Swindlers have been a pernicious presence in trade finance since the product first emerged, centuries ago. The spate of frauds and insolvencies in the Middle East and Asia during 2020 were painful reminders of the severe consequences for financiers who fall victim to fraudsters, or do not respond quickly enough when suspicions arise.
But every bank has a team of staff who try to protect their institutions from shady borrowers, and who sometimes need to call on investigative specialists, especially when disputes go to court. Jacob Atkins talks to three experienced trade finance crime fighters about the dark days of early 2020, the current state of wrongdoing in the sector, and whether seeing fraudsters behind bars deters would-be wrongdoers.
Willem Toren
After decades in sales, operational and commercial roles across trade finance, commodities and logistics, Willem Toren made the jump to safeguarding Standard Chartered’s sprawling trade and commodity finance business from financial crime. Toren retired from the bank in September this year.
GTR: Did you always have an interest in financial crime and compliance? How did you end up in those roles?
Toren: I think that the bank recognised that if you want to effectively combat financial crime in trade finance, you have to take on people who understand trade finance. A 2013 thematic review by the UK regulator found that sanctions evasion, fraud and money laundering in trade were generally undertaken using the documents that form the core of documentary trade finance. The falsification of such documents, like bills of lading and invoices, is a significant part of that. As a result, the bank figured that having a deep knowledge of the operational processes, issues and challenges of trade finance would make more sense than to just have financial crime experts who know a lot about money laundering, but nothing about the trade business itself. Moving roles every five years or so between first and second-line positions kept me sharp, and having that background and broad understanding helped me tremendously when I started doing anti-financial crime for trade.
GTR: What makes people good financial crime investigators? Many have good trade finance knowledge; what sets apart those who are able to make the jump into compliance and investigations?
Toren: I think it is a certain sharpness, a certain intellectual need to dive deeper into what is happening in a transaction, and at the same time to have the experience and background to see where a transaction fails the smell test. It’s this type of person that just generally looks a little bit beyond the obvious. For instance, one of the people that we hired had a background in ship agency services, which in a shipping company is the area responsible for creating the bills of lading. This person had a particular nose for finding bills of lading that had been tampered with.
GTR: How would you describe the prevalence of fraud in trade finance at the moment?
Toren: We’ve had some really big ones involving international banks, starting from around 2020, which came to light as a result of the market shifts during Covid, amongst other reasons. I think that we, as banks, had been looking at certain activities in trade finance that we really should not have encouraged: the financing of trade transactions on copy documents, the financing that happened in a lot of areas where certain companies were able to keep themselves afloat by doing round robin transactions between various traders. Hin Leong got everybody’s attention, but they were not the only one, there were quite a few.
Why do we not see so many large frauds at this point? We’ve seen banks step out of trade finance partly because of the losses from these frauds, and I’ve seen banks that have very seriously tightened up their anti-fraud activities and taken a different approach. There was a change in mentality on the management side of trade finance; it was very clear to them that it’s not sustainable to have regular losses that would be bigger than their operational income, and something needed to be done. Does that mean that there is less fraud at this point in time? I think there is a good chance a lot of fraud and money laundering has gone underground, so to speak. We don’t see it because there is a good risk that a lot of it is on an open account basis. To be honest, if I were a money launderer, the last thing I would use would be documentary trade products. There’s still a lot of scrutiny on documentary trade now, but not so much because banks think there’s a lot of financial crime happening in the space, but because regulators are still limping around on outdated ideas of how money laundering takes place in trade.
GTR: What was it like being in Singapore in early 2020, as all these commodity traders that had been longstanding clients of many banks in the city-state started going under?
Toren: It was a very bitter and saddening realisation because a number of these companies had been at the forefront of trade finance in Singapore for quite some time. They were considered top-of-the-line companies, and in previous incarnations I had worked with these companies, also from the commercial side. So, to then see what happened with these companies is quite sobering.
But it was not the first time Singapore had seen a large trade finance fraud. Does that mean banks have difficulty learning? I think it might. Over time you will see similar problems happening again and again, and I’ve seen quite a few over 40 years. Some of these things really are not that hard to understand: if you allow certain types of financial activity to take place on the basis of documents that are not genuine, then it becomes really enticing for companies to use those copy documents to get some more finance, to temporarily overcome a liquidity shortage, or to boost their cash position for a little while.
GTR: It seems like you’re saying banks should take some of the blame for these problematic financing practices becoming widespread and for allowing traders to get too creative?
Toren: Absolutely. It might be because of commercial pressure or because you want to take business away from your competitor. But it doesn’t really matter, banks have to take into account that if they change the risk profile of their financing, then they’re setting themselves up for higher levels of risk. When there are a lot of banks providing trade finance, and new banks come in and they want a slice of the pie, they might make concessions on price; they might make concessions on the requirement to submit original documents. Then, suddenly, that becomes the norm for the large borrowers, and once you allow it for the large names, then the next step is the medium-sized names. Banks see that a company has been around for 15 years, they know them quite well, so they make allowances. But then, ultimately, it goes wrong.
GTR: In your experience, are law enforcement bodies good at handling trade finance investigations? Are there any particular countries that do it well?
Toren: I think Singapore is quite good. I found this out because a particular case ended up in the newspapers, and you see the names, and you realise this is a case that we brought to the attention of the Commercial Affairs Department [of the Singapore Police Force]. There are many countries where a lot of financial intelligence units and police departments are overwhelmed, or lack the knowledge or funding to investigate the suspicious transaction reports submitted by banks and to go after a lot of these [criminal] organisations. In my view, over the last 10 years, it’s been really easy to just move everything to the banks and make it their responsibility to look at stuff, rather than sit down and create the political will and the budget. I think there are a lot of countries that are guilty of that particular approach.
Jonas Rey
Jonas Rey runs Athena Intelligence, an intelligence and risk consultancy based in Geneva.
The company has worked for trade finance lenders exposed to large-scale frauds and insolvencies in the commodity trading sector, including through the use of trade finance fraud tactics.
GTR: Can you give a brief description of your career and how you got into this line of work?
Rey: I’ve always been fascinated by the world of investigations and intelligence in general, and initially, I wanted to work for the foreign affairs department of Switzerland. But when I finished my studies, I was a poor student and needed some cash, so I found a very well-paid internship at Credit Suisse. But the job just wasn’t for me, it was really boring. So, when I saw an opening at the corporate intelligence firm Diligence, I applied, got the position and stayed there until 2019. That’s where I really got into investigations of international commodity trading, disputes, asset tracing, recovery and verification of trades.
My first large trade finance case was an investigation into Balli Steel, which we did in 2013. I was fascinated by how the trades were structured, all the parties involved, and, frankly, the ease at which the fraudsters were able to move money through that system. I thought there was something that definitely needed improving in that sector, so when I had the chance to start my own business,
I decided to focus a large part of it on commodity trading and finance. That’s why, with Athena, we tend to do a lot of commodity-related investigations and trade finance-related investigations.
GTR: It’s interesting that Balli Steel was your first investigation. What was your reaction when you saw last year that executives at the company were jailed?
Rey: I think it was a good decision and a good signal to the market – but my God, that was a slow decision-making process. It took more than 10 years to go from our investigation, the Serious Fraud Office taking over and there finally being a conviction [in January 2023]. The official investigation process is not very efficient.
I think it’s partly due to the nature of trade finance, which is very international. It’s very complex and you have trades between multiple different entities in different countries, which renders official investigations complex and time-consuming.
GTR: You say it was a good signal to the market – do you think people getting jail sentences may dissuade someone who is considering lying to their banks and committing trade finance fraud from doing so?
Rey: Absolutely, it’s a great deterrence. But in many of the fraud cases that we have seen recently there is no accountability because the banks or entities that have been the victims of a fraudster tend to refuse to call them a fraudster. They also tend to refuse to fully prosecute them. It’s a bit of a chicken and egg problem, because they don’t want to sue because it takes too long to see it through, provided it does go all the way to the end. They’re not really willing to engage in a 10-year-long process to see somebody perhaps go to jail, but perhaps also to just get a suspended sentence, or even get off completely because it’s too difficult to investigate properly.
GTR: You’ve been involved in trade finance fraud investigations for just over a decade. Have the tactics fraudsters use changed over that period?
Rey: I think the tactics remain the same, but the sophistication has evolved. We still see the same schemes: double and triple financing, undisclosed related-party transactions, random shell companies being presented as a legitimate counterparty. But back in the day, you would often see the beneficial owner of companies connected to a fraud would be someone as obvious as the fraudster’s wife. Now this has evolved, probably because there is more verification done at the banking level and it’s much easier for banks to get details of counterparties – you don’t have to travel to Belize or Panama to get company information – and there’s a bit more scrutiny of the trades, compared to 12 years ago. That’s good, but now the fraudsters are being a little bit more creative and a little bit more concealing in their activities. But the fundamentals of trade finance fraud haven’t been totally revolutionised, which is good because it means it’s the same scheme that can be detected over and over again, provided you know what to look for and how to look for it.
GTR: What’s the strangest thing you’ve come across while investigating a suspected fraud?
Rey: We were doing an investigation in Dubai in 2015, in a large fraud scheme involving 100 companies. Nobody could reach these guys, so we travelled to the office of the main company, which was supposed to be the centre of this fake invoicing, triple financing scheme. We got there, and it was a bit like a scene from a zombie movie: there was nobody in the office, people had left their lunch uneaten in the offices for what looked like two or three weeks, and all the company laptops were still there. The main door of the office had been broken into by presumably very angry people. It was a surreal scene. Obviously, the promoter behind this company had decided to leave the country; they had fired everybody instantly and we were left with a sort of financial crime scene.
GTR: Is there a way to predict when trade finance frauds might become more likely? Are there particular economic conditions that are more conducive to them happening?
Rey: It’s hard to predict, because it depends on many factors. Fraud is cyclical, and a particular fraud might happen for years before it is detected. If it’s a company that has a legitimate business and they are only doing one or two fake transactions to help with cash flow, one might never detect it, because it will be insignificant compared to the total amount of turnover that they have. But if there is a macro event like we had with Covid, then obviously everything comes to light. When a credit crunch or price volatility episode happens, it is the weakest traders that have resorted to problematic transactions that will be exposed. But there is no magic formula to detect that early, because the criminal minds out there are getting quite good at embedding problematic trades in real business. One could argue that even in the case of Hin Leong, while there was insane fraud at the end, it didn’t start as one. It was a legitimate business at the beginning. When they grew quite fast, everybody was happy for a while, until it spun out of control. Perhaps without Covid, it would have taken several more years to come to light.
Alberto Almaraz
For the last 14 years, Alberto Almaraz has been fighting financial crime in trade at large international lenders including MUFG, SMBC and Standard Chartered, from which he departed in August.
GTR: How did you first get into the world of trade finance compliance?
Almaraz: It was completely by accident. In 2010, I had to do work experience at the end of my degree in France and decided to do it in London. I came across an opportunity at the International Maritime Bureau (IMB). They were looking for someone who spoke Spanish and French, and although at that time I had no idea about fraud and financial crime, I thought it sounded interesting. It was supposed to be three months, but I stayed on and spent four years there learning about shipping and trade. I think I got lucky, because just a few years after I started, the Financial Conduct Authority published the [TR13/3] thematic review, and it was a good time to be starting in that area.
GTR: Were the cases you worked on at the IMB back in 2010 significantly different to the types of cases happening now?
Almaraz: It has evolved. Back in the day, you would find a fraudster, a money launderer, or someone evading sanctions would do things that were very basic, because banks were not really checking very hard. If they were committing a fraud, they would come up with a bill of lading that didn’t really look like a bill of lading, and the vessel didn’t exist, or if it existed, was on the other side of the world. If they were evading sanctions, they would just put Dubai instead of Bandar Abbas in Iran [on the bill of lading], and it was all quite simple to check. Now, things have definitely evolved. For sanctions evasion, it’s no longer about changing the port name. I have seen cases where people are creating fake signals and pretending that their ship is in a different location. If they have a vessel loading in Iran, they create fake [automatic identification system] signals for the vessel that make it appear it is in Mumbai, for instance. That is a degree of sophistication that makes it very difficult for compliance professionals.
It’s no longer simple. For fraud and anti-money laundering, back in the day, you’d get ridiculously fake bills of lading that were very obvious. Now, they know banks are tracking containers and vessels, so either they will ship containers full of rubbish to make sure those checks show that there is actually a correlating vessel movement, or they will use real shipping details to manufacture fake bills of lading that will pass banks’ checks.
GTR: To what extent can the work that people like you do in trade finance compliance be automated, and how much can technology replace what is currently manual work?
Almaraz: It is easy to automate basic checks, for example checking if a vessel was really in Dubai. You can connect with an API to one of those container carrier websites and check what location the containers were actually loaded in. But with the degree of sophistication that I mentioned earlier, if someone is shipping empty containers or containers full of rubbish, I don’t know how detecting that can be automated. That comes down to really having very good knowledge of who your client is, what your client is doing, and looking at indicators that are changing continuously. In the example I gave about the vessel that was spoofing its location to Mumbai, we saw that because the data was showing that the vessel was not moving a single metre, or it would suddenly jump back a few hundred kilometres. Ultimately, you could automate that, but it needs to be a system that looks for every single possible thing that could go wrong, and we are not there yet.
GTR: Since 2010, how has technology changed your job or the way you work?
Almaraz: Tools that show what your client is doing are a lot faster and easier. We sometimes forget when we’re talking about trade anti-money laundering and trade fraud that we’re looking at what the client is doing and what is happening around the trade transaction. Whenever you’re looking at this criminal activity, there will be a flow of illegal funds somewhere and it’s important to keep that in mind. If you have a client that is laundering funds through trade, they will still need those funds to come into their account before they can use the trade transaction to move those funds around. Now we have tools that allow us to look at clients’ account activity before or after the trade transaction. I think that’s where it has become much easier. There are also great tools now for looking up who clients are, their registration details, and analysing if they have relationships, including social connections. There are tools out there that will tell you if different companies are using the same address, common email, or share employees and directors. Analysis of large amounts of data has become a lot easier, compared to the large amount of manual data we used when I first started.
GTR: Where do you feel a lot of the financial crime in trade finance is currently happening?
Almaraz: On the AML side, we keep hearing that trade-based money laundering doesn’t happen in documentary trade. I don’t fully agree with that. In countries with capital controls and foreign exchange restrictions, this will happen a lot. Whatever criminal activity you’re doing in those countries, you obviously want to get your money out of the country and get it into a hard currency, like anyone else. They don’t want to lose their money to inflation and devaluation. One of the relatively easier ways of getting access to foreign currency is by pretending that you’re conducting a trade transaction. A lot of central banks in countries with currency controls require the use of documentary trade because it’s easier for them to track the utilisation of foreign currency. So I see a lot of this happening in documentary trade.
You also still see many companies abusing trade facilities to get liquidity more cheaply than general purpose loans. And, of course, there has also been an increase in sanctioned countries and exporters in those countries still find ways to get buyers – the level of sophistication is making it harder for banks to detect that.
