Combating trade finance fraud
Trade finance is an important tool, enabling roughly 80% of global trade.
Courtesy Trade, Treasury, Payments (TTP)
Trade finance is an important tool, enabling roughly 80% of global trade. It serves as the backbone for $25 trillion in annual transactions. But it’s also a mechanism used by fraudsters. The ICC United Kingdom estimates that up to 1% of trade finance transactions are potentially fraudulent, valued at over $50 billion.
Trade finance fraud typically involves falsified shipping documents, misrepresenting goods origins and fraudulent digital platform lending. Fraudsters can exploit outdated verification processes using fake templates and use sophisticated tools, such as generative artificial intelligence, to forge bills of lading (BLs), invoices, and customs paperwork.
This decade alone has seen large trade finance-specific frauds, such as billionaire jeweller Nirav Modi stealing $2 billion stolen from Punjab National Bank through fraudulent letters of credit (LCs), First Brand’s $2.3 billion hole in its balance sheet relating to third-party factoring arrangements, and more recently the US Securities and Exchange Commission’s allegations against fintech Triterras for inflating trade finance volumes.
In a recent webinar entitled, “Trade Fraud is Escalating: Why the alarm is ringing and what must change”, Complidata’s CEO Ben Arber countered the belief that trade finance fraud is the result of a genuine company or person taking a shortcut, which accidentally ends up as fraud. He maintained that most fraud is about personal enrichment.
Arber pointed to basic control failures as a common trend among fraud cases. For example, a company that finances a supplier to get paid earlier than their invoice should control where the funds go. In the First Brands case, none of the lenders controlled the account into which buyers were settling the invoices.
Barriers to effective action
Yet warning signs seem to go unheeded when it comes to controls. Does it come down to organisational inertia, or is there more to it? Neil Shonhard, CEO of fraud mitigation firm MonetaGo, pointed to the US controls regime, which is optically robust – with underwriting, field exams, foreign-based controls, audit evaluation, reviews and the legal framework surrounding the Uniform Commercial Code (UCC) filing system – but has structural limits.
“It’s not necessarily a lack of sophistication or effort on the side of institutions. There isn’t a reliable way to verify the exclusivity of the collateral and invoice receivables, no ability to detect cross-lender duplication, no portfolio- or ecosystem-wide visibility into fraud and who has financed what,” according to Shonhard. “Fraud today is multilateral, whereas most controls are bilateral.”
Digital public infrastructure or registries like the UCC could prevent fraud problems by moving control to pre-disbursement and treating receivables as unique. However, organisational and commercial dynamics come into play, which can slow the adoption of such systems.
“Teams have a vested interest in keeping flows moving, avoiding friction as they don’t want to disrupt client relationships,” said Shonhard. “Competitive pressures means that lenders are reluctant to collaborate on industry-wide initiatives because of concerns around client relationship and perceived loss of advantage.”
He also highlighted the “cyclical memory” problem. “As markets recover and revenue grows, past frauds fade from focus. While the lessons might be acknowledged, they can be quietly forgotten,” he said. “Fraud relies ultimately on manipulating flows. By the time a trend is visible in a post-transaction check, the losses are already crystallised.”
Part of the challenge is defining trade fraud, according to Tod Burwell, President and CEO of BAFT (Bankers Association for Finance and Trade), because it manifests in different ways, such as fraudulent structures, duplicate invoice financing or plain vanilla trade-based money laundering where fraudulent shipments are being financed.
“It’s a little bit of ‘Whack-a-Mole’, depending on what type of fraud we’re trying to combat,” he said.
Burwell highlighted the “phenomenal tools” fraudsters now have access to. “There are entire supply chains built around fraud, such as deepfakes-as-a-service to create fake identities and other things to avoid controls. Fraud has a level of sophistication that also makes it difficult to combat structurally,” he said.
Moving from detection to prevention
Documentary trade has been relatively less impacted by trade fraud than factoring, receivables finance, commodities finance, etc, according to Arber. Many believe that the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (MLETR) and the move to electronic BLs and bills of exchange will continue to help the battle against fraud.
However, while most lament the paper-based nature of documentary trade, Burwell pointed out that are indications that the paper itself can trigger an experienced trade finance person to detect fraud. “When you can see and touch it, it gives you the ability to look at it with a third eye. Once you move to digital, you don’t necessarily have that ability to do it,” he explained.
An emerging challenge is the skills cliff, said Michael Byrne, CEO, Institute of International Banking Law and Practice (IIBLP). “While many experts are getting ready to retire, we haven’t been teaching the next generation how to open the FedEx envelope and sniff the paper to see if it was at sea for seven days. Some software vendors are trying to replicate that third eye. But the knowledge that experts have is difficult to teach, even a super smart AI,” said Byrne.
The closer trade gets to open account and pure payments, the easier it is for fraud to scale and the more difficult it is to manage and contain it, according to Burwell. “We need to work collaboratively towards a multilateral ecosystem, where the parties to trade can work from a common source. We also have to adapt and build common controls, because once we move away from the paper itself, we lose one of the friction points that allows us to identify and prevent fraud,” he said.
Byrne, for one, doesn’t believe that even the best oversight in the world will prevent fraud. “One of the main challenges is that detection is a post-event analysis – we review what happened, but the money’s gone, and the criminal won, unfortunately,” he said.
In his mind, to transition from detection to prevention will require transparency across the different players on the financing side. “We also need leadership that is committed to fraud prevention, which means we are probably going to walk away from money – a difficult thing for banks as they aren’t in the business of stopping transactions. In the shift to prevention, there are technology tools that can help – but they won’t solve fraud completely. We also need expertise in reviewing, performing pre-transaction checks and additional due diligence.”
Cross-border cooperation and collaboration is also required. But what does this look like? It requires standard data, according to Shonhard, which enables cross-border risk mitigation by comparing documents across trade stages, from invoices to BLs, purchase orders, and warehouse receipts.
“The pre-disbursement check, rather than the forensic check afterwards, is the future,” he added. “That is what good industry-led global cooperation would look like.”
The role of industry associations
According to Burwell, a mind shift needs to happen which recognises trade finance fraud isn’t a bank issue to figure out. “This is an ecosystem issue, which includes the shipping community, governments and every entity that touches trade and the flow of funds,” he said.
Almost a decade ago, BAFT published a paper that proposed more public-private collaboration and the inclusion of customs and shipping companies in sharing information to identify financial crime more effectively. “We spend far too much and get far too little economic payback for the investment we make in financial crime mitigation. We need to be able to do this across public and private sectors,” Burwell said.
He believes that industry bodies like BAFT can play a role in convening the broader ecosystem. In addition, they should define and share best practices, as well as provide education and a platform for technology platforms or solution providers to showcase new fraud-fighting capabilities.
Byrne agreed with Burwell. “IIBLP provides an opportunity for members and bankers to talk about what they’re facing today, not theoretically. We bring experts together to talk through how to solve the issue. Because if one bank is having that problem, then it’s likely that 10 more are having the same problem at the same time. Being able to share issues, as well as identify and disseminate best practices is invaluable,” he said.
Greater collaboration
When thinking about what good looks like in a fraud-resilient trade finance world, Shonhard believes that the foundation must be industry associations, multilateral development banks, International Chamber of Commerce, etc., showcasing proven successes in other jurisdictions – what works but also what doesn’t. “The faster we take an ecosystem approach with public-private partnerships, the faster we will have meaningful impacts over the next one to five years,” he said.
Burwell agreed: “We have to take an ecosystem approach, where we can share information based on proven, golden source data. Then we can take some of the learnings from our multi-faceted control environment and apply those to the different fraud typologies within trade.”
“Perhaps what’s missing between the good actors is trust or belief that the system that works in one place can work somewhere else, so perhaps a little less scepticism is needed,” said Byrne. “Concrete steps banks can take today is to perform a review of their systems, processes and people’s knowledge of where to go if they spot something.”
What emerges, then, is not a single solution, but a shift in approach that treats fraud as a systemic challenge requiring shared visibility, earlier intervention, and a willingness to act before the damage is done.
