Metals industry grapples with fraud wave

As Aurubis boss Roland Harings visited the construction site of its new US plant last month, the German metals recycler was unravelling a colossal fraud back home in Hamburg.

Europe’s biggest copper producer had discovered it was missing vast amounts of the metal from its warehouses — Aurubis this week said its stocks are €185mn short — and blamed a suspected conspiracy between suppliers and its own staff.

The case is the latest in a sector plagued by scandal. But even life-long industry insiders were shocked at the size of the alleged scam.

“I’ve been in the business over 55 years and I can’t remember seeing something on this scale,” said Michael Lion, a Hong Kong-based metals recycling veteran. “I can’t recall an instance of collusion of this type.”

The problems at Aurubis follow claims of an even bigger case targeting Trafigura, one of the world’s largest commodity traders, which reported in February that it had been the victim of an alleged $590mn fraud involving cargoes of purported nickel that actually contained much cheaper materials.

In August last year global trading groups including Glencore cut ties with a Chinese metals merchant after $500mn of copper went missing at a storage site. In other recent scandals, supposed bags of nickel at a London Metal Exchange warehouse were found to be full of rocks, while US trading company Gerald Group bought cargos of tin concentrate in Brazil that turned out to be sand.

Aurubis revealed a separate case just three months ago, saying the German public prosecutor’s office had obtained arrest warrants for members of a crime ring in relation to thefts of precious metals worth more than €20mn.

While the Trafigura case is working its way through London courts and the blow to Aurubis will be softened by insurance payouts as well as asset seizures related to the precious metals theft, the scale and frequency of recent scandals have shone a spotlight on the sector’s vulnerability to fraud.

Aurubis believes employees in its sampling department must have played a key role in the alleged crime.

Along with paperwork from suppliers falsely stating the quantity of metals contained in scrap shipments, the company reckons the samples were tampered with, leading it to pay for inflated invoices and record receipt of far greater amounts of metal than was actually the case.

Attempts to find which of its 400 suppliers committed the fraud are complicated by the fact that tracing the source of scrap is impossible once it has been processed and melted down into fresh metal.

Most of the scrap it processes, including used electronics that contain copper, gold and palladium, is mixed with concentrates — the raw product from mining operations — as it is turned into new metal. That means “the footprint of the individual supplier can no longer be identified”, Harings told the Frankfurter Allgemeine Zeitung.

Aurubis has not yet broken off any relationships with suppliers, although a person close to the company said it had temporarily stopped trading with some where it had identified “question marks”.

The sector’s processes make it particularly vulnerable to crime.

Ian Milne, an executive at MonetaGo, a fintech business that tackles financing fraud, said the industry was failing on two fronts: independent checks that commodities received match what has been paid for, and ensuring documents issued are not fake.

“It comes down to how the whole community has relaxed some of the controls they had,” he added.

Observers say that with credit increasingly given on a corporate basis rather than on individual transactions, banks have lower visibility of traders’ activities, and that commodity traders’ compliance failings include insufficient due diligence on counterparties, too few independent inspections of shipments and a lack of robust internal procedures to detect rogue employees.

Some executives argue that disruption to flows of global commodities and capital resulting from the war in Ukraine has created new possibilities for fraud.

“If western banks no longer finance Russian oil and gas business, then more lending is channelled into other industries and larger companies,” said Baptiste Audren, chief revenue officer at Komgo, a trade finance platform backed by large banks. “When there’s more banks fighting for business, then there’s more potential for fraud.”

A further problem for commodity trading is that the business tends to rely on paper-based systems that are vulnerable to manipulation.

“We still do trade finance much as we did 30 years ago,” Audren said.

Several market participants said the industry was falling short on even basic controls and processes.

Simon Collins, chief executive of blockchain trade technology provider TradeCloud and a former head of metals at Trafigura, noted scrap quality was generally determined by visual inspection.

He said the “archaic but surprisingly accurate method” was “highly reliant on individuals rather than technology”, and therefore “close internal controls and processes are essential”.

Aurubis said it was “comprehensively improving the level of protection against professional crime” through measures such as access restrictions, increased checks and more surveillance.

Aurubis and Trafigura have each been making big profits so have been able to absorb the losses. “They can lick their wounds,” said Jean-François Lambert, a commodities banker turned consultant.

Some in the industry are confident these issues will sort themselves out as banks enhance scrutiny and controls and checks are tightened along the metal sector’s supply chain.

“It’s a self-curing moment we’re having here,” said Christian Lins, partner at management consultancy Oliver Wyman.

But others are not convinced.

Harings has said Aurubis “will do everything in our power to ensure the recycling industry as a whole is not undermined”. But he has warned of havoc across the sector if more companies fall victim to “the new form of crime”.