B2B Cross-border Payment Part 5 - What are cross-border invoice payment frauds - How they affect B2B gross-border payments globally

According to a report in 2022 on the Medius website - a company specializing in providing saas solutions for enterprise financial management in the United States, US businesses lose on average $300,000 per year due to invoice fraud.

The figure above is relatively significant and causes substantial damage to businesses, especially small and medium-sized enterprises involved in cross-border invoice payments.

So, what is invoice fraud in cross-border invoice payments, and how can it be prevented? Let's explore with FinFan in the following article.

First, let's find out with FinFan what cross-border invoice payment is.

Overview of B2B Cross-border Payments in 2022-2023

*Analysts estimate that $39.3 trillion of cross-border business-to-business (B2B) payments will be made in 2023, and reach $56.1 trillion by 2030. Add the wholesale banking sector to that (which includes institutional investments and currency trading), and the current value of cross-border B2B payments is $186.2 trillion, accounting for 98% of all international transactions.

Growth has been a consequence of globalisation that has increased trade, and so the need to transfer currencies across borders. That commerce has been driven by large enterprises trading in physical goods, but the growth in B2B ecommerce will see it become the leading contributor by 2030, worth $22 trillion.

This is B2B catching up with the consumer market. Increasingly, businesses are going to online marketplaces to purchase goods and services (eg Alibaba, Amazon Business, Upwork, ECPlaza). Meanwhile, the pandemic accelerated the move for many to open up or improve their online sales channels, and service demand from consumer businesses that needed to do the same.

They are being supported by the emergence of a new breed of fintech players that are making it easier and cheaper for large and SMB companies to send and receive B2B payments from abroad.*

*Source: bvnk.com

What is a cross-border invoice payment?

In the previous article, FinFan introduced payment models such as export payments, import payments, and the challenges that businesses face in executing these payments.

Additionally, FinFan provided an illustration of the 10 steps of LC (Letter of Credit) payment, including the step where the exporter must provide all relevant documents for payment, including the cross-border invoice for the products supplied to the importing party to complete the cross-border invoice payment process.

From the analysis above, we can see that cross-border invoice payment is a payment transaction, typically B2B, where the recipient of goods, upon payment to the abroad supplier, will receive documents detailing the contents of the goods, payment methods, payment terms, and payment conditions between the two parties.

How can a cross-border invoice payment help businesses?

It helps limit the problem of payment fraud as well as payment delays from product suppliers.

On the contrary this facilitates the execution of various accounting transactions for the business later.

Why can cross-border invoice payment solve the above problem for businesses?

For instance, if both parties opt for the LC method to carry out the transaction, following the 10-step payment process as mentioned by FinFan in B2B transactions related to import and export article, there will be a step where the business issues this payment invoice, which will be stored in the tax records of the tax authority where the business is headquartered.

Furthermore, when presenting these documents to the exporter's bank, the exporter's bank will then present this invoice to the importer's bank to complete the transaction and receive the goods.

At this point, both banks act as third-party intermediaries for the transaction, and they are tasked with reconciling the payment amount from the importer to the exporter. This helps mitigate risks in payment transactions arising from fraud or delayed payments.

As the importing company has submitted documents and collateral to the importing bank, if the payment does not proceed as agreed, the importing bank will still disburse the amount to the exporter and proceed with sealing and liquidating the assets of the importer.

The opposite scenario also occurs when the exporter fails to deliver the goods or engages in fraudulent activities during the process of shipping the goods to the importer.

In such cases, the importer's bank will not release the payment to the exporter's bank until the discrepancy is resolved.

This ensures that the importer is protected from financial losses due to non-delivery or fraudulent behavior by the exporter.

Additionally, the importer's bank may initiate legal action or impose penalties on the exporter to recover any losses incurred.

What if there was financial technology intervention in cross-border B2B payments related to import and export?

Through the example above, we can see the importance of banks in connecting international payments between importers and exporters.

However, the issue here is that payments through banks can sometimes take a significant amount of time due to complex procedures in accounting profession, while both the exporter and importer may need quick funds for certain economic activities.

Because of this in the present day, with the advancement of technology, some integrated accounting software applications for businesses have emerged, greatly assisting businesses in generating electronic invoices for cross-border import and export payments.

However, connecting these accounting software programs together is quite challenging, especially when it comes to compliance with cross-border payment laws and separate import and export taxes of each country and territory linked together, such as the EU.

Furthermore, the payment technology in each country and territory may vary, and the exchange rate difference between banks in different countries and territories also varies. This will increase the cost of cross-border payments related to imports and exports.

Therefore, it is necessary to have a suitable solution to support the collection and disbursement of the payment amount for import and export on all forms of payment.

The solution not only needs to provide a multi-currency payment account for the business but also needs to support the business in the process of integrating APIs between different enterprise financial management software.

Additionally, it must offer the business multiple payment methods and include a KYC (Know Your Customer) and AML (Anti-Money Laundering) check system for each payment method.

Read more about solutions of FinFan here

So, we have now gained an understanding of the contours of cross-border invoice payment, as well as its applications within the realm of business.

Next, let us delve into the realm of cross-border invoice payment fraud with FinFan and explore its repercussions on global invoice payment.

What is cross-border invoice payment frauds?

Cross-border invoice payment fraud refers to fraudulent activities that occur during cross-border transactions involving invoices.

This type of fraud typically involves manipulation, alteration, or fabrication of invoices in order to deceive parties involved in international trade payments.

Types of cross-border invoice payment frauds?

Here are some common forms of cross-border invoice payment fraud include:

Falsifying Invoices

With this type, the CFOs of entrepreneurs create fake invoices for goods or services that were never delivered or rendered, allowing the fraudster to obtain payment for non-existent transactions.

Overbilling

This is the most popular type of cross-border invoice payment frauds used by some construction companies.

Here the financial managers of companies use some accounting professions to inflate the amount on legitimate invoices to charge more than the actual value of goods or services provided.

Underreporting

This problem often occurs with import companies, they often deliberately reduce the value on invoices to evade taxes or customs duties, or to circumvent import/export regulations.

Manipulating Currency Exchange Rates

This is also a rather painful problem for trading companies connected to international companies when the partner companies can alter the exchange rates on invoices to exploit differences in currency values and gain additional profits.

However, a multi-currency account can help businesses solve the above problem.

Phantom Shipments

Creating invoices for fictitious shipments or using the same invoice for multiple transactions to deceive buyers or financial institutions.

The impact of cross-border invoice payment frauds on gross-border payments globally

Financial

Invoice fraud leads to significant financial losses for organizations, businesses, and banks. Both parties involved in the transaction may lose cash or goods they've transacted but not received payment for, or receive payment based on counterfeit invoices.

Not stopping there, some cross-border invoice fraud cases also affect a country's economy if that company has a large economic influence on that country.

Reputation

Organizations and businesses suffer reputational damage when either party discovers invoices have been tampered with. This can result in the loss of customers and business partners, causing long-term harm to reputation and relationships.

Trust in the payment system

Cross-border invoice payment frauds diminish trust in the global payment system. When users lose confidence in the transparency and safety of the payment process, they may turn to alternative payment methods or altogether avoid international transactions.

Legal and compliance

Cross-border invoice payment frauds violate legal regulations and compliance principles, resulting in legal repercussions for the parties involved. This may lead to legal disputes, asset loss, and other legal consequences.

Therefore, addressing invoice fraud is crucial to safeguarding the transparency, integrity, and reputation of the global payment system.

Some cross-border invoice fraud cases globally from the start of 21 century

Cases of cross-border invoice payment fraud all stem from internal problems in the business

Here are recent examples of invoice fraud in international trade payments, causing serious consequences for businesses and the financial industry.

• The Enron Scandal: Enron, one of the largest energy companies in the United States, was implicated in one of the most significant invoice fraud cases in business history. They employed fraudulent accounting techniques to conceal debts and generate inaccurate financial reports, leading to the company's collapse in 2001.

• The Parmalat Case: Italian dairy company Parmalat was involved in a major invoice fraud scheme where they created falsified documents to conceal substantial debts and reduce taxes. This incident resulted in the company's collapse in 2003.

• The Olympus Scandal: Japanese camera company Olympus was exposed after being found to engage in fraudulent transactions and concealing significant losses in its financial reports. This led to one of the largest financial scandals in Japan's history.

• The WorldCom Case: WorldCom, one of the leading telecommunications companies in the United States, utilized fraudulent accounting methods to artificially inflate revenue and reduce actual profits in its financial reports. When this fraud was discovered in 2002, WorldCom had to declare bankruptcy.

• The Satyam Case: Indian information technology company Satyam shocked the world when it was discovered to have engaged in large-scale invoice fraud, including falsifying the number of customers and revenue. This scandal resulted in the company facing numerous legal and financial repercussions.

• Wirecard Scandal: Wirecard, a German electronic payment company, engaged in a series of financial frauds, including falsifying invoices and financial documents related to import-export transactions. When this was exposed in 2020, Wirecard declared bankruptcy.

• Hin Leong Trading Case: One of Singapore's largest oil trading companies, Hin Leong Trading, was found to have committed invoice fraud in their financial management. Specifically, they falsified invoices to conceal significant debts. This incident resulted in one of the biggest financial scandals in Singapore.

• PNB Case: The Punjab National Bank (PNB) of India was embroiled in a major invoice fraud case involving influential businessman Nirav Modi. In this case, Nirav Modi used unsecured credits from PNB to conduct billions of dollars’ worth of fraudulent import-export transactions.

Cases of sophisticated cross-border invoice payment frauds/scams around the world by hackers

The above cases of cross-border invoice payment fraud all stem from internal problems in the business when the board of directors of the business has bad intentions for personal gain.

However, in reality there are still many cases where invoice fraud takes place on a global scale due to some foreign factors, typically hackers.

The following are some cases of sophisticated cross-border invoice payment scams around the world by hackers:

• Ubiquiti Networks Scam (2021): Hackers targeted Ubiquiti Networks, a global networking technology company, in a sophisticated phishing scam. They gained unauthorized access to the company's internal systems and stole employee credentials, allowing them to submit fraudulent invoices and redirect payments to their own accounts. The scam resulted in Ubiquiti Networks losing millions of dollars.

• FACC Cyberattack (2016): FACC AG, an Austrian aerospace company, fell victim to a sophisticated cyberattack involving fraudulent invoice payments. Hackers infiltrated the company's email system and impersonated high-level executives to authorize payments to fraudulent bank accounts. The scam resulted in FACC losing approximately €42 million.

• Crelan Bank Cyber Heist (2016): Hackers targeted Crelan Bank, a Belgian financial institution, in a cross-border invoice payment scam. They compromised the bank's internal systems and manipulated transaction records to redirect funds to accounts controlled by the hackers. The scam resulted in Crelan Bank losing €70 million.

• Epsilon Data Breach (2011): Epsilon, a global marketing services company, experienced a massive data breach orchestrated by hackers. The breach compromised the personal information of millions of individuals and also exposed sensitive financial data, including invoice payment details. While not a direct invoice payment scam, the breach highlighted the vulnerability of cross-border financial transactions to cyberattacks.

• Maroochy Shire Council Scam (2005): The Maroochy Shire Council in Australia fell victim to a sophisticated cyber scam involving fraudulent invoice payments. Hackers infiltrated the council's email system and manipulated invoice payment instructions, resulting in over $2.4 million being transferred to offshore accounts.

These cases demonstrate the growing threat of sophisticated cross-border invoice payment scams perpetrated by hackers, underscoring the need for robust cybersecurity measures and vigilant oversight of financial transactions.

For that reason, businesses when choosing a service provider that supports API connection for cross-border corporate invoice payments also need to pay attention to information security issues as well as to prevent unwanted attacks.

Solution of FinFan

As a seasoned payment technology company with over 10 years of experience in facilitating cross-border transactions among businesses, FinFan consistently endeavors to stay abreast of emerging trends in combating international cybercrime and safeguarding cybersecurity, aiming to deliver optimal services to its corporate partners.

We consistently support our customers in detecting and preventing fraud by identifying suspicious transactions and thwarting fraudulent activities in payments.

Furthermore, we ensure compliance with Payment Card Industry Data Security Standard (PCI DSS) requirements.

About FinFan

FinFan is a cross-border embedded financial services company that focuses on mass disbursement, fund collection, card processing, IBAN, and digital APMs solutions, which can provide valuable input and integration on and for the same. FinFan is already integrated with almost the world's well-known MTOs, PSPs, switch, and core fintech platforms such as Money Gram, Thunes, Qiwi, Remitly, World Remit, Bancore, PaySend, Terrapay, Ria Money Transfer (Euronet), Dlocal, Ripple, TripleA, FoMo Pay, Wings, etc.

For more information, please contact us through:

🌐https://finfan.io

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