7 Red Flags for Identifying and Preventing Fraudulent Loans in a Politically Charged Environment

Export Import BankThe future of the U.S. Export-Import bank (Ex-Im) is uncertain. Ex-Im, the official export credit agency of the United States, facilitates the export of U.S. goods and services by providing American businesses with loans, guarantees, and credit insurance when private sector lenders are unable or unwilling to do so.  The bank is a self-declared devotee of the American dream: its core mission is to support American job growth.  However, there are many critics that claim Ex-Im is a form of corporate welfare corrupted by crony capitalism and fraud, unduly influencing the marketplace by approving loans based on political connections.  Some members of Congress who hold these concerns have entangled the bank in a legislative battle, leaving its fate in limbo.  With the new White House administration on the horizon, the picture gets even fuzzier.

So, what’s going to happen?  There are a couple of possibilities:

Freshly inaugurated President Trump could end the bank’s authorization along the lines of his campaign pledge to “drain the swamp.”   This would make the critics happy, and would certainly put a stop to any potential fraudulent activity.  But would this decision hinder American companies’ ability to compete in the global market and negatively impact U.S. jobs?

Ex-Im is sometimes notoriously referred to as “Boeing’s Bank” based on the large volume of loan guarantees provides to airlines buying Boeing jets.  Nicknames aside, this is a good example of the value of the bank: its service indirectly supports the nearly 150,000 American jobs created by Boeing, along with the jobs of Boeing’s suppliers.  Ex-Im helps the company compete against its chief rival Airbus, which leverages similar financial support from European equivalents to Ex-Im.

On the other end of the spectrum, Ex-Im has an established record of helping smaller companies as well.  In FY 2015, almost 90% of the banks transactions by quantity directly supported American small businesses.

Upon inspection, it appears there is inherent value in the U.S. Export-Import Bank.  If there were a way for the bank to eliminate fraud and ensure an unbiased loan approval process, it’s hard to see how Ex-Im couldn’t gain the support of all Americans.

The key to stopping fraud is detecting red flags, particularly within all of the supporting documents required for a loan product.  Here are 7 fraud red flag identifiers, already recognized by the U.S Export-Import Office of Inspector General:

  • Red flag #1: Misrepresentations in the application process
    • What to look for: multiple changes in the financed amount request, description of goods needed, or suppliers and exporters.
  • Red flag #2: Suspicious financial statements
    • What to look for: financial statements on multiple transactions are similar in style, type, font, format, and errors.
  • Red flag #3: Invalid pro forma invoices
    • What to look for: product descriptions that do not match a supplier’s line of business.
  • Red flag #4: Inflated commercial invoices
    • What to look for: product descriptions are not within market value, or available in-country at lesser cost.
  • Red flag #5: Falsified bills of lading
    • What to look for: bills of lading that are missing key pieces of information, or that have discrepancies in products or shipment information when compared to invoices and customs records.
  • Red flag #6: Altered customs and export certificates
    • What to look for: foreign customs documents that contain other consignees or value when compared to data on freight customs documents.
  • Red flag #7: Discrepancies in finance documents
    • What to look for: assignment of processed granted to third-parties not documented in the rest of an application.

Of course, the challenge for Ex-Im,–as well as all financial institutions for that matter, is that actually red flags do not exist.  The warning signs are buried in the millions of pages of supporting documentation. The good news is that there are technology solutions to identify the fraudulent activity: Big Data analytics and machine learning.

A big data platform that analyzes 100% of Ex-Im’s loan and insurance applications could detect advertent or inadvertent fraudulent activities by identifying anomalies and patterns in the data.  Furthermore, machine learning algorithms could be leveraged to find for the types of irregularities that a skilled human is trained to identify, and applied on a big data scale.

In summary, a data-driven process is quite literally the opposite of cronyism, and is recommended for any institution that is either providing export financial services or spending taxpayer dollars.  And it’s especially recommended for any organization that is doing both of those things.

Here’s looking at you, Ex-Im.