Red Flags in Commodity Contracts: 5 Clauses That Signal Fraud in 2026
Beyond the Fake Website
In the secondary sugar market, fraud does not always look like a primitive phishing attempt. In 2026, it often appears as a legitimate 20-page Sales and Purchase Agreement (SPA) filled with sophisticated legal loopholes designed to trap your banking instrument or siphon off “application fees.” These contracts are engineered to look institutional while being functionally unenforceable.
A contract is only as effective as its bankability. “Joker Brokers” and fraudulent syndicates utilize templates that contain structural contradictions, outdated Incoterms, and “Soft Clauses” that void the seller’s liability the moment your credit is issued. This guide deconstructs the most dangerous red flags in commodity contracts to ensure your legal team can audit and disqualify bad actors instantly.
Identifying red flags in commodity contracts requires a focus on “Soft Clauses” and “Upfront Fee” demands. Legitimate sugar trades operate on a bank-to-bank basis where no cash moves until the product is verified and loaded. Any clause requiring payment for notarization, allocation fees, or licenses before the banking instrument is operative is a hallmark of fraud.
1. The “Upfront Fee” Clause
The Golden Rule of 2026 Commodity Trading: Money only moves when the product moves. Fraudulent sellers insert small, plausible-sounding fee requirements before the banking instrument (DLC/SBLC) is issued. They label these as:
- “Allocation Reservation Fees” or “Blockage Fees”
- “Legal Notarization or Apostille Fees”
- “Export License Registration” or “Ministry of Agriculture Stamp Duty”
The Scam: These fees are typically $2,000 – $5,000—small enough that a buyer might pay them just to “move things along.” The fraudster collects these from hundreds of buyers and then disappears. A Tier-1 refinery has its own export licenses and dedicated legal departments; they do not require a buyer to fund their administrative overhead.
Be wary of documents titled “Consultancy Agreement” or “Facilitation Agreement” rather than “Sales and Purchase Agreement.” If you sign a consultancy contract, the “Seller” is legally framed as a service provider. If the sugar never ships, they can argue your payment was a non-refundable “consulting fee” for their time, making legal recovery impossible.
2. The “Soft Clause” Trap
A “Soft Clause” is a condition inserted into a Letter of Credit (LC) that makes the payment dependent on a subjective event or an action controlled by the seller. This is one of the most critical red flags in commodity contracts because it voids the financial security of the instrument.
Hard Clause vs. Soft Clause Comparison
| Clause Type | Example Language | The Result |
|---|---|---|
| Hard Clause (Safe) | “Payment upon presentation of Bill of Lading and SGS Weight/Quality Report.” | Objective. If the sugar is loaded, the bank must pay. |
| Soft Clause (Fraud) | “Payment subject to Seller’s bank confirming allocation availability.” | Subjective. The seller can block payment even after you’ve opened the credit. |
| Soft Clause (Fraud) | “Payment subject to Buyer’s final inspection at destination port.” | Dangerous. Sellers use this to refuse liability for damage during transit. |
Manager’s Takeaway: Never allow clauses that depend on “Seller’s ability” or “Third Party approval” inside the banking instrument. The bank should pay based on Documents, not Opinions.
3. The Performance Bond Loophole
Standard contracts require the seller to post a 2% Performance Bond (PB). Fraudsters attempt to decouple the timing of this bond from the activation of your LC to gain leverage without risk.
The Trap: The contract states that the Seller will post the 2% PB after the Buyer’s LC is already “Active and Operative.” This allows a fraudulent seller to “Monetize” your LC (using it as collateral for their own loans) without ever intending to ship sugar. If they can’t get their loan, they walk away, and you have no bond to claim as compensation.
The Fix: The contract must state that the Buyer’s LC is issued “Non-Operative” and only becomes “Operative” upon the Buyer’s bank’s receipt and verification of the Seller’s 2% Performance Bond. This ensures the seller commits funds before yours are at risk.
4. Jurisdiction & Arbitration Traps
A contract is worthless if you have to sue the seller in a jurisdiction that favors locals or has no established maritime law. Fraudulent contracts often list “The District Court of [Seller’s Local Province]” as the venue for disputes.
The Professional Standard:
Legitimate international sugar trades should be governed by English Law with arbitration via the LCIA (London Court of International Arbitration) or Singapore Law (SIAC). These are neutral, internationally respected venues that understand the nuances of the UCP 600 rules governing Letters of Credit.
5. The Verity Deal Contract Audit Protocol
At Verity Deal, we act as the final firewall before you sign. Our audit protocol for 2026 includes:
- Redline Verification: We strip all soft clauses from the Draft SPA to ensure the LC remains a “Hard” instrument.
- Sequence of Operation: We mandate the “Non-Operative to Operative” sequence for all 2% Performance Bonds.
- Incoterm Audit: We ensure the contract uses Incoterms 2020 correctly, preventing the common “FOB Container” mismatch.
6. Frequently Asked Questions
The seller wants me to pay for the SGS inspection. Is that normal?
No. In 2026, the Seller is always responsible for the inspection at the Port of Loading as part of their proof of performance. The Buyer only pays for an optional secondary inspection at the destination port.
Can I use my own contract template?
Most refineries insist on using their own pre-approved SPAs because their banking facilities are tuned to that specific language. However, you should always redline the document to remove any clauses that signal the red flags mentioned above.
What if the seller refuses to accept a Non-Operative LC?
This is a disqualifying red flag. It suggests they do not have the liquidity to post a 2% Performance Bond or they are intending to monetize your instrument without shipping product. Walk away immediately.
