Fraud can strike at any stage of international trade—explore common schemes, warning signs, and practical prevention strategies.
We often praise human creativity, whether in the form of music and art, architecture, or engineering. Unfortunately, this creativity also extends to avoiding payments or otherwise betraying the trust of a trading party. Adding the complexities of cross-border trade with varying jurisdictions, the geographical distance between the buyer and the seller, business cultures, and the improving ease of doing business, international trade becomes fertile ground for sophisticated fraud schemes.
To successfully navigate the seas of international trade without being capsized by fraud, Recovery Advisers will share some examples of types of fraud we have encountered in our trade finance and credit insurance practice; how these can potentially be identified; and what you can do to prevent them early in the trading lifecycle.
What may happen – types of fraud
At the application stage (meaning the fraud is committed at or near the outset of trade negotiations), we can distinguish roughly a dozen scenarios. These include company financial information being inflated or completely fabricated to access funding; suspicion arising from unusual trade patterns and evidence of common ownership or transactions between subsidiaries; selling the same goods to multiple buyers or vice versa; demanding payment for goods never ordered; third party-related issues, such as buying agents ordering without authorisation or shipping to a third party to avoid future recoveries; diverting payments to various (unrelated) bank accounts; virtually posing as a real company, without any background or real commercial intent; and finally, sophisticated scenarios that go as far as engaging in a sham arbitration, leveraging the validity of the reputation an arbitration award may carry.
At the transaction level (meaning that fraud is linked to the performance or the illusion thereof), the most notable fraud pattern involves collusion in its various forms, where trading parties conspire to deceive the bank or insurer to access financing. This includes agreeing to ‘lose’ goods in transit or inflating invoice values to reduce their own financial exposure. In rare cases, particularly in commodity trading, containers may change ownership multiple times at sea, resulting in goods that are not as ordered — even if the weight matches, the contents may be swapped for something less valuable.
The third category was identified as (re)payment issues, namely cases that centre on the buyer’s capacity to pay. This category includes pre-bankruptcy orders aimed to increase the future bankruptcy estate or knowingly ordering goods without the ability to pay; phishing attacks resulting in false payments; and falsely pledging ‘valuable’ assets as collateral for future payments.
What to watch out for – early warnings
In most fraud cases, by the time they are discovered, it is too late: contracts are signed, loans disbursed, or goods already dispatched. There are, however, some common signs that can be spotted early on and require additional attention.
Intracompany trade: Companies establish a set of subsidiaries/sister companies and generate several intracompany trades, i.e., a paper trail in lieu of real trade. In this scenario, goods may change ownership rapidly while actually owned by the same company, kept or stored within the same facility, without ever crossing borders or registering movements.
Simple means of communications: Communication through WhatsApp or email addresses with non-company-designated domains makes it difficult to verify the identity of the real owner, unless the parties meet and formally confirm each other’s identities.
Recent change of ownership: Recent change of ownership may mean that the owners will come and go, and their liability is limited. It may also mean that the owners, usually following illicit activities, are attempting to cover their tracks.
Spike in trade volume or lack of trading history: A company ordering an unusually high volume of goods in its early years may indicate either an imminent business closure or a temporary spike, with the intent of committing fraud on a particular delivery.
Difficulty tracing cargo: When goods disappear without records, get derailed or lost, further investigation is needed. The creditor might legitimately dispatch the goods and request payment, while the buyer may deny payment, claiming non-receipt of the goods — depending on the agreed underlying contractual terms.
Asset qualification: Balance sheets often present healthy asset valuations, whilst in reality such assets can be extremely difficult (if not impossible) to dispose of to satisfy a verdict. Examples of such assets are certain types of licenses and intellectual property rights that are specific to the owning company.
Inexplicable complexity: When the lender/insurer runs into a transaction structure that is unnecessarily complex compared to industry standards, whether due to the involvement of additional companies, distributed payment methods, or differing jurisdictions, the risk and claims managers should be alerted.
What you can do – recommended actions
Check, check, and check, regardless of how burdensome that may seem. It is the only way to filter out impostor transactions and traders.
Reference letters from banks can confirm the identity and financial stability of the buyer, the account and transaction history, and payment behaviour. In our experience, the most powerful tool is the physical visit, including checking the party’s offices, factories, storage yards; meeting with leadership, management, and owners; or interviewing their accountants and auditors to confirm the company’s financials.
Physical visits may be resource-intensive for an insurer, bank, or exporter, and without the knowledge of the local market may not lead to prompt results. Official papers, such as tax returns and commercial registrations, are usually presumed to be accurate and complete. However, they should always be corroborated by a physical visit.
Internally, education about detection is vital, and not only for claims managers; sharing experience between originators, underwriters, sales staff, portfolio managers, and legal teams helps to increase preparedness.
Despite the potentially gloomy picture painted above, exporters, banks, and insurers should not lose faith in trading internationally. There is indeed good news. In 99% of cases, buyers do pay. Therefore, we encourage everyone to be open to international trade – with the caveat that all parties involved should conduct thorough due diligence on their trading partners. Taking that extra step will be worth the time, because preventing fraud is always better than remedying it after the fact.
