Commodity trading fraud – an increasing problem
An often overlooked consequence of conflict is an increase in commodities trading fraud. Commentators have identified this as a result of the Russia/Ukraine war and, with the Hamas/Israel war, the scene is set for an even greater impact.
The commodities trade is an industry all of its own. Fundamentally, it has remained unchanged for over a quarter of a century, often bucking the trend for increased process automation. Machines are passed over for experts, and paper still favoured over IT systems. Operations frequently span continents and the values involved are large. A very attractive combination for fraudsters.
In a recent FT article, Baptiste Audren, chief revenue officer at Komgo, a leading trade finance platform, stated that “If western banks no longer finance Russian oil and gas business, then more lending is channelled into other industries and larger companies… When there’s more banks fighting for business, then there’s more potential for fraud.” In short, the opportunities for fraudsters become greater.
Mr Audren’s comments make a lot of sense to us.
So too does the financial impact. Despite the current conflicts, commodity prices have, and are predicted to remain, ostensibly stable. Regarding the Hamas/Israel war, the World Bank have however recently posited that “the outlook for commodity prices would darken quickly if the conflict were to escalate”.
It is no surprise then that we have increasingly seen criminals targeting the industry, and no let up in claims arising.
Such claims come in many guises. Losses, as mentioned, can be substantial, affected parties varied, and circumstances complex. Most cases however have one thing in common – the need for detailed, yet understandable, quantum calculations. This is where we at ASL specialise.
Typically, in such cases, there can be two parties that suffer the loss.
1. The buyer or commodity trader:
The end customer or commodity trader sustains the loss, having suffered either a physical theft of goods en route from the supplier, or, having purchased goods not meeting the predetermined standard and carrying an appreciably lower value than that paid.
2. The asset finance provider:
Particularly where transaction values are higher, a short-term lending facility is often required to facilitate the purchase and sale of the commodities. Geographical distance, language barriers, and currency changes often make such funding arrangements complex. In our experience, and unfortunately, fraudsters can take advantage of this complexity – no matter the due diligence of the lender. The supplier, trader or end customer, can cause loss by drawing on the granted credit facility and running.
We have found, especially recently, that the geography of these frauds has spread to all corners of the planet.
A tailored approach is required for each and every commodity loss. Each transaction is different, and care must be taken to appreciate the detail. Factors often seemingly peripheral to quantum can have a highly material impact on the final indemnity. Our chartered accountants have the breadth of knowledge to consider such factors when calculating quantum. Examples of recent issues we have seen, which are best investigated by experienced accountancy professionals, include:
- Intra-group transfer pricing
- Goods and services taxes
- Foreign exchange movements
- Residual value received in substandard goods purchased
- Varying points of purchase and sale
- Fluctuations in interest and exchange rates.
Even veterans of the industry have been surprised by the scale and complexity of such fraud . Glencore and Trafigura have suffered well-publicised frauds, costing them over $500mn, which were only possible as a result of collusion between staff and suppliers. With fraudsters circumventing ever increasing layers of control, these frauds are not only hard to prevent but also to quantify, especially when they have been able to operate for extended periods.
The impact of worldwide unrest has reverberations in every sector, and the full extent of recent developments perhaps remains to be felt by the commodities trade. We will keep you updated on claims trends that we see evolving.