Trade Finance / Commodity FinanceExpert Evidence International

Commodities & Trade Finance Expert Witness

The provision of trade finance by local, regional and international banks and alternative credit funds is the lifeblood of international trade: without it, the goods and services which we consumers depend on in our daily lives simply wouldn’t be available in the volumes required. Where once investors were invited to stump up cash for a seafarer to visit far off lands and return with a bounty of merchandise, trade finance has evolved to become today a multi-channel offering with global reach, uniting a mine worker in Chile with an internet marketplace billionaire in China, and enabling goods to be exchanged and paid for long before they actually arrive at their destination. From trading physical merchandise to trading the paper that relates to the physical merchandise, we now face an era where parties will be trading digital entries in a distributed ledger to replace trading the paper that still nonetheless relates to the physical goods. Welcome to this brave new world!

Key amongst traded goods are the Commodities (raw or semi-processed materials) that we take for granted every day: the fuel that drives our cars; the coffee that wakes us up in the morning and the sugar that sweetens the taste; the cocoa that provides us with chocolate and the various nuts that complement our confectionary; the steel and aluminium used in construction; the wheat and other grains from which our bread is baked; the cotton which clothes us and the wool which adds the warmth. Then there’s the copper in our electricals, the lithium in our batteries, the lead in our pencils… commodities are everywhere and they form a significant and specialised sub-set of the trade finance market.

It’s inevitable then that in a trade finance market estimated to be worth around US$70trillion handling hundreds of millions of transactions annually that not all will run to plan. Fraud will happen. Disputes will arise.

Our experts are highly experienced former practitioners, skilled at understanding the complexities of trade finance and of commodity finance. We can assist with a forensic review of the arrangements which gave rise to the fraud or dispute and opine on whether those arrangements were fit for purpose or whether the application of rules based guidelines (e.g. UCP 600 for Documentary Letters of Credit) were correctly applied. We can advise as to whether the proper due diligence was carried out before engagement and whether any security given was effectively taken. In the specialist world of commodity finance, we can additionally look at whether market practice was respected and whether any specialist trade instruments were correctly drawn up and understood.

Documentary Letters of Credit (‘LCs’) are a mainstay instrument used in both trade finance and commodity finance. Disputes arise often over the handling of these instruments once they’ve been issued and a presentation made – resolution typically requires understanding the rules based system for handling LCs (UCP 600) and how it should be applied. This may be the case too for Standby Letters of Credit (‘SBLCs’) that are stated as being issued subject to UCP 600 (otherwise the URDG 758 is likely to apply).
Original Bills of Lading (‘OBLs’) provide the tangible evidence of shipment and thanks to their negotiability as a title document are frequently taken by lenders as security. But as recent mis-delivery cases have shown, there are limitations to relying on OBLs if you are a lender. Understanding these limitations helps lenders to manage expectations.
Switch Bills of Lading (‘SBLs’) arise where a supplier wishes to split a consignment or to hide the details of the original supplier from the buyer. They can only be issued by submitting the OBLs in exchange to the shipper who then issues the new set. Understanding the likelihood and implications of SBLs is pivotal for a lender who is reliant on Bills of Lading for security.
Trust Receipt Loans have become a regular feature of a Commodity Finance offering but they seem not so well understood by some providers. Firstly, there should be a pledge in force to grant the rights to which the trust receipt refers and, secondly, if the goods covered by the trust receipt have already been discharged, commingled or disposed of, then any claim is no longer to the goods but to the trust receipt issuer to account to the lender for their proceeds.
Oil trader Letters of Indemnity (‘LOIs’) have become mainstream across the spectrum of oil traders where once they were reserved for the majors. But this expansion comes with consequences: lenders have in some cases failed to understand what the LOI is, what it does and what the implications of its usage are. Stated in most oil LCs as being offered as an alternative to the OBLs when presenting documents for payment, issuing banks have mistakenly assumed the LOI confers similar rights to having the OBLs or that the issuing bank is a party to the LOI or its discharge mechanism when it actually isn’t.
Loan arrangements for both trade finance and commodity finance and any of their derivatives can be simple or they can be complex. But in any event they should be fit for purpose and appropriate for the borrower. If you feel you’ve been mis-sold or ill-advised when taking out a trade or commodity finance loan (or structured trade, structured commodity, export finance or receivables finance loan), we can help to put the arrangements in perspective.