Trading companies who elect to act as financiers to buy and sell cargoes in place of banks are being warned that they must exercise the same degree of care with transactions as are required of financial institutions.

Banks who fail to operate stringent due diligence and 'know your customer' procedures have often been caught up in the collusion between buyers and sellers to defraud, as most vividly demonstrated in the Solo Industries case last year.

The latest warning, issued by the IMB in London, follows an incident where a major trading house opted to put itself between buyers and sellers to facilitate the movement of a number of consignments of sugar cane and vegetable oils in the Far East. Believing that the commodities being offered by Golden Nice International Ltd were genuine, it underwrote 10 shipments totaling several thousand tones, paying the sellers in advance on receipt of the bills of lading and providing the buyers with suitable credit terms.

When no payment was forthcoming from the buyers at the end of the credit period the trading house quickly discovered that the cargo never existed and the shipments never in fact took place. Investigators revealed the bills of lading to be false and subsequently found that Golden Nice was no more than a paper company with an address in the New Territories. It has since disappeared without trace. As the documents were not properly checked before payment, the trader has effectively nothing it can claim against and will have to stand the losses alone.

"Trading companies have various reasons for wanting to shoulder the risk on such occasions, but they must realise that they have no comebacks if they fail to conduct sufficient checks into the operations of proposed partners," says Capt Jayant Abhyankar from ICC Commercial Crime Services in London, which numbers the International Maritime Bureau under its range of investigation services.

"If a trader wants to act as a financier for strategic reasons, they must realise that their role in the transaction becomes much the same as that of any trade finance bank. This includes checking the authenticity of documents, a service the IMB regularly performs for its members, and making other checks into the physical existence of the companies and cargoes they are proposing to do business with.

"This case illustrates the consequences of failing to do so, but it is by no means an isolated incident and in others the losses have been so big as to bankrupt companies. It also underlines the increasing reliance traders and banks place on the worth of documents alone, and is further proof that the industry must reverse this trend and get back to conducting business on the basis of sound and well substantiated research."