Ten major banks from Switzerland’s commodity and trade finance sector have finalised a best practice guide aimed at avoiding a repeat of the fraud and insolvency scandals that shook the sector last year. 

The Swiss Trading & Shipping Association (STSA) published the guide in late October, following a full year of work. Though not mandatory, the recommendations are designed to “reduce the potential for future losses” and ensure commodity finance activities remain sustainable, the association says. 

“This initiative arose as a result of the significant losses experienced in a number of fraud or insolvency events that impacted the sector globally in the course of 2020, leading to a perceived need to strengthen and standardise market practice in the field of commodity finance,” it adds. 

One of the most high-profile fraud scandals last year was the collapse of Singapore trader Hin Leong. The company fell into insolvency after failing to disclose heavy losses, with judicial managers then uncovering a “vicious cycle” of trade finance fraud, where fake transactions were used to obtain financing from banks and pay off earlier debts. 

Banks also lost billions following the collapse of Singapore’s Agritrade, where a former executive has since been charged over allegedly fraudulent bills of lading (BLs), while fraud allegations have also been made following the downfall of UAE-based Phoenix Commodities and GP Global. 

A string of other fraud claims have also hit the commodity trading market, with Sugih EnergyHontop Energy and BP among those that have faced litigation over the past year. 

Several banks scaled back their commodity and trade finance businesses in the aftermath of those scandals, with some – notably ABN Amro and BNP Paribas – discontinuing such financing completely. 

In many of the fraud cases, allegations have arisen around circular trade arrangements, where each leg is financed by a bank but the cargo ends up in the hands of the initial seller. Such transactions are often used primarily as a means of generating working capital. 

The STSA guide recommends banks “abstain… from financing circular transactions which aim at creating liquidity”, and suggests they “raise as a red flag” attempts to do so by traders. 

In terms of documentation, the guide recommends banks perform random checks to confirm BLs are genuine, and use technology to track vessel movement in order to ensure voyage timings are in line with the expected underlying trades. 

Where financing is provided against copies of BLs, banks should generally seek receipt of the original documents. The guide says banks should not finance copy BLs older than 10 days, or 30 days for crude cargo, from shipment date. 

It also recommends banks put in place a procedure around warehoused goods, including maintaining the right to carry out periodic third-party checks. Inventory documents should be received directly from the warehouse and verified electronically, it adds. 

If multiple banks are financing inventory in the same location, or at sea, the association suggests they use the same inspection company.  

Other means of financing, such as borrowing base facilities, should be restricted to larger clients, it says. 

The 10 banks involved are the Swiss branches or headquarters of Arab Bank, Banque de Commerce et de Placements, Banque Internationale de Commerce, CA Indosuez, Credit Suisse, ING Bank, Sberbank, Société Générale, UniCredit and UBS. 

Speaking at last week’s GTR Commodities event in Geneva, Lisa Weihser, legal and regulatory affairs officer at the STSA, describes the work undertaken as a “lessons-learned exercise” that takes the industry “back to basics”. 

Orhan Gunes, head of commodity trade finance at Sberbank, said at the same event it is seen as “a valuable document [that] summarises the practices that are going to be applied in transactional finance”. 

“We have seen a lot of avoidance in the market around the fraud cases and how to prevent fraud,” he said. “I think that moves the quality of due diligence and quality of this process much higher.” 

Citi’s global head of commodity and energy trade finance, Christine McWilliams, added that the guide should also be seen as helpful information for trading companies seeking financing from banks. 

“We look at the commodity financing space, and we look at the expectations of what it takes to be a trader today – then we layer in ESG expectations and we layer in these compliance expectations,” she said at the event. 

“This implies a level of policy, a level of infrastructure, and a level of rigour that a smaller or mid-sized trader may not be expecting. As a client, you want to know what your banks expect.”