The use of fake or duplicated documents to secure multiple commodity finance loans – an issue that crops up with startling regularity – could easily be solved by the implementation of readily-available technology. What’s behind the apparent inertia? Eleanor Wragg reports.


Of the many flavours of deception and dodgy dealings that have emerged in the commodity trading sector of late, documentary fraud is one of the most pernicious. High-profile cases such as the Qingdao imbroglio, the Agritrade collapse and the nickel scandal involving warehousing firm Access World, became ongoing sagas resulting in millions of dollars of losses to financiers, as well as an erosion of trust across the commodity finance sector as a whole – an issue that has only been compounded by the recent flurry of oil traders accused of creating elaborate fake trades to obtain finance.

While the commodities involved differ, each of these fraud cases exploited a key vulnerability: financiers’ reliance on paper documents that can be forged with relative ease. And while industry efforts to digitise one of these documents – the bill of lading (BL) – have been gathering pace for some time, the warehouse receipt, which was at the heart of some of the biggest scams of recent years, has not received the same level of attention. This, says Raj Uttamchandani, executive director at Trade Finance Market, is inexcusable.

“We’ve got the tech available to stop problems like these,” he tells GTR. “You would have thought that the industry would have learnt a lesson after a massive value fraud like that of Qingdao.”

Since 2020, the trade finance fintech has been working with Nigerian commodities exchange Afex on its electronic warehouse receipts system, which farmers and other agricultural producers in the West African country can use to access credit facilities from banks and other lenders on the back of the value of their produce.

“The warehouse receipt is digitised and anyone can check it,” he says.

It is not just in Nigeria where warehouse receipts have been converted into ones and zeroes. In India, the government has been issuing negotiable warehouse receipts in electronic format since 2017 as part of wider plans to bolster the agricultural sector’s access to finance. In China, Sinochem, the country’s fourth largest state-controlled oil company, created in 2020 a blockchain warehouse receipt platform for small and medium enterprises in the petrochemical sector.

Speaking to GTR, a Sinochem spokesperson says: “The credibility of warehousing enterprises and regulators, which are important participants in commodity trade and financing, has been seriously questioned. If banks are to re-enter the inventory-related commodity finance market, we must reconstruct the credit system of inventory-related pledge financing, the core of which is to solve the problem of how to trust warehousing enterprises.”


A solution no-one wants

However, rather than being leapt upon by the commodity finance sector as the answer to its multi-million-dollar fraud problem, these three initiatives remain merely isolated examples of how technology can be used to make warehouse receipts less risky – and the reasons for this are manifold.

The first is the nature of warehouse receipts themselves. Unlike BLs, which are cross-border documents that are accepted from jurisdiction to jurisdiction, warehouse receipts are domestic pieces of paper that differ by country, by commodity type, and even by warehouse operator, and as such cannot be standardised in the same way as a BL, nor held in any one global repository.

“It’s one thing to digitalise a warehouse document, but what you do with it? Where do you have the register? Who runs the register, and who takes responsibility if it fails?” says Geoffrey Wynne, partner at law firm Sullivan.

In the case of the Sinochem system, the digital warehouse receipts are published and registered in systems managed by the People’s Bank of China, with the solution already being used by six banks including China Construction Bank, Hengfeng Bank, Huaxia Bank and China CITIC Bank. However, not all central banks have the appetite to take on this kind of responsibility.

“The logistics of all of this mean that, theoretically, it is easy to talk about digitalising warehouse receipts, but it is actually quite difficult to make it work,” adds Wynne.

Another reason for the relative inaction around digitalising warehouse receipts is that, unlike BLs, they are not universally considered documents of title – and therefore are seen as less important.

Although the text of the UNCITRAL Model Law on Electronic Transferable Records refers to warehouse receipts as transferable documents, under English law – the dominant legal system in trade – a warehouse receipt is not considered as such.

“The world of warehouse receipts is rather imprecise as the practice surrounding issuance, use of and financing against warehouse receipts differ by jurisdiction and operator,” says Tat Yeen Yap, managing director, Asia Pacific, at digital fraud prevention solutions provider MonetaGo. While some jurisdictions – notably India – have warehouse receipt legislation, work has only recently begun at the International Institute for the Unification of Private Law on a model law on the documents.

“It remains to be seen what divergences will appear between the model law and extant local laws,” says Yap. “Documents issued by warehouse operators are not standard, and practices surrounding warehouse documents are subject to arrangement – there is no industry rule.”

He adds that for there to be an industry solution for verifying the authenticity of warehouse receipts, warehouse operators would first have to agree on an industry standard for the documents. “The UN model law on warehouse receipts would help, as would work by multilaterals in developing countries to create enabling environments for warehouse financing.”

The final reason – and probably the most important – is that several actors prefer the status quo, and as a result are unwilling to make the switch from paper to digital.

“There have been efforts to digitalise warehouse receipts internationally, which have not been met with great success,” says Yap.

The best illustration of this is the lukewarm reception of the London Metal Exchange’s (LME) digital metal storage system, LMEshield.

Launched in 2016 – partly in response to the Qingdao outrage – it offers a secure electronic system for the millions of tonnes of metal held outside the LME’s own network of registered warehouses, providing electronic receipts to help protect against fraud.

“Major warehouse operators did not adopt it because they had little incentive to, since they already had market share,” says Yap. “LMEshield worked like an owner registry where banks, traders and owners would transfer title therein, which meant one could see the previous owners. This also kept big traders away.”

The wider commodities sector is one “where a lot of things go unsaid”, adds Trade Finance Market’s Uttamchandani. “Some participants don’t want technology to play a part, because it makes things much more transparent.”


Making paper better

Even though the concept of an electronic warehouse receipt appears to be a tough sell to the industry, there are other ways that financiers can harness technology to derisk the document, such as blockchain deduplication solutions. Offered by numerous fintechs, including both MonetaGo and Trade Finance Market, these solutions can create a digital fingerprint of any document and then check it against others on a registry to ensure it has not already been used to raise finance.

“We use very basic parameters to create a hash of the warehouse receipt,” says Uttamchandani. “It is things like value, date and quantity. If the fingerprint matches, then we know that this warehouse receipt has been financed before, but it can also tell us if other people have checked whether that warehouse receipt has been financed, which should also raise a red flag.”

For its part, MonetaGo has partnered with Swift to trial its fraud prevention solution, which enables financial institutions to check for duplications of all trade finance documents, from invoices to bills of lading, purchase orders and warehouse receipts. “There is no unique challenge providing deduplication for warehouse receipts,” says Yap. “The fingerprint of any document, including warehouse receipts, enables the unique identification of the document, which enables us to detect if that document is the same as, or suspiciously similar to, another document that has already been financed.”

However, whether or not banks will adopt these kinds of solutions to combat warehouse receipt fraud remains to be seen, with Uttamchandani less than convinced.

“It comes down to the same old issue that we come up against every time we try to discuss trade and digitalisation. We need to get past the internal hurdles that banks seem to have around adopting new technology,” he says.

For now, and much to the chagrin of technology solution providers, most investments on adding security to the warehouse receipt seem to be focused simply on making paper better rather than doing away with it entirely, with recent examples including the addition of QR codes, special watermarks, or even NFC chips like those found in debit cards, to the document – making forgeries more difficult, but not impossible.