“The banks still haven’t looked under the hood,” warns one executive as the probe at Qingdao port (centering around the duplication of warehouse certificates in order to use a metal cargo multiple times to raise financing) begins to spread to the entire Chinese warehousing sector. As Reuters reports, even if banks or their customers have insurance for the metal, some warehouse sources said they might struggle to get paid if fraud is uncovered or their agents are implicated. Though many global firms are involved in the warehouse industry in China, there has been outsourcing to local firms to cut overheads and avoid dealing with complex local regulations. That appears to have back-fired. One thing looks certain, however, banks involved in commodity financing in China are set to charge higher fees: “The cost is certainly going to go up, whether it’s going to be from local banks or international.”
Reuters reports
Shaken by a fraud investigation into metal financing in the world’s seventh-busiest port, banks and trading houses have been made painfully aware of the risks they face storing commodities in China’s sprawling warehouse sector.
The probe at Qingdao port centers around a private metals trading firm suspected of duplicating warehouse certificates in order to use a metal cargo multiple times to raise financing.
China’s roaring commodity financing business, which has helped drive up stockpiles of commodities at ports to record levels, stored in warehouses not always regulated to the same extent as elsewhere.
And the concerns are spreading…
“The banks still haven’t looked under the hood,” said an executive at a bank involved in commodity financing in China, referring to China’s warehousing sector.
And the legal troubles are growing…
“Warehouse receipts are not title documents, they are documents of entitlement. But they are being used as title documents for sales and purchase and transfer of ownership,” said a person at a warehouse company with operations in Qingdao.
Everywhere else outside of China, a warehouse receipt is cut for one party.”
A source at a Western bank with direct knowledge of Qingdao said warehouse firms should bear the brunt of responsibility, while a senior official at a warehouse firm at the port said responsibility “remains very much up in the air.”
A lawyer, who has previously been involved in litigation over fraudulent warehouse receipts, said banks primary recourse would be against whoever had forged receipts.
“But if the fraudster is gone, the bank may decide that it wants to go against the warehouse,” said the lawyer, who did not want to be named because of the sensitivity of the issue.
