The inventory finance world is still haunted by fraud. The collapse of Singapore trader Hin Leong in 2020 revealed it had dramatically overstated the value of inventory held to obtain nearly US$1bn from numerous lenders, drawing parallels with the 2014 Qingdao scandal. However, the appeal of off-balance sheet inventory finance has not been dented. John Basquill examines why demand is soaring, and how market participants are protecting themselves from risk.


The downfall of Singapore’s Hin Leong left the commodity trading and finance market in shock. Meaning “prosperity” in Chinese, Hin Leong grew from humble origins. Its chairman Lim Oon Kuin, known as OK Lim, founded the company in 1963, with a single fuel truck making diesel deliveries to local fishing communities. Over the following decades, Hin Leong grew to become one of Asia’s largest independent oil trading houses.

But in April 2020, Lim revealed in a Singapore court filing that the company had suffered US$800mn in undisclosed losses in the futures trading market, and that goods set aside as collateral for borrowing from banks had in fact been sold. In the months that followed, it emerged that Hin Leong had duped banks into providing letters of credit for trades that had already been financed by other lenders, or in some cases, trades that did not exist in the first place.

The incident sent shockwaves through the trade and commodity finance sector, which was already reeling from the collapse of disgraced commodities trader Agritrade International just six weeks earlier. Many banks scaled back lending to all but the largest traders, with some exiting the market completely. The phenomenon was dubbed a “flight to quality” and has had a profound impact on commodity finance ever since.


Hin Leong: an inventory finance scandal

Much of the fallout of Hin Leong’s collapse focused on its abuse of traditional trade finance facilities. However, an overlooked aspect of the scandal was the misuse of inventory in raising finance from the banking sector.

An investigation by PwC, appointed as Hin Leong’s interim judicial managers, found that after an independent stock-take and communication with barges and vessels, the value of the company’s total inventory amounted to US$212mn. Its audited financial report for the previous year had recorded the value of inventory held as US$1.278bn, a figure the report says was likely “grossly overstated”.

Around US$84mn of the inventory located appeared to have been pledged to lenders as part of financing facilities, PwC revealed in a report finalised in June 2020 and seen by GTR – yet the amount outstanding to lenders was “significantly higher”, standing at nearly US$650mn.

“This is more than thrice the value of total inventory available,” it said. It adds that between November 2019 and March 2020, Hin Leong had drawn down around US$866mn from its inventory financing facilities. It did so through both commodity repurchase agreements, an off-balance sheet method of using inventory to generate working capital, and the submission of bills of lading (BLs) to banks detailing cargo used as collateral for borrowing.

The PwC report details an example of how inventory repurchase agreements were misused. In February 2020, Hin Leong sold around 240,000 metric tonnes of inventory to a bank with the intention to buy it back at a later date. The goods were supposedly stored in seven tanks overseen by Universal Terminal, a storage operator that was part of the wider Hin Leong group and under the control of OK Lim’s son, Evan.

The following month, Hin Leong sold the same amount of inventory to the bank to roll over the agreement. However, in April, it did not fulfil its end of the bargain by repurchasing the goods, prompting the bank to obtain a court injunction in an attempt to shield itself from potential losses.

Upon investigation, PwC says it found the quantity of inventory held in the tanks was only 133,000 metric tonnes, and that Hin Leong had continued to sell it to other buyers after its failure to complete the repurchase agreement.

In addition, new inventory financed by letters of credit from other banks was loaded into the same tanks. As of June 2020, the report had identified at least three parties with competing claims over the goods.

Other suspicious transactions involved using inventory aboard vessels as collateral for loans, with PwC uncovering irregularities with the BLs that Hin Leong provided to lenders. Of the 22 bills analysed, 16 were signed by Hin Leong staff rather than the master of the vessel or authorised employees at the shipping operator, Ocean Tankers – also part of the wider Hin Leong empire. The signatories of the other six BLs could not be identified.

In two of those 22 cases, the BLs pledge inventory that Hin Leong did not actually own, the report adds. These were used to raise around US$130mn in financing. In 12 other cases, the overall quantity of inventory on board vessels was less than half of that stated in the BLs submitted to lenders, enabling Hin Leong to obtain US$516mn in loans based on inventory worth less than US$280mn.

The financial losses resulting from Hin Leong’s demise are comparable to the Qingdao scandal in 2014. In that case, a private metals trader used fake warehouse receipts to obtain loans using cargoes of copper and aluminium as collateral, but it later emerged those goods had been moved elsewhere or did not exist in the first place. Losses to international banks were believed to have topped US$1bn, while Chinese banks were exposed to the tune of US$3bn.

In Hin Leong’s case – incorporating both inventory finance and other trade-related fraud – total liabilities to bank and other creditors was estimated to stand at US$3.5bn.


Lenders unfazed

In the wake of Hin Leong’s collapse, the trade and commodity finance market underwent a period of soul-searching. Financial difficulties and fraud claims at other traders, notably in Singapore and the UAE, spread nervousness among banks.

Smaller and mid-sized traders reported financing lines being tightened or pulled completely, and banks embarked on strategic reviews and collaborative projects to ensure they would not be fooled again.

Inventory finance, however, has followed a different path. Market participants report that demand for facilities – particularly off-balance sheet repurchase agreements – has soared since 2020, driven by a combination of supply chain disruption and concerns over access to liquidity. Banks and non-bank fintech companies are jostling for position as potential deals emerge.

“We’ve seen more frequent and more disruptive events happening, on top of the day-to-day normality of trade wars and the pandemic,” says Emma Clark, global head of marketing and corporate affairs at London-headquartered Falcon Group, an inventory management and financing provider.

Imbalances between supply from Asia – particularly from China, where vital ports and other facilities have faced intermittent shutdowns to limit the spread of Covid-19 – and demand in western markets, notably the US, has caused major disruption to maritime trade since early 2020. The result has been a spike in shipping costs and an increase in delayed journeys.

“Previously, when it comes to managing supply chains, companies would look primarily at costs. But with this level of disruption, companies are now looking beyond cost, and are prioritising resilience instead,” Clark tells GTR.

That trend has prompted a shift away from just-in-time supply chains, and towards just-in-case inventory management. In manufacturing, for example, companies fear being unable to produce goods because they are missing a key componentdue to shipping delays – but holding onto inventory for longer than needed or arranging vendor-managed inventory programmes can prove an expensive solution.

“A third-party inventory ownership model means a buyer can have the inventory it needs on hand, on a just-in-case basis, but through an off-balance sheet solution,” Clark says. “In the last couple of years, driven by the disruptions to supply chains, we’re being approached by global companies – names we wouldn’t have expected in the past – that are looking for solutions around supply chain resilience.”

Erik Wanberg, head of inventory management at US-headquartered supply chain finance company Taulia, says efforts to protect against disruption – for instance, by building up safety stocks or buffers – are combining with a desire to optimise working capital, particularly as signs emerge of a global economic slowdown.

“We see this in many industries with extended supply chains that are difficult to manage due to ever-changing demand,” he tells GTR. “As the economy slows, we also see companies wanting to optimise their operations and improve the efficiency of their working capital deployed in operations.”

Taulia, for its part, announced in April 2021 it intended to expand into inventory finance, complementing its payables and receivables financing offering by finding new ways to release capital tied up in physical supply chains.

Borrowing using inventory as collateral can be an effective way of doing that, Wanberg says, but lenders can sometimes be reluctant if the location of the inventory, its jurisdiction or the availability of data are challenging. Structures where the funder takes ownership of the goods helps postpone putting inventory on a corporate’s balance sheet until it is needed in production.

Catherine Lang-Anderson, a partner at Allen & Overy and head of the law firm’s trade and commodity finance practice, says that structure is “key for accounting purposes”.

“You may have goods that are just sitting there in a warehouse, not contributing to working capital,” she tells GTR. “At a time when liquidity can be harder or more expensive to obtain, when commodity prices are rising and borrowers may have maxed out revolving credit facilities, being able to shore up financing without taking on balance sheet debt can be a great help.”


Managing the risks

The question for lenders, then, is how to avoid being caught up in the next inventory fraud case. Though scandals on the scale of Hin Leong or Qingdao are rare, smaller incidents are more common.

As recently as August 2022, three separate incidents of alleged fraud have arisen at aluminium warehouses in China. The state-owned Securities Times newspaper reported in June that more than 20 companies were believed to have pledged the same inventory multiple times to different financiers, while in a separate case, stocks of the metal financed at a Guangdong warehouse were significantly smaller than first thought.

In August, Bloomberg reported that a warehouse in Hebei contained 200,000 tonnes less copper than lenders had expected, worth nearly half a billion dollars.

“The biggest risk when it comes to inventory finance is fraud, through techniques like multiple financing,” says Singapore-based trade commodities trading expert Eric Chen, director of business development at GUUD Finance.

“Sometimes this can happen if the same company owns the cargo and the facility where it is being stored, because there is no independent third party involved. At other times there is a risk of collusion, so that cargo can be moved out of a warehouse without the knowledge of the owner. But if it’s done right, inventory finance is actually safer than payables or receivables finance.”

Payables finance transactions typically take place before the supplier ships goods, meaning the funder takes a credit risk on that supplier, whereas with receivables finance, credit terms are being sold to a buyer that will repay later, Chen says.

“If you do inventory finance properly, there is still value in the goods that you are taking ownership or security over,” he says. “The problem when it comes to fraud is that when the goods are gone, they’re gone. You can try and recover your losses through lawsuits, but that ends up proving extremely costly. There may be specific, rare cases where you can make an insurance claim, but no insurer will provide open-ended cover for fraud.”

“Funders need to protect themselves from the start,” he says.

One way of improving oversight is through technology. Chen notes that internet of things devices are able to detect goods being compromised and alert owners, and that containers can be fitted with GPS trackers. At the same time, some fintechs are specialising in the collection and analysis of data associated with supply chain finance-related products.

Lenders should also examine in detail the practicalities of a transaction, says Allen & Overy’s Lang-Anderson. “That means looking at who is signing off on documents, whether there is independent scrutiny or whether goods are being managed internally, what checks and balances are in place, and precisely what inventory is being financed,” she says. “There are risks, but you can structure around them.”

Niamh Dennehy-Maher, counsel at the same firm, adds that post-closing audits and monitoring warehouse inspections are also useful tools. In cases where the warehouse is owned by the borrower, stock monitoring or collateral management agreements can be helpful in providing independent oversight.

“Banks with real expertise in commodity finance are really focused on these issues and always alive to the possibility of fraud, so they do put in all sorts of safeguards,” she adds.

Financiers should avoid a one-size-fits-all approach to risk management, Taulia’s Wanberg says. Inventory finance for static commodities and metals “has inherent risk and requires specialised knowledge and controls to manage that risk, especially between trading companies”, he says.

“This type of inventory finance is very different from financing components in transit that are needed in production between longstanding trading partners, held in third-party control, and with data signalling to provide the transparency needed to safely finance the flows. These are two very different types of inventory financing.”