Chapter 5: 007 or Trade Espionage and Villainy

Insights Book| 16 April 2024

With regular repeats of financial crises over the years, each asset class has its controversies, gossip and juicy stories. Let’s peek at the dark side of the trade-finance industry. The main surprise in 2021 was Greensill. Previously one of the greatest upsets was when Barings, the famous British merchant bank which had been in business for over 200 years, collapsed, sending shockwaves through the financial world. Trade finance is, however, in a much more robust and safer position than ever before.

Research-driven investors discover trade finance as a financially appealing and protected asset class, providing funding to meet the growing demand for financing trade. Financing trade ideally carries a social responsibility. Regulators believe financing international trade attracts money launderers and other financial wrongdoers as well. Such generalisation can easily be applied to any coffee shop, dry cleaner, bakery or amusement park − in fact any place that exchanges products or services for cash (ie where large numbers of transactions are undertaken, for small amounts of money). The same cautious methods the banks enact as protection can be adopted by investment firms as well.

The case of British merchant banks offers ample evidence of what happened when trade financiers failed to mitigate risk properly and, thus, learned the hard way, through financial or existential loss. A particularly shocking case was the burning up of a stellar name: Barings.

The Fall of Barings Bank

Barings Bank was founded in 1762 by Francis Baring, a British-born member of the German-British Baring family of merchants and bankers. Its collapse in 1995 after trader Nick Leeson was promoted to run its Singapore office shook the financial world.

Leeson joined the settlements department of Barings Bank in London in 1989, having learned the art of trading in futures (buying or selling a commodity at a specific price and date in the future) in Japan.

At the time, Barings Bank was one of the most established and reputable banks in the world. Leeson was working predominantly in assets like commodities, precious metals, stocks and bonds. He was excellent at his job and quickly climbed the ladder within the bank. He seemed to be making money for the bank and his superiors liked this personable and driven young man. At 28, he was promoted to head of the Baring Bank office in Singapore.

Leeson executed and settled transactions through the Singapore Exchange, but he did not invest in trades at all; he was merely guessing about and betting on industries and trades which would be profitable using derivatives. This seemed to pay off for the bank, with his transactions accounting for nearly £10 million or 10 percent of its annual profits.

As the Singapore office director and as per his instructions, Leeson should have kept the books cash neutral, managing investment portfolios without adding any of the firm’s capital as capital gained or lost on a trade belonged solely to the client’s account, with the bank taking a brokerage fee as compensation for facilitating the trade, regardless of the economic outcome.

Leeson – claiming later that he was bored – began using the bank’s capital for his market bets. Time and time again, the market worked against him. His situation become desperate and his investment motivation each day was to recover the loss of yesterday – a reckless double-up strategy, more suited to Las Vegas where it is called a martingale. The snag with this strategy is that if you run out of cash you lose. This is what happened to Leeson.

While all this was happening, his employers still trusted Leeson because they didn’t know what he was up to, and he seemed to be making a significant and positive financial impact on the bank’s profit and market reputation. He should not have been left with the responsibility of checking his own trades. Instead, the bank should have supervised him, advising him to safely balance his risky investments.

Leeson hid his bad trades in a fake account which became known as the “88888” account. It recorded all the trades and losses Leeson funded with bank equity carefully hidden from Baring’s headquarters in London. By 1993, Leeson was down over £23 million; within a year, his undeclared and unaccounted losses stood at £208 million.

On 16 January 1995, Leeson was desperate to earn back the money he had lost. He decided to play a ‘safe’ hand that day. Expecting that the markets and therefore his options would remain stable overnight, he decided to straddle the Singapore and Tokyo stock markets.

This strategy is used when the trader believes the underlying asset will not move significantly higher or lower over the lives of the options contracts. The maximum profit is the amount of premium collected by writing the options, but the potential loss can be unlimited, so it is typically a strategy for more advanced traders. The risky move would allow Leeson to recoup a small number of losses that he could reinvest and start making substantial amounts of money back.

That night his position in the market was conservative and the stock market remained stable, but overnight, the Great Hanshin- Awaji earthquake hit Japan and caused the Asian markets to collapse. The large-scale ‘quake’ hit the Ōsaka-Kōbe (Hanshin) metropolitan area of western Japan and faced with even more enormous losses, Leeson now attempted to offset his trading failures by investing in a series of increasingly risky trades betting on the recovery of the Singapore market. But these market trades didn’t pay off either. With discovery now inevitable, Leeson fled to Kuala Lumpur with his wife.

Barings officials launched an investigation into his activities and discovered the 88888 account with losses of £827 million, all of which Barings was liable to cover and which was twice the bank’s available trading capital.

There was no conceivable way to save the bank and following a frantic and failed bailout attempt, on 26 February 1995 and 233 years after it first traded, Barings Bank ceased to exist. The same day, Leeson was arrested in Germany and charged with fraud, deceiving his superiors and inappropriately allocating bank funds.

Lessons Learned from Leeson

The lessons that the world trade sector learned from the disaster were that no one person can be responsible for nor should be allowed to check and approve their own trades, and that every industry must have checks and balances built into the system, protecting the global economy and investment firms alike.

With trade-finance arrangements spanning continents, time zones and cultures, not to mention the complexities with documentation, logistics and compliance, daily trade risks and issues to watch out for are often on a much smaller scale than espionage or criminal intent.

Fraud in the context of trade financing is the purposeful misuse and abuse of financing trades for illegal, immoral or unlawful purposes. The intended outcome is deception, which can happen in a multitude of ways.

Money Laundering

Money laundering has become a permanent concern − and not only in trade. The act of money laundering is when agreements are made to conceal the origin of funds.

The Global Trade Review stated in an August 2020 article: “International trade networks can attract criminals who exploit the interconnected supply chains to move illicit funds through the formal financial system, a practice known as trade-based money laundering”. The prevalence of criminal schemes has grown as well in the trade-finance sector, and the results are lengthy and increasingly costly processes.

Importers and exporters can also be victims. Say a business or an individual based in a country called Atlantic Europa, (the fictional country in The Tale of Eliminating Bandits (1847), one of the sequels in The Water Margin, an early Chinese novel) is sitting on cash collected by selling illegal or sanctioned products or selling to sanction countries. To recycle the funds and make them legitimate, the fund owners invest in a trade-financing arrangement.

Once the invoice is settled, that money comes back clean. Criminal organisations and syndicates today own significant industrial and real estate in most countries. They take great care to come across as legitimate SMEs. Global regulators have difficulties telling the difference between the funds and the owners. While regulations are vital for organised business, overregulation strangles it.


Impersonation is defined as when parties conceal their identity, and it often goes together with money laundering. Not all that is not disclosed is fraud, of course, and there is no law against cash payments either; there can be many reasons why beneficiaries do not wish to disclose transactions, contracts or facts. The most valid one is personal discretion, a none-of-your-business approach I personally very much defend.

On the less glamorous side of the impersonation spectrum are bankruptcies; unsuccessful banking and business history; and credit ratings. The dark side of the (trade) moon.

FATF, the Paris-based Financial Action Task Force founded by the G7 countries in 1989, is a global standard-setting body working with financial intelligence units across the globe, cleansing the legitimate trade-finance sector of money-laundering and impersonation schemes. FATF works in conjunction with Europol, the European Union’s law-enforcement agency.

A recent success of FATF and Europol was the shutdown of a multinational money-laundering network in 2020. The agencies found that a trading network involving car parts was laundering money for local drug traffickers and tax evaders.

The criminal activity was supplemented by false paper trails for sales and purchases to disguise the funds’ origin and confirmed ties to the Mafia. Blending the illegal with the legitimate trading activity, the corrupt business intended to evade detection and hide its criminal activity under cover of legitimate transactions.

Fake Trades

Fake trades appear in a company’s official business and financial records but never actually happen in real life. False documentation to gain approval for trade-financing arrangements is a widespread issue. Blockchain technology offers a possible remedy.

False documentation includes fake invoices; false LCs and bank guarantees; and well- crafted but false bank statements and balance sheets. It is impressive – and somewhat concerning – to see what can be created with a high-end colour printer.

Double Financing – The Devil is in the Detail

Double financing is the term for when a company receives funding from more than one investment firm for the same invoice, cargo or receivable. The result is that funders are not paid for goods as the importers are not receiving them.

A case of double financing rocked the industry in early 2020 when Asian markets started to struggle with the Covid-19 pandemic and oil prices plummeted. This combination created a liquidity squeeze.

As lenders attempted to collect payments, cracks widened in the exporter’s balance sheets. By March 2020, when Credit Agricole SA and HSBC Holdings PLC issued a payment guarantee for $76.5 million of fuel from a Singapore trader, Hin Leong Trading Pte., they had no idea that they would be the newest victims of a double-financing scam. While Hin Leong Trading Pte. was pledging the fuel to back the loan, it allegedly agreed to sell the same cargo to another trader, who sought letters of credit from three banks, including Credit Agricole. When the issue was investigated, the Singapore police discovered that they overstated the value of assets by “an astonishing amount of at least US$3 billion” comprising US$2.23 billion in accounts receivables which had no prospect of recovery and US$0.8 billion in inventory shortfalls.

An illegitimate activity often is the last effort to generate liquidity and to cover the company’s financial losses. The double- financing schemes focus on the sale and repurchase of a cargo.

Funds received from one financial institution were allocated to a previous customer’s account to inflate their receivable balances. The result is a kind of trade-financing Ponzi scheme, and the process needs to be repeated to keep the enterprise afloat until the bitter end. To continue the farce, the enterprises in question falsified financial and business documents on a massive scale to obtain their financing. As of June 2020, global regulators had identified 15 banks and 58 import letters of credit that were not supported by an underlying sale or transaction. The debt amounted to US$3.5 billion.

The practice of double invoicing came to life in the 1980s and is primarily possible due to a lack of due diligence on the part of the borrower or, alternatively, is an inside job. Experts lean towards the belief that the trade-crime issue in Singapore was an isolated incident.

The fraud allegation against several Singapore trading companies led to a downturn of the Singapore economy that rippled into other financial economies worldwide. The market has given rise to the question of whether those scandals are isolated incidents provoked by rogue traders, a trade-finance problem or a Singapore problem. We can avoid future repeats by performing extensive due diligence.

Authenticity of the Goods and ‘Swag’

People dealing in stolen or illegally purchased goods for profit are called fences. Luxury Swiss watches, often Rolexes, are sold at a ridiculous fraction of their price because they are either an imitation or from a theft − either way, defrauding tourists or international jewellers. It does not take much commercial wisdom to question the true origin of a Rolex sold for €25 on a street corner or even for €999 as a special deal.

Authenticity is a rising problem for premium-goods manufacturers as the margin between a genuine Rolex and a fake are dramatic. In certain markets there are even fake Porsche cars still sold as Porsche, let alone the fake Lacoste crocodile logos, as well as Hermès and Louis Vuitton handbags to name a few of the most obvious examples.

The three critical things which may happen when offered cheap goods are: they are of poor quality; there is late delivery or no delivery at all; or the goods are damaged or incorrect on arrival. We covered a variety of authenticity issues back in chapter three and this section therefore may be worth a second read at this point.

The Greensill Case

Supply-chain financing firms experienced significant receivable problems in 2021. Greensill, an Australian investment firm founded in 2011 had a meteoric rise, becoming an international leader in supply-chain financing, with over €160 billion in assets financed.

With offices in London, New York, Chicago, Miami, Frankfurt and Sydney, and banks in the UK and Germany, Greensill served corporate customers in over 60 countries. The investment firm came under scrutiny when Germany’s financial-supervisory agency, BaFin, noticed irregularities and asked law enforcement to conduct a special forensic investigation into Greensill’s German bank.

The 2021 run-in with the law was not the first time that Greensill came under regulatory scrutiny. In May 2020, BaFin reported that several of Greensill’s clients defaulted amid large- scale corporate collapses and accounting scandals, as reported by the Financial Times. In 2020, Greensill quietly leaned on its insurers to cover the losses and hoped that the industry wouldn’t notice.

To get a sense of scale, the Financial Times reported that investment funds had close to $120 million of exposure in the troubled firms, including firms like Agritrade, another Singapore- based commodity trader and BrightHouse, the British rent-to-own and cash-lending service company.

BaFin, Germany’s financial regulator as well as the UK’s FCA and Serious Fraud Office (SFO) audited Greensill’s financial records, paying particular attention to the account of one of its largest borrowers, the UK-based and Indian-owned GFG Alliance conglomerate, a noteworthy owner of UK steel companies:

“One of the most serious findings of BaFin’s probe was that the bank booked claims for transactions that hadn’t yet occurred, but which were accounted for as if they had”, Bloomberg reported, citing people familiar with the matter. The questionable claims were related to companies associated with British industrialist Sanjeev Gupta, a key client of Greensill Capital.

While the investigation continued, the major insurer that covered Greensill globally, not the individual invoices they discounted, withdrew their two most significant policies. Without such blanket insurance coverage, Greensill was unable to continue operating and filed for insolvency. Tarnished by criminal accusations of false receivables and a still-ongoing investigation by the UK serious fraud office, no other investment firm was willing to or interested in taking on the risk associated with the protection of potentially a no-product or no-goods situation.

In the US, Greensill was found to have been lending money to SMEs based on potential future sales of a business, instead of on its past transaction history, which heightened the level of risk and could be interpreted as an irresponsible approach to financing international markets and good-faith investors.

Greensill’s loss in insurance coverage triggered a wave of defaults among Greensill borrowers, causing the losses of more than 50,000 jobs worldwide. The company’s collapse was swift and final as the administrators looked to liquidate its assets. Greensill attempted to sell the financing company to another investment firm to ease its losses. The Financial Times reported that BaFin also filed a criminal complaint against Greensill’s German bank management for suspected balance-sheet manipulation: the final nail in the proverbial coffin.

The Involvement of Banks

Red flags began popping up in 2021 around billions of Paycheck Protection Program (PPP) loans that seemed illegitimate. As at April 2021, the US Justice Department had brought criminal charges against 209 individuals in 119 cases related to the PPP. It has been alleged in criminal charges by the Justice Department that one SBA (Small Business Administration) employee took bribes to process fraudulent economic-injury disaster loans.

As well as seeking to bribe banks, criminal companies might attempt to entice trade-financing firms directly to provide money for felonious activity if they agree to turn a blind eye. However, with governing bodies increasing their audits, these incidents tend to happen less. As a result, while trade finance becomes more regulated, overall cost per transaction increases.


Non-payment can occur for a multitude of reasons, including lack of funds by the buyer or lack of intent to pay their invoices. It might also occur when SMEs enter larger markets with more competitors offering the same products at lower rates. Emerging SMEs may need to lower their prices, decreasing their margins, leaving them with less liquidity to honour their invoices – in other words, market share at any price. While not always directly fraudulent, there is an inherent fraud risk involved.

Artis’ Strategy

Being highly thorough in the choice of markets, sectors, counterparties and investment opportunities is imperative. The goals are simple; to mitigate risk and to apply enhanced due diligence. Adequate governance is in place at Artis and ensures observance of these principles.

Internal processes have been established to reduce our reliance on external risk assessment, including detailed appraisal, transaction optimisation and double verification of everything from personal histories of upper management through to the network of suppliers that both importers and exporters use to conduct their business.

Appraising the customer in depth requires full business transparency by the borrower. Artis wants to know if and where the transaction adds value. Agents not adding value to the product chain are often a red flag and to be avoided.

The Basic Rules We Like:

1. Speak to the person paying for the product. While this might kill many so-called opportunities, it saves significant time, money and nerves. It eliminates much of the unknown from the outset in particular deals that only existed in the mind of an intermediary and without commercial validation.
2. Monitor the profit and loss trends of the business and how they perform in a flourishing and declining market.

Companies withholding information, records or histories won’t be funded. The more open a company is about sharing personal and business information with Artis, the more easily the firm will move to the next stage, of verification.

Optimising the Transaction and Trade

We craft our contracts with risk mitigation in mind. Minimising risk leads to the decision as to whether a lender requires supply-chain financing or a factor. At this stage, we decide on pre-shipment payment or offer the SME an open account. Optimising the trade case by case means more control, less risk and predictable returns for investors.

Other methods to optimise and verify a trade outside the inherent trade structure include the physical inspection of the trade collateral. There are many good inspection companies that assist in this process, so you do not have to visit each warehouse. An optimised trade results in the appropriate tenor and satisfactory payment terms for all parties.

The importer will thus have enough time to pay for the product and benefit from better liquidity management, and the exporters have pre-shipment funds available to facilitate seamless transport of goods; an optimised trade is therefore a trade worth the investment.

The Inspection

The next stage in the process is to inspect all documentation and any third-party confirmations. Issues that could have been missed during the first verification stage might be found by simply carefully re-reading documentation and combing through the small print.

Secondary inspection steps we take include verifying the signatures to ensure that they match across all documents. A personal signature tends to vary slightly with each stroke of the pen. The review mechanisms need to be state of the art to identify even small details

The legal due diligence is a must and is undergone before signing off on any contracts and paying any funds.

Once financing is deployed, audits continue to be performed at regular intervals. Regular audits of the accounts spot payment delay early. A deal approved three months ago may not be due for payment for another two months; much can happen in five months. Auditing our assets at regular intervals prevents the risk of double financing, leaving the firm without payment on significant invoices or without delivering the promised goods.


In the face of delayed payments, we take the same methodical approach as we do in our due diligence. Trade-finance companies are here to support their clients in difficult moments.

It is in the interest of all parties, especially after putting them through extensive legal and operational checks. The collection of our invoices begins with a notice of the invoice payment 15 days before a payment is due, leaving the buyer enough time to arrange for liquidity planning.

If payment is not received by the tenor date, Artis will be in touch again with a reminder. In the case of factoring, Artis reminds the borrower that they are the owner of the goods and claims the return of the goods. If payment reminders continue to go unanswered, Artis will enact other means of getting the attention of borrowers, to expedite payment.

A single transaction can be made up of various small invoices. Invoice payments that are more than seven days overdue are reported to the major credit bureaux, which might prevent the borrower from obtaining funding until the matter is resolved.

A claim is filed with the credit insurance to receive payment from insurance instead of relying on the borrower. The final stage is for Artis to discontinue funding of the account and file for the insurance pay-out for the total amount of the transaction. Our insurances cover fraud as well as port risks, delivery failures and other problems.

We have acquired our knowledge from our history in the trade-financing sector and from seeing the mistakes that other financing institutions have suffered from. Next, we will look at the legal sanctions and challenges associated with international trade that can impact investments for years to come.