Allegations of financing fraud at aluminium warehouses in China have dredged up memories of the 2014 Qingdao scandal, prompting calls for stronger efforts to tackle double financing and warehouse frauds.

One trader, Ping An Trading Co., recently found that physical stocks of aluminium it financed at a warehouse in Guangdong province were significantly less than it thought, according to local and international media reports.

In a separate case, more than 20 companies in several cities are suspected of pledging the same aluminium stocks several times over to different financiers, according to a Reuters report citing China’s state-owned Securities Times newspaper, which put the value of the stocks in the billions of yuan.

The cases have sparked a keen interest in the metals sector, partly due to worries of a repeat of a 2014 scandal centred in the Chinese port city of Qingdao, which involved the creation of fake warehouse receipts, multiple pledging of the same stocks and pitted traders such as Mercuria against major banks.

However, the details that have emerged so far in this case suggest the amounts involved are much lower, and no banks have yet been named as victims of fraud. Instead, those that may face losses are likely to be larger Chinese traders that provide finance to smaller traders by lending against stored commodities.

But one of the chief causes of the 2014 scandal appears to have contributed this time around, too: a lack of due diligence by those providing financing.

“Common sense always says that you do some homework, some due diligence – you want evidence that whatever’s been pledged to you actually exists,” says Ian Milne, a veteran of trade and commodities finance.

The memories of being burned in the Qingdao scandal and a rash of insolvencies and frauds in the commodities trading sector after the pandemic hit in 2020 may also lose their potency over time, he suggests.

A recurring theme of trade and commodities finance fraud is that “because these things are cyclical, people tend to forget that it was such a problem,” Milne, now head of Asia Pacific sales at MonetaGo, tells GTR. “Any reminders that these things are still going on acts as a sobering reminder to the industry.”

In recent months, spot aluminium prices on the London Metals Exchange have fallen off record highs of around US$3,500 per ton reached in March this year, with prices dropping to six-month lows earlier this week.

Just as Covid-19 and plummeting oil prices exposed sometimes years-long frauds by mid-sized traders in Asia, the slide in aluminium prices may have contributed to the emergence of the warehouse irregularities in China.

“I suspect a fair amount of double financing, be it on land or sea, just doesn’t get detected until an external event occurs that causes creditors to enforce their security,” says Baldev Bhinder, managing director of Singapore law firm Blackstone & Gold. “I would imagine that the drop in aluminium prices, connected with Covid lockdowns, might have triggered creditors to call on their collateral.”

“It doesn’t really surprise me that a double financing issue has arisen again,” Bhinder tells GTR. “We are seeing an unprecedented liquidity squeeze in the market coupled by astronomical prices of some raw materials. Pledging goods to raise financing seems a viable option when liquidity is tight but there is also an increased risk of double pledging.”

Traders with stocks on aluminium in some of the warehouses implicated in the current financing scandal have raced to extricate their assets, according to Fastmarkets, while police have reportedly sealed others off.


Registry calls

After the slew of fraud crises in Singapore in 2020, banks active in trade and commodities finance, with the support of the Singaporean government and other groups, have worked on projects designed to help root out fraudulent behaviour by traders.

A Trade Finance Registry, which has been under development since 2020, is expected to allow participating banks to check if financing has already been raised against a particular transaction document – including warehouse receipts – and avert double financing attempts.

The SGTradeX platform, which went live earlier in June, is also partly aimed at tackling fraud by allowing financiers to view end-to-end documentation in a trade, rather than only the documents presented to them by their client.

Asked if some level of commodities financing fraud is inevitable in a market as vast and fragmented as China, Milne suggests that if Beijing were to make a similar move and build a trade finance fraud registry, authorities would be able to detect any duplicate warehouse pledging.

“If China’s central government says tomorrow, we want a fraud registry that would mitigate this type of situation, purely for private warehouses, that could be implemented in a relatively short period of time,” he says.

According to Bhinder, warehouse frauds reoccur “because of the ease of creating forged paper documents coupled with the difficulty of detection, [which] will not get addressed until the process is digitised and centralised”.

Singapore, along with jurisdictions such as Bahrain and the Abu Dhabi Global Market, has also adopted the UNCITRAL Model Law on Electronic Transferable Records (METR), which affords legal recognition to the digital equivalents of traditionally paper documents such as bills of lading.

Bhinder says “adoption also needs to occur in countries where goods are held and pledges created such as China”.

“This is often easier said than done because there are competing warehouse operators, banks and traders involved in the industry and getting consensus amongst all of them is always going to be challenging.”

Banks have also raised concerns that the use of registries may allow competing lenders an insight into their commercial arrangements, a fear the fledgling Singaporean registry hopes to allay by using a cryptographic hash to maintain confidentiality.