Trade finance: fraud risk

A one minute guide

What is this risk?

All businesses face a risk of fraud – whether that is coming from their customers or from inside the company.

Mitigating fraud risk involves procedures. Good working practices reduce the risk that a fraud can occur by detecting or deterring the activity before it can cause a problem.

What kinds of fraud risks are in trade finance?

There are many potential sources of fraud risk:

External frauds can include:

  • Fake trades: is this a real transaction between a supplier and a buyer?

  • Rocks in the box: Will the supplier cheat the buyer?

  • Impersonation fraud: Are these people who they claim to be?

  • Authenticity: Are these goods stolen or being sold illegally?

  • Money laundering: Is this trade a front to legitimise criminal cash?

  • Bank account: Is this the correct bank account of the supplier or buyer?

Internal frauds can include:

  • Booking fake trades, customers and shipments

  • Diverting payments

  • Covering up mistakes

How is fraud risk mitigated?

All of these are dealt with by using experienced people, good systems and strong procedures.

In trade finance, a significant mitigation of fraud risk is to make sure that the buyer confirms the details of the trade every time.

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

Trade finance is difficult to get right because transactions often span continents, time zones and cultures. Transactions are also technical and can be complex with multiple documents, parties, multi-modal logistics and banking systems.

One of the main challenges, but also strengths, of trade finance is that mistakes are visible very quickly, especially compared to other financial businesses. There are two main reasons:

  • Trade receivables turn into cash very quickly. The typical maturity of a trade receivable is 90 days. A trade receivable is an invoice for goods and / or services. 90 days after shipment, the money is due. If something odd is going on, it is cruelly exposed by the absence of a payment and likely the absence of a buyer.

  • There is no “extend and pretend” opportunity. Unlike loans which can be refinanced by rolling over at maturity, a trade receivable has to be paid in cash and cannot be settled by another trade.

A trade finance business that has financed 100s of shipments likely has strong enough procedures, systems and people to have fraud risks under control.

How does PrimaDollar manage fraud risk?

Fraud risk can never be ruled out.

At the same time, with 100s and 100s of shipments now successfully financed, the PrimaDollar team has a strong track record. This is also not the place to set out how we manage the risks – as you can imagine, it is important to preserve the confidentiality of the processes involved.

But this underlines the importance for investors who are concerned about the risks of financing trade receivables to take careful note of the track record and experience of the partners that they rely upon.

How do I find out more?

Visit our site www.primadollar.com and also check out our pricing at www.primadollar.com/getalivequote.php.

There are one minute guides on the risks in financing trade receivables generally and on some of the specific risks involved.

  • Risks in financing trade receivables: here

  • Credit risk in trade receivables here

  • Commingling risk in trade receivables: here

  • Performance risk in trade receivables: here

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