By Andrew Raymond, CEO, Bolero International

Brexit, Covid-19 and a series of significant fraud cases have intensified the quest for risk mitigation by banks and businesses engaged in international trade.

Even before the virus outbreak, well-known names in the banking world started to withdraw from financing oil and gas transactions because of the operational risk and losses they incurred.

The pandemic has caused huge disruption and alongside it have come the complications of Brexit and uncertainty about US-China trade relations. This is a potent mixture that adds to the risks of involvement in trade. The US Attorney General, US security agencies, Interpol and IBM[i] have in their different ways warned about the current confusion opening up opportunities for fraud as normal patterns of behaviour change.

Banks’ concerns have been heightened by well-publicised allegations of fraud in commodity transactions. The Hontop Energy (Singapore) Pte and Agritrade International cases reportedly inflicted losses of more than $9 billion on global lenders, while the effects of the current high-profile Hin Leong oil trading case in Singapore are still being worked out.

For organisations involved in trade transactions, the closure of offices during anti-coronavirus lockdowns around the globe added hugely to risk. Banks had many different business continuity scenarios, but none in which nearly all staff would work from home for months on end. Corporates were confronted with their paper documents being stuck with couriers, postal services and yes, even banks.

Paper-based processes have increased the risks

This has exposed the fragility of paper processes. Presenting key paper documents such as bills of lading under letters of credit to comply with the terms of their issue is extremely difficult when ports are deserted and bank staff work from home. As paper documents disappear in couriers’ networks, transactions stall, business continuity is disrupted and the opportunities for fraud rocket.

The weaknesses of a paper-based system were apparent in the Agritrade case, which involved duplicate bills of lading. The Hin Leong case, meanwhile, hinges on allegedly fraudulent use of 58 import letters of credit, as well as bank statements, bills of lading, sales contracts and invoices. Letters of indemnity are also said to have been used instead of bills of lading because the original bills were unavailable.

Disruptions to business continuity caused by the pandemic have not only impacted the use of paper payment instruments such as letters of credit, but also frustrated the processes used for bank guarantees. Corporates have had fall back on the use of insecure and unstructured email processes between their banks and counterparties when handling guarantees. This is an area where direct communication to multiple banks under a single digital platform would clearly add value for corporates, giving them a secure interface without the vulnerabilities of paper.

Continuing uncertainty makes the caution of banks understandable, but it does not help their corporate clients if they just pull back. It makes it much harder for any type of company to conduct and finance cross-border transactions.

Digitisation addresses the business continuity and security challenges in trade

This all makes the most convincing case to advance trade digitisation as quickly as possible. From a business continuity perspective, digitisation makes physical barriers or restrictions irrelevant. Applications for trade finance, including letters of credit, standby letters of credit and guarantees can be submitted safely from any location including someone’s home, with approval given remotely by all parties. The immediate digital transfer of documents is fast and secure.

Instead of delays and missing paper documents, the use of a reputable digitisation platform for such transactions gives banks and corporates a secure line of communication, with each party knowing who, what, where and how the document or message was sent. This introduces new levels of trust and reassurance. All parties benefit from traceability and have an organised view of instruments and reporting. In-built levels of authorisation to approve and send messages and the removal of easily-forged paper hugely reduces the risk of fraud and makes it ten times harder for false documents to slip through.

Encryption ensures security, while electronic audit trails provide constant visibility of documents to counterparties. Digital transmission removes the costly delays of couriering and is far safer and better-organised than untidy emails. Certain bi-lateral agreements and rule books may also be put in place, having legally enforceable protocols to ensure the correct global use of such digital platforms, again substantially reducing risk. Questions of ownership in relation to electronic bills of lading (eBLs) are resolved because ownership is conferred by a dedicated eBL title registry, requiring layers of approval.

Multi-banking trade finance solutions provide greater comfort

At the same time as reducing fraud risk, digitisation also injects far greater comfort into the relationships between corporates and banks. Although some major banks have withdrawn from commodity finance, there are still plenty of options for corporates, satisfying the changed appetite for risk mitigation.

Multi-bank trade finance solutions nurture and develop these relationships, reducing levels of anxiety since they have established rule-based networks that make it easier for corporate treasuries to conduct and monitor their transaction.

Once companies have signed up and provided the necessary level of authentication, they can solidify relationships with banks and use a single solution to monitor and optimise credit lines, letters of credit and guarantees.

As corporates finance and conduct transactions on the solution, they reap the efficiency benefits, while banks know and trust the origins of the transactions and electronic documents they are required to process, speeding up approvals.

Digitisation cannot eradicate fraud or trade friction. Yet the case for digitisation could hardly be stronger in the current uncertainty when the pandemic is still playing out, Brexit may cause further disruption and companies involved in commodity transactions focus on their core business while still requiring financing and risk mitigation.

If global trade is to rebound from the pandemic, paper needs to be removed its processes as the starting point for a rapid shift to digitisation and a multi-banking approach to trade finance solutions.

[i] https://www.ibm.com/blogs/regtech/as-the-economy-contracts-and-social-anxiety-increases-new-payments-fraud-threats-emerge-ibm-regtech-blog/