Fighting financial crime in Trade and Supply Chain Finance

Due diligence is a common challenge for the banking industry, as trade transactions are highly susceptible to the risks associated with financial crime, money laundering and terrorism finance.

Banks are often viewed as the first line of defense against financial crime and are on the forefront of transaction policing. But are they equipped to fight fraud and financial crime?

Financial fraud remains the main cause of financial losses . The combined losses from the infamous Qingdao port commodities fraud in China, which was exposed in 2014, are estimated in excess of US$1bn, with Citi, Standard Bank, Standard Chartered, HSBC and many others among the victims, The ingenuity of modern fraudsters has led to them being dubbed ‘scampreneurs’. They are constantly looking for new ways to deceive banks by exploiting weaknesses in systems, processes and, most importantly, people. Invoice frauds such as fresh-air invoicing and double invoice financing are just two examples of techniques that threaten financial institutions. Collusion between buyers and sellers to commit fraud against banks is common in complicated scam schemes.

Detecting scampreneurs and preventing fraud is a primary objective of any bank’s risk management program. An effective program relies on experienced resources, strong procedures and efficient systems.  The same set of tools and techniques that the bank uses to identify potential money laundering and terrorism financing can help it to identify and fight fraud. 

An International Chamber of Commerce (ICC) survey revealed that 18% of trade finance rejections in 2017 were directly linked to incomplete or failed due diligence checks, specifically related to KYC and KYCC (know your customer and know your customer’s customer)¹. Robust KYC procedures are key to preventing fraud. The require information not only to be transparent and accessible but also to be used effectively.  Because customers’ circumstances can change over time, it is essential for banks to understand and capture these changes so they can identify irregularities on an ongoing basis.

New technologies also offer tools for monitoring customers at the transactional level, known as KYT (know your transaction). Historically, banks have dealt with documents for trade transactions rather than for the underlying goods or services. The practice was to only check the consistency of trade documents against specified documentation packs, e.g. commercial contracts, bills of lading, inspection or packing lists. There was no practice or obligation to check whether, for example, the price was right in absolute terms, or if the transaction itself had an economic rationale. 

However, the digitalization of trade and supply chain finance means that trade transactions can be monitored against a wide range of data from various sources, often in real time. As recently as June 2019, the ICC published policy statements for financial crime compliance checks on the price of goods in trade transactions² and mitigation against proliferation financing³. 

Modern technologies such as machine learning (ML) and artificial intelligence (AI), all underpinned by APIs, can provide fast, automated data analysis and reporting to facilitate more effective KYC, KYCC and KYT. For example, banks can be alerted to an unusual price for a specific type of goods against similar transactions or a mismatch with general economic conditions.

<sub>1. ICC GLOBAL SURVEY ON TRADE FINANCE, 2018
2. ICC Policy Statement - Financial Crime Compliance Checks on the Price of Goods in Trade Transactions – Are Price Checking Controls Plausible? (06/06/2019)
3. ICC Policy Statement – How Does Global Trade and Receivables Finance Mitigate against Proliferation Financing? (06/06/2019)</sub>