INTERNATIONAL CHAMBER OF COMMERCE UNITED KINGDOM: FIGHTING FRAUD IN INTERNATIONAL TRADE
Today marks the beginning of the first Global Fraud Summit in London, with international governments, banks and businesses joining forces to tackle this huge drain on public pockets in the UK and around the world.
Combatting trade fraud is a key concern for international trade. The $5trillion global trade financing market has been repeatedly targeted by fraudulent actors seeking to mislead banks and secure undue or repeat financing. For example, Balli Steel was able to defraud five trade finance lenders using fake shipping documents, amounting to a $500million scheme which affected a further 18 banks and other creditors.
This would not be possible in a digital trade system which swaps paper for data. By sharing data, lenders would be able to flag suspicious or repeat finance applications. Thanks to the Electronic Trade Documents Act – passed into UK law last year to replace arachic shipping laws written in the 1800s – companies are now able to stop using cumbersome physical documents and go digital.
At present, it is the norm for banks, companies and governments to separately verify and authenticate the identity of every buyer or seller in a supply chain using a complex web of fragmented identity systems. The difficult-to-navigate regime is making banks increasingly cautious about trade fraud. When banks fear loses, credit lines are cut, the price of finance increases, and SMEs with limited resources are hit the hardest, creating barriers to overseas markets and cutting growth potential.
Legal entity identifiers (LEIs) are central to the solution. An LEI is a 20-digit combination of number and letter specific to a business, similar to a company number, creating a shared global standard to identify trading entities. This allows governments, regulators, banks and businesses to identify who is who in the trading system without the need for unnecessary bureaucracy and duplication.
The scale of savings that could be made by combating trade fraud are vast. A 2019 FinCEN note advised that vendor impersonation alone cost US businesses $9billion during the 2016-2019 period, and Bloomberg estimated that the potential losses to banks from trade finance fraud in Singapore from 2014 to 2020 totalled US$9.26bn. Connecting government and industry with digital trade infrastructure would also help to tackle the £9billion VAT gap in international trade, as well as other issues and inefficiencies which act as a drag on growth.
Chris Southworth, secretary general of the International Chamber of Commerce United Kingdom, said:
“The international trade community is right to be extremely concerned about fraud, but this concern is hampering SMEs around the world seeking to trade across national borders. Accelerating the shift towards digitalised trade systems is the single greatest enabler of solutions that will help us all to fight back against fraudulent businesses and individuals. These criminals are ultimately stealing resources meant for growing companies wishing to thrive on the world stage. We need urgent coordination across governments, trade regulators and businesses to fix the vulnerabilities in our outdated paper-based trade systems by embracing digitalisation, fighting fraudsters, and making international trade faster, cheaper, simpler and more sustainable for businesses of all shapes and sizes.”
