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The Qingdao Scam: The Time for Paperless Trade is Now

The Qingdao Scam: Chen Jihong and other Dezheng Resources staff members are sentenced by Qingdao Intermediate People's Court in December 2018 for fraud. Photo: Qingdao Intermediate People's Court

PortandTerminal.com, May 8, 2019

In the high-tech world of financial markets, the continued use of paper receipts in trade finance looks arcane. Industry leaders are calling for an immediate move to digital documentation

Qingdao, China – In 2018 a court in East China a man named Chen Jihong was sentenced to 23 years in prison for fraud. The verdict brought an end to a four-year probe into the firm that he founded, which was accused of defrauding banks out of over two billion dollars. Mr Jihong pulled it off by illegally duplicating warehouse certificates and then using the fake copies as collateral to trick banks into giving his company massive loans.

The Qingdao Scam shook international commodity markets and deeply damaged confidence in China’s warehouses and two of its ports; The Port of Qingdao and the Port of Penglai.

Since the Qingdao Scam, the risk of fraud in trade finance may have even gotten worse according to industry insiders.

In this article, we’ll look briefly at how Chen Jihong’s company pulled off the Qingdao Scam and how blockchain may be the solution to prevent it from happening again.

The Qingdao Scam

The proofs of ownership for precious metals stored in Chinese port warehouses were illegally copied and then given to unsuspecting banks as collateral on loans and other payments

Chen Jihong’s company made forged copies of warehouse receipts showing that they owned large amounts of aluminium and copper ingots that were stored in warehouses at two Chinese ports. With the forged paper copies as collateral, they were able to approach banks asking for money, using the fake warehouse receipts as proof and collateral to back up the loans.

The banks believed that the forged copy of the warehouse receipt they were given was an original, not knowing that the same metals had been pledged as collateral many times to other banks.

How much did they get away with?

In the end, Chen Jihong’s company stole $US 1.81 billion in funds using either fake warehouse receipts or fake certificates for aluminium ingots, alumina and refined copper held at the ports of Qingdao and Penglai.

They also stole another $530 million in loans, letters of credit and bank acceptance bills from 13 banks by repeatedly using the same cargoes as pledged collateral.

Paperless trade’s time is now

In an article published yesterday by Bloomberg, a senior executive at Asia’s second-biggest lender emphasized that the $9 trillion business of financing global trade needs to go digital ASAP. The article highlighted the Qingdao Scam as an example of what is at stake.

Forgers have become so adept at faking documents used by banks that going paperless has become a necessity for the industry

Ng Chuey Peng, Managing Director and Head of Global Commodities Finance, Oversea-Chinese Banking Corp Ltd.

Ms Peng, who has over 20 years experience in commodities, said in an interview in Singapore. “Going paperless has to happen.”

Industry blockchain experts agree. Gadi Ruschin, CEO/Co-founder of WAVE BL, an Israeli company that is working to fix the trade paperwork problem, agrees with Ms Peng’s concern.

“The actual situation is even worse than imagined. Anyone can get an empty draft of Bills of Lading, warehouse receipts and other documents on the black market for a low price and then print it by himself” Mr Ruschin commented by email to PortandTerminal.com.

“The only way to fight this problem is by digitizing the industry, electronic signatures are much stronger and safer than watermarks and other types of security measures for paper. Blockchain is solving a long-lasting technological problem of creating unique files that cannot be multiplied or copied” Mr Ruschin concluded.

Summary

As much as 80 percent of global flows of merchandise — worth about $9 trillion annually — is financed by some form of credit, guarantee or insurance. Paperwork is still largely what still keeps it moving.

In the high-tech world of financial markets, the continued use of paper receipts in trade finance looks a bit ridiculous given the better options out there. While some processes are already being digitalized and banks and commodity traders are experimenting with blockchain technology, paper documentation remains widespread and the risk of fraud elevated.

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