One of the world’s largest private metals traders has announced that it faces the prospect of over half a billion US dollars of losses caused by a fraud allegedly perpetrated by one of its counterparties, an India based supplier of nickel.1
Industry insiders have expressed surprise at the scale of this fraud, which appears to suggest that even experienced industry professionals with sophisticated risk management frameworks can fall victim to established scams of this nature.
The scam allegedly misrepresented the existence of underlying commodities (nickel) and falsified supporting trade documentation, thereby allowing empty containers of non-existent nickel to be fraudulently pledged as collateral for financing.
Such frauds typically evolve over an extended time frame, and often engage multiple parties, thereby compounding the scale of the fraud. It is currently unclear whether this unfortunate commodities trader will seek to absorb this massive monetary loss on their balance sheet or ultimately attempt to lay elements off to the financial institutions which provided finance or otherwise seek recoveries from counterparties and/or insurers.
Perhaps surprisingly, traditional marine cargo insurance and crime insurance tend not to respond to this established and significant risk scenario, due to intentional policy exclusions or simply the absence of verifiable physical cargo or inventory [Englehart CTP (US) LLC v Lloyds syndicate 1221 and others].2
We therefore recommend that industry participants carefully check their operational controls and procedures alongside the adequacy of their insurance arrangements, by running this topical loss scenario against their policy terms conditions, to satisfy themselves that they are adequately protected.
Alternatively, for bank lenders in this space, specific Commodities Documentary Fraud Insurance (CDF) is available, having been developed in the London market following the massive 2015 Qingdao Aluminium fraud3 (still the biggest fraud of this kind).
The CDF policy may offer up to USD 100M of limit and, subject to policy terms and conditions, covers direct loss to bank lenders when placing reliance on fraudulent commodity trade documents such as bills of lading, warehouse receipts and the like. A simple policy construct ensures ease of access to worldwide coverage for all commodity classes.
For further information, please speak to your WTW broker.
3 Qingdao metals scandal accused handed 23-year jail term
