Trade Finance Risk: Documentary Fraud and Money Laundering Book

This new book is a detailed yet practical guide to the detection and mitigation of the risks at the core of the international banking business.

Written by Howard Palmer, author of the best-selling book Bank Risk Analysis in Emerging Markets and International Trade and Pre-Export Finance, the book opens with an examination of the characteristics of fraud and a definition of the problems. Twelve detailed chapters investigate topics such as types of fraud, bank risk analysis of fraud, due diligence and money laundering. The book then presents a practical seven-step guide to the techniques of fraud avoidance.

Of special interest to trade finance officers, bank risk analysts, internal audit and compliance officers and anyone involved in cross-border lending, this comprehensive book draws on the extensive experience of the author as an expert trade finance practitioner. It is an essential and up-to-date guide to dealing with the scams that can be hidden by organised criminal groups. It also explains how to avoid becoming a victim of fraud and money laundering, something that every banker needs to understand.
Excerpted from Chapter 1 of Trade Finance Risk: Documentary Fraud and Money Laundering


Why is fraud so difficult to detect?

Banking is a risk-taking business and most banks are well prepared for the risks they are taking in areas such as the ability of a borrower to repay a loan, or the political risk of a country, or fluctuations in commodity prices, and so on. Most banks, however, do not take into account the possibility of fraud or, at best, give it little importance in the internal analysis of the sovereign or political risk of aparticular transaction, without considering their own staff and structures, or any other risk entry points where fraud may creep in.

International documentary fraud is one of those areas where the parties involved may not be willing to divulge information publicly, which makes it difficult for the investigator to establish fraud. The financial products that are used as vehicles for fraud, such as the letter of credit (LC), bank guarantee or standby LC, are so widely used that everything seems to be in favour of the fraudster. Certainly, an ex-banker operating as a fraudster would have a head start over others in their particular field.

The reason why more cases of fraud are now brought before the courts, and are more widely reported, is due to the changing nature of the banking industry. Whereas in the past the correspondent bankers of banks involved in a fraud may have been willing to share the costs of a fraud between themselves, and so maintain good relationships, the amounts involved in the frauds now originating from some emerging markets are now so high that litigation is the only possible solution. I must reiterate that this book is in no way intended as a substitute for seeking professional legal advice at all levels, and banks must defend themselves by employing fraud avoidance techniques as discussed later.

The author is continually surprised by the unwillingness of banks to investigate a possibly fraudulent transaction and the suspected perpetrators of the fraud, be they within or outside the bank. I hope this book will help in redirecting banks' energies towards a proper fraud risk avoidance system.