Combating an elusive problem

Traders of recyclables pride themselves on forming and maintaining personal connections, and doing so can be critical to avoiding an occasional problem in the sector: fraud.

This week, the Washington-based Institute of Scrap Recycling Industries (ISRI) issued an alert to its members regarding scrap shipments being sent to the wrong destination and stolen, apparently involving fake instructions and confirmations from the “buyer” as to where the shipment is supposed to be headed.

Last year, a scandal involving purchased scrap materials with mispresented values cost Germany-based Aurubis AG hundreds of millions of dollars and resulted in the resignations of top executives.

Chris Yerbey, CEO of Amsterdam-based Tradefox Inc. and Scrap Connection BV, says those two firms are working to develop tools to address fraud, particularly as it applies to the cross-border trading of recyclables.

In an interview with Recycling Today, Yerbey says such cases of fraud can be difficult to solve, which means the cliché “an ounce of prevention is worth a pound of cure” applies to the situation.

Recycling Today (RT): What forms does fraud or materials misrepresentation most commonly take in the metals recycling and trading sector?

Chris Yerbey (CY): When it comes to fraud, the most damaging is the substitution of material for something of no value, such as stone or dirt. These cases do not happen every day but when they do the financial losses are catastrophic.

Two more common types of fraud involve the shipment of a material which is substantially off in quality or the acceptance of a deposit for material and then never shipping.

I’ve seen several cases where material of a lower grade was purchased from a yard and then represented as a higher grade such as shredded steel that was shipped as ISRI 211 grade (ferrous shred, 70 pounds per cubic foot) when ISRI 210 (ferrous shred, 50 pounds per cubic foot) was purchased.

Our capital recovery team has seen several cases recently where a trading company or scrap yard has convinced a buyer to advance a 20 percent payment to start the first order and then simply not shipped any material.

Both of these are very big frustrations for buyers. These are the kinds of losses that are difficult to recover and end up becoming a huge drain on buyers’ time as they work to sort them out.

RT: Does such fraud occur within national borders, or is it more common in trans-oceanic shipments?

CY: Without question, fraud becomes much easier to pull off in the international space. Of course, there are examples of people who cheat each other within national borders, but those problems are much easier to avoid and resolve when the buyer and seller are not thousands of miles away.

RT: Once a company has been victimized, what recourse does it have to litigate or recover damages?

CY: Recovering money in these situations can be very difficult. It’s important to take immediate action and report those cases in a public manner.

I highly recommend that everyone report their case to Tradefox and to any of the relevant trade associations.

Tradefox has a trade reputation report on almost every company involved in the recycling trade. Reporting these problems to us is completely free of charge. We evaluate each case carefully and if we agree with the claim, we flag the company report. Once that’s done, the word spreads very fast. Often companies are willing to quickly resolve disputes once they know they’ve been reported, before the word spreads too far.

I think this is a very important first step and, again, it’s something that we don’t charge for because we feel like this is the very important value which we should provide our industry.

If the offending party is a member of any trade association, I would recommend reporting them there also. We can also provide a third-party validated claim that can be handed over to any trade association.

After this step is complete, the collection process needs to start immediately. It’s very important not to let these cases sit idle. If the collections process is not successful, then it’s also important to start the legal process immediately. When a company trades unfairly, financial stress is the underlying motivator. That company might be in danger of closing up shop at any moment, in my opinion. So, it’s important to really chase these cases.

Tradefox has a recovery team now that focuses specifically on helping our members recover money that they’ve lost in unfair trading practices. This is a service that is offered on a “no cure, no pay” basis. We have collected almost $2 million in cases just since the Material Recycling Association of India (MRAI) conference in Kolkata, India, this January. We lead the collections process with an 80 percent success rate. If collections are unsuccessful, we have a network of attorneys that we use who specialize in cases like these.

RT: To what extent does Tradefox see preventive measures as the best tactic for a trading firm?

CY: Preventive measures are of the utmost importance. Every company has its own practices in place and does their best to avoid losses. Typically, that means doing online research, paying for business intelligence from third-party vendors, and often checking with people who have traded with their counterparty in the past. Also, measures are taken to avoid the typical traps that scammers set. However, people are creative and find new ways to cheat others, so having access to the best and most current information is crucial.

RT: What tools has Tradefox developed as ways to help scrap processors and traders conduct due diligence on current and prospective trading partners?

CY: Our Trade Reputation Reports are the most helpful products we have that help companies avoid losses. They contain the data we can display publicly, headlined by the Tradefox TrustScore. The TrustScore is created by analyzing all the data we have on every company that buys or sells recyclables. Post-trade reviews are the most heavily weighted. These are ratings on integrity, material quality, the claims process, shipping and payment.

Most of our customers use Tradefox reports for predeal due diligence, before every trade.

Trade Reputation Reports can also be used to find new businesses to trade with. That's definitely the second most popular use case, but the primary purpose is to help companies avoid losses by allowing our members to view the opinions of buyers about sellers and sellers about buyers. 

We have just launched a new service which is getting significant traction. Tradefox Capital Recovery was created to help our members recover losses from unfair trading practices. This service is offered on a “no cure, no pay” basis. We have a team of specialists that can support the collections process all the way through litigation if needed.

RT: To what extent are the tools offered by Tradefox accessible to the entire recycling community, including smaller operators?

CY: Our products and services are priced with small-to-medium enterprises (SMEs) in mind. Tradefox derives its value from the trade reviews submitted by its members. So, we are by default a product for the entire recycling industry, including smaller operators.