A series of high-profile fraud cases has rocked Asian commodities and trade finance of late, leaving banks scrambling to protect themselves. But as the risk evolves, how much more can the industry really do to make sure financiers aren’t left high and dry? Eleanor Wragg reports.


Anyone who has followed the numerous trade and commodity finance fraud cases in recent years would be forgiven for thinking that Asia was particularly susceptible to bad actors. From the Qingdao metals fraud to the Access World nickel fraud, the Punjab National Bank letter of undertaking fraud, and the Sinocore International documentary fraud, it seems that every few months a new, high-profile case emerges from the region.

To be clear, there is no evidence that Asia is any more fraud-prone than any other part of the world, generally speaking. In fact, PwC’s biannual Global economic crime and fraud survey found that just 46% of Southeast Asia respondents experienced fraud and economic crime, versus 49% globally. However, it does seem to see the bulk of the blockbusting trade-based crime cases, something banks operating in the region are increasingly aware of.


A numbers game

The combination of the fall-out from cases such as Qingdao and increasingly stringent guidance from regulators has seen banks in Asia become uniquely expert in spotting fraud faster and taking action more effectively.

“In Hong Kong and Singapore, with some of the guidance that has come out in the last couple of years in relation to trade-based money laundering and under-invoicing and over-invoicing, banks have started to understand properly what it is and put in place some good systems in order to spot it,” says Jolyon Ellwood-Russell, partner at Simmons & Simmons.

As a result, the number of cases where banks have found themselves under investigation or being fined for trade-based money laundering is “almost next to nothing”, adds Ellwood-Russell. Indeed, the pendulum has almost swung too far in the opposite direction. “The banks are getting into one or two problems where they are being overcautious and not paying out when they get a Swift message because they don’t know the source of the money, or not every box has been checked, so you also see a spike in those types of problems for the financial institutions.”

Nonetheless, despite banks’ vigilance, structural, regulatory and legal factors are combining to make Asia something of a hotbed for trade-related fraud and money laundering.

“In Asia, there is quite a high occurrence of things being caught,” says Ellwood-Russell. “The reason behind some of the schemes, whether over-invoicing or under-invoicing, is primarily to try to evade or get around capital control regimes in countries like China. Europe or the US and other places don’t have those restrictions, therefore you are probably going to see a higher degree of incentive for people to be bad players and try to get around those rules in order to get money out of the country.”

Beijing wants money earned in China to stay there, in order to help fund further development, and places severe restrictions on the flow of capital out of the country to achieve this. For many, mis-invoicing trade transactions represents a convenient – albeit illegal – alternative to getting money in or out of the country.

The region is also home to the world’s best-known pariah state: North Korea, which has spawned APT38, an aggressive and destructive hacking group that has used the Swift network to steal millions of dollars from banks worldwide. For many, the hackers represent the highest-profile cyber threat to trade finance banks around the world, as illustrated by their 2016 hack on the central bank of Bangladesh, through which thieves stole US$81mn by transferring cash to bank accounts in the Philippines.

It is also something of a numbers game: with China the world’s undisputed export champion, and many of the world’s supply chains now stretching across the Asean region, there is simply more trade coming out of Asia than the rest of the world, and more trade means more fraud, particularly as it still relies on easily forgeable paper documents.


Old methods still bear fruit

Criminals have long found ways of manipulating the trade finance system for their own gains, and many of the methods used are nothing new. For example, invoice finance fraud, or double financing, is as old as the hills, but remains a major headache for banks and alternative lenders alike, who have limited ways to check if an invoice has already been financed by another funder. As a result, millions of dollars are lost to fraudulent invoices each year.

Solutions are at hand: the World Blockchain Trade Consortium is currently working on building a decentralised registry for invoices across multiple continents. The idea is that financiers can use this registry to cross-reference an invoice before committing to financing it.

Meanwhile in India, fintech company MonetaGo has partnered with Swift to pilot a similar blockchain-based fraud mitigation solution with a number of Indian banks which will help them reduce fraud in receivables financing by enabling them to check if invoices have already been financed.


A new risk emerges

But like a mythical hydra, once one head of the trade finance fraud beast is cut off, two more spring up in its place. This is the concern of the International Maritime Bureau (IMB), a division of the International Chamber of Commerce specialised in protecting the integrity of international trade by seeking out fraud and malpractice, which has sounded the alarm on the growing sophistication of trade-based fraud.

“We have seen a worrying increase in cloned bills of lading,” Michael Howlett, deputy director of the IMB, tells GTR. “There are a lot of these bills of lading related to shipments into or out of Asia. We also see that as the shipping information becomes more transparent, schemes relating to bill of lading manipulation are becoming increasingly more sophisticated.”

More worrying still is that it is near-impossible to automate most checks on the physical documents, so fintech-based solutions are out. “Ultimately it relies on something which in our view cannot be automated in certain circumstances. Although we rely on some publicly available information, the real value comes from the IMB database on bills of lading, deeper analyses and direct contact with some of the stakeholders in the shipping chain. It involves physical contact with people in the worldwide IMB network. It’s these checks that uncover the sophisticated scams operating today. That has been recognised by several financial regulators on a global level,” says Howlett.

Often used as a way to abuse the banking system in order to achieve cheaper finance, the funds gained from cloned bills of lading are in many cases repaid to the banks, says Howlett, although he cautions that this will not always be the case.

“We have spoken to many banks regarding a recent series of multiple financing schemes, and some of them have told us that no one has lost any money – yet. But when the music stops, and the bank is left holding those documents, it would not be able to present them to a ship owner and ask them to deliver the cargo against it,” he says.

Creating a cloned bill of lading is surprisingly straightforward, and troublingly difficult to uncover. Up to 95% of false – be that erroneous or fraudulent – bills of lading are issued by non-vessel owning common carriers (NVOCCs), which, unlike carriers or their agents, do not tend to have any assets which are at risk in these transactions.

“Information on vessel movements or cargo details is often readily available, and unscrupulous parties use this information to extract money from the banking system,” explains Howlett. “Any routine checks that banks make into the vessel’s movements or cargo operations may deliver a positive response, ie, yes, the vessel was there, yes, it did load the cargo. But the bills of lading that are going to the banks are not always the operative documents. This is really the worry and the banks need to protect themselves.”

To help banks respond to this threat, the IMB launched its NVOCC Register in Singapore in January, which includes a set of anti-fraud standards and aims to create a database of creditable carriers that can be referred to by an NVOCC’s counterparties.

Banks who are members of the IMB can now check whether the NVOCC named on the bill of lading presented to them has signed up to the IMB code of conduct, allowing them to dodge bad actors. While there is no regulatory requirement for NVOCCs to sign up to the register, the hope is that they will be incentivised to join as banks may process the documents on the register faster than those that are not.


Digitisation: panacea or empty promise?

The obvious response to slashing the incidence of fraud in trade is to remove the very element that makes it so vulnerable: paper. In fact, one of the chief drivers of Asia’s fintech boom has been the need to solve for rampant fraud among trade processes. But with some of the world’s best cybercriminals cracking new tech as soon as it is released, blockchain and AI may not be the answer to all of the industry’s prayers. Indeed, as far back as in 2015 Interpol was warning that blockchain could be repurposed as a means for spreading malware.

All that remains, then, is for banks to continue to walk the fine line between overcautiousness and prudence as they continue to combat the ever-changing face of trade-based fraud across the region.