Restoring Trust by Promoting More Transparency

By Ong Kai Kiat

Singapore received shocking news that leading Dutch and French banks, ABN Amro and Societe Generale, would be pulling out most of their trade financing business out of Singapore. This came about after both banks suffered heavy loss in April 2020 after financing Hin Leong Trading’s oil trading activities. Four months later, both banks raised the white flag and exited their core business in Singapore.

Source: Trade Finance Global

The fraud of Hin Leong Trading was the largest at US$3.6 billion amongst other recent frauds such as ZenRock (US$600 million), Hontop (US$192 million) in the oil trading business. The unfortunate fact was that ABN Amro and Societe Generale were the second and fourth largest lenders to Hin Leong while being exposed to other notable frauds.

While the shareholders of these banks would suffer from reduced profitability and smaller dividends, the pain was also shared by retrenched employees and their family who depend on their income. Our wider society would also suffer from higher food prices as commodities would incur significantly higher financing cost to ship them onto our shores. Other defaults would also result in higher financing requirement in getting loans such as mortgage and so on.

Adapting Leading Technologies to Restore Confidence

Despite the progress of technology, the buyers and sellers who access trade financing remain highly opaque due to secrecy laws. While it makes business sense to keep transactions secret to prevent competitors from undercutting the deals, it also created space for fraudulent transactions.

As the famous Qingdao fraud case had showed in 2014, an unscrupulous trader could forge multiple fake documents on the same set of cargoes to 13 banks and receive US$1.78 billion in financing. All 13 banks would look at the various documents independently and the trader could possibly get 13 sets of funds. Another proven fraudulent activity would be to sell inventory pledged as collaterals so when the banks tried to seize the collaterals, not only do they find multiple claims on the collaterals, the collaterals themselves had vanished into thin air.

Source: Deloitte

As Deloitte had shown, fraud is just one of the pain points in today’s process where technologies such as Blockchain can restore trust to financial institutions who had suffered major losses.

Blockchain allows all parties in the same system to share data easily and securely which prevents the multiple financing of invoices. Blockchain even tracks the movement of goods in real time as additional safeguard against fraud and delays.

The willingness to adapt to technology had been proven to boost business confidence. For instance,

3E Accounting adapted digital marketing techniques to determine its entry into the controversial Hong Kong market in January 2019. Their digital marketing efforts bore fruit and they chose to enter the market in July 2019. Thereafter, they received significant traction in the Hong Kong market and achieved HK$20,000 in monthly sales within their first six months.

Global Collateral Registry

Blockchain is a complex technology which requires multiple players such as banks, shipping companies, buyers, sellers, government agencies to collaborate with each other. While the successful implementation of blockchain would be ideal, the actual implementation might take several decades and strong political will for global governments across the globe.

A more realistic alternative would be to create a global collateral registry similar to commercial credit bureau. This would allow global lenders to lay claim or at least see if certain collaterals had been claimed by other credits before extending credit across different countries. Such a global collateral registry would no doubt be difficult to create as it would require cross-government collaboration. However, it is more feasible than a globalized blockchain solution.

Source: World Bank

The World Bank had suggested that the creation of a collateral registry would be instrumental in creating a stronger credit environment. The creditors can lay non-possessory claim on movable assets which would track across transactions without knowing the specific details of the asset. This would both provide for the necessary business secrecy and also the fraud protection required by financial institutions. There should also be proper laws in place to ensure the security of both lenders and borrowers.

Reforms for Resilient Financial Sector

All these should have happened in an ideal world. We are not living in an ideal world and external pressures had unveiled the fraud. Therefore, it would be necessary to have such measures in place and to start to take solid steps towards restoring confidence of the banks. Their confidence had been shaken by a long series of scandals in the past few years and the recent spate of unnerving frauds seemed to be the last straw that broke the camel’s back.

Reforms such as the creation of a separate regulatory unit of the Singapore Exchange had been useful in restoring confidence in the wake of the Noble scandal but more reforms had to be done today. Singapore is a financial hub which employs 170,000 workers and accounted for 13.3% of our GDP. The financial sector’s median wage of S$7,600 is significantly higher than the national median wage of S$4,600. This is an important sector in itself and also to the wider economy.

The irony was that Hin Leong didn’t do anything suspicious to cause the banks to lose confidence in them. It was the oil trade war between the Saudi Arabians and the Russians on 08 March 2020 over at the other side of the world which crashed oil prices by 65% and shook the confidence of the banks. They stopped lending and demanded repayment. Within 1 month, the game was up for the oil traders. For Singapore, we need a stronger and more resilient financial sector that can withstand the rigours of heavy external shocks. For that, we would require greater transparency to facilitate free flow of information while preserving business secrecy. For that, serious reforms would be inevitable.