Fake Shipments, Fast Cash: Trade Finance Fraud on the Rise

For as long as there have been banks, bad actors have tried to rob them.

And as a report from the International Maritime Bureau (IMB), which is part of the International Chamber of Commerce’s (ICC) commercial crime division, reveals, a new trade finance threat is emerging to shake the high seas — with logistics providers and exporters increasingly joining forces to manipulate shipping documents and swindle banks.

“False documents indicating cargoes have been shipped are presented under documentary credits to generate funds for the sellers before the shipment is made,” IMB Director Pottengal Mukundan said in a statement. “Once the funds are released it would appear the goods are shipped. This is an abuse of the documentary credit system which relies upon shipments to be made as stated upon the bill of lading. From a banking perspective it can give rise to a number of risks if these transactions are allowed to continue unchecked.”

Per the bureau, the rise in scams primarily involves importers in West Africa and exporters in China.

But using false or altered shipping information to secure pre-shipment finance and other forms of trade financing is difficult to detect and poses a significant risk to banks everywhere, which are often left exposed to substantial financial losses.

As these trade finance fraud schemes grow more sophisticated, banks must understand the risks, recognize red flags, and implement robust safeguards to protect themselves, including prevention solutions that use digital innovations.

For example, last Tuesday (Sept. 3), Lloyds Bank launched a collaboration with artificial intelligence (AI) platform Cleareye.ai, saying they will use AI to streamline processing and compliance checking for trade finance documentation.

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The IMB report says there has been a “sustained increase” in suspicious trade documents, which are up by 11.4% to date compared to the same period last year, and up 10% for the most recent quarter.

Shipping documents, such as bills of lading, certificates of origin and inspection certificates, play a critical role in trade finance. They serve as proof that goods have been shipped, inspected and meet the specifications agreed upon in the trade contract.

Banks use these documents to release financing, such as letters of credit, factoring or other forms of pre-shipment finance, which allow exporters to receive payment before the goods have been delivered. However, when these documents are falsified, the entire trade finance transaction can be based on fraudulent information, exposing banks to considerable risk.

In fraudulent schemes, logistics providers and exporters may collude to create fake shipping documents or alter legitimate ones. These manipulated documents can claim that goods have been shipped when, in fact, they have not, or that the value or quality of the goods has been inflated.

In some cases, the fraud involves goods that do not exist at all, or the shipment of lower-quality products that do not meet the contract’s terms. By the time the fraud is discovered — often after the goods have failed to arrive or have been rejected by the buyer — the bank has already released funds to the exporter, resulting in significant financial losses.

Banks should conduct enhanced due diligence when dealing with new or unfamiliar trade partners, particularly if they have no prior business history. A lack of transparency or reluctance to provide additional information about the transaction or the goods being shipped should be treated as a potential red flag.

Read more: Unmasking Digital Imposters Is Rising Priority for Industrial Economy

Fraudsters are becoming more sophisticated in their methods, using advanced technologies to create convincing fake documents and cover their tracks. In some cases, they may even bribe customs officials or other authorities to issue false certificates of origin or inspection. The use of digital platforms in trade finance has also opened new avenues for fraud, as cybercriminals can exploit weaknesses in digital systems to alter or forge electronic shipping documents.

Inconsistent or conflicting information between different documents, such as the bill of lading, invoice and certificate of origin, should raise concerns. Discrepancies in the quantity, quality, or value of the goods being shipped may indicate that the documents have been manipulated.

Fraudsters often use multiple intermediaries to create a complex chain of transactions that makes it harder to trace the flow of goods and payments. The involvement of numerous logistics providers, agents or third-party companies can be a sign of an attempt to hide fraudulent activity. And if goods are being shipped through unconventional or unnecessary trade routes, it may suggest that the logistics provider is trying to obscure the true origin or destination of the shipment. Banks should also be wary of shipments involving high-risk jurisdictions known for weak regulatory oversight.

“What you want to do is catch it before it becomes a crisis,” Boost Payment Solutions Chief Technology Officer Rick Kenneally told PYMNTS for the series “What’s Next in Payments: Protecting the Perimeter.”

He added that the first step in threat detection can be as simple as “keeping up with the basics” as it relates to monitoring and compliance checks, noting that “they will turn things up.”

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