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Fraud Risk

What is Fraud Risk?

All businesses, small or large go through the risk of fraud. It might come from the associated clients or even from inside the company.

For mitigating fraud risk various procedures has to be taken in consideration. Good working practices helps in reducing the risk that a fraud may occur by significantly detecting or determining the activity before it actually cause a problem.

What kinds of fraud risks are in trade finance?

There can be many potential sources because of which fraud risk can occur:

External frauds include:

  • Fake trades: the transaction between the exporter and importer is real or fake?
  • Rocks in the box: Will the exporter cheat the importer by not delivering the expected products?
  • Impersonation fraud: Are they the similar ones that they claim to be?
  • Authenticity: The products being shipped are stolen ones or being sold illegally?
  • Money laundering: Is the involved trade is a front to legitimise criminal cash?
  • Bank account: Is the mentioned bank account of the supplier or buyer is accurate one?

Internal frauds include:

  • Booking of fake trades, clients and shipments
  • Diversion of payments
  • Covering up the mistakes

How is fraud risk mitigated?

All such fraud risks can be dealt efficiently with the involvement of experienced people, effective systems along with strong procedures.

In trade finance, a significant way for mitigating fraud risk is by ensuring that the importer confirms relevant details of the trade each time.

How do I tell if you have fraud risk under control?

Trade finance is a little difficult to avail as the included transactions usually span continents, time zones as well as cultures. Apart from this, few transactions can be technical and gets more complex by the involvement of multiple documents, parties, multi-modal logistics and banking systems.

One main challenge as well as strength, of trade finance is, mistakes can be easily visible in minimal time, especially while comparing with other financial businesses. There are two main reasons:

  • Trade receivables can be turned into cash very quickly. The usual maturity of tenure for a trade receivable is 90 days. An invoice for products can be considered as a perfect trade receivable. 90 days post to shipment, the money is due. If something unexpected goes on, it is quickly exposed by the absence of due payment as well as the absence of a buyer.
  • There exists no “extend and pretend” opportunity in trade finance. Unlike loans that can be refinanced by just rolling over at the maturity time, a trade receivable has to be paid on time in cash and cannot be settled using another trade.

A trade finance business which has financed numerous shipments will have strong enough procedures, efficient systems and people can keep fraud risks under control and can even help in mitigating them.