"The 4 billion pieces of paper keeping global trade afloat"

" The 4 billion pieces of paper keeping global trade afloat \r\n\r\nThey are relatively easy to fake. Frequently get lost. And can add huge amounts of time to any journey.\u00a0Yet paper documents still rule in the $25 trillion global cargo trade with four billion of them in circulation at any one time.\r\n\r\nIt is a system that has barely changed\u00a0since the nineteenth century. But\u00a0that dependence on bits of paper being\u00a0flown from one party to another\u00a0has become a vulnerability for companies which move and finance the world\u2019s resources around the globe.\r\n\r\nIn one high profile case,\u00a0banks including ING Groep NV\u00a0discovered in 2020 that they had been given falsified\u00a0bills of lading \u2014\u00a0shipping documents that designate a cargo\u2019s details and assign ownership\u00a0\u2014 in return for issuing credit to Singapore\u2019s Agritrade Resources.\u00a0In another dispute, HSBC Holdings Plc and other banks have spent three years in legal wrangling to recover around $3.5 billion from collapsed fuel trader Hin Leong, which is accused by prosecutors of using \u201cforged or fabricated documentation,\u201d when applying for credit.\r\n\r\nThe International Chamber of Commerce estimates that at least 1% of transactions in the global trade financing market, or around $50 billion per year, are fraudulent. Banks, traders and other parties have lost at least $9 billion through falsified documents in the commodities industry alone over the past decade,\u00a0according to data compiled by Bloomberg.\r\n\r\n\u201cIt\u2019s the easiest type of fraud to commit,\u201d said\u00a0Neil Shonhard, chief executive officer of anti-fraud platform MonetaGo, \u201ceither falsifying a document or sending duplicates to banks \u2018A\u2019\u00a0\u2018B\u2019\u00a0and \u2018C\u2019\u00a0without them speaking to each other.\u201d\r\n\r\nThe ICC said in a 2022 report, co-authored by MonetaGo, that as much as $2.5 billion of those annual fraud costs\u00a0ended\u00a0up realized as losses for financiers \u2014\u00a0unearthed by commodity price shocks or other external events.\r\n\r\nAdvocates\u00a0say online platforms already exist that can secure, store and transfer documents, making it much less likely that banks would be presented with doctored bills of lading or other documents, such as\u00a0invoices\u00a0for cargoes which might not even exist or which are full of stones masquerading as valuable precious\u00a0metal. Online hacking remains a risk, but one that is far more difficult to pull off than photocopying pieces\u00a0of paper, they argue.\r\n\r\nDigitization also offers a potential boost\u00a0for business.\u00a0A McKinsey study\u00a0based on industry interviews and data from carriers estimated that adopting electronic bills of lading would enable as much as $40 billion in\u00a0additional\u00a0global trade volume through reduced trade friction, particularly for emerging markets.\u00a0The theory is that banks could in future be more amenable to finance trade for smaller, potentially riskier, counterparts if they did things digitally. The main container shipping lines, McKinsey added, could save as much as $6.5 billion a year in direct costs if they moved to full adoption of digital bills of lading.\r\n\r\n\u201cWe believe that with just a couple of small efforts everybody across this ecosystem can go out there and reap these benefits,\u201d said David Dierker, McKinsey senior expert and co-author of the report.\u00a0He argues that there\u00a0is little or no downside beyond the initial investment\u00a0to change processes:\u00a0\u201cFreight forwarders and shippers will need to adapt, but everyone benefits at least as much as they would have to invest. And the carriers benefit much more.\u201d\r\n\r\nLess\u00a0than 2% of\u00a0global trade is transacted via digital means, but that is set to change.\u00a0Of the world\u2019s top 10 container shipping lines, nine \u2014 which account for over 70% of global container freight \u2014\u00a0have committed to digitizing 50% of their bills of lading within five years, and 100% by 2030.\u00a0Some of the world's biggest mining companies including BHP Group Ltd., Rio Tinto Group, Vale SA and Anglo American Plc have voiced their support for a similar campaign in the bulk shipping industry.\r\n\r\nThe greatest barrier to that expansion has been legal. Banks, traders, insurers and shipping companies have had the means to go digital, but up to now a paper bill of lading has been the only document recognized by English law that gives the holder title ownership\u00a0to a cargo. A bank or insurer won\u2019t cover a deal that isn\u2019t legally secure, and without financing, deals are unlikely to happen.\r\n\r\nTo address that, the\u00a0UK passed the Electronic Trade Documents Act in July which enshrines digital documents with the same legal powers as paper ones. English law on trade documents goes back centuries. It underpins around 90% of global commodities and other trade contracts. So the UK law change represents a big step.\u00a0Singapore, another center\u00a0for maritime law, created a similar legal framework in 2021 conducting its first electronic bill of lading transactions in 2022. Similar legislation is expected in France later this year.\r\n\r\nThe next challenge will be getting companies to change processes that have been in place for hundreds of years. For all its faults, paper is something that everyone understands and while businesses are happy to join a critical mass of digital trade, few\u00a0are keen to be the first to take steps in that direction.\r\n\r\n\u201cFor this to work, it requires all of us to adopt the same data standards so that we can communicate more effectively to enable verification in a truly interoperable manner,\u201d\u00a0said Lynn Ng,\u00a0Global Lead for Sustainable Value Chains at ING, the biggest bank in commodity finance.\r\n\r\nThe UK\u2019s legal push is based on a\u00a0model law put forward by the United Nations.\u00a0Such transnational bodies have been important in putting together statutes that have to be acceptable and usable by the whole world. It has been broadly welcomed by the industry:\u00a0\u201cWe believe this is one of the solutions which would help in reducing documentary fraud,\u201d said\u00a0the trading house Trafigura Group.\r\n\r\n\u201cIt\u2019s not a panacea for the electronic bill of lading and we\u2019ve got a way to go, but I\u2019m massively energized by this change and I think it will make a significant difference to how the industry views these digital instruments, said Marina Comninos,\u00a0co-head of the\u00a0paperless trade management company,\u00a0ICE Digital Trade. \u201cWe\u2019re still at such a nascent point in international trade, with only a small fraction of global trade being digitized \u2014\u00a0we need oxygen and this is oxygen.\u201d\r\n\r\nAs a newly qualified lawyer\u00a0working in the Singapore office of Holman Fenwick Willan in the late 2000s, Michael Buisset remembers flying 5,000 kilometers to Hong Kong and back in a day, briefcase in hand, to get a last-minute bill of lading signed off by a client.\r\n\r\n\u201cMy rate was much cheaper than it is now, but it\u2019s just a testament to the waste of time and money that paper documents can create,\u201d Buisset, now head of the firm\u2019s office in the commodities trading hub of Geneva, said.\u00a0\u201cAnd of course there was the risk of it getting lost.\u201d\r\n\r\nSuch trips still happen, even though that transfer of documents could feasibly be executed in minutes via an online platform. The full documentation process on a 2022 deal to ship nickel in containers from miner BHP Group Ltd. in Australia to Chinese buyer Jinchuan, financed by banks from each country, took under 48 hours over the ICE Digital Trade platform, the company said.\r\n\r\nFor now, when a cargo of coffee is shipped from Brazil to a roaster like Illycaffe SpA in Europe it sets off a flurry of printing.\u00a0Three identical bills of lading need to be produced and gradually make their way between sellers, banks and buyers, stopping off at law firms and consultants\u00a0in order to guarantee the rights to the cargo across its 20 day journey. There are also paper invoices, certificates of analysis, and additional documents to measure weight, origin, packing, and moisture content if it is ores that are being shipped.\r\n\r\nIt is\u00a0impossible to accurately calculate how many documents are printed for a given trade route but\u00a0Brazil exports over 900,000 tons of coffee to the European Union every\u00a0year. And that represents a lot of paper \u2014 McKinsey estimated that at least 28,000 trees a year could be saved by reduced friction in the container trade.\r\n\r\nAs well as providing details of the cargo, its destination and origin, the documents give the holder ownership rights over whatever is being shipped,\u00a0crucial for holding transport companies accountable for any damages or loss that might occur, or indeed to give banks and insurers some security when providing hundreds of millions of dollars to finance a single shipment.\u00a0The biggest vessels that transport oil, known as Very Large Crude Carriers, are moving cargoes valued at over $170 million at current prices.\r\n\r\nThe multi-step process begins when\u00a0an agent prepares the bill of lading and receives sign-off\u00a0that all the details are correct from the seller, ship owner, trader\u00a0and end-buyer. The ship is then loaded and\u00a0original bills of lading are issued by the vessel\u2019s owner and signed by its captain.\u00a0The three original bills of lading are then released to the seller \u2014 in the Brazilian example, the coffee producer \u2014 which passes them\u00a0on to its financing bank along with additional documents to receive payment. The coffee company\u2019s bank will endorse the bill of lading by writing on the back of it.\r\n\r\nIn many cases a carrier will need to set sail before this\u00a0process is complete, so the vessel\u2019s captain will provide a shipping agent with a letter of authority to complete the\u00a0documents on their behalf.\r\n\r\nThe next leg of the journey for the\u00a0bill of lading is from the coffee company\u2019s bank to the trading group\u2019s equivalent\u00a0via DHL Worldwide Express or FedEx Corp. The trader\u2019s bank then makes the payment to the\u00a0producer\u2019s bank against the receipt of those documents. Assuming everything is okay at this stage\u00a0the bank working for the trader endorses the bill of lading, signs, stamps, dates and delivers it to its counterpart representing the buyer of the cargo, which\u00a0in turn pays the trader\u2019s bank for the goods and\u00a0hands the bill of lading to the master at the destination port to obtain the release of goods.\r\n\r\nThis pass-the-parcel style approach to the bureaucracy is happening in parallel with the physical goods being loaded, shipped around the world and delivered. Sometimes the documents may only need to move between a small cluster of offices\u00a0in Geneva or Singapore \u2014 where companies across the supply and finance\u00a0chain have set up offices to be close to one another. But often they are far more tortuous.\r\n\r\nThe news section of the website of\u00a0the\u00a0Grain and Feed Trade Association,\u00a0GAFTA, is often dedicated to bills of lading feared lost or stolen, where companies publicly state their ownership of a cargo to dissuade other parties at the arrival port from stealing their wheat or soybeans\u00a0potentially worth hundreds of thousands of dollars. Although rare, many cargo owners believe the risk to be sufficient to issue the public hands-off warnings.\r\n\r\n\u201cPractically everybody I know who works in the industry has at some point encountered bills of lading getting lost,\u201d said Richard Watts,\u00a0a Geneva-based specialist in maritime trade and a board adviser to electronic document platform Secro.\u00a0\u201cIt doesn\u2019t happen often but given the pure number of documents that we\u2019re sending around the world at any one time \u2014\u00a0even if\u00a00.001% of them get lost \u2014 that\u2019s still a very expensive and complex problem, often with a ship waiting to discharge.\u201d\r\n\r\nDigital startups like Vakt and\u00a0ICE Digital Trade offer the opportunity to transfer trade and other financial documents electronically. Bolero has been doing it since the 1990s. Oil majors, such as BP Plc and\u00a0Shell Plc, traders like Gunvor Group and banks including Soci\u00e9t\u00e9 G\u00e9n\u00e9rale SA have stakes in Vakt, while Intercontinental Exchange bought essDOCS\u00a0last year for an undisclosed sum, betting that the move online will accelerate.\r\n\r\nBut the lack of\u00a0public examples highlights the uphill battle to full adoption of electronic bills of lading.\u00a0Trafigura used essDOCS\u00a0for an Australian iron ore shipment back in 2014. Taiwanese shipping line Wan Hai used Bolero\u2019s electronic bill of lading for a polyester filament trade to China in 2018.\r\n\r\nThis\u00a0low take-up is largely due to the continued lack of legal recognition in many jurisdictions and banks\u00a0\u2014 which finance the cargoes in transit \u2014 but will not accept\u00a0a digital bill of lading as collateral in most cases. Advocates say the UK law reform should change that.\r\n\r\n\u201cWe\u2019re still living in the Dark Ages in terms of global trade,\u201d said Secro\u2019s Watts,\u00a0\u201cafter this call I\u2019ve got to go down to pick up some bills of lading for a fertilizer shipment from a bank and send them via courier to Argentina, it\u2019s all just a bit silly.\u201d"

"The 4 billion pieces of paper keeping global trade afloat"

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