Enterprise software firm pioneering digital industry transformation, R3 published an article regarding the relevance of blockchain in reducing the occurrence of fraud and money laundering in the bunkering industry in light of the Hin Leong scandal; it was written by Henry Roxas, Head of Trade Finance at R3 and shared exclusively with Manifold Times:
The phrase “money laundering” often conjures up images of illicit cash-only dealings, the black market, questionable investment infrastructures, and inefficient Know-Your-Customer (KYC) processes. It is always a problem which is happening in another industry or another part of society. However, money laundering is taking place in the bunkering industry—and it is big business.
In fact, “Trade-Based Money Laundering” (TBML), the use of trade finance to obscure the illegal movement of funds through misrepresentations of the price, quality or quantity of goods’, is a growing global concern. With financial hubs like Singapore and Hong Kong playing a pivotal role in facilitating international trade flows, they have also become a centre of economic crime in the form of TBML with reports showing that Asian countries account for five out of the top ten nations with the largest average value gaps in the form of misinvoicing, demonstrating the scale of the risks of TBML faced by the region’s economies. While compliance officers face mounting pressure to bring rampant TBML under control, new technologies are presenting innovative means of creating a financial system which is secure, transparent, and compliant.
Fragility of the Trade Financing System
The rise of TBML has been in large part due to regulators and the financial services providers’ inability to effectively tackle the issue, particularly when compared to other areas of financial fraud which have been increasingly ineffective as banks apply greater emphasis to KYC and AML procedures in their day-to-day operations. Despite the trillions of dollars poured into combating fraud in the past decades, the complex financial transactions which take place during TBML prove effective in obscuring the source of “dirty money”. The efficacy of TBML is highlighted by the fact that existing monitoring software is incapable of recognising most instances of fraud—with 95% of flagged transactions proving to be false positives.
Weaknesses which are exploited to launder money are the result of limited visibility and standardisation across the value chain within the bunkering industry which makes it easy for illicit actors to embezzle funds through the misrepresentation of assets, forged documents, and double financing. One need only think of the much-publicised Hin Leong Trading scandal for a characteristic example of nefarious actors obtaining financing for cargoes which did not exist.
This lack of transparency and visibility is made worse by the inherent complexity of international trade. The countless middlemen involved in any given transaction serve to add layers of complexity and provide new stages to the value chain where fraud can occur. Usually paper-based documents necessary for ensuring the validity of cargoes change hands between innumerable importers, importer banks, exporters, exporter banks, freight forwarders, insurers, inspectors, couriers, and public officials. As banks are forced to operate solely on the documents they receive from the buyer/seller, they have limited capacity to establish the veracity of the documents provided—that is, whether they are over-priced or forged, etc.—making fraud especially difficult to detect in instances of collusion between multiple parties within the value chain.
Blockchain and TBML
In an ecosystem involving countless transactions across networks of immense scale, all of which are plagued by documentary fragmentation, it is plain to see how TBML remains such an effective means of committing fraud. A systemic problem, what we require to strengthen the trade financing sector is an end-to-end solution which facilitates greater transparency, secure data sharing, and more effective monitoring. Enter blockchain.
The potential of blockchain to streamline the documentation process within the bunkering sector alone has profound implications for TBML efforts. However, more than this, blockchain also facilitates effective data sharing between parties, solving issues of transparency and visibility across the value chain. With blockchain, this can all be done in a far less costly and paper-intensive way than current TBML methodologies which offer few alternatives and maintain high barriers to entry to the industry.
By encrypting data and storing it immutably—blockchain eradicates the need for man-hours to consolidate and reconcile data; it also reduces the ability of any actor to falsify documentation to zero. The technology is also able to scale and process millions of transactions, and already enjoys significant uptake amongst leading financial service providers—for example, the Spunta Project in Italy which optimises interbank data transfers and settlements has been adopted by over 100 Italian banks (91% of the nation’s banks) and the number of processed transactions is expected to exceed 350 million by the end of 2020. Meanwhile, here in Asia, DBS and Standard Chartered are working on a digital Trade Finance Registry (TFR) to enable participating financial institutions to tap into a secure database of trade transactions financed across banks in Singapore. These deployments of blockchain could have a radically game-changing effect on the bunkering industry, increasing clarity and visibility across the value chain.
In addition, blockchain has the potential to be paired with other technologies like IoT devices, to address issues throughout the trade process. For example, IoT can be used to monitor the bunkering process and generate bunker delivery notes that are stored on the blockchain and shared with authorised parties, bringing greater security to traditional ways of working and providing banks with a solution that allows them to monitor the entire physical supply chain from terminals to the buyer’s vessel.
If blockchain provides so many answers to the issues facing the bunkering industry, why then have we been slow to adopt the technology? Because replacing legacy systems can prove to be a laborious and costly effort, despite the long term benefits it brings. Without external factors creating urgency to replace old ways of doing things, many companies will put off adoption or fail to see the many benefits of embracing emerging technologies and new ways of working proactively.
As regulators and financial service providers continue to focus on TBML in efforts to crack down on widespread, and incredibly costly fraud, however—we can expect to see novel solutions and innovative technologies increasingly incorporated into their considerations. What may have previously been viewed as too costly or dramatic an overhaul of existing systems may prove the path of least resistance for the bunker industry and trade finance sector going forward—as more traditional AML processes have thoroughly failed to have an impact on illicit trade flows.
From where we stand today, it looks like blockchain may be the most promising response.
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