High-profile fraud cases have dominated headlines in the trade finance sector, but a spate of smaller, sophisticated scams continues to unfold quietly, particularly in receivables finance. John Basquill examines the hidden tactics, shadow networks and shelf companies that are continuing to target lenders across numerous markets, increasingly in the non-bank space.
The trade finance sector is no stranger to fraud. From multiple financing of letters of credit to funding shipments of non-existent goods, the 2020s have so far been characterised by a string of high-value scandals resulting in major losses for some of the industry’s largest lenders.
However, a series of smaller cases of alleged fraud has so far gone under the radar.
Drawing from extensive discussions with industry insiders, including trade finance lenders and sources close to ongoing disputes, as well as reviews of court filings, internal correspondence and other documentation, GTR can reveal a pattern of methods used to fool lenders into parting with their cash.
Across all cases examined, receivables financing is the product involved, and non-bank financial institutions are the target.
An elaborate alleged fraud
In one ongoing case, a non-bank trade finance lender has brought legal action against a commodity trader, claiming it was the victim of an extraordinary series of fraudulent misrepresentations and document forgeries. GTR has agreed not to name the parties involved at this stage, and as of press time the trader has yet to file its defence.
The story begins in mid-2022. According to court filings, brokers acting on behalf of a Middle East-based commodity trader approached the lender with a receivables financing opportunity. They shared financial audit documents and ownership details showing a seemingly reputable company with a long history of trading activity.
The brokers explained that the commodity trader had identified two willing buyers of materials and was seeking financing for trade receivables, the claim alleges.
The commodity trader forwarded an email to the lender, supposedly from one of the buyers – referred to in this article as Company A. The email appeared to come from a manager within Company A’s accounts payable department, and set out that the company would execute irrevocable payment undertakings (IPUs) to underpin the sale of receivables, court filings say.
Company A’s brokers continued to provide documents to the lender’s representatives, including invoices outlining the trade receivables to be sold, various shipping documents appearing to show an actual movement of goods, and details of cargo inspection arrangements, the claim says.
Comfortable with the documents presented, and with the security of an IPU, the lender agreed to purchase two receivables for metals sales of and wired the purchase price directly to the trader.
But when payment became due a few weeks later, the lender alleges it received only a tiny percentage of the funds owed.
The lender attempted to chase up payment for the rest of the sum, but at that point, Company A’s representatives and brokers stopped returning calls and emails, it says. It started to suspect it had been duped.
Upon investigation, the lender says it found there was no individual working at Company A by the name given, and the email address used did not correspond to the company’s registered domain.
The lender also cites other red flags, including receiving an email seemingly from the trader’s chief executive, but signed by its broker – supposedly working for an unrelated company. The lender now believes that the broker and trader’s chief executive “either work closely together or are alter egos of each other”.
“This entire offer file was replete with false and fraudulent documents,” the lender now alleges.
“The invoice, signature of [the Company A individual] and shipping documents were all fictitious.”
The lender’s lawsuit makes similar allegations about trade receivables from the second buyer, Company B, which it financed a few weeks after the Company A transactions and before any wrongdoing was suspected.
The same brokers, acting on behalf of the commodity trader, introduced two Company B employees to the lender by email. Those individuals subsequently confirmed during a conference call that they had agreed to purchase materials from the trader and were willing to execute an IPU.
Again, the brokers provided an invoice and shipping documents, and the lender agreed to purchase receivables for two sales and disbursed the funds. This time, once payment became due, the lender says it received no payment at all.
The lender then discovered that the email addresses for the two purported Company B employees did not match Company B’s official registered domain. Although one of the names matched an actual employee at the company, the email address was not his.
Its claim alleges that the invoices, signatures and shipping documents “were all fictitious”, and there was no sale of goods.
Companies A and B are genuine entities, but the lender believes the individuals it was transacting with were impersonators. When contacted by the lender, representatives from the real Companies A and B had no knowledge of the IPUs.
Across the four invoices financed, the lender says it suffered a seven-figure loss.
According to the lender’s claim, it has since contacted an in-house lawyer at the real Company A’s parent company. The lawyer told them a “nearly identical fraud” had been attempted against another finance provider around the same time.
As of press time, there has been no resolution to the case.
A network of facilitators
GTR has spoken to several representatives from trade finance lenders about alleged frauds they have suffered in the last two years, and although each is different, there are many common themes.
One is the use of seemingly unrelated trading companies that are, in reality, connected. In the above case, the defendants can be linked to several other companies involved in commodity trading and trade finance, according to public information as well as internal emails and company data seen by GTR.
One individual whose company – a non-bank trade finance lender – has lost money in an alleged receivables financing scam believes that known fraudsters routinely acquire several shelf companies – typically firms that already exist but have no activity – for small fees.
They then create opaque ownership structures and place little-known associates in executive roles, the source says, speaking on condition of anonymity. Publicly available information gives the appearance that those traders are unrelated and legitimate companies.
These networks of commodity traders then artificially build up their balance sheets by arranging transactions between each other. These trades are likely based on recycled or fabricated invoices, and exist only to create the illusion of real business, the source suggests.
Intermediaries – such as the brokers acting on behalf of Companies A and B in the above case – then help arrange financing on their behalf. Debts are not repaid, and at that point, the use of opaque ownership structures and “dummy” CEOs mean it is near impossible for lenders to recover lost funds.
These suspicions are supported by a September 2024 report from Resistant AI, a Czechia-headquartered technology firm that uses forensic artificial intelligence to detect fraud.
The report says the easiest way for fraudsters to produce fabricated invoices is to modify existing ones and pass them off as new, typically using online editing tools or software.
“Bad actors… will sometimes create shell companies through fake invoices, complete with fake contact and payment details in order to embezzle funds,” it adds.
These networks are not limited to commodity traders and brokers.
To mitigate non-payment risk, financial institutions usually insist that receivables finance arrangements are protected by credit insurance. However, a second source familiar with several ongoing fraud claims, also speaking on condition of anonymity, says this approach is also fraught with risk.
They cite one instance where the commodity trader had insurance cover in place, but after funds were not paid, the insurer “turned out to be a company owned by the fraudster”.
Both sources emphasise the crucial role played by the intermediaries or brokers that arrange financing on behalf of these dubious traders.
“My understanding is they’re part of a cabal of… businessmen who ostensibly operate separate businesses, but are closely connected socially and professionally,” the second source says.
In one example, at least two lenders are known by GTR to have lost seven-figure sums on receivables finance provided to one Europe-headquartered commodity trader, which they now believe was acting fraudulently.
That trader has since been wound up, meaning previous legal action has been halted, although GTR understands it is also the subject of a complaint made to a UAE government fraud reporting service.
One of the lenders that lost funds believes the company’s former director is a close associate of at least one of the brokers acting on behalf of Companies A and B above.
There are “a lot of guys that are operating like this”, the other lender says. “They have defrauded before, a lot of people… but it’s very difficult to actually catch them. They’re not really sitting as company directors on these firms, but they set up shell companies. They operate in the shadows.”
The source involved in multiple trade finance disputes adds: “My take is that there is something underlying the industry at the moment. I’m not clear of the extent of the group, but they seem to be interconnected… and I think they’re perpetrating significant frauds across the industry, repeatedly.”
Risks in receivables finance
The receivables finance sector appears to be well aware of the fraud risks it faces. And according to a survey of 207 senior representatives at credit facility providers carried out last year by Lenvi, a UK-headquartered technology firm that provides software for lending, risk management and compliance, the problem appears to be getting worse.
89% of respondents reported that fraudulent activity targeting their receivables finance business increased during the 2022/23 financial year compared to the year before. A third said the level of fraud increased “considerably”.
Fraud methods vary from market to market, partly due to differences in business practices and regulatory requirements around receivables finance, Lenvi says.
But across France, Germany, Spain and the UK, the survey found around a quarter of premeditated fraud cases involved the creation of fake businesses and fictitious invoices.
Over a quarter reported seeing old invoices recycled for financing purposes, and 27% said fraudsters had attempted to finance the same receivables more than once. 22% reported seeing “fresh air” invoicing, where there is no genuine underlying activity at all.
Lenvi subsequently warned in an August 2024 report that changes in the receivables finance market are adding further pressure to the way funders have to manage risk.
It says a maturing of the market means larger corporates’ financing needs are now largely catered for, meaning lenders seeking further growth are exploring the SME sector. It cites data from industry association FCI showing “modest” 3.6% growth in the global factoring and receivables finance market during 2023 as a sign the market for highly rated corporates may be “becoming saturated”.
“While this shift opens up new avenues for expansion, it also comes with its own set of challenges – particularly in terms of operational efficiency and fraud management,” it says.
When seemingly legitimate, unrelated companies are, in fact, shelf companies trading with each other, managing these risks is challenging.
“There’s a difference between being the victim of a fraud and being negligent,” says the source currently involved in multiple disputes.
“[Lenders] have been deceived by quite sophisticated conmen, and that is different to being negligent in the due diligence process when engaging in a trade. The fraudsters cover up and create fake information, so if you are entering into a negotiation process in good faith, it’s very hard to cut through that.”
