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The bunker industry has been driving everyone bonkers with its trade-based money laundering cases. R3 Trade Finance Head Henry Roxas talks about how blockchain can help.
The vast world of shipping is a mystery to most people not directly involved in it. Globally, around 11 billion tons of goods are transported each year by cargo ships. For context, there are over 7 billion people in the world, meaning the shipping industry transports over 1.5 tons of goods per person each year.
This industry has traditionally been paper-based, and numerous parties are involved in each transaction. Some of these parties include terminal operators, tanker vessel operators, traders, corporations, banks, governments, and more. This makes bunker industry transactions opaque.
Separately, general processes in the industry have left several points of vulnerability open for bad agents to exploit. For instance, physical documents are often physically mailed by parties, and often need to be amended many times.
Therefore, it comes as no surprise that the bunker industry has frequently been a victim of organized crime–particularly when it comes to trade-based money laundering (TBML). TBML refers to the use of trade finance to obscure the illegal movement of funds through misrepresentations of the price, quality or quantity of goods.
“It’s very easy for illicit actors to embezzle funds [in the bunker industry] through the misrepresentation of assets or forged documents, or even double financing,” says R3 Head of Trade Finance Henry Roxas. R3 is the enterprise software firm behind the blockchain platform Corda.
Since the bunker industry mainly operates offline, it is difficult for financial institutions to authenticate documents based on when credit was issued. Moreover, the parties involved in a bunkering transaction are often vertically integrated, adding to the problem.
“These parties would often collude with each other because they’re part of a larger parent company. And so it makes it even harder for people to identify fraudulent documents because there’s collusion among different parties,” says Roxas.
“And in the case of banks, when they’re trying to identify a legitimate trade, they will often compare documents and try to identify discrepancies and if you have collusion amongst different parties it just makes it that much harder,” he explains.
Last year, TBML led to the collapse of Singapore-based bunker industry giant Hin Leong Trading. A court filing indicated that Hin Leong had obtained financing from several banks for cargoes of oil that did not exist – a classic case of forgery and misrepresentation of assets. The company owed a total of about $3.8 billion to 23 banks and filed for bankruptcy in April last year.
In June 2020, two former employees of Coastal Oil Singapore, which filed for voluntary liquidation in December 2018, were charged with debt fraud. The duo had allegedly created false sales contracts and invoices amounting to $247 million to secure financing from banks.
These frauds led to hundreds of millions in losses for banks and other involved parties. Therefore, enterprises like R3 are now trying to implement blockchain in the industry to bring about transparency and prevent fraud and TBML.
How blockchain can help prevent TBML
Blockchain technology, despite being over a decade old, is still in its early stages of adoption. However, over the past few years, blockchain adoption has steadily grown across industries like banking, finance, supply chains and more.
So far, R3’s platform Corda has been deployed across several sectors and helped businesses transact directly and in strict privacy using smart contracts. Importantly, these contracts allow real-time exchanges of information, and ensure that assets and agreements are in sync, Roxas says. One R3 client was able to reduce its material procurement to pay time by up to 50% and reduce operating costs by 70%, according to Roxas.
With TBML becoming a growing concern among banks, governments, and corporates alike, R3 is trying to bring about the same kind of efficiency and transparency in the bunker industry using blockchain.
Though greater transparency and security are important benefits to a paper-based industry like bunkering, the more interesting application lies in combating TBML and financial crimes with the help of blockchain. Roxas explains:
“When either transactions or documents are recorded on blockchain, they’re encrypted and immutable,” he says. This drastically reduces the vulnerability points which make fraud, forging of documents, TBML, and other financial crimes possible at present.
“And so, it allows parties such as banks to validate the authenticity and integrity of documents so they know who’s created it, whether it’s been tampered with, and that’s very valuable,” Roxas adds.
Other perks of implementing blockchain in bunkering
According to Roxas, blockchain implementation in the bunker industry can do more than just automate processes and prevent TBML.
“It’s not just a way to reduce costs and improve efficiency and transparency, but even potentially create new opportunities where you create new risk models, and thereby, maybe more appetite to finance companies that were previously too risky,” he says.
Roxas goes on to simplify it further. According to him, since banks can obtain authentic data easily using blockchain, they are more open to using alternative types of data for new credit risk models. This can potentially help banks provide new forms of financing, he says.
One example is banks issuing electronic bunker delivery notes (e-BDN) using blockchain, which some of R3’s customers are considering at present. According to Roxas, banks can use secure hardware to create an e-BDN that is recorded on the blockchain. This e-BDN can then help them know where the bunker fuel is and who’s holding it.
Banks can “validate that it’s a legitimate transaction [and] so it just creates new opportunities for them to use data in a way they haven’t previously done,” says Roxas.
Moreover, implementing blockchain can also bring down the cost of doing business of individual banks. The cost of doing business is basically the cost incurred by banks to deploy fraud and financial crime prevention methods.
In other words, since in a blockchain a consortium of banks participate, they do not have to individually implement fraud prevention measures. The cost is shared by the banks and this in turn reduces the cost to income ration for the trade business arms of individual banks.
The road ahead
As per Roxas, there’s been a key change in the approach to combating TBML. In the past, efforts to combat TBML have mostly been at an individual organization level. However, with increasing instances of multi-million dollar frauds, concerned parties are taking a consortium-based approach, which started the discussion on blockchain implementation in bunkering.
“There’s definitely a renewed interest in implementing new TBML solutions. There’s an appetite from both the private and public sector,” says Roxas.
The consortiums exploring TBML preventive solutions are being “either led by the private industry, such as a group of banks or led by the government themselves in certain jurisdictions,” he adds.
And these consortiums are not just looking to beat TBML together, but are also looking at information sharing and collaboration. Blockchain is just the tool they need, says Roxas.
So now, the only question is whether R3 will succeed in implementing blockchain in the bunker industry at a large scale. After all, there were previous attempts to introduce blockchain to this traditionally paper-based industry which failed to gain momentum. But Roxas is optimistic about the future.
“Governance rules, regulations, standards – these are the common challenges that are part and parcel whenever you’re implementing industry level change, and I think that’s what people are looking to do,” he says.
“We’re excited to see what plays out in the next few years, but we’re quite optimistic that there is a role for R3 in helping combat TBML.”
Header image courtesy of Charlie Hang on Unsplash.