- Fraud represents a very real ongoing threat to metals traders.
- This threat is just one of many risks that metals and commodities merchants manage on a daily basis.
- The risk highlights just how important it is for all in the metals industry to have robust traceability in place across their operations and suppliers.
- Whilst technology alone cannot protect your business, a good CTRM can provide more fraud protection tools than you might expect, and it can improve many other areas of your business too.
Introduction – the fraud threat
In the last few years we have seen several major fraud scandals in metals trading. These scandals, combined with market conditions, have led to a tightening of lending criteria from many banks, with multiple banks pulling financing from clients in some regions. Whilst this limits the bank in question’s exposure, it can increase the risk of fraud for the rest of the market, as traders look to alternative finance providers, which can be less regulated and perform less due diligence than traditional bank financing requires.
High-profile cases include Trafigura facing a potential $577 million loss on nickel transactions that the company describes as “a systemic fraud”. This fraud case led to the LME cancelling 9 warrants and reminding all warehouses that metal must be weighed before it is placed on warrant. Nickel is usually stored in bags, which makes it more of a target for fraud, but the simple act of weighing stock can uncover this straight away.
Other high-profile fraud cases include in August 2022 when a group of Chinese merchants found that a copper trader wasn’t holding almost $500 million worth of copper ore that should have been their collateral. A site visit discovered that of the 300,000 tons that had ben pledged, the trader was holding only 100,000.
Going back further, the 2014 fraud scandal in Qingdao shocked the metals trading industry into a push for digitalisation, which is still only slowly materialising. This fraud relied on fake warehouse receipts and certificates, as well as double-financing – pledging the same stock as collateral at multiple banks. These practices exposed the dangers of a disconnected trading system lacking communication between players and over-relying on paper documentation.
And whilst the cases that make the news often involve larger trading houses and significant sums, smaller traders are just as exposed to the risk of fraud, and have fewer resources available when things go wrong. The good news is that metals traceability can help identify warning signs and reduce the risk of fraud.
These ongoing issues with fraud in metals trading highlight why traceability is so important. Traceability is the ability to verify where and how a product or shipment originated and how it came to be in its present location. It is often discussed in terms of its role in sustainability, but it can have many benefits beyond this. Below, we explore how embedding traceability within your metals CTRM can help your organisation mitigate the risk of fraud.
Minimising the risk with traceability in a CTRM
Gen10’s CommOS commodity management platform includes a wide range of tools to help our clients manage traceability alongside their metals operations.
Know Your Counterparty (KYC)
CommOS includes a CRM module which stores all your key client information. As well as allowing your team to check information on counterparties’ financial stability, credit lines and how close they are to credit limits, you can manage your counterparties’ certifications and create alerts for any future counterparty audits in line with your ongoing KYC efforts.
The CRM brings counterparty management and traceability within your trading system, making the information available to all teams in real-time. Traders can therefore make informed live decisions based on the current situation, and risk managers can analyse trends and look for patterns that could indicate problems before they occur.
Contracts and documents
Ensuring your contracts are airtight can be an important factor in your everyday operations and if something has gone wrong with a shipment. CommOS includes a wide-ranging set of contract management features, including the ability to select pre-approved text blocks and contract templates complete with your full T&Cs. You can also ensure contract pricing is clear for all parties and includes all variables that affect pricing, including incoterms, quality and delivery premiums and payment terms. This means that if your counterparties fail to deliver for any reason, the contract is readily available and your business is better-protected.
CommOS also provides opportunities to store and manage documents from different counterparties, again simplifying both traceability and risk management. And because your team can specify your own mandatory fields for different parts of the supply chain, your system will alert traders to any counterparties not providing documents to industry standards, a warning sign to investigate further.
Conducting inspections is a common way for traders to protect themselves from fraud as well as other issues arising from damaged or faulty cargoes. CommOS uses a series of automated workflows customised by your team to automate and standardise contract progression. This means that you can define when physical inspections need to take place in your workflow and make the process of arranging them more streamlined.
And when inspections have been carried out, we make it easier to quickly update your digital records so you maintain full traceability and keep your operations moving. This can include document uploads that automatically update your records based on files received from a trusted inspection company.
Physical location monitoring
Traceability means keeping track of your stock whilst it is in your hands as well as its journey to you. CommOS updates in real time as shipments are allocated and move between warehouses, and you can integrate vessel tracking systems into CommOS to see where shipments are even at sea. This can be a helpful fraud prevention tool in helping you identify unusual activity and delays as well as helping your operators plan your logistics as efficiently as possible.
Risk management controls
Training your team is an important step in fraud prevention, but any training is only as good as its compliance rate. The good news is that CommOS includes many different risk management tools that protect your organisation in real-time.
The automated workflows ensure your processes are followed at all stages, meaning that contracts cannot be progressed unless they are compliant with your processes. And other controls can be built into these workflows too, such as the inspections and credit limit checks mentioned above, as well as reconciling warehouse receipts – so that, for example, you can ensure nickel weight has been checked at the warehouse.
You can also specify mandatory documents, information, or approval flows before contracts can be progressed. The workflows also automate traceability by ensuring this information is passed on and transformed as your contracts, shipments and operations progress, without the need for manual updates.
And because trading, operations and risk teams are all using CommOS to manage their actual role, risk reports all update live throughout the day, with no need for traders or operators to make any additional updates. Live reports provide real-time traceability which allows your team to identify any potential issues sooner, and can prevent risky transactions occurring in the first place, all whilst reducing the reporting and administrative burden.
The risk of fraud is all too real in metals trading, alongside the many other risks that commodity merchants manage on a daily basis. Technology can’t stop crimes being committed but the onus of due diligence on all parties concerned has increased dramatically and this trend will only continue.
This in turn increases the administrative burden on operations. Demonstrating to banks that you have the controls and audit trails combined with the digital paperwork in place and readily available can go far in providing them with the comfort they need in order to finance operations. At the same time, the way we have designed our CommOS platform greatly improves efficiency and productivity and reduces the burden on your operations teams, keeping them engaged on higher value tasks, creating a win-win-win scenario.
Find out more about how CommOS helps the metals industry manage their trading and operations.
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