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The trade finance industry is reeling from another high-profile warehouse receipts fraud, after ANZ was stung by a nickel fraud worth more than US$300mn.

ANZ has filed court proceedings in California, vowing to pursue causes of action against “fraudsters, once their identities are known”, after the bank 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 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 in Asia.

The case has raised the spectre of the Qingdao metals fraud of 2014, 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. The bank claims 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 said: “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. At this stage, 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 in the act of attornment.

The chain of endorsement can grow so long and continue on 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 exposing the physical commodity itself disappearing. 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,” Peter Bennett, a trade and litigation partner at Stephenson Harwood, tells GTR.

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. This is one way in which this case differs from Qingdao.

How it differs from Qingdao

Because they are cases involving fraudulent warehouse receipts in the Asian metals trading world, the 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, they 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.

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, or what quantities did exist.

Bennett, who along with Stephenson Harwood colleague Jonathan Spearing, represented Mercuria in the aforementioned 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 quipped this week: “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 it.

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 is 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.”

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

Technology has been earmarked as a way of lowering the risks: LME Shield was developed as a direct response to Qingdao, but its use is limited. Blockchain would also be useful in restricting the use of duplicated documents, but widespread deployment seems a long time away.

Dominic Broom, a member of the ICC’s Banking Commission, spoke to GTR on the back of the ICC’s latest Rethinking Trade Finance report, and said: “Ultimately technology is a very positive force for the industry. There have always been degrees of malfeasance on the fringes of trade. But you have to put that into context. The headlines are very loud when they happen, but meanwhile, day in and day out, billions of dollars’ worth of trade is happening without incident, often between counterparties that know each other very well. These supply chains and practices are deeply integrated.”

Note: this story was updated on July 6, 2017 to include a statement from Marex Spectron.