Compliance and fraud in trade finance
Within the intricate and, to some, opaque framework of global trade finance, two forces operate in constant tension: the imperative to facilitate the seamless flow of international commerce, and the necessity to prevent its exploitation through financial crime and regulatory breaches. Enabled by the likes of documentary credits, guarantees, bills of exchange, and increasingly by digital instruments, trillions of dollars in goods and services annually traverse borders, with the potential for abuse scaling alongside legitimate trade activity.
From my perspective as a global practitioner in trade finance, what is abundantly clear is that compliance and fraud do not exist in isolation. They are not parallel risks to be managed separately; they are interdependent dynamisms shaped by evolving threats, regulatory shifts, and digital transformation. To navigate this terrain effectively, one must approach it as both an operational discipline and a strategic imperative.
Trust
Trust is, and always has been, the foundation of global trade. For centuries, commercial exchange has relied on evidentiary proof and mutual reliance between parties often separated by oceans and jurisdictions. The bill of lading is a quintessential example; a single document that can carry the weight of legal title and millions in financial leverage.
Yet this deep reliance on documentation or, to be more precise, the perceived authenticity of such documentation, occasionally emerges as the Achilles’ heel of the trade finance system. Fraud thrives in the disjuncture between document and reality. I have seen too many cases where bills of lading are forged, invoices are inflated, or financing is duplicated across institutions. The very instruments designed to reduce risk may become vectors for abuse when manipulated.
Recent history provides no shortage of examples. The downfall of Hin Leong Trading in Singapore, where inventory was misrepresented and liabilities concealed, sent shockwaves through Asia’s trade finance market. Similarly, the collapse of Greensill Capital in the UK revealed the vulnerabilities of supply chain finance, specifically, how receivables that may never materialise can be used to secure real financing. There have also been a number of recent high-profile cases around the world, where issues such as fraudulent documents and false representations have been highlighted.
Not all fraud is overt. It often resides in a murky space between unethical practice and outright illegality. Over-invoicing, under-invoicing, double invoicing, mis-declaring the nature of goods, and channelling payments through opaque shell structures, exploit systemic ambiguities and place a heavy burden on compliance teams to distinguish negligence from deception.
Compliance
There was a time when compliance in trade finance was treated as a cost function, a back-office activity focused on procedural adherence. That era is now firmly behind us. Compliance has moved into the boardroom, recognised not only for its protective function but also for its value in enabling sustainable, scalable business.
This shift has been catalysed by intersecting pressures. Regulatory expectations have expanded dramatically, enforcement has become more aggressive, reputational stakes have grown, and the complexity of global transactions has intensified. As a result, today’s compliance officer must be part legal analyst, part technologist, part strategist.
The compliance landscape now encompasses a wide array of regimes. Beyond Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) frameworks, institutions must comply with tax transparency initiatives, navigate international sanctions regimes (from OFAC, the EU, and the UK’s OFSI), and adhere to anti-bribery legislation such as the UK Bribery Act. Increasingly, ESG reporting obligations are entering the field, demanding that trade finance address not only financial risk, but ethical and environmental exposure.
Sanctions compliance has become particularly complex in the wake of geopolitical developments. The sweeping sanctions introduced after Russia’s invasion of Ukraine forced financial institutions to scrutinise even routine transactions. Commodity trades that were once benign such as fertilisers, metals, and energy, became the subject of intense due diligence. Documentary credits issued before sanction announcements suddenly presented retroactive legal and reputational risk.
In this environment, compliance cannot function as a mechanical name-checking exercise. Effective oversight requires a layered, contextual approach. Who owns the vessel transporting the goods? Where did the cargo originate? Is the beneficial owner concealed beneath a complex trust structure in a secrecy jurisdiction? These are not abstract questions; they are compliance triggers with legal consequences.
Technology
Technological innovation has brought unprecedented capabilities to the compliance function. Digitalisation of trade processes has enabled greater transparency, speed, and efficiency. Distributed ledger technologies offer immutable transaction records, minimising the risk of document fraud and duplication. Smart contracts can automate compliance logic, ensuring that specific conditions are met before funds are released or documents are transferred. Artificial intelligence now assists in anomaly detection, highlighting inconsistencies in trade routes, invoice values, and customer behaviour that warrant further investigation.
But technology is not a panacea, it introduces its own risks. The rise of deep-fakes, synthetic identities, and AI-driven document manipulation poses new challenges for KYC and authentication processes. Cyber threats against trade platforms have become more sophisticated. Furthermore, the integration of digital systems comes with its own compliance obligations, namely, cybersecurity, auditability, and data protection regulations such as the GDPR.
And critically, despite rapid progress, the transition to digital documentation remains incomplete. In jurisdictions where electronic bills of lading lack legal recognition, paper fraud remains an ever-present threat. The gap between digital promise and legal reality continues to expose institutions to unnecessary risk.
Trade-Based Money Laundering
Perhaps the most insidious threat to the integrity of trade finance is trade-based money laundering (TBML). Unlike more traditional forms of money laundering, which rely on the movement of funds, TBML operates within the very framework of global trade to conceal illicit value transfers.
It is subtle, sometimes hard to detect, and often hidden in plain sight. Under- or over-invoicing, phantom shipments, and manipulated valuation are all tools in the TBML arsenal. A container may be real, the documents complete, and the payment processed, but the underlying purpose may be the laundering of criminal proceeds. The Financial Action Task Force (FATF) continues to highlight this risk, especially in sectors with high volume, low transparency, and complex supply chains.
Detecting TBML requires a radically different approach to compliance. One cannot rely on transactional red flags alone. Instead, a more holistic model is needed, one that understands the trade corridor, benchmarks commodity prices, analyses logistics, and collaborates across industry silos.
Unfortunately, many banks do not yet possess the systems, data, or cross-border reach to conduct this level of analysis at scale. The paradox is clear: as trade becomes more global and interdependent, our capacity to scrutinise it in real time struggles to keep pace.
People and culture
Despite advances in digital compliance, fraud prevention remains fundamentally a human task. The most effective defence often comes from experienced professionals who detect when something is ‘off’, a subtle change in documentation, an atypical client request, or an unexplained delay in shipment.
This intuition cannot be replicated by code. It must be cultivated within a culture that values risk awareness, encourages escalation, and supports critical questioning. Where commercial pressure overrides compliance judgement, fraud finds fertile ground.
Culture is shaped by leadership. Boards and executive teams must set the tone, making it clear that compliance is not just a regulatory obligation, but a reflection of the institution’s values. Training must go beyond routine modules. Scenario-based exercises, real-world case studies, and interdisciplinary engagement are essential in building a culture of vigilance.
Regulatory environment
One of the persistent challenges in trade finance compliance is regulatory fragmentation. While tools such as the UCP 600 and ISBP bring consistency to documentary credits, there is no overarching global compliance framework equivalent to the Basel standards in banking.
Each jurisdiction enforces its own AML, sanctions, and regulatory regimes. Some are robust, others patchy. This unevenness fosters regulatory arbitrage, where transactions are structured through jurisdictions with minimal oversight. It also impedes the sharing of critical information across borders.
To address this, multilateral cooperation must move beyond declarations to tangible alignment. Institutions such as the ICC, FATF, and WTO have an increasingly vital role to play in building a shared compliance architecture, one that supports transparency without stifling trade.
Convergence
The trajectory of compliance in trade finance is one of convergence. We are seeing rules, technologies, operational workflows, and responsibilities intersect in ways that demand a more integrated approach. Institutions that treat compliance not as a constraint but as an enabler will be better positioned to compete and lead.
Legal reform is also gaining pace. The UK’s Electronic Trade Documents Act (2023) is a landmark development, enabling electronic documents to carry the same legal weight as their paper equivalents. Other jurisdictions are following suit, paving the way for cross-border recognition of digital trade instruments.
Simultaneously, technical solutions are emerging as force multipliers. These technologies do not replace compliance professionals; they empower them by highlighting risk, enabling analysis, and ensuring that decisions are grounded in real-time data.
Nevertheless, no technology can substitute the judgement, ethics, and contextual intelligence that human professionals bring. Compliance excellence will always be rooted in people. Empowered by the right tools, supported by leadership, and aligned with purpose, they are the custodians of trust in trade.
Conclusion
Compliance and fraud are not peripheral concerns in trade finance; they go to the heart of its legitimacy. As we navigate an increasingly complex, digital, and regulated global economy, the need for systems that are both trustworthy and agile has never been greater.
Trade finance must continue its transformation, not merely to meet regulatory demands, but to redefine how value is safeguarded, how risk is shared, and how global commerce is conducted with integrity.
The institutions that will thrive are those that recognise compliance as a strategic asset. They will be the ones which combine technological innovation with human insight, who build cultures of integrity, and who help shape a trade ecosystem built not just on efficiency, but on trust.
To operate at the crossroads of compliance and fraud is to engage in the essential work of protecting trade’s future. It may be a challenge, but is also a profound opportunity.
By utilising AI/ML- powered OCR, rule engine validation, detection of anomalies and inconsistencies, continuous learning, and maintaining transparent logs of compliance checks, Traydstream helps banks and corporations streamline compliance, avoid penalties, and improve transparency in trade finance.
Dave Meynell
