Spotlight On Commodities Disputes ' Civil Fraud

• Published date: 13 November 2023
• Subject Matter: Finance and Banking, Criminal Law, Commodities/Derivatives/Stock Exchanges, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Norton Rose Fulbright
• Author: Mr James Lockwood, Nick Grandage, Emma Cridland and Jonathan Hawkins

In this article we take a look at six recent commodities cases involving fraud to identify key areas of risk and ways to mitigate it. The article is structured as follows:

A. Analysis of recent fraud trends and developments in the commodities space, key issues from the cases, expectations for the future, and practical steps which can be taken to help reduce the fraud risk.

B. Key takeaways from the six cases. For more detailed summaries of the six cases click here.

Part A - Analysis

Commodities fraud: trends and developments

Fraud has been a real theme of recent cases. Several high profile and high value international warehouse receipt frauds were uncovered between 2017 and 2019, which have generated three of the cases we feature. The remaining three cases give a sense of the wider landscape for potential fraudulent activity in the market. They concern a mis-performance 'carousel' in relation to an oil transaction, a bill of lading fraud and a cyber-hack that led to the fraudulent notification of payment details.

Commodities frauds tend to follow established patterns, with most of our cases examples of at least one of the following:

1. Type 1: bad document fraud - the fraudster provides a fraudulent document (e.g. an invoice, a receipt or a document of title) in a commodities transaction for assets, which may or may not actually exist. The document is often a forgery. The document does not give the rights over or title to the assets the defrauded party contracted and paid for.
2. Type 2: double dealing fraud - the fraudster provides an apparently authentic document for assets that exist, but commits the same assets to multiple different counterparties. When the fraud unravels, there are multiple competing claims to an inadequate pool of assets.
3. Type 3: spinning plates fraud - the fraudster lacks funds or assets to meet its immediate transaction obligations. It meets them by sourcing (often on false pretences) new funds or alternative assets. When the plates stop spinning, someone (usually the last person brought in) finds they have lost out, for example their funds or assets are gone with no replacements or payments forthcoming, or the assets due to them have already been used.
4. Type 4: sham transaction fraud - the fraudster obtains finance from a lender on the basis of a misrepresented or fictitious transaction or tries to explain away its defaults with specious commercial rationale. The lender's funds are used, the financed parties become insolvent or otherwise disappear and the lender finds itself out of pocket.

Commodities fraud: key issues from the cases

Knowledge gaps and due diligence

The cases demonstrate how knowledge gaps, and a lack of general transaction transparency in the market, create the opportunity for fraud. Natixis v Marex and EDF Man involved parties in repo chains not identifying warehouse receipts as forgeries; in Engelhart a bills of lading fraud was only discovered when an unexpected cargo was actually delivered. Knowledge gaps...