A group of major banks hope that a blockchain-based registry of trade finance transactions will put a stop to the fraudulent practices that have plagued Singapore’s commodities sector this year, though onlookers question whether the project’s scope is extensive enough to bring about real change.

The registry project is jointly led by Standard Chartered and DBS Bank but brings together 14 international financial institutions. Built on a platform developed by Singapore-based technology firm dltledgers, it is now at proof-of-concept stage following pilot testing that started in June.

A joint statement from the two lead banks describes the registry as “a secure central database for the banking industry to access records of trade transactions financed across banks in Singapore”.

Details associated with trade documents are submitted to the platform, which can then determine whether financing is being sought multiple times for the same cargo.

“This mitigates against duplicate financing from different bank lenders for the same trade inventory, leading to greater trust and confidence among banks and traders alike,” the statement says.

The registry is also supported by government innovation agency Enterprise Singapore, with the Association Banks of Singapore acting as an advisor. The 12 other banks involved are ABN Amro, ANZ, CIMB, Deutsche Bank, ICICI Bank, Lloyds, Maybank, Natixis, OCBC, Rabobank, SMBC and UOB.

The Monetary Authority of Singapore (MAS), which regulates the city state’s banking and finance sector, says it is “glad to see the banking industry coming together, collaborating with government agencies and technology partners, on this important initiative”.

“A digital trade registry strengthens trade financing banks’ ability to avoid duplicate financing, and facilitates more sustained credit flow in trade financing,” adds Ho Hern Shin, the authority’s assistant managing director for banking and insurance.

According to dltledgers documentation, seen by GTR, the aim of the project is to let each participant bank “validate whether or not another financial institution has already submitted a particular title instrument for financing purposes”.

Those title instruments could be bills of lading, charter party bills of lading or letters of indemnity, it says.

Rather than submit those documents in full, banks upload pre-agreed sets of information from those documents onto the platform. Data submitted includes the type of financing being sought, loading and vessel information and the identity of the exporter and importer.

That information is encrypted and not visible to other participants, but rather sits within each bank’s own node – in other words, that bank’s part of the network.

The registry can then compare data uploaded by different banks, flagging up any indications that double financing is being sought on a single transaction but without sharing potentially sensitive data.

“Without a central repository, lenders in Singapore are blind as to whether bills of lading or physical cargo have already been pledged and financed,” dltledgers says.


Beyond double financing

For the commodity trading industry, the stakes are high. A string of high-profile company collapses and accusations of fraud have left banks wary of providing finance to the sector, with some looking to consolidate their commodity finance operations and others – notably ABN Amro – closing that line of business entirely.

However, industry insiders question whether a trade finance registry can effectively address those issues without the involvement of buyers, sellers, traders or shipping companies.

The Standard Chartered and DBS statement says Singapore’s banking association plans to invite all banks to join the project as members, but does not mention whether other counterparties will also be incorporated.

“I can’t see how it would work unless the relevant counterparties are directly linked to the registry and can validate themselves,” says a Singapore-based source who requested not to be identified. “For any system without independent validation from buyers, you cannot guard against fraudulent sales invoices.”

Another question raised is how the platform could identify instances where financing is only sought once, but the value of cargo is inflated or does not exist in the first place.

Sam Mathew, global head of documentary trade at Standard Chartered, confirms that the registry project currently only intends to tackle attempts at duplicate financing, rather than other types of trade finance fraud.

“In the future phases… we may expand the scope of the platform to enable capabilities such as authenticating validity or authenticity of shipping documents by way of real-time API integration with third-party shipping companies and platforms,” he tells GTR.

Mathew adds that existing checks conducted by banks should be sufficient to test whether cargo exists in the first place, although there are plans to have bill of lading authentication built into the registry at a later date.

Checks for double financing alone would not be enough to bring a complete halt to the fraudulent activity that has emerged in Singapore.

At Hin Leong, for example – once one of Asia’s largest fuel trading houses until vast undisclosed losses came to light in April – a review of the company’s conduct carried out by PwC revealed a “vicious cycle” of fraudulent activity reminiscent of a Ponzi scheme.

Funds received from one customer would be allocated to a previous customer’s account in order to inflate receivables balances and cover up prior losses, a report revealed.

Hin Leong was also accused of routinely obtaining financing from multiple banks for the same trade, but also of financing the sale of cargo it did not own or that did not exist at all. The company’s liabilities to various banks and other creditors was estimated to total as much as US$3.5bn.

Similar allegations have arisen at several other of Singapore’s trading houses, including ZenRock, Sugih Energy and Hontop Energy, with banks claiming trade transactions were fabricated so those companies could obtain liquidity.

Sriram Muthukrishnan, global head of trade product management at DBS Bank, acknowledges there is “still much more to be done”.

“The future roadmap envisages the involvement of other key industry participants such as shipping companies, ports and customs authorities to contribute to the enrichment of the trade finance registry’s validation capabilities,” he tells GTR.

Other digital trade platforms have also expressed interest in integrating with the registry, he adds.