Crescent: another export finance fraud?
Tim Nicolle
News is breaking in Bangladesh of a US$90m fraud involving a government-owned bank (Janata) and a local exporter (Crescent Group).
Fraud risks have to be assessed and managed with great diligence and care. Making a poor credit decision can hurt, but fraud can be fatal to a bank, exporter or importer.
PrimaDollar is set up to help banks, exporters and importers to trade more safely at low cost and without collateral.
- We pay the exporter at shipment and collect from the buyer later.
- This means that exporters and local banks who work through us are not directly exposed to the risk of fraud in the trade; fraud is a risk that PrimaDollar manages.
Of course, it would be imprudent to set out all the systems that we have in place – but here are some examples of fraud (or alleged frauds) from the last few years, and some guidance on how to use our services to help trade on better terms, whilst mitigating these risks.
Check the cost of our services: click here.
Should you be worried about these things?
Yes – these scams affect all of our wealth and prosperity, introduce uncertainty into business, and cause great harm to innocent people even if they are not involved. If you are caught up, the losses can be significant and even fatal to your business.
1. Janata Bank, Bangladesh – Crescent Group – alleged
News is breaking in Bangladesh (August 2018) of an alleged skimming fraud involving Tk 765 crore (about US$90m) of fraudulent export trades.
This situation seems very similar to the alleged Indian Modi fraud case (see next secton).
It is alleged that there was collusion between officials in Janata Bank (a state-owned bank) and Crescent Group companies to provide advance payments against export trades that never happened.
The process is alleged to be as follows:
- Fake export documents are generated evidencing shipments of goods to importers that do not exist. These are backed up by letters of credit from a dubious African bank, perhaps even sent over the SWIFT network.
- Janata Bank staff, failing to carry out proper due diligence, approve advance payments against these letters of credit.
- The advance payments are siphoned off and laundered internationally. The money disappears.
- It seems the arrangements were given credibility by circulating cash for a period of time to suggest that the trades were real, allowing the volume to be pumped up to higher levels.
Whether or not Crescent Group was complicit in the alleged processes, the reputational damage is significant.
2. Nirav Modi, India – Punjab National Bank – alleged
This is an alleged INR 6,498 crore (about US$950m) fraud involving the famous society figure and jeweler to the wealthy, Nirav Modi.
There are many similarities with the alleged Crescent Group fraud:
It has been alleged that:
- PNB, a state-owned Indian bank, provided letters of credit (or letters of undertaking) in favour of companies controlled by Mr Modi through the SWIFT network. Other banks then advanced cash against these guarantees.
- These guarantees, it seems, were issued by one or two branches of PNB without proper controls. As there were no assets or substance behind the guarantees that were issued, PNB ended up having to pay out without a means of recovery.
- Collusion between bank officials and the customer is an essential ingredient to this story. But also here, PNB’s internal systems are alleged to be at fault – as the SWIFT terminals were not connected to the accounting systems, allowing bank staff to issue guarantees without any checks or accounting being done.
3. Y&X, Bangladesh – 25 exporters affected
The Y&X story arose in the summer of 2017 – amounting to some TKs 600 cr (about US$70m).
This transaction did not involve corrupt officials in local banks, but shows how a lack of proper due diligence can lead to significant losses.
- A new buying house (trader) appeared on the Bangladesh scene arranging big supply orders for big international retail names.
- Prices were good, but a condition of each order was that the materials and trims were taken from named Chinese suppliers (who were part of the fraud).
- The orders were fake, the imported materials were over-priced – and so large amounts of cash were skimmed out of the pockets of the Bangladeshi exporters involved.
- The fraud came to light only when goods, delivered to the ports in the UK, were unclaimed. There were no buyers.
PrimaDollar has written an article about this topic already: click here.
4. How to avoid the fraudsters?
If you involve PrimaDollar in your transactions – whether you are bank, an importer or an exporter – you will benefit from our low cost finance, no requirement for collateral – and also from our systems and procedures to mitigate the risk of fraud in cross-border trade.
Your trades will be much safer with our involvement.
PrimaDollar provides low cost, collateral-free trade finance to exporters, buying houses, traders and importers. We sit in the middle of these supply chains.
We normally pay the exporter at shipment.
This means that we are exposed to the risk that a trade is fraudulent.
It could be that the exporter has no intention of making the goods, maybe the shipments do not exist, perhaps the importer is a fake company, perhaps the banks at either end of the supply chain are not providing correct information, maybe we are dealing with people impersonating the actual companies that we think we are dealing with etc.
Fraud risk is, perhaps, the biggest challenge that any trade financier has to deal with. We take these risks seriously. We have the systems and procedures in place to detect and avoid those transactions which are not right. Sometimes, perhaps, we get “false-positives” which means that we turn down probably good transactions. But this also is a necessary part of our business.
So what kind of checks do we do?
- We never work confidentially. We will always talk to the importer, the exporter and all the parties involved in the supply chain. This is why we were not caught in the Y&X fraud.
- We do not provide our finance relying upon SBLC, letter of credit, bank guarantees. We focus on the credibility of the buyer itself. We have the systems and relationships that allow us to underwrite the buyer on a standalone basis where-ever he may in the world. If the buyer’s credit does not work standalone, we will not take the trade. That does not mean we give no weight to other supports – but our analysis starts with the buyer itself.
- We validate independently the identity of the people that we work with. There are a variety of checks that we do – which we will not set out here. But this is a common-sense process.
- Via our access to global customs and shipping records, we validate bills of lading and other documentation provided – and we will often audit an existing shipment to an importer to see how it has been sold down after receipt as part of our initial underwriting.
- We finance against shipping documents, not just a commercial invoice. And we expect to see original documents, or to have these documents certified to us by a trusted third party.
All of this activity is a natural part of our daily business. These are not difficult or complicated matters, and these checks are quick and simple to carry out.
5. So what should you do?
Fraud in international trade has always been present. But with pressure on margins, the move to “open account” or “sale contract” or shipping on “DA terms” – both exporters and their bankers are more and more at risk.
Detecting fraud and managing risk in international trade requires an international network and sophisticated systems to make the checks that are needed.
Use PrimaDollar, and you will have the benefit of our experience, systems and international network. Moreover, our low cost and collateral-free finance pays at shipment – and we take the credit risk of the importer (collecting the funds later from the buyer).
Banks and exporters:
Work with PrimaDollar, and export safely using
our low cost, collateral-free finance.
Check the cost: click here.
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