The UK’s trade finance pools are merging forces with the International Chamber of Commerce United Kingdom (ICC UK) in a new industry to stamp out duplicate financing fraud, a practice that the industry organization says has siphoned “billions of dollars” from the global financial services industry.
Spearheaded by the Centre for Digital Trade and Innovation (C4DTI), the initiative will see the ICC UK bring together bank and non-bank financiers to deliver on recommendations in a 2022 whitepaper, including the adoption of digital tools to shut fraudsters out of a trade.
As part of the project, ICC UK has partnered with financial technology provider MonetaGo, the developer of the Secure Financing system that powers the Trade Financing Validation Service across the global Swift network and the Association of Banks in Singapore’s Trade Finance Registry.
First launched in India, MonetaGo’s service has been in live production since 2018, when the company says it has processed over 4 million transactions, preventing double financing fraud across all types of trade finance.
Duplicate financing fraud, in which a borrower exploits banks’ inability to share information to obtain finance multiple times for the same cargo, has rocked the trade finance industry in recent years. High-profile scandals, such as the frauds uncovered by the 2020 collapses of Singapore-based traders Hin Leong, Agritrade, and Zenrock, have left banks battling – often in vain – to recoup multi-million dollar losses. This led some to withdraw from trade finance entirely or limit their lending to only the top end of the market, leaving smaller companies scrambling for funding.
Despite banks’ assertions – backed up by ICC Trade Register data – that trade finance is, by and large, a low-risk activity, a near-constant stream of headline-grabbing cases is doing little to inspire confidence in the industry. Just last week, for example, in a lawsuit brought by the UK’s Serious Fraud Office, two former executives of Balli Steel were convicted of providing banks with “misleading information, false shipping documents and forged signatures on fake sales contracts” to obtain trade finance facilities, resulting in losses totaling US$150mn.
Because trade finance fraud often goes unnoticed until a company defaults on its financial obligations, these cases potentially represent the tip of the iceberg. As a gloomy macroeconomic outlook weighs on the financial health of many companies worldwide, the likelihood of more fraud cases coming to light is increasing by the day – driving the ICC UK to take action.
“This is a problem that has been around for a long time, and it is businesses that are picking up the bill,” Chris Southworth, secretary general of the ICC UK, tells GTR. “We recognize that banks have put in a lot of hard work towards tackling trade finance fraud, but they are hampered by the current regulatory environment that does not allow them to share information on deals they have financed. Change is possible, as we’ve seen by the imminent passing of the Electronic Trade Documents Bill will enable the digitalization of the insecure paper-based trade system. We now have new technology we didn’t have before, and now is the moment to address this problem.”
MonetaGo’s service overcomes the information-sharing barrier by enabling financiers to hash some aspects of a trade document to create electronic fingerprints, then pushed to its secure data repository without revealing any of the information held on the record. The financier can then apply different states to the paper, such as whether it has been registered or financed, enabling other lenders to check if a transaction is already funded.
However, its success as a utility depends on the network effect – unless a majority of potential financiers of an invoice or purchase order are using the service, it cannot detect all possible frauds.
The C4DTI-led project, in which the ICC UK says most of the country’s trade finance banks are participating, seeks to solve this.
“Not all innovations need years to deliver value, and stopping replication financing copy, in collaboration with MonetaGo, is a great illustration of an existing answer that will have a significant impact in the short term,” says Southworth.
“The problem isn’t that we don’t have a solution. We do have a solution; we don’t have the necessary coordination in the market. What we can do is help convene. The banks are supportive, and we are now formalizing those discussions into a full-blown work plan.”
Neil Shonhard, CEO of MonetaGo, tells GTR that the work plan will “ensure that UK’s banks and non-bank lenders, irrespective of where they are in their digitization journeys, will be able to leverage the Secure Financing system to make their financing safer, regardless of which platforms, booking systems and workflow tools they use to provide financing to customers.”
“Prevention of duplicate financing through the use of privacy-preserving technology is something MonetaGo has created and is available to lenders to stop duplicate financing fraud today. In collaboration with the ICC UK, C4DTI, and the UK’s trade finance community, we can all increase confidence to lend by shutting fraudsters out of the ecosystem, enabling more financing to be extended to boost trade and promote economic growth in the UK,” he adds.
The C4DTI says in a statement that the project will deliver by the end of 2023, making the UK the first G7 economy to implement this issue and holding “hundreds of millions of pounds” in lost funding that can be better spent facilitating genuine trade transactions.
