The latest case of document duplication should not be surprising, but left the industry shell-shocked. Technology may help eradicate this problem, as Finbarr Bermingham reports.


In July, the trade finance industry was left shell-shocked by another high-profile fraud, which had echoes of the Qingdao case of 2014. Australian bank ANZ lost more than US$300mn due to a nickel fraud, in various parts of Asia.

The bank subsequently filed court proceedings in California, vowing to pursue causes of action against “fraudsters, once their identities are known”, after it was left with ownership of 83 fraudulent warehouse receipts which pertain to cargoes of nickel stored at Access World warehouses in Singapore and South Korea.

In a statement issued to GTR, the bank says: “The exposure was fully accounted for at our recent half year result and was significantly less than the total value of the payments due. Given the exposure was not material to the group it did not require a specific disclosure and was included in our general provisioning line. It’s also important to note our standard documents provide recourse for ANZ in the event of fraud.”

However, questions have already been raised about banks’ due diligence in metals trading in Asia, as well as the risk involved with issuing and endorsing warehouse receipts there.

The case has raised the spectre of the Qingdao metals fraud, when banks including Citi and Standard Chartered were duped by multiple fraudulent warehouse receipts issued for single instances of cargo, stored in the Chinese port of Qingdao.

It also comes months after Access World, the metals warehousing arm of commodity trader Glencore, issued a warning over fraudulent warehouse receipts circulating under its name. There has yet to be any indication of who produced the fraudulent receipts.

In June, the French bank Natixis sued metals broker Marex Spectron for US$32mn, claiming to have lost the money in a fraud involving fake warehouse receipts at Access World warehouses. However, Marex Spectron vigorously contests these claims.

In a statement sent to GTR, the broker says: “With Natixis’ knowledge, we had the receipts we received from the client inspected and authenticated by Access World, the LME-approved warehouse that had issued the receipts, for the very purpose, and as a precondition to entering into the transactions. In addition, as Natixis knew, we had the physical metal in the warehouses checked by Alfred H Knight, the specialist metals inspection company. Based on this validation, Marex Spectron and Natixis proceeded with the transactions.”


What we know

ANZ had a repo deal with broker ED&F Man, whereby the bank was buying a consignment of nickel. ED&F Man had purchased the nickel on back-to-back terms, from two Hong Kong-based companies called Come Harvest and Mega Wealth.

These were non-obligated repos, meaning neither ED&F Man nor the two Hong Kong companies were obligated to buy them back. The total amount of nickel is reportedly more than 30,000 tonnes, which in today’s market is worth more than US$300mn.

These 31 purchase contracts between ED&F Man and ANZ were the subject of 84 warehouse receipts, purportedly issued by Access World. The receipts were first issued to a Singapore company called Straits, who subsequently endorsed them to Come Harvest and Mega Wealth. As the metal was sold on to ED&F Man, the warehouse receipts were endorsed again. This happened again when the receipts were endorsed to ANZ.

ED&F Man got wind that there was a problem with the authenticity of the warehouse receipts, at which point it told ANZ that it would not be buying them back (it had an option to do this, but no obligation). ANZ was at this point holding 84 receipts, which it brought to Access World, asking them to put the nickel on warrant to sell. It’s at this stage of the process – when a sale is agreed and the receipt endorsement cycle comes to an end – that the receipts are actually inspected. It’s here that Access World saw that 83 of the receipts were fake and refused to accept them.

Part of the issue was that through all these chains of endorsements, the warehouse receipts were never presented to Access World – or any other warehouse operator – for inspection. A warehouse receipt is not a title of ownership, in the way that a bill of lading is. It only becomes so once the warehouse operator inspects it after the warrant to sell is issued (the act of attornment).

The chain of endorsement can grow long and continue for months and months, before this act of attornment takes place, meaning there is ample opportunity for someone to forge them fraudulently, which is what seems to have happened here.

“If you run a repo chain where you rely upon repeated endorsements of the warehouse receipts and without ever having transferred the right of possession through an attornment of the warehouse receipt, then you clearly run an increased risk of a fraud either in the form of multiple pledging of the commodity, or the physical commodity itself disappearing,” Peter Bennett, a trade and litigation partner at Stephenson Harwood, tells GTR. “One can also look at having the warehouse receipts authenticated, but of course this presupposes you have the original warehouse receipts in the first place.”

ANZ, in its court filings, is quite clear that it believes someone in the endorsement chain created or was involved in creating fraudulent Access World receipts, and it has opted to chase the money and find out who is behind the fraudulent activity. This is one way in which this case differs from Qingdao.


How is this different to Qingdao?

Because they are cases involving fraudulent warehouse receipts in the Asian metals trading world, comparisons are inevitable. There are a number of key differences, however.

One of the major fallouts from the Qingdao fraud was the Citi vs Mercuria case, which was heard in London’s High Court. Both parties disputed the master agreement and argued over who was liable for the losses on the repo deal. However, in this case, ANZ and ED&F Man appear to be co-operating.

Rather than challenging the master agreement, in this case the parties are looking further down the chain and attempting to uncover who committed the fraud and recoup their losses that way. ANZ has brought pre-action disclosure and discovery actions in Hong Kong, the US and Singapore with a view to finding out where the money has gone.

With the Qingdao case, it was unclear (and thanks to the lockdown on warehouses in Qingdao Port, still is) whether the metals underpinned by the fraudulent warehouse receipts existed, and – if they do – the quantities thereof.

Bennett, who along with Stephenson Harwood colleague Jonathan Spearing, represented Mercuria in the more recent case, says: “There is no suggestion that Access World don’t have the metal to honour the original warehouse receipt. The allegation here is that what has been produced to Access World by ANZ is a forged warehouse receipt and against which they are not obliged to deliver the nickel.

“ANZ had paid millions of dollars for the nickel under the terms of the master repo agreed with its seller MGM [the parent company of ED&F Man], and obviously assumed that with the transfer of endorsed receipts from its seller it had the right to possess the nickel as against Access World. However, as against what are believed to be forged warehouse receipts Access World have challenged that claim. Hence ANZ have turned their attention to the fraudsters.”


Could it have been prevented?

The post-Qingdao landscape has been full of soul searching and this will inspire even more.

One metals trader in an off-record exchange quips: “Due diligence my ass at the banks, they want the quick money.” This may be harsh, but it is a commonly held view in the industry. There’s no indication that ANZ has done anything wrong, but has it done everything right?

Certainly, being involved in the metals markets in China is risky. There are lots of shady operators waiting to seize opportunities to make a quick buck, and most banks will already be reviewing their business in this sector to see if it is worth keeping open, with many having already exited.

But that is not to say that it isn’t possible to do business in the sector. It happens legitimately every day.

Bennett says: “What can you do to try to control the risk? Bearing in mind that the risk of fraud can never be completely eradicated, there are some things that can be looked at.”

He explains how you can make sure the transaction is sound: “Undertake due diligence on the warehouse and its operations; due diligence on your counterparties; fully understand the means by which you are transferring your rights of possession to the repo commodity bearing in mind you will be transferring warehouse receipts which are not documents of title; check if the transfer will be by attornment or if something else envisaged; check the contract terms under the warehouse receipt in terms of limitation and exclusion clauses, amongst other provisions; check the counterparty risk and whether a third-party guarantee might be required, and finally, check that there is appropriate insurance in place.”


Looking to tech

Technology has been earmarked as a way of lowering the risks and some of the fraud-fighting tools developed have come as a response to the Qingdao fraud. The London Metal Exchange (LME) has developed LMEshield, a central electronic register that lodges digital commodity receipts. By removing paper from the equation, it limits the chance of duplication of documents. Its use thus far is limited, but the LME has been working with Chinese authorities on several pilot launches in the country.

Blockchain would also be useful in restricting the use of duplicated documents: in fact, this is one of its major selling points to those in trade finance. “Where we see uses cases for blockchain is in the management of trade finance documents, to avoid duplication and double-spend. If you think of the Qingdao fraud and the duplication of warehouse receipts. Would that have happened in a blockchain environment? Probably not,” says Ian Kerr, CEO of Bolero, a trade digitisation company.

The industry is some way from the point at which blockchain would be deployed comprehensively enough to stop fraud. Even when it is deployed, you get the impression that if someone wants to commit fraud, they will simply find another way. However, it will certainly help eradicate document duplication (even if it’s simply by removing paper documents from the equation).

A number of fintech startups have been looking to find solutions to these issues. Chief among them is Singapore-based Trade Finance Market (TFM), which has developed technology that it says will prevent invoice and warehouse document duplication. TFM recently launched InvoiceCheck, a tool enabling banks and factors to check if an invoice is potentially being double-financed.

Executive director Raj Uttamchandani tells GTR: “In response to Qingdao, we have created a solution similar to InvoiceCheck called CollateralCheck, which de-risks warehouse receipt financing. These tools have been created to resolve specific supply chain problems with the aim of providing liquidity to SMEs and filling the infamous ‘trade finance gap’. Eventually we see these tools linked together – but for now we are focusing on specific niches where there is a real use for blockchain technology. Instead of reinventing the wheel, we utilise technology to provide easy-to-use infrastructure to de-risk trade finance.”

Eliminating the risk from trade finance is a lofty goal and will probably never happen in full. The industry is leaning heavily towards emerging technology to help manage the risks better. Blockchain is one such solution, however artificial intelligence and machine learning are also going to be crucial. What is important is that these technologies are able to work together, using their combined strengths to drive risk down.

The work being done by the Monetary Authority of Singapore is a realisation of this: Singapore is working towards being a digitised trade hub, with both of these technologies playing a crucial role in this. There is a whole suite of programmes combining the private and public sectors, aimed at digitising trade flows through smart logistics, shipping and freight. On top of this, the aim is to have a digitised banking environment.

For now, though, banks will continue to face instances of fraud and, if the tone of conversations about this nickel fraud is anything to go by, they do so with grudging acceptance. With trade, this is the unfortunate nature of the beast.