Already buffeted by ferocious storms from the Covid-19 pandemic, Singapore’s financial landscape was thrown into further disarray in April following a financial scandal at leading oil trader firm Hin Leong Group. Its founder, Lim Oon Kuin, was found to have hidden US$800 million ($1.11 billion) worth of losses, selling inventories to multiple parties and using the same cargo to obtain financing from different banks.
In the words of interim judicial managers Goh Thien Phong and Chan Kheng Tek of PwC Advisory Services, Hin Leong fabricated documents on a “massive scale”, and this has allegedly been going on for some years.
This scandal has threatened Singapore’s “squeaky-clean” reputation for financial integrity and robust regulation. A slew of other commodity traders, ranging from ZenRock, Agritrade International and Noble Group are also in trouble of one kind or another, undermining Singapore’s status as a trading and financial hub.
A study by PwC found that nearly a quarter of Singapore-based respondents reporting fraud encountered a cumulative loss of more than US$50 million each compared to 13% globally.
“To me, this is a wake-up call about our regulatory framework for private companies. As we see here, they could be huge but yet subject to little checks and balances,” says associate professor Mak Yuen Teen of NUS Business School in an interview with the Nikkei Asian Review. While Minister of Trade and Industry Chan Chun Sing remarked during a Bloomberg interview that Singapore’s reputation has yet to have been irrevocably damaged, the occurrence of these scandals does highlight the need for more robust regulatory measures going forward.
Blockchain technology has often been touted as an important tool in combating fraud. The Harvard Business Review defines it as an “open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. Using cryptography to link different “blocks” of transactions together, data recorded in each block cannot be subsequently modified, creating an especially secure system for the recording of financial transactions.
“[Blockchain] allows verified contributors to store, view and share digital information in a security-rich environment, which helps to foster trust, accountability and transparency in business relationships,” says IBM general manager Ross Mauri. An EY survey conducted in 2018 found that 32% of legal, compliance and anti-fraud professionals were planning to adopt blockchain and distributed ledger technologies in that year, highlighting blockchain’s growing importance to contemporary compliance operations within a digital economy.
Souleima Baddi, chief executive of trade finance firm Komgo, told Euromoney that she was confident that blockchain could provide much-needed modernisation to the sector, given most commodity trades are still conducted almost entirely by paper. “Blockchain is a large step forward for an industry that hasn’t changed in hundreds of years,” says the former deputy head of trade and commodity finance at Societe Generale Geneva, who believes that the technology can help mitigate the risks of large commodity shipments between distant countries.
Various banks have been experimenting with blockchain-based trade financing systems and processes. On July 15, DBS — a member of Contour, a network for open trade finance — marked another milestone in the digitalisation of trade finance. It completed the first fully digital end-to-end secured letter of credit between Nanjing Iron & Steel, Singapore Jinteng International and Hope Downs Marketing Company.
“With yet another transaction pair on our network, we are showing the full scope of what a blockchain solution can offer to trade finance. This is a hugely positive sign of a changing industry,” says Contour’s CEO Carl Wegner.
DBS’s push into digital trade financing took another step forward when on July 22, it announced a partnership with Infor, a business cloud software provider. Broadly, Infor will integrate digital trade financing capabilities into its Infor Nexus global network of more than 68,000 businesses with participation from DBS.
For a start, DBS will provide digital trade financing services to one of the world’s largest apparel companies, so as to provide a faster and more efficient trade financing up and down that company’s chain of suppliers and partners, which are mostly SMEs.
“Our collaboration with Infor enables greater transparency into complex supply chains and provides insights into the transaction patterns between an anchor and its ecosystem of suppliers,” says Sriram Muthukrishnan, DBS’s group head of trade product management. “We leverage these insights to provide quicker and more cost-efficient financing to suppliers much earlier in the cycle, as compared to conventional post-shipment supplier financing programs. This is especially relevant today, as we continue to operate in an environment characterised by prolonged trade disruptions and tighter credit lines, where optimal working capital management is key to survival,” he adds.
Incidentally, all three local banks are among those exposed to Hin Leong’s woes, with a total of some US$600 million owed. DBS alone is owed US$290 million.
“The silver lining arising from challenges faced in the current environment is a rapid acceleration and acceptance across all industries and geographies of the need to digitalise to survive and thrive in the ‘new normal’,” says Muthukrishnan. He expects more companies transitioning from analogue-based trade finance processes to digital ones in the near future.
Tan Bin Ru, co-chairwoman of Blockchain Association Singapore (BAS) and CEO (SEA) of OneConnect Financial Technology, notes that while blockchain technology may not be as effective if implemented on a single enterprise level, a blockchain trade financing platform can help to prevent Hin Leong’s case of fraudulent financing but this would require the entire banking community to be on a common trade finance platform.
Yet, tech evangelist John Khaw believes that blockchain will still help Singapore’s financial sector regain investor trust following this incident. “Using its immutability and the need for consensus attributes, [blockchain] offers a tangible form of trust that can be leveraged in many ways,” Khaw tells Trade Finance Global.
Fraudsters beware
According to Amit Ghosh, head of Asia Pacific at blockchain provider R3, one of the main benefits that blockchain technology brings to anti-fraud efforts is to facilitate information sharing between key stakeholders such as regulators, banks and corporations. Through closed blockchains where user identification is compulsory, these stakeholders can collaborate to monitor financial transactions while identifying and acting on potential fraud cases.
“Enterprise-level blockchains enable the addition of a specific type of entity into the transaction that we refer to as a regulator node. This regulator node can be incorporated into the network, and it enables regulators to monitor transactions that occur on a real-time basis...This can reduce the need for manual regulatory reporting, and can significantly reduce costs,” says a joint research report by Alisa Caprio, head of trade and supply chain at R3, and Benjamin Jessel, head of the distributed ledger practice at global financial service consultancy Capco.
By joining banks engaged in compliance collaborations, regulators can develop powerful synergies with industrial firms to fight financial fraud. Aside from improving industrial regulatory compliance by bringing all parties on a common platform, regulators can also act more rapidly to shut down incidents of fraud by stopping a transaction swiftly instead of having to pick up the pieces afterwards. General data quality is improved when regulators and businesses share data with one another, strengthening collective anti-fraud efforts.
Central banks and financial regulators are excited about the potential of blockchain to combat fraudulent transactions. R3 has partnered with the Monetary Authority of Singapore (MAS) to launch Project Ubin, a research project exploring the potential of blockchain and distributed ledger technology for clearing of settlements and securities. “This is with the eventual goal of developing simpler to use and more efficient alternatives to today’s systems based on central-bank-issued digital tokens,” says MAS.
Some central banks are even looking into the development of digital currencies. The People’s Bank of China is experimenting with “digital renminbi” to challenge the domination of private cryptocurrencies like Bitcoin and Libra, while Sweden’s Riksbank has partnered with R3 to pilot its own e-krona digital currency. Digital currency increases the difficulty of committing fraud due to more extensive monitoring of transactions, says Ghosh, though he warns that such currencies are not a panacea in preventing fraud.
As Covid-19 accelerates the digitisation of the global economy and more international financial transactions take place online, blockchain will take on an increasingly important role. The Boston Consulting Group (BCG) expects that the full digitalisation of trade finance processes would enable over 90% of data field interactions to be streamlined to speed up trade. A 2016 survey by the International Chamber of Commerce further reported a growing number of litigation and fraud cases related to trade financing over the last few years. This includes US$1.1 billion against Citigroup for financing falsified receivables.
“Blockchain can reduce processing time, eliminate the use of paper and save money while ensuring transparency, security, and trust. These are the key benefits of blockchain in trade finance. Removing bad actors and forcing everyone to play fair in a new transparent way of doing business will virtually eliminate the risk of manipulation by participants in the chain,” remarks Oliver Belin, CMO of trade finance platform TradeIX.
Despite the strong anti-fraud potential of blockchain, Tan of OneConnect notes that the lack of available skilled personnel in Singapore will limit the ability of firms to fully realise the full potential of blockchain. The co-chairman of the Blockchain Association of Singapore (BAS) notes that training technically-competent talent locally can be difficult, especially as the universities have yet to implement classes in blockchain competency. This is especially harder for mid-career switchers, who regularly face more difficulties in performing technical tasks.
Tan notes that this challenge stems from Singapore not acting quickly enough to develop a tech-savvy workforce, leaving it to play catch-up to countries like India and China which have acted more quickly. While BAS has teamed up with local polytechnics to start blockchain courses, firms like OneConnect have turned to overseas talent to fill their technical ranks. Still, Tan believes that government support will help existing workers develop the skills necessary to stay relevant in a digital economy.
Low risk doesn’t mean no risk
Despite being a relatively secure form of record-keeping, Lim Yihao, principal cyberthreat intelligence analyst at cybersecurity firm FireEye, warns that no technology — blockchain included — is ever fully secure from cyberthreats. “The security of even the best-designed blockchain system can fail in places where the fancy math and software rules come into contact with humans, who are skilled cheaters in the real world, where things can get messy,” agrees Mike Orcutt, associate editor of the MIT Technology Review.
Blockchain systems also tend to do poorly within high-performance environments such as high-speed financial trading since the speed of verification on blockchains tend to be inherently slow compared to the transactions it is trying to record. As transaction speeds can make a difference between large profits and catastrophic losses in such a highrisk environment, blockchains may be ill-suited to regulating such transactions, where massive sums of money are often at stake.
Neha Narula, director of MIT’s Digital Currency Initiative, also points out that blockchain developers run the risk of creating an insecure blockchain architecture even if using “triedand-true” cryptographic tools. Weaknesses in blockchain architecture are difficult to amend, as the very barriers that make it difficult for transaction data to be amended also prevent rectification of design flaws within blockchain architecture. The more complex a blockchain, the more likely undetected design flaws lie in wait to be exploited.
The open nature of public blockchains to scrutiny and modification has led to additional security risks vis-a-vis private blockchains with limited access. If an attacker takes over more than half of the blocks in a blockchain, they can capture the entire chain and manipulate it as they please. The MIT Technology Review also notes the possibility of an “eclipse attack” on public blockchains, where attackers controlling one block within the blockchain can fool it into accepting false data, potentially allowing fraudsters to erase their tracks.
But perhaps the weakest link in a blockchain are the users themselves, as it is easier to extract sensitive information from humans than take on a byzantine blockchain. Cybersecurity firm Barracuda Networks notes that Covid-19 has seen a 667% spike in phishing cases since end-February to obtain such sensitive access information. The relatively large attack surface of a blockchain due to multiple users also exposes multiple points of entry for attackers.
While conventional cyberattacks on software and hardware as well as phishing attacks remain more prevalent and viable than a direct attack on blockchains, Lim notes that governments and blockchain vendors should do more to educate users about how blockchains work and the potential risks they may expose themselves to. Both can also work together to ensure that transactions are compliant with anti-money laundering regulations, since transactions on such a platform can be anonymous and thus difficult to trace.
Despite these challenges, it is abundantly clear that blockchains are the future for fighting financial fraud in the new economy. “While it may seem scarier in the earlier days, I think ultimately the blockchain creates a safer world,” says Fred Ehrsam, founder of cryptocurrency exchange Coinbase. “Everything will be tokenised and connected by a blockchain one day.”
