Magnifying glass above financial documents
Dubious IOUs have also played a part in many of the spectacular collapses in the commodities trading industry this year, from Agritrade to ZenRock © Getty Images/iStockphoto

We may have just entered the third decade of a new millennium, but 2020 is rapidly becoming a banner year for one of the oldest scams in the book: invoice fraud. 

NMC Health has been the London stock market’s most dramatic fall from grace this year. In a few short months, the UAE-based healthcare provider crashed from its lofty perch in the FTSE 100 index into administration.

The latest revelation: Neopharma, a pharmaceuticals company controlled by NMC’s Indian founder BR Shetty, is investigating whether invoices relating to fake medicine sales underpinned borrowing at NMC.

Dubious IOUs have also played a part in many of the spectacular collapses in the commodities trading industry this year, from Agritrade to ZenRock. 

Trading firms have unravelled with alarming frequency this year — in everything from oil to rice — to the point that Dutch lender ABN Amro has decided to stop financing such traders entirely. France’s BNP Paribas is considering doing the same.

This business of lending money against the little slips of paper that underpin global trade is as old as the hills.

Letters of credit, where money is borrowed using the “bills of lading” certifying that shipments of goods are on the way, are ancient. Similarly, the practice of invoice factoring, in which customer IOUs can be exchanged for money upfront, goes back centuries.

A slightly newer spin on all this is so-called reverse factoring, or supply-chain finance. Invoices are still involved, but the process is flipped around: a financial institution pays a company’s suppliers upfront at a discount, before collecting the full amount from the company later.

But the chief innovation of this technique, arguably, is that someone convinced accounting watchdogs that such facilities should not count as debt on corporate balance sheets. Little wonder the activity was so appealing to NMC Health, which used numerous methods to conceal the true scale of its borrowing from investors.

Shortly before its administration it discovered more than $4bn of loans that were previously undisclosed.

All this should remind investors of one of the basic aphorisms of capital markets: that there is nothing really new in finance. Look under the hood of whatever the shiny new thing is, and you will find something old.

The basic ways we provide credit to one another have existed for millennia. And for as long as invoices have existed, people have forged them.

Take Emil Savundra. In the UK he is best remembered as the Sri Lankan swindler of the swinging sixties, who — after pulling off an audacious insurance scam that left hundreds of thousands of motorists out of pocket — agreed to a live television interview with David Frost, Britain’s fiercest interrogator of the time.

In the decade before he earned notoriety, Savundra used forged bills of lading to dupe various European banks and nation states alike out of millions of dollars.

But lenders need to be wary of more than just falsified documents.

Many of this year’s commodities trading scandals have involved double (or triple or quadruple) pledging, in which the same invoice is presented to multiple banks to unlock financing.

Banks that relied on credit insurance to cover them if it all went wrong, have found themselves among a crowd of lenders claiming against the same trade, leading to messy disputes.

In other cases, the documents themselves may be legitimate, but no exchange of goods ever takes place. 

This happens when the two sides act in cahoots purely to unlock further borrowing. While the unsuspecting lender believes it has a claim on assets, it has really handed over money with no strings attached. This becomes apparent only if the music stops.

But the key question is why major international lenders are still falling victim to invoice fraud, decades after Savundra scammed a series of banks.

This year’s blow-ups have revealed trade finance’s continued over-reliance on paper. Blockchain technology might provide a useful alternative, over time, but introducing more digitisation — beyond simply sending scanned invoices over email — would be a start.

Basic due diligence also helps. It should be a clear red flag to lenders when two sides of a trade are related in some way. Such connections are sometimes deliberately undeclared or obscured. But this was not the case with NMC and Neopharma: it was entirely public that the two companies shared the same owners, and lenders would have done well to pay invoices between them closer scrutiny.

If history is any guide, however, banks will be hoodwinked for years and years to come. It all serves to demonstrate that there is an equivalent maxim for finance’s underbelly: there is nothing new in fraud.

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