In physical commodity trading, your counterparty is everything. A bad counterparty can destroy your business.
Counterparty Risk Types
| Risk | Description | Consequence |
|---|
| Credit | Failure to pay | Financial loss |
| Performance | Failure to deliver | Supply disruption |
| Fraud | Intentional deception | Total loss |
| Compliance | Sanctions/regulatory | Legal liability |
| Reputational | Association damage | Business impact |
Real-World Losses
| Case | Loss | Cause |
|---|
| Hin Leong (2020) | $3.5B | Fraud, hidden losses |
| Agritrade (2020) | $1.5B | Fake cargo |
| Noble Group (2018) | $4B+ | Accounting fraud |
Know Your Customer (KYC)
Required Documents
| Document | Purpose |
|---|
| Certificate of Incorporation | Legal existence |
| Memorandum & Articles | Structure |
| Shareholder Register | Owners |
| Director ID/Passport | Verify individuals |
| Proof of Address | Location |
| Bank Reference | Banking status |
| Trade References | Business verification |
| Financial Statements | Health |
| Tax ID Certificate | Tax status |
Beneficial Ownership
Identify:
- Shareholders with >25% ownership
- Directors and senior management
- Ultimate beneficial owners (UBOs)
- Persons with significant control
Anti-Money Laundering (AML)
Red Flags
| Flag | Risk Level |
|---|
| Shell companies | High |
| Complex structures | Medium-High |
| Cash payments | High |
| Round-trip trades | High |
| Unusual pricing | Medium |
| Rush transactions | Medium |
| Opaque ownership | High |
Suspicious Patterns
| Pattern | Description |
|---|
| Carousel | Cargo circles A→B→C→A |
| Wash Trade | Sell then buy back |
| Price Manipulation | Artificial pricing |
| Layering | Multiple intermediaries |
Credit Assessment
Analysis Framework
| Factor | Weight |
|---|
| Financial Strength | 40% |
| Payment History | 25% |
| Business Quality | 20% |
| Security | 15% |
Key Ratios
| Ratio | Target |
|---|
| Current Ratio | >1.2 |
| Quick Ratio | >0.8 |
| Debt/Equity | <2.0 |
| Interest Coverage | >2.5 |
| Days Payable | <60 |
| Days Receivable | <45 |
Credit Rating Scale
| Rating | Limit | Terms |
|---|
| A | 3× monthly | Open 60 days |
| B | 2× monthly | Open 30 days |
| C | 1× monthly | CAD or L/C |
| D | Single cargo | L/C only |
| E | None | Decline |
Red Flags
| Flag | Risk | Action |
|---|
| Won’t provide financials | High | Decline |
| Hidden offshore ownership | High | Enhanced DD |
| Sanctions match | Critical | Stop |
| No trade references | High | Prepayment only |
| Adverse media | Variable | Investigate |
Transaction Flags
| Flag | Action |
|---|
| ”Must close today” | Slow down |
| Below-market price | Verify cargo |
| Changed specs | Re-verify |
| Third-party payment | Investigate |
| Changed destination | Verify buyer |
Sanctions Screening
Major Programs
| Authority | Lists |
|---|
| OFAC (US) | SDN, SSI, Sectoral |
| EU | Consolidated |
| UN | Security Council |
| UK OFSI | UK Sanctions |
Who to Screen
| Entity | Frequency |
|---|
| Counterparty | Per transaction |
| Beneficial Owners | Onboarding + annual |
| Directors | Onboarding + annual |
| Vessels | Per shipment |
| Banks | Onboarding |
Screening Providers
| Provider | Coverage |
|---|
| World-Check | Comprehensive |
| Dow Jones | Extensive |
| LexisNexis | Good |
| ComplyAdvantage | AI-enhanced |
| OFAC Tool | US only (free) |
Ongoing Monitoring
Frequency
| Activity | Frequency |
|---|
| Sanctions screening | Per transaction |
| Payment behavior | Monthly |
| News/adverse media | Quarterly |
| Full KYC refresh | Annually |
| Material events | Ad hoc |
Warning Signs
| Indicator | Concern |
|---|
| Payment slowdown | Cash flow |
| Management changes | Instability |
| Negative news | Various |
| Credit downgrade | Deterioration |
| Market rumors | Reputation |
Documentation
Retention Periods
| Record | Period |
|---|
| KYC Package | 7+ years |
| Credit Assessment | 7+ years |
| Sanctions Screens | 7+ years |
| Trade References | 7+ years |
| Contracts | 7+ years |
Audit Trail
Record for every review:
- Who — Person conducting
- What — Documents reviewed
- When — Date and time
- Decision — Approval/rejection
- Approval — Authorized signature
Case Studies
Hin Leong (2020)
Loss: $3.5 billion
Red Flags Missed:
- Opaque ownership
- Founder had total control
- Inadequate audit oversight
Lesson: Verify cargo independently, don’t rely on relationship alone.
Agritrade (2020)
Loss: $1.5 billion+
Red Flags Missed:
- Warehouse receipts not verified
- Single documentation source
- Rapid growth without infrastructure
Lesson: Always verify collateral independently.
Key Takeaways
- KYC is mandatory — Know who you’re trading with
- Verify everything — Trust but verify
- Credit limits matter — Never exceed exposure
- Screen continuously — Sanctions change
- Document everything — If not written, didn’t happen
- Red flags are serious — Don’t ignore warnings
References