OTC Commodity Trade Due Diligence Services

OTC Commodity Trading Requires More Than KYC

A company can legally exist and still be incapable of delivering a commodity transaction.

Basic corporate KYC can confirm that an entity was incorporated, identify directors and establish beneficial ownership. That is only the beginning of commodity transaction diligence.

A buyer also needs to know whether the supposed seller actually controls the commodity. A seller needs to know whether the buyer has credible purchasing capacity. A lender needs to understand how title, payment, collateral and repayment interact. Everyone needs to understand whether the vessel, warehouse, terminal, bank and commercial documents correspond to a real transaction.

This distinction is especially important in OTC markets because there is no centralized exchange guaranteeing that the seller controls the asset or that the buyer can settle the transaction.

Our OTC Commodity Trade Due Diligence Scope

Counterparty Due Diligence

The first workstream establishes who is actually participating in the transaction.

We review the legal entity, corporate status, registration history, directors, beneficial ownership, operating address, trading history and stated business activity.

The review becomes deeper when a recently established entity proposes a transaction far larger than its apparent balance sheet or operating history would normally support.

A newly formed commodity trader can be legitimate. It still needs to explain how it obtained access to the supplier, logistics, capital and banking capacity necessary to perform the proposed transaction.

Where the immediate concern is specifically the upstream supplier, we can also perform a dedicated commodity supplier due diligence review.

Beneficial Ownership Matters

Knowing the corporate name is not enough.

The transaction may involve holding companies, nominee directors, offshore companies, subsidiaries, state-linked entities or intermediaries operating across several jurisdictions.

We seek to understand who ultimately owns or controls the relevant counterparties and whether the ownership structure creates additional compliance, reputational or performance risk.

Where beneficial ownership cannot be established to a reasonable level, that becomes a material unresolved issue rather than a box to be ignored because the commercial terms look attractive.

Authority to Sell or Buy the Commodity

One of the most common problems in physical commodity markets is that the person negotiating the transaction is several layers removed from the principal.

A chain can contain an introducer, sub-mandate, mandate, facilitator, consultant and supposed representative before reaching anybody who can actually bind the buyer or seller.

This creates both execution risk and information distortion.

We examine the contractual authority claimed by intermediaries and try to determine where the executable principal actually sits.

A legitimate agent can add value. A seven-layer broker chain generally does not.

Seller Capacity and Commodity Control

A seller's ability to sign an FCO does not prove that it controls physical inventory.

Depending on the transaction, evidence of supply can include executed upstream contracts, title documents, warehouse records, terminal documentation, production information, allocation evidence from an identifiable principal, shipping records or other commercially appropriate evidence.

The exact evidence differs by commodity and Incoterm.

A producer selling its own output has a different control chain from a trading house purchasing cargo FOB and reselling it CFR. A warehouse seller has different documentation from a refinery executing a term supply agreement.

Our task is not to demand the same generic "POP package" for every transaction. It is to determine what evidence should logically exist for the actual trade being proposed.

Buyer Capacity and Source of Payment

Seller diligence has an equal opposite side.

The buyer may be genuine but lack the capital or banking facility required to close.

We therefore examine how the buyer intends to settle the trade. That may involve balance-sheet cash, a documentary letter of credit, trade-finance facility, borrowing base, inventory finance, receivables facility or another defined source.

A buyer planning to purchase USD 20 million of petroleum with no cash, no approved bank line and no lender mandate does not yet have a settlement solution.

If the underlying transaction is otherwise viable, this may lead into trade finance structuring for the live commodity transaction rather than pretending that due diligence alone solves the capital requirement.

We Test Whether the Trade Makes Economic Sense

A major part of commodity due diligence is economic coherence.

We examine the purchase price, resale price, benchmark, differential, freight, storage, financing, inspection, insurance, taxes and other major cost components.

A transaction should produce a commercial margin that has an identifiable source.

That source might be geography, timing, logistics, credit, blending, processing, market access, storage, quality differential or another genuine market inefficiency.

A large unexplained discount requires an explanation.

If internationally traded material is supposedly available at a price far below the observable market while every participant claims to be earning additional commissions, the economics themselves become a due-diligence issue.

Benchmark and Differential Review

Physical commodities are often priced relative to benchmarks rather than at arbitrary fixed discounts.

Crude oil can price against Brent, Dubai, Oman or WTI-related references. Refined products can price against regional assessments. Metals can reference LME or other accepted pricing conventions. Agricultural commodities can reference exchange contracts, regional benchmarks or negotiated basis values.

The due-diligence process asks whether the proposed price formula makes sense for the product, location, quality and delivery terms.

A genuine discount can exist. The question is why it exists and whether that explanation survives commercial scrutiny.

Contract Review From a Commercial Perspective

Our due diligence includes a commercial review of the proposed transaction documents.

We examine whether the contract identifies the actual commodity, quantity, specification, delivery location, shipment period, pricing mechanism, payment mechanics, inspection procedure, title transfer, risk transfer and other essential terms.

We also identify internal inconsistencies.

For example, a contract can describe an FOB sale while requiring the seller to control obligations that would normally fall on the buyer after loading. A supposed tank-to-tank transaction can contain procedures copied from a CIF cargo sale. A payment sequence can require bank actions that do not correspond to normal banking practice.

Where legal opinions or contractual drafting are required, qualified counsel should perform that work. Our review focuses on transaction coherence, financing implications and obvious execution risk.

Incoterms and Delivery Risk

Delivery terms determine much of the risk allocation.

FOB, CFR, CIF, FCA, DAP and other Incoterms affect freight responsibility, insurance, control of transportation, delivery points and risk transfer.

Due diligence therefore needs to test the trade against the actual Incoterm rather than treating the three-letter term as decorative text on an invoice.

The delivery obligation should reconcile with the supplier relationship, shipping plan, bank documents and payment mechanism.

Oil and Refined Petroleum Due Diligence

Petroleum transactions require additional diligence because vessel movements, terminals, storage, cargo origin and sanctions can all materially affect execution.

For crude oil, diesel, jet fuel, fuel oil, naphtha, LPG and other petroleum products, we can examine:

• seller and supplier identity;
• refinery, producer or upstream source where relevant;
• product specification;
• loading or storage location;
• vessel information;
• IMO number and ownership;
• flag history;
• insurance and P&I information;
• voyage history;
• AIS anomalies;
• ship-to-ship transfer history where relevant;
• certificates of origin;
• terminal and tank claims;
• inspection arrangements;
• sanctions exposure;
• proposed payment mechanics.

For petroleum-specific transactions, clients can also review our detailed guide to due diligence on crude oil and refined petroleum trades.

Know Your Vessel

For seaborne commodity trades, the vessel itself is part of the counterparty-risk picture.

The IMO number is particularly important because vessel names and flags can change while the IMO identity generally remains associated with the vessel.

We look for information relevant to ownership, management, historic names, flag changes, trading patterns, insurance and suspicious voyage behavior.

Unexpected AIS gaps, unusual ship-to-ship transfers, ownership changes immediately before a voyage or inconsistent cargo-origin documents can justify enhanced review.

None of those facts alone automatically proves wrongdoing. The pattern determines whether further investigation is warranted.

Tank Storage and Terminal Due Diligence

Fake storage claims are common in online petroleum transactions.

A document carrying the logo of a recognized terminal does not establish that the seller controls product there.

We review the claimed facility, contracting entity, storage relationship, tank documentation and proposed verification process.

We also assess whether the commercial procedure is consistent with how the stated facility and trade structure would normally operate.

Unsolicited requests for tank-extension fees, injection fees, access codes or other unusual payments should be reviewed carefully before funds are sent.

Warehouse Receipt Due Diligence

Metals and agricultural transactions can involve warehouse receipts or other evidence of stored goods.

The key questions include whether the warehouse exists, whether it actually holds the goods, whether the receipt is authentic, whether the goods are already pledged and whether the issuing warehouse has authority and financial substance.

For financed trades, lenders can require collateral-control arrangements that go far beyond receiving a PDF warehouse receipt from the borrower.

Metals Trade Due Diligence

Metals transactions introduce their own risk profile.

Depending on the commodity, diligence can cover producer or supplier identity, mine or refinery origin, warehouse location, assay, purity, weight, inspection, export rights, title documentation, sanctions, transport and payment.

For exchange-referenced metals, price logic can often be tested against recognized market benchmarks and location premiums.

For concentrates and less standardized materials, treatment charges, refining charges, payable content, moisture, penalties and assay mechanics become part of the commercial review.

Agricultural Commodity Due Diligence

Agricultural commodities bring additional issues around crop origin, quality, seasonality, storage, phytosanitary requirements, export permits and shipment timing.

A sugar, grain, cocoa, coffee or edible-oil transaction should be reviewed against the actual supply chain.

The seller's ability to export, the origin of the goods, warehouse or processor relationship, inspection arrangements and documentary requirements all matter.

Extremely large volumes offered by small intermediaries without evidence of procurement capacity require additional scrutiny.

Inspection Companies Need to Be Verified Too

Commodity contracts often refer to inspection by SGS, Bureau Veritas, Intertek or another inspection provider.

That reference does not make every certificate carrying the company's logo authentic.

Inspection documentation should correspond to the actual facility, date, commodity, quantity and contract stage.

Where appropriate and possible, key documents should be verified through the issuing organization or another reliable channel rather than relying entirely on copies supplied by the counterparty.

Shipping Document Review

The bill of lading, certificate of origin, inspection certificate, commercial invoice, packing list and other shipping documents should tell one coherent story.

We look for discrepancies in:

• commodity description;
• quantity;
• vessel;
• ports;
• dates;
• shipper and consignee;
• country of origin;
• invoice value;
• container or cargo details;
• document issuers.

Small inconsistencies can be clerical. Material inconsistencies can indicate that documents have been assembled from unrelated transactions.

Sanctions Due Diligence

Commodity transactions can create sanctions risk through counterparties, beneficial owners, banks, vessels, ports, countries, cargo origin and destination.

Oil and metals transactions require particular care because sanctions regimes can directly target the commodity, producer, vessel, bank or commercial party involved.

A sanctions review should therefore extend beyond checking the seller's company name against one public list.

Where the transaction presents material sanctions exposure, specialist sanctions counsel may need to determine whether the proposed activity is permitted under the laws applicable to the relevant parties.

KYT and Payment-Flow Review

Know Your Transaction is particularly useful in commodity trades because the commercial documents and money flow should reconcile.

The buyer, seller, beneficiary bank, paying bank, invoice, contract and shipment should form a logical sequence.

Unexpected third-party payment instructions require explanation.

If the sales contract identifies one seller but payment suddenly needs to be sent to an unrelated company in another jurisdiction, that change should be resolved before settlement.

The same principle applies where intermediary fees or commissions are routed to unrelated entities.

Our KYT framework for trade finance transactions explains how transaction monitoring complements ordinary customer KYC.

Payment Instrument Due Diligence

Commodity transactions can use cash prepayment, documentary letters of credit, standby letters of credit, bank guarantees, documentary collections, open account or other settlement methods.

We examine whether the requested instrument corresponds to the underlying commercial requirement.

Procedures involving unnecessary SWIFT messages, unusual pre-advice steps, impossible bank confirmations or financial instruments unrelated to the actual payment obligation create additional risk.

The purpose of the bank instrument should be clear: pay the seller, secure a contingent obligation, finance inventory or support another defined commercial exposure.

Bank Due Diligence

A bank name on a procedure sheet is not evidence that the bank has approved the transaction.

We distinguish between a counterparty stating that it "banks with" an institution and an institution actually agreeing to issue, advise, confirm or finance a transaction.

Where the transaction depends on a letter of credit or other bank undertaking, the relevant banking relationship and issuance path need to be credible.

If financing has not yet been arranged, due diligence may identify a funding gap that needs to be solved before the parties sign an executable contract.

Broker Chains Are a Due Diligence Issue

Intermediaries are common in physical commodity markets. Excessive intermediation is different.

A transaction involving several layers of brokers can make it impossible to verify commercial information directly with the principal.

Each layer can also introduce commissions, confidentiality restrictions and distorted information.

The issue is not that every broker is fraudulent. The issue is whether the chain prevents reasonable verification of the seller, buyer, commodity and commercial authority.

Our article on fake commodity flows and internet broker chains covers this problem in more detail.

Common Red Flags We Investigate

We Do Not Judge a Trade From One Document

Commodity fraud detection is usually pattern-based.

A certificate of incorporation can be genuine while the trade is fake. A vessel can be real while the cargo does not exist. A warehouse can exist while the seller has no title to inventory stored there. A valid bank account can belong to a company that cannot perform the contract.

The due-diligence process therefore compares multiple independent facts rather than asking whether one PDF appears authentic.

Our Due Diligence Report

The result is a structured transaction review rather than an informal email saying that the deal "looks fine."

Depending on mandate scope, the report can cover:

• transaction overview;
• counterparty profile;
• beneficial ownership;
• authority and intermediary chain;
• supplier-capacity assessment;
• commodity and pricing analysis;
• logistics assessment;
• vessel or storage review;
• document findings;
• payment and banking structure;
• sanctions and financial-crime flags;
• financing readiness;
• unresolved information requests;
• material red flags;
• recommended conditions before proceeding.

Where the transaction is being presented to a lender, the work can also be expanded into our trade finance due diligence report service.

Red, Amber and Green Findings

Not every issue should automatically kill a transaction.

We distinguish between matters that appear satisfactory, matters requiring clarification and issues serious enough to justify stopping progression until they are resolved.

A missing document can be remedied. An unclear ownership chain can sometimes be explained. A contradictory vessel history may require enhanced investigation.

A fabricated terminal, sanctioned counterparty or seller with no identifiable connection to the commodity is a different level of problem.

Due Diligence Before Issuing a Letter of Credit

One of the most important moments to conduct due diligence is before the buyer instructs its bank to issue a documentary letter of credit.

Once an instrument is issued, the transaction has moved beyond preliminary discussion and into a formal banking obligation.

The buyer should therefore understand who the beneficiary is, whether the supplier can perform, whether the goods and shipping route are credible and whether the letter-of-credit conditions match the actual transaction.

The bank examines documents rather than physically inspecting the cargo on behalf of the buyer.

Commercial due diligence remains the buyer's responsibility.

Due Diligence Before Prepayment

Prepayment creates an even more obvious exposure.

Once money has been transferred to a foreign counterparty, recovery can become expensive or impossible if the supplier fails to perform.

We therefore recommend substantially stronger diligence where a new supplier requests material advance payment.

The due-diligence scope should be proportionate to the amount at risk.

Due Diligence for Financed Commodity Trades

If a lender or private credit fund will finance the transaction, due diligence needs to support an underwriting case.

The lender will want to understand what creates repayment, which assets or receivables support the facility, how title is controlled and what happens if the buyer or supplier defaults.

The lender's analysis is therefore wider than fraud screening.

Where the transaction passes the commercial review, Financely can move into commodity trade finance structuring and debt arrangement for qualifying trades.

Our OTC Commodity Due Diligence Process

What We Need to Start

Send us the proposed sale and purchase contract or FCO together with the legal names of the buyer and seller.

We also need the commodity, quantity, price formula, Incoterm, origin, loading or storage location, payment method and proposed transaction procedure.

For shipping transactions, include available vessel information. For stored commodities, provide the warehouse or terminal documents. For financed transactions, include the proposed bank instrument or lender structure.

If a broker chain is involved, provide the chain rather than hiding it. Understanding who sits between the principals is part of the review.

This Is Paid Transaction Due Diligence

Financely provides paid commercial and financing due diligence for live OTC commodity transactions.

The assignment is designed for principals, investors and financing parties that have a material amount of capital or contractual exposure at risk.

The scope and fee depend on the commodity, jurisdictions, number of counterparties, transaction value, logistics, document volume and depth of review required.

External costs may apply where the transaction requires specialist legal advice, sanctions counsel, inspection, vessel intelligence, corporate records, independent verification or other third-party work.

What Our Due Diligence Does Not Guarantee

No due-diligence process can guarantee that a counterparty will perform in the future.

We report on information available during the review, identify inconsistencies and assess whether the proposed transaction appears commercially coherent based on the agreed scope.

We are not a law-enforcement agency, forensic laboratory, inspection company or sanctions regulator.

Where specialist legal, technical or investigative work is required, we identify that requirement and coordinate with appropriately qualified providers where included in the mandate.

Frequently Asked Questions