while others employ different technologies.
Zekkar says Stockholm-headquartered Enigio, for example, would be an unproductive target for hackers because once a document is created on the platform, it is solely under the control of the document owner, rather than Enigio, with cryptographic keys to the document stored elsewhere.
But he tells GTR that platforms need to have contingencies in the event of bankruptcy.
While paper documents are not physically affected by the financial collapse of a bill of lading holder, the sudden demise of a platform that hosts digital trade documents could impact their existence or accessibility.
Zekkar says sophisticated users of Enigio ask critical questions such as: “How can I secure my assets? Because if they are on your platform, they will go down with you, and that’s a problem.”
Enigio has a remote setup for the event of an insolvency, but Zekkar says all digital trade providers must also have contingency plans in place. “These things need to be educated, assessed and understood by the market, because we don’t want to end up in a situation where… a technology company goes under and the asset or the market is disappearing.”
Not a silver bullet
The chaos caused by the Covid-19 pandemic was a catalyst that has propelled efforts to digitise trade.
Worldwide lockdowns showed how easily trade finance processes could be skewered by logistical disruption – one trade finance specialist at a UK firm told the audience at an ICC UK Centre for Digital Trade event in April that thousands of documents piled up in her living room while she worked from home – but it also exposed shady practices.
As banks’ risk appetites diminished, the tide of liquidity went out, exposing a handful of companies using dubious, and in some cases fraudulent, financing tricks in order to survive. The losses suffered by banks from these frauds reinforced the case for trade finance digitisation.
But in an alternate universe where trade had already seen significant digital advances by 2020, would those frauds have been averted or mitigated?
David Cuckney, director of the International Maritime Bureau (IMB), believes they would have happened anyway. “These digital ecosystems, platforms… don’t guard against collusion.”
“If you have buyers and sellers or charterers, shipowners, etc, who are part of the same transaction, but the intention to defraud is there from the outset, it doesn’t matter what medium your documents are in. Whether they’re paper-based or electronic – there is still that sort of fraud risk.”
He points out that traders such as Hin Leong – whose founder Lim Oon Kuin was convicted of cheating and forgery charges in May this year – and Balli Steel, several of whose executives were jailed last year for defrauding trade finance banks in 2012 and 2013, both had their own shipping companies that issued their own bills of lading.
“Ultimately, if you have a bad egg who is part of the ecosystem and there is the intention to defraud, then the digital system won’t guard against collusion. You still have to have your checks and balances; you still have to check beyond the documents.”
The IMB, part of the International Chamber of Commerce’s commercial crime services unit, specialises in ferreting out fraud in maritime trade, where the victims are typically banks and insurers.
The bureau investigated its first fully digital trade finance transaction in 2018, which turned out to be a straightforward double financing fraud: “They simply replicated all the information from the genuine transaction and negotiated exactly the same deal elsewhere,” says Cuckney.
He says it’s difficult to estimate the percentage of the IMB’s caseload involving eBLs because they are generally treated the same way as paper documents.
“We’ve been warning our members for some time about some of the challenges of digitalisation, particularly electronic bills of lading,” Cuckney tells GTR. “A lot of the purveyors of electronic bills of lading and digital platforms, they like to talk about all the benefits – of which there are many – but very few address the fraud risk, other than just saying, everything’s digital, so the fraud risk is reduced.”
“Very few of them actually go into detail about how the fraud risk gets reduced. Just because everything’s online and digitised or secured in these digital repositories, we all like to think that means they’re safe and secure. But in the world of information security, that might not always be the case.”
Speed lures fraudsters
In many countries with established instant inter-bank payment systems, online financial fraud targeting individuals has skyrocketed because it is so easy to rapidly transfer illicit gains. Could a similar trend emerge in a digital-first trade ecosystem?
“It is good to make everything digital, but I’d be remiss if I didn’t say we’ve got to understand the risks around digital fraud and the risks around cybersecurity,” Nicholas Reeks, IT director for Tata Steel UK, said at the ICC UK Centre for Digital Trade conference. “Every platform [we work with], we’re going to need to understand its level of security, its level of integrity.”
“If you get an email from someone, and it’s just slightly spoofed – and we see this quite frequently – it does put you into risk in the supply chain,” Reeks said at the London event. “It could easily happen on paper – far more easily, usually, but it happens more quickly on a computer.”
Maybank’s Yap says digital documents should be safer from alteration or forgery compared to their paper predecessors, but there are still risks to be managed.
“Imagine an electronic bill of lading could be manipulated by malicious actors to change the title holder, for example, which could potentially result in the delivery of the cargo to the malicious actors,” he says. “I know of no such case, but it is it is one scenario that we want to be assured would not happen through proper technology risk management.”
Industry rules, such as the ICC’s eUCP (Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation), aim to cover the risk of that type of fraud by requiring the documents to be capable of being authenticated “as to the apparent identity of a sender and the apparent source of the data contained in it, and as to whether it has remained complete and unaltered”.
Yap adds: “Personally, I do not think that the speed will lead to more fraud in trade finance; speed is what we want, because efficiency is the goal.”
Industry initiatives such as Singapore’s Trade Finance Registry, which allows financial institutions to run checks on documents provided by clients to prevent double financing, should be made even more efficient through the use of electronic documents, Yap says.
There is also a lively market of fraud prevention vendors, many of them technology-focused, across the financial services and trade sectors.
Trade finance is one of the most venerable banking products, having existed in some form for several hundred years. But fraud is even older and people who want to make money illicitly are always more imaginative than those whose job is to prevent it.
“Fraud is as old as time,” says Richardson of HFW. “Every time you come up with a solution, the fraudsters will try to find a way around it. It will therefore still exist but that is not to say we should not be trying to stay one step ahead.”
