As the world continues to globalize and expand, international trade has become a more complex and diversified entity. Although new sophisticated technology and relaxed corporate policies have made it easier for practitioners to do business, these new developments have created a savory environment for fraudsters. Trade finance frauds are on the rise with syndicated criminals cashing in to the detriment of the economy and financial institutions.
Only recently, the port of Qingdao in China was the stage for a billion dollar trade finance fraud. According to reports, two major mining companies in the Shandong Province have reportedly secured more than $15 billion in fraudulent loans for the import of various metals. One of the suspected companies apparently re-pledged the same stockpile of metals over and over again as collateral to obtain loans from multiple banks. This is supposedly a common practice in China where local companies rely on imported metals to acquire short-term financing from banks.
The sketchy deals were made using some form of “illegal arbitrage between foreign currency exchange and bank interest rates”, which resulted in a profit of 900 renminbi for the traders. Some of the big names in the banking sector that are now cutting their losses include Britain’s Standard Chartered Bank, Citigroup and South Africa’s Standard Bank.
3 Denominators Common To All Trade Finance Frauds
According to apex SEO and Internet Marketing company DCM Moguls, there are three common denominators involved in frauds of such great magnitude.
- An opportunity
- In-house impropriety
- Pressure to commit fraud
Having been an experienced player in the online domain for more than a decade, DCM Moguls is all too familiar with the specter of trade finance frauds. DCM Moguls utilizes the latest in cutting edge online marketing practices to create an astounding web presence for various online businesses, both big and small. Their wide range of services, which include link building, web design, mobile website conversion, social marketing 2.0 and video marketing among others have propelled the success of numerous brick and mortar establishments from scratch.
Quite naturally they are concerned with the other end of the spectrum – the destructive forces at work, aimed at pillaging business and financial institutions for the purpose of fraudulent gain.
According to DCM’s fraud mitigation and risk assessment experts, all businesses should institute a systematic approach to fraud detection and prevention.
The Warning Signs
DCM recommends that there are several warning signs that an establishment should look out for when a trade finance fraud is in progress.
- Unauthorized access to trading, settlement and financial risk monitoring systems.
- Lack of restriction on traders booking transactions to other books or accounts
- Creation of unauthorized or false counterparties
- Contract with no upfront cash flows or margin calls
- Discrepancies in confirmations and settlements that are not monitored or followed up
- High volumes of cancellations and amendments of trades
- Excessive use of spreadsheets
- Monitoring of net rather than gross positions
- Review of daily trading activities not performed or reviewed at senior levels
- Trading of new or non standard products and lack of restriction in doing so
- Lack of controls around cash receipt and payment
- Lack of controls around counterparty confirmations
5 Effective Ways To Prevent & Intercept Trade Finance Fraud
DCM Moguls acknowledges the fact that while the majority of commodity trading firms would have considered the impending risk of fraud and devised mechanisms to mitigate the risk, at times they just might not be enough. Hence, in addition to the measures already adopted to prevent fraud, DCM suggests the following courses of action:
- Systems – Assessment of access and change management, real time reporting and risk alerts and restricting the use of spreadsheets and other manual workarounds.
- Trade Surveillance – Proactively using data mining and analysis to uncover unusual trading patterns
- End To End Controls – Assessing whether controls are designed effectively and whether they are actually operating. Also, indentifying any unknown or suspicious patterns that emerge.
- Risk Evaluation Metrics – Evaluating whether current reporting and key metrics are fit for purpose in showing where risk is concentrated. These include the tracking of red flags.
- Human Behavior – Evaluating the human and organizational factors that include work culture, employee satisfaction, personality and performance management.
Commenting on the recent spate of trade finance frauds in China, DCM suspects that such magnitude of fraud would not have been possible without some internal involvement by individuals who had unrestricted access to back office systems and other sensitive organizational processes. Also, due to lack of proper enforcement many red flags were either dismissed, ignored or went unreported.
The SEO giant once again stresses on the importance of synergy between the front, middle and back offices so that individual indicators could have been collated more effectively. According to DCM’s senior tech, the fraudulent traders took advantage of the insufficient segregation of duties prevalent in the swindled financial institutions. “This would not have happened, had there been designated internal bodies concerned with deal initiation, confirmation, valuation and settlement of the loans”.
