What is a Title Document
In commodity trading, a bank requires assurance that the commodity is actually under ownership of the company they are financing, before they will transfer funds (or at least any bank worth dealing with would). The main method of proof for banks is known as a title document. The party that holds/is named as the rightful owner of the goods in the title document can then use it as proof of ownership and is able to pay a supplier for those goods.
Title documents can take a few forms but there are two main documents in our industry: holding certificates and bills of lading.
A holding certificate or 'HC' can be issued by a supplier, but it is more secure when it is issued by a 3rd party such as a warehouse. It will list the exact details of the parcel of goods, the date at which title was established, who the rightful owner of the material is, and where it is being stored. Importantly, once it is issued it is a legally binding document that means only those listed in the HC have the rights to further move the material from its current location. If the HC is issued directly to a financing bank, even the trader that has bought the commodity will not be able to issue instructions on that product without the bank's explicit approval.
A bill of lading or 'BOL' is similar to an HC in that it will list the exact details of a parcel of goods, but unlike an HC where the material is static, a BOL is a transport document. It will detail the method of transport, the place of loading, and the place of discharge. In commodities, vessel BOLs are considered title documents however truck BOLs are not. Rail and barge BOLs it can depend on the level of confidence your financing bank has in that logistics provider whether they will accept that as a title document. Importantly, the company that the BOL is made 'To Order' is the holder of that document. Once a BOL has been issued to the order of a company, it is that company alone that can issue any further instructions, or collect material once it has arrived at destination. Shipping companies will only release material to those listed on the BOL so it is deemed an extremely secure document.
So given these documents exist to create security for commodity companies and banks, what can go wrong? Well, the most common way for fraudster's to act is to create fake title documents. This could be a supplier that issues more than one HC to multiple parties hoping to get paid multiple times for the same product. Or it could be a trader that uses the same BOL to get financing from multiple banks on the same shipment.
The commodities industry can be quite archaic in some ways - the fact that we still use a physical piece of paper to take title of tens and sometimes hundreds of millions of dollars of product is a bit strange given the technologies that exist today. But despite the need for modernization, until it actually happens companies will continue to face these risks. This is why the need for iron clad compliance departments, knowledgeable employees that are confident in raising red flags when they see them, and robust 'know your counterparty (KYC)' procedures are paramount in commodity trading. There are many different ways to detect fraudulent actors but following best practices and giving your staff the keys they need to be vigilent are the best ways to prevent these occurrences. Far too often companies are reactionary when a loss occurs, rather than being proactive and putting things in place to prevent losses in the first place.
