Category: Top Stories

Now is the time to invest in trade fraud prevention

By Jesse Chenard, CEO at fintech MonetaGo, looks at why the risk of trade fraud is higher than ever and analyses how the landscape is changing. Jesse outlines the reasons why trade fraud thrives in even the most prosperous of industries and discusses how technology could provide the solution.

The recent scandals in Singapore were just some of the many cases last year where fraud could have been mitigated if governments and financial institutions worked together to implement better trade fraud prevention practices.

As economies across the world begin to recover from the pandemic, we will see a flurry of activity in trade across the globe. While the economic benefits of this are inarguable, another direct consequence of an uptick in activity is an increase in trade fraud.

This correlation has stood true for as long as trade has been carried out and is an almost inevitable by-product of the benefits increased trading activity will bring.

Fraud flourishes where confusion reigns

Fraud flourishes amid uncertainty, chaos and outdated processes, which tend to be those that are paper-based. Over 80% of global trade relies on trade finance, yet many financial institutions still rely on paper-intensive documentation and clunky legacy systems, leaving trade finance susceptible to fraud.

Trade finance encompasses invoice financing, purchase orders, warehouse receipts and bills of lading – all of which come with their own set of standards, systems and the inevitable stack of paperwork. In 2018 the global invoice factoring and finance market alone was worth $2.9 tln. It's time for government and financial institutions to come together and provide innovative solutions for trade fraud prevention.

A key example of the type of confusion that allows trade fraud to flourish is the UK's exit from the EU. Uncertainty on rules and paperwork following the eleventh-hour Brexit deal has created the perfect petri-dish of conditions that make it easier to execute trade fraud.

Fraudsters will be looking to take advantage of any ambiguity or loopholes in regulatory frameworks, as the UK pulls out of a vast web of EU regulations. This is on top of reduced and increasingly complex UK-EU co-operation in criminal matters, often crucial in the multi-jurisdictional issues sophisticated frauds entail.

Looking to a digital solution

Many of the challenges outlined above could be solved through industry-wide co-operation and digitization of trade finance.

From trade finance to customs clearance, transportation and logistics, trade in goods involves multiple actors and remains paper-intensive.

Distributed ledger technology, commonly referred to as blockchain technology, is one of the most powerful solutions which would enable financial institutions and governments to mitigate trade fraud. With blockchain, huge amounts of paperwork could be verified and processed automatically. An immutable blockchain ledger could provide transparency over the transportation and processing of physical and online goods. Double financing could be eradicated.

Another area of trade that can significantly benefit from the use of blockchain is enforcing VAT compliance by combating 'carousel fraud', also known as 'missing trader fraud'. VAT is vulnerable to fraud because it relies on self-reporting and a disjointed system of rules and enforcement among individual countries.

Blockchain could solve many of the system's weaknesses by creating a registry of digital invoices that would allow tax authorities both domestically, and in some cases internationally, to see and verify the taxes paid when a product changes hands.

Blockchain's intrinsic features of immutability and transparency mean that trading counterparties have the assurance that 'what you see is what I see'. The Economist calls blockchain a 'trust machine'.

Co-operation at the industry-level and digitization of fragmented legacy systems through new technologies is the key to mitigating fraud in trade finance. Cross-border flows could be tracked from start to finish, and the need for paper could be eliminated entirely. With the right technology, we can learn and evolve from the lessons of trade fraud, mitigate future occurrences, and allow all countries to prosper through safe and secure trade.