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STSA & Commodity Finance Banks Outline Best Practices for Fraud Mitigation

The Swiss Trading and Shipping Association (STSA) and ten major banks recommend vessel tracking, monitoring, and Bill of Lading verification to prevent fraud and significant losses in commodity trade financing.

After a number of fraud and insolvency cases shook the commodity and trade finance sector in 2020, the Swiss Trading & Shipping Association (STSA) has, for the very first time, published a best practice guide for mitigating risk across transactional financing, governance, and more.

While the adoption and implementation of such guidance is non-binding, the recommendations come from some of the industry’s leading financial institutions, including Arab Bank, Banque de Commerce et de Placements, Banque Internationale de Commerce, CA Indosuez, Credit Suisse, ING Bank, Sberbank, Société Générale, UniCredit, and UBS. And, with Switzerland positioned as the leading European centre for commodity finance, adopting these practices can serve to benefit the whole supply chain.

Why is commodity trade financing susceptible to fraud?

There are some key inherent risks associated with commodity trade finance, from production risks, to exposure risks, price volatility, and the complexities of having multiple parties involved. As a result, when it comes to ensuring payment flows throughout the value chain, shipping and transport documents, as well as certificates of quality and quantity, are required as evidence. 

However, with this comes great risk if such documents are not properly verified, leading to the issues that have occurred over the past year, such as: 

  • the financing of issued invoices without underlying trades,
  • the financing of duplicate Bills of Lading (BLs), and
  • the issue of the true nature of goods when a shipment is not what it claimed to be.

Commodity trade mismanagement like the above, as well as the effects of the global pandemic, have only aggravated the situation, making it clear that banks require dedicated risk models and monitoring tools, in conjunction with specialist risk management procedures and teams, to ensure transactions are legitimate and prevent fraud.

What are the best practices for thorough due diligence?

When it comes to voyage and BL finance, the message from the STSA is clear: verification is essential. To confirm the genuine nature of BLs, banks should perform thorough document checks, including ensuring that BLs are issued to order of the bank. In the case of a BL copy being used, it should be followed up by receipt of the original BL, with particular attention paid to the BL date. The STSA guidance states that “no financing of copy BLs older than 10 days (30 days for crude cargo) from shipment date” should occur, with “old” copies noted as an immediate red flag.

For further surety, it is recommended that banks should “track vessels and perform regular monitoring to ensure consistency with the expected voyage and timing” of a BL. To do so, organisations should make sure they have access to solutions that enable real-time vessel movement visibility.

How can I track vessels and verify Bills of Lading?

Bills of Lading have long been marred by their vulnerability to fraud, but are an essential piece of the puzzle when a commodity trade financing bank is deciding to finance a trade or not.

However, traditionally a paper based document, BLs have always presented an opportunity for fraudsters to either forge them and illegitimately claim delivery of a shipment, or to be manipulated. Learn more about them in our white paper, What is a Bill of Lading, and How Do I Verify One?

Pole Star’s regulatory technology, PurpleTRAC, includes Bill of Lading verification functionality, allowing users to confirm whether the BL is a recognised, legitimate asset within the database of container lines currently supported. The system then provides a list of all vessels, ports, and container lines involved in the delivery of the BL, enabling users to ensure regulatory compliance throughout the transaction, while mitigating the risk of fraud.

Within the same solution, users can monitor a vessel’s historical and real-time movements, identify any out of the ordinary ports of call, and investigate periods of non-reporting, ship-to-ship (STS) transfers, or other suspicious activity. Additionally, PurpleTRAC screens for the vessels used, their associated ownership and management, and port state control history against best-in-class sanctions watchlists in under 30 seconds. It also provides that all-important audit trail for demonstration of best efforts in compliance should regulators ever come knocking.

As a result, PurpleTRAC provides commodity trade financing banks with the visibility needed to continue their commodity business without making headlines.

Get a demo or schedule a free 14-day trial by contacting purpletrac@polestarglobal.com

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