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Will fraud be bigger than Covid-19 for trade credit?

Georgina Fenton – Consultant

In our last newsletter we commented that we had seen an increase in claims resulting from fraud – particularly involving commodity traders. According to the GTR, this was also the topic which most concerned trade credit professionals in 2020. The string of commodity finance fraud cases filed across Asia in some cases even caused banks to withdraw from the sector entirely.

Underwriters we have spoken to recently have also voiced concern that fraud might have a bigger impact on their bottom lines than Covid-19. Insolvencies resulting from the pandemic are inevitable, despite the stimulus packages that have kept shuttered businesses in hibernation; because of changing consumption and ways of working delaying economic re-growth, and sporadic new Covid-19 outbreaks. And with greater economic pressures, we will of course see more fraud as people cut corners and take riskier options. That in turn will lead to more non-payment and more insolvencies. But could this be a chicken-and-egg situation? It may be that Covid-19 has simply precipitated the discovery of frauds that would have remained hidden in more buoyant times.

The market’s response to this situation appears to make it increasingly difficult for new players to get credit cover – with underwriters appearing to favour tried and tested names. On the other hand, buyers of insurance are seeing more intense questioning of straightforward risks; probably not a bad thing.

Fraud and Covid-19 can be seen to have had a similar impact on trade credit insurance. As the GTR has also noted; one of the lessons learned from Covid-19 is that financial entities need to improve due diligence, credit checks, deal structuring and monitoring processes in order to avoid frauds. As underwriters have noted, there is an urgent need for the sector to move away from paper documents. Bills of lading, for instance, are far too easy to manipulate and we have heard anecdotes of the same piece of paper emerging hundreds of times!

The pandemic has hastened digitisation in general and improving systems will make it harder to disguise fraud. Seen in this light, fraud and Covid-19 have been catalysts for a beneficial transformation in the trade credit market.

Covid-19 has also prompted a change in approach to underwriting for some; where they were previously relying on the out-of-date information contained in a balance sheet, underwriters are telling us that they are now putting more weight on a company’s liquidity and cash flow forecasts, as well as weighing up longer-term potential structural issues.

For our part, we have continued to receive more instructions resulting directly or indirectly from fraud than can be attributed to the pandemic. We thank the market for their support; our healthy scepticism for the facts as presented, gained from over 30 years adjusting crime claims, puts us in a good position to identify and adjust claims which involve fraud.

Do you agree that fraud has had a bigger impact that Covid-19 on this sector? We would be very interested to hear your experiences with these issues.

February 2021
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