WEBVTT - Counterfeiting Scandals Keep Slamming the Commodities Market 0:00:10.039 --> 0:00:13.240 Hello, and welcome to another episode of the Odd Blots podcast. 0:00:13.320 --> 0:00:15.560 I'm Tracy Alloway and I'm Joe Wisenthal. 0:00:15.880 --> 0:00:19.079 Joe, have you ever heard of something called the tablet 0:00:19.280 --> 0:00:22.360 of a Naser? I'm going to mispronounce that because my 0:00:22.440 --> 0:00:25.959 ancient Mesopotamian isn't up to scratch, but the tablet of 0:00:26.000 --> 0:00:26.599 a Nasser? 0:00:27.200 --> 0:00:27.360 No. 0:00:27.720 --> 0:00:28.000 Never. 0:00:28.440 --> 0:00:30.840 This became like a big internet meme. There were lots 0:00:30.840 --> 0:00:34.240 of jokes about it, but it was basically this tablet, 0:00:34.320 --> 0:00:37.240 this old Mesopotamian tablet I think it was like four 0:00:37.280 --> 0:00:41.159 thousand years old with cuneiform written on it. People sometimes 0:00:41.200 --> 0:00:45.040 talk about it as the world's oldest business complaint. 0:00:45.360 --> 0:00:48.199 You know, not only have I never heard of this tablet, 0:00:48.320 --> 0:00:51.080 I'm actually struggling to like figure out what the next 0:00:51.080 --> 0:00:53.000 thing you're going to say is that connects it to 0:00:53.080 --> 0:00:54.320 this episode that's coming up. 0:00:54.440 --> 0:00:56.280 This is the most random intro to. 0:00:56.320 --> 0:00:57.360 What I like. 0:00:57.520 --> 0:00:58.800 I like this one. I like where you're going. 0:00:58.840 --> 0:01:01.320 I'm trying, I'm trying to bring historic context. But okay, 0:01:01.400 --> 0:01:04.520 So written on this tablet was a business complaint against 0:01:04.720 --> 0:01:08.240 this guy, a Nasser, who was a copper trader in 0:01:08.319 --> 0:01:12.360 ancient Mesopotamia and his customer had written a complaint basically saying, 0:01:12.760 --> 0:01:16.560 you promised me a certain amount and type of copper, 0:01:16.920 --> 0:01:20.040 you gave me lesser quality copper, and I am upset 0:01:20.080 --> 0:01:21.280 and you have to do something about that. 0:01:21.360 --> 0:01:23.720 So I get this is okay. Now I get how 0:01:23.720 --> 0:01:25.360 this makes sense. And I guess this is like a 0:01:25.360 --> 0:01:29.160 phenomenon throughout history that if you're buying actual physical stuff, 0:01:29.680 --> 0:01:32.000 there is a question of you enter into a contract, 0:01:32.480 --> 0:01:34.560 did you actually get the stuff? Is the stuff that 0:01:34.640 --> 0:01:36.280 the stuff that the person said they were going to 0:01:36.319 --> 0:01:38.520 give you? Is it actually what it is? Is it real? 0:01:38.720 --> 0:01:39.440 That's exactly it? 0:01:39.480 --> 0:01:42.800 And how do you check beforehand to see whether or 0:01:42.840 --> 0:01:44.440 not the stuff that you're going to be getting is 0:01:44.440 --> 0:01:47.080 the stuff that was promised to you. These are ancient, 0:01:47.319 --> 0:01:50.120 ancient problems. And the weird thing is it seems like 0:01:50.160 --> 0:01:53.720 the commodities world hasn't actually progressed that much from cuneiform 0:01:53.800 --> 0:01:56.600 tablets written on stone to what we use today, which 0:01:56.680 --> 0:01:57.680 is mostly paperwork. 0:01:57.840 --> 0:02:00.320 I remember an episode we did with Dan Davies several 0:02:00.440 --> 0:02:03.560 years ago, and we talked about the salad oil scandal. 0:02:03.680 --> 0:02:05.480 The fame is one where the guy like filled up 0:02:05.480 --> 0:02:07.680 those tanks filled with water and then put a thin 0:02:07.760 --> 0:02:10.600 layer of oil, and they came and they checked and 0:02:10.639 --> 0:02:12.200 they're like, oh, these tanks are oil, and he was 0:02:12.200 --> 0:02:15.720 able to borrow against them. Warren Buffett made a bunch 0:02:15.800 --> 0:02:18.359 in the crash of all the entities that were associated 0:02:18.360 --> 0:02:20.799 with it. But this stuff always fascinates me because I 0:02:20.840 --> 0:02:23.920 think these are the stories where there's something different between 0:02:23.960 --> 0:02:26.800 just the lines we see on the chart, these abstracted 0:02:26.919 --> 0:02:30.200 version of commodities versus like the actual handling of the 0:02:30.240 --> 0:02:30.679 real thing. 0:02:30.880 --> 0:02:33.960 Right, there's the financialized commodity, the line that you see 0:02:34.000 --> 0:02:36.880 on an electronic screen, and then the actual commodity. The 0:02:36.919 --> 0:02:39.320 two are supposed to match or relate, but they're not 0:02:39.400 --> 0:02:41.560 one way or another. But they're definitely not the same thing. 0:02:41.840 --> 0:02:44.320 And recently, one of the reasons we wanted to do 0:02:44.360 --> 0:02:48.200 this episode is there have been a series of scandals 0:02:48.240 --> 0:02:52.000 in commodities land that have to do with collateral management. 0:02:52.120 --> 0:02:54.840 So the big one that springs to mind is Elemy 0:02:55.040 --> 0:02:58.000 discovering that it had a bunch of rocks instead of 0:02:58.080 --> 0:03:01.200 nickel backing some of its content, and this kind of 0:03:01.639 --> 0:03:04.320 was a major talking point in commodities world. 0:03:04.440 --> 0:03:07.280 Yeah, we recently did that interview with us CME chief 0:03:07.360 --> 0:03:09.400 Terry Duffy, and he seemed to acknowledge that there's like 0:03:09.440 --> 0:03:13.400 something about Nichols specifically that makes it susceptible to this 0:03:13.440 --> 0:03:16.720 sort of deception. But we didn't really get into the details. 0:03:16.919 --> 0:03:19.600 But this is just so fascinating that involves like heists 0:03:19.600 --> 0:03:22.160 and scams and deceptions on the fraud and it's just 0:03:22.400 --> 0:03:24.480 as you say, it's throughout history. So I'd love to 0:03:24.560 --> 0:03:25.960 learn more about how this business works. 0:03:26.040 --> 0:03:29.360 Yeah, why does the commodities world seem so sort of 0:03:29.600 --> 0:03:32.320 ripe for these types of scandals. I'm very pleased to 0:03:32.320 --> 0:03:34.880 say that we have truly the perfect guests. We are 0:03:34.920 --> 0:03:37.640 going to be speaking with multi time, a lots guests 0:03:37.680 --> 0:03:41.520 at the moment. Mercury Group CEO Anton Posner and Mercury 0:03:41.600 --> 0:03:44.880 Group Coooh, Margo Brock, thank you so much for coming 0:03:44.920 --> 0:03:46.120 back on all thoughts. 0:03:46.080 --> 0:03:47.000 Thanks for having us. 0:03:47.520 --> 0:03:48.840 Thank you great to be here. 0:03:49.200 --> 0:03:51.360 So the last time we talked, I think we were 0:03:51.400 --> 0:03:54.360 talking about the barge business and what was going on 0:03:54.520 --> 0:03:58.360 in the Mississippi River. But walk us through your approach 0:03:58.440 --> 0:04:01.080 to collateral management because this is a space that you 0:04:01.160 --> 0:04:04.240 play in. I think you do some business for major 0:04:04.280 --> 0:04:07.200 players such as the big banks, but what exactly do 0:04:07.240 --> 0:04:09.280 you guys do in the field of collateral management. 0:04:09.960 --> 0:04:13.240 Sure, yeah, I'll take the lead on that one trace. Again, First, 0:04:13.240 --> 0:04:15.960 I'd just like to say, as that canneiform reference you made, 0:04:15.960 --> 0:04:18.479 they're still fighting it out in court and Athens. Their 0:04:18.600 --> 0:04:21.560 errors are still has not been resolved, so it's still 0:04:21.600 --> 0:04:22.000 going on. 0:04:22.520 --> 0:04:23.560 We can litigate it right now. 0:04:23.600 --> 0:04:26.479 Yeah, exactly, it's continuing. So yeah, that's why I have 0:04:26.520 --> 0:04:32.320 conneiform keyboard on my iPhone. So what we do We, 0:04:32.400 --> 0:04:35.719 as you mentioned, we work for several major banks that 0:04:35.720 --> 0:04:39.360 are involved in physical commodity finance and trade. In addition 0:04:39.440 --> 0:04:43.719 to trading companies and producers and commodities, a certainly a 0:04:43.760 --> 0:04:47.120 strong focus on metals and steel and raw materials that 0:04:47.160 --> 0:04:50.760 go along with it. On the collateral management front, we 0:04:51.560 --> 0:04:57.120 perform audits and inspections at facilities for banks and financiers 0:04:57.160 --> 0:05:03.159 that are financing physical commodities to do some initial vetting work, 0:05:03.760 --> 0:05:08.960 finding out the procedures, diving into the everything from the 0:05:09.000 --> 0:05:11.680 ownership and the procedures and the personnel that are involved 0:05:11.720 --> 0:05:15.680 in issuance of documentation to who's going to be the 0:05:15.720 --> 0:05:18.960 primary point of communication, how are they keeping track of 0:05:19.000 --> 0:05:22.560 who owns what? And so forth. That is the pre 0:05:22.839 --> 0:05:26.720 work that's done preliminary ahead of a finance deal. And 0:05:26.760 --> 0:05:29.440 then once there are physical commodities in place, we're doing 0:05:29.920 --> 0:05:33.480 jobs like having auditors go out and count physical metal 0:05:33.480 --> 0:05:38.880 accounting bundles of aluminum, ingots and warehouse for banks to 0:05:38.920 --> 0:05:41.400 verify what's there. And even to the point where we have, 0:05:41.960 --> 0:05:46.880 through our subcontract or partners, flying drones to measure the 0:05:46.920 --> 0:05:50.640 heights an angle of repose of stockpiles of coal, for example, 0:05:50.720 --> 0:05:54.200 to verify approximately how many tons are in stockpile for 0:05:54.600 --> 0:05:58.440 banks that are financing drybulk commodities like that. 0:05:59.120 --> 0:06:01.360 I have a question before we get into like the 0:06:01.440 --> 0:06:04.479 various frauds and deceptions, why do we take like a 0:06:04.600 --> 0:06:08.280 very sort of simple, sort of vanilla instance of how 0:06:08.400 --> 0:06:11.720 trade would work. Like suppose Tracy has a bunch of 0:06:11.760 --> 0:06:15.159 oil and she wants to pledge it borrow some money 0:06:15.160 --> 0:06:17.440 from me, and I would need to make sure that 0:06:17.480 --> 0:06:21.120 she actually has the oil and she actually. 0:06:22.560 --> 0:06:22.760 Oil. 0:06:22.880 --> 0:06:23.920 Is the old story, right. 0:06:24.600 --> 0:06:27.359 Yeah, Tracy is coal. She doesn't want she wants to 0:06:27.400 --> 0:06:30.760 borrow against it, get some liquidity for it. I say, yeah, 0:06:30.839 --> 0:06:33.679 I want to. I'm happy to lend against your coal. Tracy, 0:06:33.720 --> 0:06:36.039 but I need some proof that it's there. She goes 0:06:36.080 --> 0:06:38.360 to you, what's like the basic steps of the process. 0:06:38.400 --> 0:06:39.320 What do you produce for me? 0:06:39.520 --> 0:06:43.080 Sure the you know, initially, and we work with our clients, 0:06:43.080 --> 0:06:46.800 with our bank and trading clients to determine what level 0:06:47.400 --> 0:06:48.919 they want to go down, how far they want to 0:06:48.920 --> 0:06:51.520 go down the rabbit hole in terms of analyzing, okay, 0:06:51.640 --> 0:06:53.880 I mean you could could be the point of sending 0:06:53.920 --> 0:06:57.520 a survey or out taking samples, sending it to a 0:06:57.560 --> 0:07:02.320 pre agreed laboratory that expertise in that particular commodity to 0:07:02.400 --> 0:07:07.279 verify the quality that's there. Of course, the quantity inspection 0:07:07.480 --> 0:07:12.640 is important, right, verifying that the quantity matches what Tracy's 0:07:12.720 --> 0:07:16.280 declaring to the bank or the financier. So verifying the 0:07:16.360 --> 0:07:21.800 quality the volume, and then also verifying and working to 0:07:21.920 --> 0:07:24.760 ensure that the facility that it's being stored at Tracy's 0:07:24.800 --> 0:07:27.920 house in Connecticut may may not past monster in terms 0:07:27.960 --> 0:07:29.840 of a secure collateral. 0:07:30.920 --> 0:07:33.040 Squirrels that have made exactly within. 0:07:32.880 --> 0:07:37.800 The exactly the biomass that's mixed in exactly right, So 0:07:37.800 --> 0:07:41.080 so ensuring that right. And we have clients that sometimes 0:07:41.120 --> 0:07:44.440 don't want us to go that deep. Sometimes it's just volume. 0:07:44.480 --> 0:07:47.320 But we're not taking samples for qualities and so forth. 0:07:47.400 --> 0:07:52.280 So we're our initial approach with a one of our 0:07:52.360 --> 0:07:55.400 clients that hire us for collateral management services is determining 0:07:55.800 --> 0:07:58.200 how far how far down they want to go. 0:07:58.560 --> 0:08:00.679 I was going to ask how much of this depends 0:08:00.720 --> 0:08:03.000 on the sample size, because it seems like an easy 0:08:03.040 --> 0:08:05.480 thing for me to do if I was worried about 0:08:05.520 --> 0:08:07.160 the quality of my coal is I don't know, I 0:08:07.160 --> 0:08:10.160 would get a really nice piece of anthracite from somewhere 0:08:10.200 --> 0:08:12.840 else and say here, here's a sample of my coal. 0:08:13.160 --> 0:08:13.440 Sure. 0:08:13.920 --> 0:08:16.840 Yeah, Well, most importantly, if you're going to draw samples, 0:08:16.960 --> 0:08:19.880 it's going to be randomized, and you're going to have 0:08:19.920 --> 0:08:22.560 a certain percentage of the cargo that has to be sampled. 0:08:22.640 --> 0:08:25.760 If it's quite a large stockpile of coal, you know 0:08:25.760 --> 0:08:28.440 you're going to want a lot of representative samples from 0:08:28.640 --> 0:08:32.800 different sides, different angles, top bottoms, and quite so people 0:08:32.840 --> 0:08:36.520 can't pick the most attractive piece of anthracites run out there. 0:08:36.720 --> 0:08:38.800 So it really does depend on the parcel size that 0:08:38.920 --> 0:08:40.080 you're talking about. 0:08:40.480 --> 0:08:43.800 I mean, you've just laid out how it's supposed to 0:08:43.920 --> 0:08:47.280 go in the theory, and yet what we've seen recently 0:08:47.480 --> 0:08:52.320 is numerous examples of people fooling the auditors, people fooling 0:08:52.360 --> 0:08:56.480 the inspectors, sometimes in kind of amusing ways with painted 0:08:56.559 --> 0:08:59.280 rocks and things like that. So what's going on there? 0:09:00.080 --> 0:09:03.959 Uh? I mean there's a lot of opportunity for fraud 0:09:04.160 --> 0:09:07.120 at all levels, at all all the facets right that 0:09:07.800 --> 0:09:11.240 of this process. As you said, going back you know 0:09:11.320 --> 0:09:14.720 to the Phoenicians right in there in their complaints. So 0:09:14.840 --> 0:09:18.560 there's no nothing, nothing much has changed except the methods 0:09:18.559 --> 0:09:23.200 of which communication has. But you know the things that 0:09:23.200 --> 0:09:25.880 could go wrong where you had the recent traffic Aura 0:09:26.320 --> 0:09:29.959 mess uh there with a thousand containers of what appears 0:09:30.000 --> 0:09:33.840 to be steel discs or fake nickel. And then there 0:09:33.920 --> 0:09:38.760 was other other examples that Henleyong scandal in Singapore for example, 0:09:38.760 --> 0:09:43.040 where you had the warehousemen that was storing the petroleum 0:09:43.160 --> 0:09:46.800 oil in this case was issuing issuing documentation to multiple 0:09:46.840 --> 0:09:50.280 financiers for the same exact stocks. You had a that's 0:09:50.320 --> 0:09:53.640 a situation where it wasn't the supplier that was the problem, 0:09:53.679 --> 0:09:57.280 but rather the facility that was doing the storage, which 0:09:57.400 --> 0:09:59.040 which has been a problem. 0:09:59.600 --> 0:10:02.240 Well, so I was going to ask and it's the 0:10:02.400 --> 0:10:04.400 sort of perfect your answer, because I was going to 0:10:04.400 --> 0:10:08.040 add on to Tracy's like, do entities become vulnerable when 0:10:08.040 --> 0:10:11.160 they work with the same counterparties over and over again 0:10:11.200 --> 0:10:13.720 and just sort of like drop their guard essentially, like, oh, 0:10:13.760 --> 0:10:15.160 this is the way we've always done it. There's the 0:10:15.160 --> 0:10:17.360 way we've always done it. And then someone figures out 0:10:17.360 --> 0:10:20.840 how to enter into that relationship that's existed for a 0:10:20.840 --> 0:10:23.840 long time. Like maybe the first time Tracy pledges are 0:10:23.880 --> 0:10:25.600 called to me, like I do a big inspection, but 0:10:25.600 --> 0:10:27.440 by the tenth time, like, yeah, I know you're good 0:10:27.440 --> 0:10:30.760 for it. But is that when fraud starts? 0:10:30.800 --> 0:10:33.360 Absolutely, because you get complacent and you let your guard down, 0:10:33.520 --> 0:10:37.440 like anything else in life. So these long standing relationships 0:10:37.480 --> 0:10:41.400 that have always just run on autopilot, and someday some 0:10:41.480 --> 0:10:43.760 guy has a great idea of how he's going to 0:10:44.000 --> 0:10:46.480 fool the system and make money. So yeah, I think 0:10:46.800 --> 0:10:48.640 you have to keep the guard up. You have to 0:10:48.679 --> 0:10:52.040 have your checks and balances in place from the beginning 0:10:52.080 --> 0:10:54.439 of that relationship straight through to the end. 0:10:54.600 --> 0:10:55.559 That's why they exist. 0:10:55.920 --> 0:10:58.480 Once you drop your checks and balances, that's when you 0:10:58.840 --> 0:10:59.800 stop being a. 0:11:00.080 --> 0:11:01.880 Of all use that you know, looking at what you have, 0:11:19.480 --> 0:11:22.520 so Here's a really basic question because I you know, 0:11:22.600 --> 0:11:24.600 we all read a little bit about the traffic Era 0:11:24.679 --> 0:11:28.320 and LME scandal, but everyone was focused on those very 0:11:28.360 --> 0:11:31.760 big names for obvious reasons. But what happened to the 0:11:32.400 --> 0:11:36.439 alleged fraudster? Do they just disappear with the money? I 0:11:36.640 --> 0:11:41.600 imagine their business of commodity shipping and producing is pretty 0:11:41.640 --> 0:11:43.000 moot at that point, right. 0:11:42.920 --> 0:11:47.240 Yeah, the producer in India, and on the Nickel situation, 0:11:47.320 --> 0:11:50.360 I'm sure is untouchable at this point in terms of 0:11:50.760 --> 0:11:55.600 ability to transact with other anyone else really at this point. 0:11:56.480 --> 0:11:58.680 He also but he also got half a billion dollars, 0:11:58.920 --> 0:11:59.920 so he's fine. 0:12:00.200 --> 0:12:04.160 Yeah, And there's no like real obvious recourse against. 0:12:03.880 --> 0:12:06.760 The trafficker is pursuing. You know, we don't certainly don't 0:12:06.760 --> 0:12:08.800 know the ins and outs of right, We're not we're 0:12:08.800 --> 0:12:10.880 not involved in that, so be clear on that. Right. 0:12:10.920 --> 0:12:15.000 So we're we're reading what transpired from news reports, right, 0:12:15.040 --> 0:12:18.160 but we you know, it looks like they're pursuing legal 0:12:18.320 --> 0:12:22.280 avenues to to to go after them, but that's going 0:12:22.320 --> 0:12:23.719 to be long and drawn out. 0:12:24.000 --> 0:12:26.240 It just to be clear on Nickel, and I think 0:12:26.240 --> 0:12:28.640 this is something Terry Duffy when we talk to him, 0:12:28.640 --> 0:12:31.079 he's like, there's something about nickel. It's that it's in bags, right, 0:12:31.160 --> 0:12:33.280 Like some metal is like stacked you see it, and 0:12:33.320 --> 0:12:38.080 so everything what would be an ideal form of auditing. 0:12:38.160 --> 0:12:40.400 I can't imagine open every bag, but what. 0:12:40.360 --> 0:12:41.880 Is opening some bags? 0:12:41.920 --> 0:12:42.199 Okay? 0:12:42.320 --> 0:12:47.520 Yeah, again it becomes that randomized audit, that randomized sampling, 0:12:47.600 --> 0:12:50.160 and you do have to you have to look and 0:12:50.200 --> 0:12:52.680 you have to go in and say, let's you know, 0:12:52.679 --> 0:12:54.839 it's all stacked in the warehouse, let's break some down, 0:12:54.960 --> 0:12:57.800 Let's pull it out, and let's just at a minimum 0:12:57.960 --> 0:12:59.520 open the top of the bags and look in. 0:13:01.400 --> 0:13:04.160 Also is going to say two Nickel is a much 0:13:04.160 --> 0:13:08.800 more higher value metal versus aluminum, let's say, or zinc. 0:13:09.240 --> 0:13:12.600 So it's like counterfeiting. If you're going to counterfeit bills, 0:13:12.600 --> 0:13:15.280 you can probably counterfeit if taking the time to do 0:13:15.320 --> 0:13:17.199 what you're going to be doing one hundred dollars bills, right, 0:13:17.280 --> 0:13:19.960 rather than focusing on counterfeiting on dollar bills. 0:13:20.360 --> 0:13:24.600 Nickel so in bags high value. 0:13:25.040 --> 0:13:27.640 And there's really been two different types of fraud on it, 0:13:27.720 --> 0:13:31.560 and one is the Indian one that traffic Goor is 0:13:31.600 --> 0:13:35.200 involved in is during shipment. So by the time it 0:13:35.360 --> 0:13:40.160 lands where it's headed, the last containers are already afloat 0:13:40.480 --> 0:13:43.839 and everything, all the documents are presented and everyone's been paid, 0:13:44.360 --> 0:13:46.880 so they haven't had the opportunity to open doors on 0:13:46.920 --> 0:13:49.720 that very first container that's shipped to even look and 0:13:49.760 --> 0:13:52.440 find their fraud. So that fraud you have to really 0:13:52.760 --> 0:13:55.800 concentrate on combating at load. 0:13:56.679 --> 0:13:59.160 And then there's the fraud of the rocks that were. 0:13:59.040 --> 0:14:01.760 In the nickel bags, and that was in warehouse for 0:14:01.880 --> 0:14:06.480 years and years, but again nobody. 0:14:05.200 --> 0:14:06.280 Opened up the bags there. 0:14:06.960 --> 0:14:09.480 So there's you know, like Anton said, it's a system 0:14:09.880 --> 0:14:12.160 as old as time, and there's so many points within 0:14:12.160 --> 0:14:15.360 that system where fraud can happen and theft happens and 0:14:15.400 --> 0:14:17.160 the opportunities present themselves. 0:14:17.280 --> 0:14:19.760 So just on this note, I mean, my impression is 0:14:19.800 --> 0:14:22.040 that one of the issues here and one of the 0:14:22.080 --> 0:14:25.640 reasons why the commodities world is susceptible to this type 0:14:25.640 --> 0:14:27.840 of fraud is, you know, not just that you can 0:14:28.400 --> 0:14:31.960 fake nickel by using some rocks put in a bag, 0:14:32.080 --> 0:14:34.840 but also so much of it relies on paperwork and 0:14:34.960 --> 0:14:37.920 you know, invoices and trade receivables and things like that. 0:14:37.960 --> 0:14:40.520 Can you talk a little bit about why that is 0:14:40.680 --> 0:14:43.840 and how endemic it is in your line of business. 0:14:44.320 --> 0:14:48.520 Sure on the paper referring to the paperwork side rate paperwork. 0:14:48.960 --> 0:14:51.360 The documents that go along with a shimment are fairly 0:14:51.480 --> 0:14:56.920 easy to forge, right, So the quality certificates that went 0:14:56.960 --> 0:15:00.240 along with that nickel coming out of India, or the 0:15:00.240 --> 0:15:05.000 the paperwork. Let's take the Henleyong situation, right, the documentation, 0:15:05.080 --> 0:15:08.520 the warehouse receipts, the holding certificates that went to the 0:15:08.800 --> 0:15:12.880 to the banks to show that that there was ownership, right, 0:15:13.280 --> 0:15:17.360 can are just printed off off a computer, signed and stamped. 0:15:17.360 --> 0:15:21.280 It's fairly easy to to make these documents and send 0:15:21.280 --> 0:15:23.920 them along, So it's the doc The paperwork is only 0:15:24.400 --> 0:15:27.560 as good as the counter party that's that's drawing it up. 0:15:27.640 --> 0:15:33.480 So it's the old trust. But verify premise, as Margo said, right, 0:15:34.680 --> 0:15:38.800 taking representative samples, not just you know the paperwork really 0:15:39.680 --> 0:15:42.240 really is to go along with a but it has 0:15:42.320 --> 0:15:44.480 to be part of a part of the bigger process. 0:15:44.600 --> 0:15:48.440 Right. So obviously one way of fighting fraud is, as 0:15:48.480 --> 0:15:51.280 you say, go in the bags, rip open a bunch, 0:15:51.560 --> 0:15:55.360 do samples. The other way to engage in fraud that 0:15:55.400 --> 0:15:57.480 you've sort of hinted up and haven't talked about as much. 0:15:57.600 --> 0:16:02.120 Is Tracy comes to me asks for money against her call, 0:16:02.400 --> 0:16:05.080 but also does it for like six or seven entities 0:16:06.040 --> 0:16:09.120 over pledges. So what are some of the checks that 0:16:09.160 --> 0:16:12.240 you do or that a party should do to avoid 0:16:12.360 --> 0:16:14.480 or prevent multiple pledged collateral. 0:16:14.600 --> 0:16:16.720 Yeah, and this is a it's a tougher one. Yeah, 0:16:16.720 --> 0:16:19.760 because let's go back to the to the ching Dao 0:16:20.040 --> 0:16:24.760 scandal in China ten plus years ago. I believe where 0:16:25.280 --> 0:16:32.080 the Western warehousing companies LM warehousing companies in China doesn't 0:16:32.080 --> 0:16:34.600 have Linda Metal Exchange warehouses. So these are the same 0:16:34.640 --> 0:16:40.040 companies that had subcontracted warehouses in ching Dao storing copper 0:16:40.160 --> 0:16:44.160 and other metals, and the warehouse been there. There was 0:16:44.160 --> 0:16:47.360 a couple of warehouses in ching Dao that were subcontracted 0:16:47.360 --> 0:16:53.359 by the LEM warehousing companies and they were in cahoots 0:16:53.400 --> 0:16:57.640 with some of the local traders there to double triple, 0:16:57.760 --> 0:17:03.400 quadruple pledge these of copper to multiple banks. So they'd say, right, 0:17:03.400 --> 0:17:05.760 you got a ten thousand tons of copper cathodes sitting 0:17:05.800 --> 0:17:10.920 in there, and the local warehouse ban was issuing warehouse 0:17:10.960 --> 0:17:15.239 receipt to multiple multiple banks. And financing entities for that 0:17:15.320 --> 0:17:21.520 same stack of copper, unbeknownst to the warehousing company that 0:17:21.680 --> 0:17:25.680 was contracting contracting with them. So they thought the western 0:17:25.720 --> 0:17:28.520 warehousing companies or the large lumy wareusing companies thought that 0:17:28.560 --> 0:17:32.600 they were that their Chinese subcontractor was doing the right 0:17:32.640 --> 0:17:36.080 thing and being honorable, but was really handing out paper 0:17:37.280 --> 0:17:39.439 left and right right for the same stack of metal. 0:17:39.720 --> 0:17:42.280 And I would say, if Joe was looking to finance 0:17:42.320 --> 0:17:44.880 Tracy's coal, you don't want to do it on Tracy's 0:17:44.920 --> 0:17:48.359 property because Tracy retains retains control of it. 0:17:49.359 --> 0:17:51.280 And that's going to be Yeah, that's going to be 0:17:51.359 --> 0:17:52.160 step number one. 0:17:52.160 --> 0:17:54.800 I want your call somewhere where I have a trusted 0:17:54.960 --> 0:17:58.760 third party controlling it and hopefully issuing only one warehouse 0:17:58.760 --> 0:17:59.879 receipt on it, so. 0:18:00.000 --> 0:18:02.600 It would be the warehouse. So in the process of 0:18:02.600 --> 0:18:06.080 getting that confirmation, it would be the warehouse sort of 0:18:06.160 --> 0:18:08.400 vouching for it, and then it would be on them. 0:18:08.600 --> 0:18:10.680 It would be on the warehouse, like would be the 0:18:10.720 --> 0:18:12.919 one breaking the law, being complicit and breaking the law 0:18:12.960 --> 0:18:13.960 if they were sending. 0:18:13.680 --> 0:18:15.720 It out to right, which is what happened in Chindawn 0:18:15.840 --> 0:18:16.200 got it. 0:18:16.480 --> 0:18:18.920 And Marker brings up a really good point, and often 0:18:18.960 --> 0:18:22.840 we've had multiple conversations over the years about providing collateral 0:18:22.880 --> 0:18:27.920 management services for stock retained at a customers or at 0:18:27.920 --> 0:18:31.760 a at a facility that's controlled by the entity that's 0:18:31.840 --> 0:18:35.880 getting that's benefiting from the financing. Right. So, as Margo said, 0:18:35.880 --> 0:18:40.440 with that's always a more complicated collateral management approach. Then 0:18:40.480 --> 0:18:44.000 you have to have regular inspections verify that when the 0:18:44.080 --> 0:18:47.240 inspector is not there, is that material being taken being 0:18:47.640 --> 0:18:51.560 being taken out right? We were We did a a 0:18:51.640 --> 0:18:57.159 similar project for inbound steel slab going into a rolling 0:18:57.200 --> 0:19:01.560 mill in Ohio. This and the bank that we were 0:19:01.560 --> 0:19:04.480 working for on that one was financing the steel slab, 0:19:04.520 --> 0:19:07.120 but it was on the property of the rolling mill, 0:19:07.480 --> 0:19:10.439 and then the bank would would have possession of the 0:19:10.520 --> 0:19:13.720 slab but also the coils steel coils that were rolled 0:19:13.760 --> 0:19:16.639 from that slab afterward. That meant we had to send 0:19:16.720 --> 0:19:20.480 in Mercury or predecessor predecessor company. We had to send 0:19:20.480 --> 0:19:24.439 in inspectors regularly to verify what was there. Did they 0:19:24.480 --> 0:19:27.120 did the mill take more slabs than they were supposed 0:19:27.160 --> 0:19:30.320 to from the stock that was that was dedicated to 0:19:30.359 --> 0:19:36.520 that particular bank And in one case, Margo uncovered interesting situation. 0:19:37.640 --> 0:19:41.959 Fraud and it was only detected simply because we were 0:19:42.000 --> 0:19:46.119 working on behalf of both banks that were financing the 0:19:46.240 --> 0:19:48.760 slab and the ultimate hot rolled coil that were coming 0:19:48.800 --> 0:19:51.720 out of the slab. So at the end of each 0:19:51.800 --> 0:19:54.640 day there was a pledge list of you know, we've 0:19:54.800 --> 0:19:58.159 we've removed this much slab from your inventory by you know, 0:19:58.240 --> 0:20:02.239 specific piece number, and to balance out the value, you 0:20:02.480 --> 0:20:04.399 now have this stack of coils and these are the 0:20:04.440 --> 0:20:07.280 numbers of your coils. And this happens on a daily basis, 0:20:07.280 --> 0:20:09.320 and all those reports came to us and basically it 0:20:09.359 --> 0:20:12.560 was a simple overlay of reports and we started identifying 0:20:12.600 --> 0:20:13.960 coils that were double pledged. 0:20:14.680 --> 0:20:17.680 Sorry explain that an overlay of reports? What does that mean? 0:20:18.160 --> 0:20:21.840 Just taking both inventory reports, both daily declarations to each 0:20:21.880 --> 0:20:24.440 of each of the banks, oh and doing them side 0:20:24.440 --> 0:20:27.320 by side to look and start realizing that we had 0:20:27.320 --> 0:20:29.879 a handful of coils that were pledged to both banks. 0:20:30.119 --> 0:20:32.959 So out of curiosity, how much was that slab and 0:20:33.000 --> 0:20:35.879 the coils worth? And the reason I ask is because 0:20:36.160 --> 0:20:40.880 this seems like a lot of work and very granular risk, right, 0:20:40.960 --> 0:20:44.879 granular high risk, and I kind of wonder, I wonder 0:20:44.960 --> 0:20:48.400 about the incentive structure here. If there are commodities dealers 0:20:48.440 --> 0:20:51.640 out there who basically say, this is a risk we're 0:20:51.680 --> 0:20:53.879 willing to take. We're going to find someone, you know, 0:20:53.960 --> 0:20:57.200 a warehouse or whoever with the least amount of paper work, 0:20:57.320 --> 0:21:00.880 the least bureaucratic process to go through. Because this all 0:21:00.920 --> 0:21:01.960 seems like quite a lot. 0:21:02.160 --> 0:21:06.120 Yeah. This the value of the slabs a few hundred 0:21:06.160 --> 0:21:08.080 bucks a ton, and then they were when they were 0:21:08.119 --> 0:21:10.440 rolled in. The coils were added value at that point, 0:21:10.480 --> 0:21:12.640 So add on another one hundred bucks a ton. I'm 0:21:12.640 --> 0:21:16.320 certainly not a steel pricing expert, right, but but that 0:21:16.520 --> 0:21:20.159 was just just to give you approximate value. But Tracy, 0:21:20.200 --> 0:21:24.920 were seeing just on your question, right, We're seeing banks 0:21:24.960 --> 0:21:29.240 that bailed out of commodity trade finance because of these problems. 0:21:29.280 --> 0:21:32.399