The risk posed by fraud in the USD4 trillion trade-financing industry has prompted banks to start exploring distributed-ledger technology like the one that underpins bitcoin.
Standard Chartered Plc, which lost almost $200 million from a fraud at China’s Qingdao port two years ago, has teamed up with DBS Group Holdings Ltd. to develop an electronic ledger of invoices that uses a parallel platform to the blockchain employed in bitcoin transactions. Lenders such as Bank of America Corp. and HSBC Holdings Plc say they’re looking at blockchain for trade finance and other banking applications.
Blockchain proponents argue that the technology will change the face of banking, helping lenders cut billions of dollars in costs. Trade financing, a centuries-old banking mainstay, may become ground zero for blockchain adoption because it promises to do away with paper invoices and the fraud that accompanies them – if banks can come together around a joint platform.
For blockchain applications, “invoices should be considered a leading candidate here, given the high potential for fraud,” said Henry Balani, global head of strategic affairs at Accuity, which provides technology to monitor trade-based money laundering.
Lenders typically don’t publish their losses from trade fraud, though almost 20 percent of banks in a 2015 survey by the International Chamber of Commerce reported an increase in fraud allegations.
In the Qingdao case, companies controlled by a Chinese-born, Singaporean businessman are alleged to have used invoices for the same metals stockpiles several times to bilk banks out of hundreds of millions of dollars. Standard Chartered wrote down $193 million in commodity assets in 2014 because of the incident. In another example, a trans-
Atlantic fraud conspiracy that used fictitious purchase orders and fake invoices to get loans for metal shipments was estimated in 2008 to have cost banks including JPMorgan Chase & Co. close to $700 million.
“Because there is no common platform for banks to screen transactions financed by other banks due to confidentiality concerns, there is a possibility that customers may capitalize on this information-sharing gap to obtain financing from multiple banks using the same invoice,” said Lum Yin Fong, one of the DBS executives who oversaw the bank’s ledger tie-up with Standard Chartered. Chanyaporn Chanjaroen and Darren Boey, Bloomberg
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