It was one of those made-for-the-tabloids scandals: a tale of financial misdeeds that included a former British Prime Minister; one of Switzerland’s largest banks; a major industrial company with dealings in the UK, Australia, and South Africa; the venerable and increasingly unlucky tech investor Softbank; and a high-flying and hard-crashing boutique bank, Greensill Capital, with a too-good-to-be-true algorithm for assessing the risk in trade finance loans.
As well as a San Francisco-based company called Taulia, which SAP acquired earlier this year in a bid to add some important new capabilities to the portfolio of SAP’s Intelligent Spend unit and its nascent Business Network initiative. Unlike every other player in this drama, Taulia was able to not only emerge unscathed from the scandal, but provide an important lesson in how a well-organized, trusted business network can help small suppliers remain in business when financial trouble looms.
The fraud game Greensill was playing involved offering loans to suppliers eager to help finance the manufacture and delivery of products into that infamously stressed global supply chain we’ve all suddenly begun to care about. For the record, Taulia was truly on the sidelines of the scandal, a Greensill technology partner with no direct role in the upstart bank’s misdeeds. But it did have a role in helping unwind the impact of the eventual insolvency of Greensill on the legitimate suppliers that had gone to Greensill for trade finance loans.
The value of being on the side of the supplier is not to discounted when it comes to SAP and its Business Network aspirations: SAP needs suppliers to flock to the Business Network not just because they could become preferred suppliers selling to the procurement side of a business network – which defines the value of existing procurement-based networks such as the Ariba network and Coupa’s Open Business Network – but because SAP’s Business Network could also provide significant value add above and beyond what the Ariba or Coupa networks can do today. Offering access to trade finance and helping mitigate the impact when problems arise is precisely one of, hopefully, the many kinds of value-add that SAP will be able to show its prospective Business Network suppliers. Ideally, the Business Network’s built-in transparency and access to data could also be put to use helping prevent future Greensill-like scams from seeing the light of day.
The Greensill Capital scandal is a convoluted mess, a veritable riddle, wrapped in a mystery, inside an enigma, and unraveling it here won’t be easy. At the center of the scandal was an eponymous trade finance bank run by Lex Greensill, a former aide to British Prime Minister David Cameron. Aiding and allegedly abetting Greensill in what turned out to be a massive trade finance fraud, was Credit Suisse, which helped capitalize some of the trade finance loans Greensill was making to the supplier market. (Former PM Cameron also had a cameo in the scandal as a lobbyist for his protégé’s bank in dealings with former UK Chancellor of the Exchequer and, as of this writing, prospective new Prime Minister Rishi Sunak – but I digress.)
Taking a page from the mortgage-backed security scandal – aka the subprime mortgage crisis – that precipitated the 2008 recession, Greensill and Credit Suisse “discovered’ a unique way to package trade finance loans and turn an extra dime. Traditionally, trade finance loans are a pretty solid bet, as they are typically based on an existing PO or invoice, which in essence tells the lender that there’s earnest money available to the supplier to repay the loan, provided the supplier can make good on its promises to produce and deliver whatever the PO or invoice have been issued for. If the bank has enough data showing that the supplier has a successful track record in fulfilling these obligations, then the loan is a pretty good bet.
But greed is never good enough, as we keep learning time and time again, and Greensill claimed to have found a way to squeeze a few more dollars out of already relatively solid trade finance system at a moment of great public interest and, unfortunately, unprecedented vulnerability. In a move that blended Minority Report and the Theranos scandal, Greensill claimed to have developed a proprietary AI algorithm that could predict the risk of lending money to a supplier based on the prospect of the supplier getting the nod to manufacture products on behalf of a customer, as yet unknown! In other words, the magical AI algorithm could predict the value of a loan before there was actual business on the table, magic that convinced Softbank to invest in Greensill as well as buy packages of Greensill’s loans to suppliers that had been collateralized by Credit Suisse. By the time this nonsense was unraveled some $15 billion in loans had been offered to suppliers by Greensill. Many, but not all, were based on this Minority Report algorithm.
Awash in funding from Softbank and others, armed with an algorithm that claimed to do the impossible, and spurred on by an Icarus-sized chunk of hubris, the stage was set for the crash of Greensill and the piling on of another mountain of mud on Credit Suisse’s already scandal-ridden balance sheet. Playing the catalyst and co-conspirator was a company called GFG Alliance, run in part by Sanjeev Gupta, a British businessman once touted as the savior of the UK’s moribund steel industry.
Over the course of a few years Greensill provided GFG with some $5 billion in trade finance loans, $1.5 billion of which were subsequently bought by Softbank in the form of collateralized loans sold by Credit Suisse. The remaining collateralized loans were sold to other hapless Credit Suisse investors. The unseen problem with the financial instruments sold by Credit Suisse, like the mortgage crisis, turned on the questionable quality of some of the loans in the “package.”
To start, the inherent riskiness of the loans for future business “approved” via Greensill’s Minority Report algorithm were not disclosed to buyers of the Credit Suisse instruments. Assuming you’re enough of a player to want to buy collateralized trade finance loans, wouldn’t you want to know that they were based on an algorithm that predicted some purported future business instead of being based on more typical, and infinitely more reliable, POs and invoices?
Worse yet, if possible, was the fact that even old school investing strategies wouldn’t have kept an investor from stepping in the muck: It turns out some of the other Greensill loans collateralized by Credit Suisse were allegedly based on fake invoices and other documents, proffered by Gupta’s company, that claimed, to cite one example, that a GFG subsidiary had sold products to four German companies, all of which denied having done business with Gupta.
So, in an unfortunate replay of the 2008 mortgage scandal, a bunch of low-value, high-risk loans were packaged into what Credit Suisse claimed was a high-value, low-risk financial instrument and sold as such. Eventually, this house of cards started to collapse and all hell broke loose: The company insuring the loans pulled out due to questions about their value and the underwriting process, questions started emerging in the press about Greensill’s exposure and its ability to cover its loans, and by March 2021, ten years after its founding and two years after the Softbank investment that started the company on its path to infamy, a German regulator filed a criminal complaint against the company and Greensill was banned from doing business.
So Greensill goes from glory to ignominy, Credit Suisse and Gupta see their brands besmirched in the press, former PM Cameron gets some unwanted bad press, and even some poor German companies that hadn’t even done business with Gupta, much less Greensill, find themselves swept up in the mess. What didn’t happen, however, was the besmirching of trade finance as a concept and a way of doing business. Thanks in part to what happened next with Taulia and the suppliers that Greensill’s insolvency was leaving in the lurch.
It’s important to note that Taulia doesn’t loan its own money or its investors’ money to companies using its spend management platform, and for Taulia, Greensill was just one of many sources of funding Taulia customers could have access to through the platform. But while Taulia’s direct financial exposure was negligible, its customers – the ones that were depending on Greensill’s cash for their early payments and supply chain loans – were definitely in trouble when Greensill’s oxygen suddenly ran out.
To the rescue came a consortium of top tier financial institutions like JP Morgan and UBS, which put up the capital to back the loans, effectively ensuring a flow of cash to the innocent suppliers caught up in the mess. A letter posted last year by Taulia CEO Cedric Bru as the scandal unraveled gives a good recounting of the scandal, Taulia’s role in it, and the mostly positive aftermath for Taulia’s customers. It’s clear that the company’s ability to find alternative lenders from the upper echelons of the industry speaks volumes to both its individual credibility as well as the viability of the role Taulia plays in trade finance, not to mention the very concept of trade finance itself.
The fact that this scandal revolved around supplier information being used – or, better yet, misused – to approve trade financing adds an important enterprise software twist to the story, specifically with respect to SAP’s Business Network aspirations. While it may be tempting to see supply chain or trade finance as a good snooze – dramatic pictures of a tanker aground in the Suez Canal notwithstanding – in the supply chain world these loans are seen as the grease that lubricates the inner workings of the global economy, particularly for small and mid-sized suppliers. And one of the great unrealized potentials of the business network concept is the ability to provide a wealth of verifiable data on supplier performance that removes even more of the risk involved in financing global trade from the process. No more using the relative opacity of traditional ways of doing business to cook the books a la Greensill’s algorithm or GFG’s phony invoices.
In other words, while it’s hard to predict what the devious minds of the financial industry’s kleptomaniacs might come up with next, it’s safe to say it would be hard to perpetrate a similar Greensill-like scam if the suppliers and their customers were transacting on a platform like SAP’s Business Network. The beauty of this network, and digital commerce platforms in general, is that every transaction has a digital record that’s recorded in real time as it takes place. These digital records aren’t just stored in a massive virtual file cabinet full of POs, invoices, bills of lading, EDI documents, orders, notifications, custom documents, shipping documents, and the like. They’re also a rich source of data for analyzing the status of orders and the ability of suppliers, logistics companies, shippers, and other partners to successfully fulfill those orders.
Assuming the appropriate permissions for data access are in place, these data can then become the source for definitive and reliable metrics on the inner workings of the global supply chain and its individual participants. Important questions about supplier reliability, compliance, payment terms and conditions, timeliness of shipments, quantities, and quality can all be answered by analyzing the key documents and transactions that underly trade – using modern data analytics tools and algorithms, not guess work and pie-in-the-sky forecasts. Or BS algorithms.
The built-in transparency of a business network is the perfect counterbalance to the opacity and under-the-table dealings that characterized the Greensill scandal. It’s pretty much a given that, whatever the sources of the data Greensill’s magical algorithm used, they couldn’t possibly be as complete as the data in a business network. Not only would Greensill’s algorithm have had some serious competition for reality-based decision-making from a real network’s order-of-magnitude better data, Sanjeev Gupta’s alleged attempts to fabricate invoices would have been laughably impossible to pull off, and Credit Suisse’s efforts to create financial instruments based on trade finance loans would have been grounded on much more reliable and verifiable data, and therefore more financially sound.
Ensuring the soundness of trade finance, a critical lifeline for small and medium suppliers, can be a huge selling point for SAP’s Business Network aspirations. So far, even before it’s really gotten off the ground in terms of deal volume, SAP’s Business Network, thanks to Taulia, is positioned to stake out the high ground when it comes to basing the finance side of its network on concepts and technologies that, by being Greensill-fraud proof, are demonstrably good for the suppliers, and lenders, that SAP is hoping to attract.
Trade finance won’t be the only post-procurement advantage of the Business Network. SAP is also making a credible play for the value of using the Business Network to support environmental regulatory reporting and compliance requirements, something I think will provide a welcome justification to myriad small suppliers that could be attracted to the prospect of using the Business Network to prove to any and all partners that they are in compliance with critical standards.
SAP still has a long way to go to attract the critical mass of suppliers, and business transactions, that will make its Business Network a real success. Ironic as it may seem, emerging on the side of suppliers in the aftermath of a massive trade finance scandal by buying Taulia may be a better starting point than anyone at SAP could have hoped for. Inauspicious by some measures, but good for suppliers, and in the world of many-to-many business networks, that counts for a lot.
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