Our experience has shown that some (fraudulent) trade documents are simply not in accordance with market practice, for example. In industries that typically use sophisticated contracts, very basic short-form confirmations may be used, or standard terms may be used that are unsuitable for use in the relevant trade, relating to a completely different commodity.
Fremont, CA: Commodity trading and financing over the years have seen a rise in number of frauds where the malpractice’s associated with the metals being the latest addition to the collection. Due to the high value and nature associated with its packing frauds committed on nickel are on the rise.
As a result, those handling the cargo are less likely to notice anything unusual, especially when it is being shipped or stored in large quantities.
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A number of practical and operational measures can be taken to minimize the risk of falling victim to this kind of fraud.
In spite of the continuing reliance on documentation, which is often easily manipulated or forged, there is no one-stop solution to fraud protection. Traders or financiers have a much better chance of detecting a potential fraud early or avoiding it entirely by combining different measures.
Counterparty due diligence
The first step towards a successful relationship is counterparty due diligence. The purpose of this exercise goes beyond ticking boxes.
Following due diligence checks, several traders and financiers have stopped doing business with perpetrators in a number of commodities frauds occurring over the past few years. There were others who weren't as fortunate.
Transactional and documentary due diligence
As a trader enters a trade, or a financier finances it, the underlying trade must make sense from counterparty due diligence perspective. A written contract should at a minimum exist between the buyer and seller that is relevant to the transaction.
Our experience has shown that some (fraudulent) trade documents are simply not in accordance with market practice, for example. In industries that typically use sophisticated contracts, very basic short-form confirmations may be used, or standard terms may be used that are unsuitable for use in the relevant trade, relating to a completely different commodity.
Physical inspections
It is essential to conduct physical surveys of goods wherever possible, as well as at different points in the logistic chain if the commodities are not simply in storage.
It is imperative those traders or financiers (or someone they have appointed) conduct such verifications independently. The past few years have shown that someone willing to commit fraud is willing to offer a written confirmation to a trader or financier, even if it may be false, as a means of satisfying them that the goods are where they should be.
