Paper documents still rule the world in global cargo trade. Indeed within this USD25 Trillion business, there is, at any one time, four billion paper documents in circulation. Importers, exporters, banks, brokers, financiers et al all rely on paper documents, which finance and move global resources around the world. It is a system that has seen little change since the 19th century and yet paper documents are frequently subject to fraud (i.e., fake or altered), get lost, and can with any particular journey add huge amounts of time.
With regards to time, data released by experts within this area suggest that the time to process a single bill of lading (paper document along with others) required for the transportation of goods, from issuance to customs clearance which for example includes preparation, issuance, shipper to bank, shipper bank to buyer bank, buyer bank to buyer, submission for customs clearance is circa 16.4 hours. Digitisation will dramatically reduce the time spent on processing.
Company lawyers are still today flying many miles to get a bill of exchange signed off at the last minute. This happened in Singapore in the late 2000’s where a lawyer flew to Hong Kong from Singapore and back in one day, (circa 5,000 miles) in order to have a bill of lading signed off by a client. Typically, this process does not happen every day but digitisation would reduce this process to minutes.
Below are examples of the main type of paper documents usually required under a documentary letter of credit that underpin global trade.
· Bill of Exchange or Draft
· Airway Bill (if air freight)
· Road Transportation Document (if road freight)
· Bill of lading
· Pro Forma or Commercial Invoice
· Insurance Policy and Certificate
· Certificate of Origin
· Inspection Certificate
· Packing List
· Warehouse Receipt – when kept in safe custody after goods arrive.
Based in Paris the ICC (International Chamber of Commerce) currently estimates that circa 1% of transactions within the global trade financing market are fraudulent equating to roughly USD50 Billion per annum. The principals involved, such as traders, banks, other financiers and parties, have, according to recently released data, lost USD9 Billion in falsified documentation over the last ten years. Experts are saying that sending duplicate documents to banks involved in a transaction or falsifying documents are the easiest types of fraud to commit.
Examples of fraud can be seen in the metals market which, going back in history and up to today, has been beset by fraudulent scandals. Some of the latest incidents have encompassed some of the world’s leading trading companies and houses including warehouses connected to the London Metal Exchange (the world’s benchmark futures market for base metals) which were proven to have shortcomings. In the world of metals, the commodity or collateral is usually underpinned by the likes of shipping documents (e.g., quantity ownership, location of goods and quality) and warehouse receipts. Such documents are open to fraudulent misrepresentation, such as being fake whereby the material maybe fictitious, or a single cargo may be pledged for multiple loans which is referred to as over-pledging.
In February of this year a well-known company within the metals industry was left facing a loss of circa USD500,000 as the nickel they had purchased did not contain the nickel as specified in documents. Their modus operandi with nickel was to purchase a cargo of nickel aboard ships then on sell that cargo when the ship reached its destination port. However, on one occasion when investigators in Rotterdam checked the contents of a container containing nickel, they found the contents to be of much lower value materials.
In 2020 a well-known energy group purchased copper from a Turkish supplier, but despite documents confirming the cargo was copper, when the containers were opened, they were full of painted rocks. The list of frauds perpetrated within the metals market is very long indeed, and of course fraud is not just found within metals but anywhere that has paper documentation. It would appear therefore that in order to reduce fraud across the industry, digitisation is the only way forward.
Many advocates of digitisation suggest now is the time to go digital, and make use of blockchain technology. In fact, they go on to say that such technology exists today, resulting in a massive decrease in fraudulent transactions. Furthermore, experts advise that that digitisation will be a boost for the sector, as digitised or electronic bills of lading would increase global trade volume by circa USD40 Billion due to a reduction in trade friction (the reduction in time and paperwork) especially in emerging markets. A very important point as muted by experts suggest from an ecological standpoint that by reducing friction in the container trade (e.g., paper documents), 28,000 tress per year could be saved.
An example of less friction has recently been seen between BHP Group in Australia who shipped nickel in containers to Chinese buyer Jinchuan. The transaction was financed by banks domiciled in each country, and using the ICE Digital Trade Platform the full documentation process amazingly took under 48 hours. Interestingly, 65,000 companies (including leading commodity producers) use the ICE Digital Trade Platform, which provides paperless global management solutions, which include digitisation, automation, and accelerates trade and post-trade operations, finance, logistics, compliance and visibility. Whilst 65,000 companies may sound a lot, remember there are still over four billion bits of paper underpinning global trade in circulation at this very moment.
Detractors say that online hacking is an obstacle to digitisation, but the plain fact is that hacking is a lot more difficult than altering a piece of paper. Indeed, expert opinion advises that that circa USD6 Billion could be saved in direct costs by the major shipping lines if they decided on full adoption of digital bills of lading. Furthermore, it is suggested that financiers such as banks would be more willing to finance those counterparts who are considered to be smaller and riskier if the sector went digital.
Currently, the industry is only transacting 2% of global trade via digitisation. However, change is in the air as ten of the world’s top container shipping lines (nine of which are responsible for in excess of 70% of global container freight), have by 2030, committed to digitalising 100% of their bills of lading, (50% by 2028). Happily, some of the worlds largest and most renowned mining companies have given their vocal support to digitisation, these include Anglo America PLC, Vale SA, Rio Tinto Group and BHP Group Ltd, who are all looking to digitise the bulk shipping industry.
So why is that with all the support for digitisation within the industry, only 2% of global trade has been digitised. The answer is a simple one, as the greatest stumbling block to digitisation is Legal. Whilst shipping companies, insurers, traders, banks and other financiers have all got the wherewithal to go digital, at present the only document recognised by English Law that gives the holder title and ownership to a particular cargo is a paper bill of lading. As a result, any deal or transaction which is not legally secured will not receive funding from a bank or cover from an insurance company, and without either of these two participants there will be no transactions.
As a result of this impasse, on the 20th of July 2023 the Electronic Trade Documents Act 2023, having received royal assent, came into effect on the 30th of September 2023*. This act gives the same legal powers to digital documents as paper ones. This represents a massive step forward, as English Law has legally controlled this industry sector for centuries and underpins circa 90% of global commodities and other trade contracts. France is expected to enact similar legislation towards the end of 2023 whilst Singapore (also a centre for maritime law), passed a similar Act or legal framework in 2021 and in 2022 conducted its first electronic bill of lading transaction.
This act is also based on a Model Law** as adopted by the United Nations, as being a transnational body, it is important that they pass statutes that are acceptable to all countries throughout the world. It has been welcomed by many companies throughout the industry and the Trafigura Group has gone on record by saying “We believe this is one of the solutions which would help in reducing documentary fraud”.
*Electronic Trade Documents Act 2023 – The UK Law Commission published their draft bill in March 2022, which this act is largely based on, and it set out the basis of how, under English law trade, documents can 1. Be dealt with and 2. Exist in electronic form, such that an electronic trade document can have the same effect as a paper trade document. The Act goes on to state that a person may possess, indorse and part with possession of an electronic trade document, and anything done in relation to an electronic trade document has the same effect in relation to the document as it would have in relation to an equivalent paper document. This Act amends the Carriage of Goods by Sea Act 1992 and the Bills of Exchange Act 1882.
**Model Law – UNCITRAL (The United Nations Commission on International Trade law) Model Law on Electronic Transferable Records 2017, aims to enable the legal use of electronic transferable records both domestically and across borders. It applies to electronic transferable records that are functionally equivalent to transferrable documents or instruments. Transferable documents or instruments are paper-based documents or instruments that entitle the holder to claim the performance of the obligation indicated therein and allows the transfer of the claim to that performance by transferring possession of the document or instrument. Transferable documents or instruments typically include bills of lading, promissory notes, warehouse receipts and bills of exchange.
The challenge facing the industry is change. People and companies get stuck in their ways and sometimes it is hard to adopt new processes when the current ones have been in existence for hundreds of years. There are many faults with paper, but it is something that everyone across the ecosystem understands, and whilst there is a global approval of digitisation, few are ready or even keen to be the first to dip their toes in the new waters. Experts have rightly expounded on the fact that if digitisation is to work, then everyone across the supply chain must adopt the same data standards, so that communication can move in the most effective way ensuring verification in a truly interoperable manner.