Published by

Vinod E P

Client Director at #dltledgers

9 Minutes read

It was the first friday after I joined the bank. My officer asked me to jot down the last written balance from different pages in a massive ledger. As I completed the work quite fast, the lady congratulated me and pointed at five more such ledgers from where balance had to be written down. Then I was asked to sum up these balances and cross-check with the balance in another massive General ledger. Though I took quite some time to correct the errors in balances and copying and tallying the book, it was exhilarating. Over the next few years, as I took baby steps into banking, tallying fascinated me no end.

Then one day, we started computerisation. Four computers landed in our office, and the process of converting the huge ledgers into electronic records began. Once this was over, Fridays no longer held the charm it had as tallying was automatic. My love with computers started then, and I began to think of how my work could be simplified. Using FoxPro, preparing a large number of statements became a breeze, and I also developed a parallel system which would calculate the ECGC premiums to be paid, help in R Return reporting apart from a few other things. The Telex machine which was a wonder in those years was replaced by a standalone Swift machine which was run using my favourite FoxPro. Over the years, I saw the introduction of networked systems and then core banking which threw my inventions into the dustbin. Swift moved from a standalone system to a centralised, networked application. Telegraphic transfer which enabled the transfer of funds within the branches of the same bank on the same day using secret codes changed to transfer of funds outside the bank with just a click of the button using NEFT and RTGS. Authentication of LCs using the secret codes sent by overseas correspondents which made us feel like Sherlock Holmes changed to a bland receipt of an MT700 and banking life has never been the same since then. Now we have integrated systems which take care of all functions in Banking and just when we think that we have seen it all, Frauds, Duplicate BLs and Multiple financing made Bankers search for a system that provides respite from these frauds. COVID19 has forced corporates to search for an e-solution for Trade which does not depend on the physical movement of documents.

Today different stakeholders have different concerns on Trade transactions. Regulators across the globe have raised the alarm about Trade-based money laundering and have instructed banks to have additional layers to cross-check before approving a transaction. Banks are more worried about duplicate Bills of lading, Multiple financing, fake BLs and the like. IMB provides a BL verification service, but it does not pinpoint an issue and only suggests that there may be concerns in the BL. COVID19 has for the first-time stranded corporates with no hope of sending documents from the sourcing location to the Banker and finally to the buyer. In todays interconnected world, can technology help address these concerns?

Let us take the example of India. India, from the time I joined banking, had a reporting system called R Return which had to be reported to the Central Bank (RBI) every fortnight. This report had details of all foreign exchange remittances and details of all exports and Imports.

When a customer in India exports goods, a GR form or shipping bill was issued by the customs, and these were required to be submitted to the banks along with the export documents. Similarly, when a customer imports goods into the country, a bill of entry was issued by the customs and this document had to be submitted to the bank within a specified period from the date of Import and these details are submitted by the banks to Reserve bank of India every fortnight. Customs also independently share the data of exports and imports to reserve bank of India and Reserve Bank matches the customs data with banks data. It identifies if any payment received without the export of the goods or payment made for an import without actually importing the goods. There are also mechanisms in place for monitoring advance payments, etc., Data submission has since been digitised, and RBI provides data of exports and imports from customs daily. Export payment or import payment has to be matched by the Banks before processing a transaction. There could be some tightening of controls etc. here and there, but mostly this is a secure system. In Singapore, the data of exports and Imports have been digitised, and NTP has made available this data to banks for trade validation on a subscription basis.

Suppose we can enable the data from India and Singapore to talk to each other, the Trade between India and Singapore can be made foolproof. For example, an exporter in Singapore exports a commodity worth USD 1000 to India (CIF). The price declared to Singapore customs is USD 1000. The Goods are imported into India, and the exporter has to declare the cost of the goods to India customs. When the Indian Importer pays for the Import, he can only remit the amount declared at Indian customs through his Banker. If the Indian Importer tries to make multiple payments through different banks for the same transaction, the present system will identify that. Assume the Indian Importer fraudulently declares a higher or lower value at the customs, his Banker would permit only the declared value to be remitted. However, If Singapore and India Customs can talk to each other, misrepresentation of value at either of the location can be identified, thereby helping both countries and the banks to identify over-invoicing and under-invoicing. The details of all transactions for the same commodity (using HS code) can be analysed to determine if the price indicated in the Invoice is in line. Singapore customs have already made available this data to banks on a subscription basis to augment trade finance compliance efforts. The above is a simplistic example to help comprehend the way technology can be used to identify under-invoicing, over-invoicing and multiple remittances in a single transaction.

Now let us take this a step closer to the problems facing us. COVID19 made countries into islands physically disconnected from each other on account of the absence of transport and the absence of courier in many locations. In the current globalised world, countries depend on other countries for Import of resources not available in-home location. Similarly, the export of commodities to the location where it is most sought helps obtain the best price for the merchandise; thus, assisting the producer and consumer pay a fair price for the product. In this interconnected world, how can Trade survive in the event of another epidemic or a pandemic? We have to find answers now as nature had given us a glimpse of what it is capable of when we thought humanity has seen and predicted it all.

I believe trade digitisation and Blockchain is the answer to this problem, but It would require a great deal of cooperation between countries to enable this solution. However, Trade intensive countries have an incentive to ensure that their export or imports do not suffer for want of a digital solution. A blockchain platform in which exporters, importers, shipping companies, inspection agencies, banks, customs etc. are members can help solve this problem.

Let us assume a smart platform available to exporters, importers, shipping companies, inspection agencies, banks, customs in India and Singapore. The Importer and exporter finalise the details of Trade through email and signs a digital contract on the platform for the purchase of say 100 tonnes of commodity C. The Importer issues Import LC through swift (which is also integrated into the platform) to the exporter's bank who in turn advises the LC to the exporter through the platform. Once the commodity is ready, the exporter in Singapore contacts the shipping company for export of the goods. Details and initial Invoice are shared over the platform to the Insurance company, and the goods are picked from the exporter by the shipping company. In turn, an e- receipt for collection of goods are issued. The invoice details are available to Customs on the platform and Customs clears the goods after inspection and matching with the details available in the platform. The shipping company raises a freight invoice on the platform to the exporter who in turn approves the Invoice and freight payment is debited from the exporters account to the credit of shipping company. The Exporter contacts independent inspection company for inspection of goods and shares the inspection parameters over the platform. The independent Inspection company inspects the goods during loading. Once the goods are loaded on the ship, the shipping company generates an e-bill of lading on the platform, and the inspection agency generates the inspection report on the platform in the next few days. The Insurance company issues the e-Insurance certificate on the platform Thus e BL, Insurance certificate and Inspection certificate are available to the exporter along with the Invoice prepared by the exporter. The exporter forwards documents on the platform to Chamber of Commerce for the issue of Certificate of Origin. The exporter checks the documents required under the LC and forwards the document to the negotiating bank on the platform along with a digital letter indicating how the documents are to be handled. Once the negotiating bank receives the documents on the platform, they examine the document with respect to the LC and inform the exporter of discrepancies which are rectified by the exporter and documents resubmitted on the platform. Once the documents are certified clean, the negotiating bank forwards the documents to the Issuing Bank on the platform. The Issuing Bank receives the documents in an instant and scrutinises the documents. The Issuing bank cross verifies the Singapore customs data concerning the goods for due diligence. Once the documents are certified clean, acceptance of the documents is provided by the issuing Bank and documents released on the platform to the Importer based on acceptance. The Importer, in turn, forwards the e-BL through the platform to the shipping agent for the release of cargo. The shipping agent, in turn, releases the documents to the customs who assesses the duty to be paid on the platform and cross-checks the Singapore customs information with respect to the transaction. Once cleared, the customs duty amount is debited from the importers account and credited to the customs account and Customs release E-Bill of entry to the Importer on the platform. India customs share the details of Imports to Singapore customs which can match that there is no under-invoicing or over-invoicing in the transaction. The goods are delivered to the Importers location by the shipping agent. On the due date of Import payment, payment is made by the LC issuing bank to the negotiating bank, and the details are visible on the platform to the Importer exporter and the Banks. The funds thus received are utilised by the negotiating bank to liquidate the discounted bill. Merchant trade Controlling merchant trade transaction through Blockchain is the subject of another detailed article.

This is an example of the dream digital trade world which I visualise and which can be made possible by Blockchain. The immutability ensures that all the information passed on to the next stage is authentic. Customs are able to cross-check the value of Trade. The Importer and Bankers are assured that the Inspection certificate and BL are authentic. The insurance company is assured that the insurance is indeed obtained for an actual shipment. Many of the Red flags indicated by regulators and trade bodies would no longer be a concern in this system.

Who will onboard the different stakeholders on to the platform? Banks and register of Companies can collaborate for adding stakeholders to the platform so that only genuine parties are added. We have seen Bankers Regulators, Importers and Exporters working in Silos. Currently, many proofs of concept trade transactions are undertaken on Blockchain platform. However, these are largely pushed by banks, and the solution largely takes care of the interests of the Banks. The Solutions pushed forward by the Customs and Regulators take care of the concerns on the genuineness of Trade, the authenticity of documents, under-invoicing and over-invoicing etc. None of these is of interest to the Exporter and Importer and Banks have been using a carrot and stick approach to ensure Exporters and Importers avail a digital solution. However, post-COVID, It is exporters and Importers who are desperate for a solution, and once they spearhead the solution, other stakeholders like Inspection Agencies, Chamber of Commerce, Shipping agencies will automatically fall in line. ICC and Governments should work together to ensure that e-documents are accepted everywhere, and legal approval is provided. COVID has provided a golden opportunity for all stakeholders in a trade transaction to collaborate on a Trade solution. The time is now or never.

Disclaimer: The views expressed herein are those of the author and do not reflect the views of the employer or any other institution

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