Industry experts have issued fresh guidance to lenders on how to avoid becoming victims of trade finance fraud, including a set of early warning signs common across recent scandals, as calls grow for adoption of cross-border invoice-checking tools.

A paper authored by an International Trade and Forfaiting Association (ITFA) working group examines several fraud cases that have blighted the sector, including the 2020 collapses of Singapore-based Hin Leong and Agritrade, and UAE-headquartered Phoenix Commodities and GP Global.

The paper notes trade finance is particularly susceptible to duplicate financing – where a buyer of goods makes multiple requests to finance the same trade – and lists potential signifiers that could indicate an attempted fraud.

Because those financing requests are generally made to several different lenders, it also recommends wider adoption of third-party registries – technology-driven tools that can detect duplicate invoices – including across international borders.

“Under normal economic circumstances most of our clients would not commit fraud, yet when times are dire some might feel pressured into doing things they wouldn’t normally do,” the paper says, giving the examples of accounting or collateral-based fraud as well as duplicate financing.

In April 2020, as the pandemic brought about a squeeze on liquidity across the commodity trading sector, Singapore-based Hin Leong revealed it had suffered undisclosed losses of more than US$800mn, and that collateral pledged to lenders had already been sold.

The company’s liquidators later uncovered instances of duplicate financing, as well as factoring and inventory finance facilities based on forged documents. They compared the arrangement to a Ponzi scheme, where funds raised were used to repay earlier debts, and the company’s founder has since been convicted by the city-state’s criminal court.

Meanwhile, Agritrade’s former chief financial officer has been jailed for 20 years for her role in deceiving lenders into providing financing for undisclosed related party transactions, which also came to light in the early months of the pandemic.

At the time of their collapses, Hin Leong and Agritrade’s initial exposures to creditors stood at an estimated US$5bn.

In the UAE cases, Phoenix faces allegations it constructed a sub-ledger of seemingly non-existent trades that were used to obtain finance, while GP Global’s restructuring officer raised concerns of irregular or fictitious commodity trades in the wake of its 2020 downfall.

“When analysing the fraud cases since the pandemic alone, a set of common themes has become apparent and with these themes a number of red flags can be identified,” says the ITFA working group paper, seen by GTR. The working group is chaired by representatives from Standard Chartered and fraud detection tech firm MonetaGo.

Examples include when a client is known to have liquidity constraints, or appears to be making repayment from funds of different origins rather than from self-liquidating trades.

Other red flags include anomalies in financial statements, such as high inventory and pre-payment levels, or frequent changes of auditors.

Warning signs reminiscent of the Hin Leong scandal include the appointment of family members to key managerial positions, and a trading house that also controls warehouses or vessels.

However, the paper notes that publicly identified frauds “account for just a small fraction of the total extent of fraud”.

“The reason for this is that many frauds are unreported due to privacy reasons or are not discovered,” it says. “Frauds tend to be concealed when the financing is repaid. These ‘undiscovered’ frauds have the potential to cause great damage to [financial institutions] and their customers, and economies, when defaults occur.”


Data silos

The paper argues that registries of invoices – where technology can be deployed to spot when single trades are being used to request financing multiple times – can serve as a useful tool in combatting duplicate financing fraud.

“Duplicate financing detection relies on information comparison, which necessitates the pooling of transaction data from all [financial institutions] into a single data repository,” it says.

Initiatives are already live in some jurisdictions. In June last year, an industry-wide registry developed by MonetaGo began operations in Singapore, allowing banks to query information on documents in real time without exposing confidential information.

A similar tool, Haifin, has been in use in the UAE since 2021, while the paper cites initiatives also underway in Italy, Spain, Thailand and Turkey.

Other technologies deployed in the fight against fraud include tools that can identify irregularities in documentation, misinvoicing and collusion between related trading counterparties.

However, adoption across the industry as a whole – and across international borders – remains limited.

“Building 15 different registries in 15 different countries, with 15 different standards around information and security protocols – that would lead to a great deal of disparate technology, and ultimately, the ability for fraud to continue, if not be exacerbated,” says Neil Shonhard, chief executive of MonetaGo.

“Registries need to be interoperable, and there is a global standard out there already, developed by Swift in partnership with MonetaGo,” he tells GTR.

ITFA chair Sean Edwards adds: “This needs to be done at the very least at national level, but also regionally and ideally internationally.

“One of the big problems the paper points out is data flow,” he tells GTR. “If data is siloed in one country and can’t be accessed in another, and if there are no common standards for processing data, it becomes extremely difficult to spot risks around cross-border trades.”

The highest barriers to cross-border data exchange are privacy regulations that prevent data sharing between lenders, and competition concerns within the banking industry, the paper suggests.

“Regardless of the data storage platform used, the usage of privacy-preserving techniques can be viewed as a prerequisite for financial sector adoption,” it says.

But if fraud detection can be improved, ITFA says financial institutions could have more confidence in providing trade finance facilities to new markets and underserved sectors of the economy such as SMEs.

“As has been observed when large frauds are exposed and lenders face the prospect of substantial losses, the natural reaction has been to limit or curtail financing,” the paper says.

MonetaGo’s Shonhard adds: “In any country, we’ve never not found fraud, yet some banks are somewhat reluctant. Registries are an essential foundational tool that creates safe and prosperous financing ecosystems.

“If you can de-risk transactions, you increase liquidity, and that leads to economic growth, more SME funding and a safer environment. There’s no downside, and when you look at the trade finance gap, governments should clearly be acting on this.”