A primer on new techniques used by the sophisticated financial fraudster, with special reference to commodity market instruments

Financial instruments such as documentary credit, structured finance and derivatives have proved their value in commodity trade. However, the sophistication of these instruments can also make them a tool for financial fraud. This report discusses how, using commodity market instruments such as letters of credit, warehouse receipts, Special Purpose Vehicles, futures and swaps, the sophisticated financial fraudster may try to trick bankers, commercial counterparties, Government regulatory or tax offices, and shareholders. Various techniques that have been used in the past are described, and illustrated with case studies (e.g. the salad oil swindle, Solo Industries and Enron). Ways in which Governments, banks and commodity firms can reduce the potential for such frauds are summarized in the report’s conclusion.