Perspective | Research on Legal Risks of Financing Trade and Its Prevention Mechanisms

In the modern business environment, financing trade, as an innovative business model, frequently appears in various commercial transactions. By combining trade methods with financial instruments, it provides enterprises with short-term financing and credit enhancement channels, thereby strengthening their cash flow. However, this complex transaction model also brings many legal risks, causing numerous disputes and resulting in serious economic losses for enterprises and the state. In recent years, departments such as the State-owned Assets Supervision and Administration Commission of the State Council have repeatedly issued documents emphasizing the strengthening of risk management and investigation in financing trade, highlighting the urgency and practical significance of in-depth research on this issue. An in-depth legal analysis of the risks of financing trade and the proposal of practical legal response strategies are extremely important for preventing and resolving related risks.

Financing trade refers to the process in which parties involved in the exchange of goods and services rely on property rights such as ownership and accounts receivable, comprehensively utilizing various trade methods and financial instruments to achieve short-term financing or credit enhancement, thereby increasing the cash flow of trade entities. Essentially, it is financing disguised as trade, significantly different from traditional trade. In practice, this trade form is diverse, usually involving complex transaction structures and multiple parties, which undoubtedly increases the difficulty of risk identification and prevention.

1.  Consignment Trade

The consignment trade model usually involves the fund provider, the financing party, and other related parties. The fund provider (i.e., the consignor) first pays the full amount to the seller to purchase goods, then resells the goods to the financing party by signing a sales contract. After paying a certain proportion of the deposit, the financing party usually pays the remaining amount through bank acceptance bills. For example, a state-owned enterprise as the consignor conducts consignment trade with the seller and the trader (financing party). The state-owned enterprise pays the full amount to the seller, while the trader pays the deposit and pays the balance through bank acceptance bills. In this model, the actual delivery of goods is directly made by the seller to the financing party. However, the risk lies in that if the financing party has credit issues and fails to pay on time, the consignor may face financial losses.

2. Entrusted Procurement

In the entrusted procurement model, the fund provider (principal) entrusts the trustee to purchase goods from the seller. The principal pays the full amount, the trustee signs the sales contract with the seller, and the financing party, as the actual demand party, usually pays through bank acceptance bills. For example, a state-owned enterprise as the principal entrusts the trustee to purchase goods from the seller, and the trader (financing party) is responsible for payment. The risk in this model mainly lies in the moral hazard of the trustee, such as colluding with the seller to inflate prices or problems occurring during the delivery of goods.

3.  Circular Trade

Circular trade involves multiple parties such as the fund provider, financing party, and bridge party. In this model, goods usually do not actually circulate. The financing party buys goods from the fund provider at a low price and sells them back to the fund provider through the bridge party at a higher price, thus forming a cycle of capital flow. For example, the financing party conducts circular trade with a state-owned enterprise (fund provider) and a bridge party. Although it appears to be a goods transaction on the surface, it is actually a financing activity. This model carries extremely high risks; once the capital chain breaks, all parties will face huge losses.

4.  Pledge Supervision

The pledge supervision model involves multiple parties such as the fund provider (usually a bank), financing party, supervisor, and warehouse. The financing party delivers the pledged goods to the supervisor for supervision. The bank signs a loan contract with the financing party and a pledge supervision contract with the supervisor. For example, a bank signs a loan contract with the financing party, while a state-owned warehousing enterprise (supervisor) is responsible for supervising the pledged goods. The risks in this model mainly include potential quality issues of the pledged goods, repeated pledging, or the supervisor failing to fulfill supervisory responsibilities.

5. Warehousing Custody

In the warehousing custody model, the buyer and seller sign a sales contract, and the goods are stored by the custodian. However, in practice, this model carries risks such as repeated warehouse receipts. For example, such problems frequently appeared during the steel trade crisis. In one case, the buyer and seller traded goods, and the warehouse (custodian) had issues with repeated pledging.

6. Confirmed Warehouse

The confirmed warehouse model involves three parties: buyer, bank, and seller. The buyer first pays a deposit to the bank, the bank issues an acceptance bill to the seller, and the seller ships goods according to the bank's instructions. For example, a bank conducts confirmed warehouse business with the buyer and seller. The risk in this model mainly lies in that if the buyer fails to pay subsequent payments on time, the seller may refuse to ship goods, causing the bank to face financial risks.

7.  Factoring

In the factoring model, the seller transfers accounts receivable to the bank, the bank provides factoring financing to the seller, and notifies the buyer of the debt transfer. For example, a bank signs a factoring contract with the seller and notifies the buyer of the debt transfer. The main risks in this model are the authenticity of the accounts receivable and the buyer's payment ability.

In financing trade disputes, the nature of contracts is often controversial, with cases where contracts named as sales contracts are actually loan contracts being common. With the development of judicial practice, the standards for identifying such contract nature have gradually become clear. According to the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases," private lending contracts concluded between legal persons, other organizations, and among them for production and business needs are generally supported by courts unless specific invalid circumstances exist. However, if there are illegal situations such as obtaining credit funds from financial institutions and then lending at high interest rates, the contract will be declared invalid. In actual cases, if a financing trade contract signed by an enterprise is identified as a loan contract, it may face legal consequences such as interest rate adjustments and contract invalidation, thereby affecting the enterprise's fund recovery and expected returns.

The uncertainty of ownership of goods directly affects the determination of contract validity and performance. In bulk commodity trade, delivery of goods is divided into physical delivery and delivery of goods documents. Delivery of ownership certificates mainly refers to the delivery of warehouse receipts and bills of lading, but in practice, warehouse receipt companies often provide non-standard certificates such as delivery orders and inbound orders, and there is considerable controversy over whether these documents can be equated with warehouse receipts. If the storage party issues multiple certificates for the same batch of goods, the determination of ownership becomes more complex. For example, in the sales contract dispute case between Zhongshang Hualian Technology and Trade Co., Ltd. and Changyi Kunfu Textile Co., Ltd., there was a dispute over the recognition of "ownership transfer procedures," which ultimately affected the case outcome. Therefore, if enterprises cannot clearly determine ownership in transactions, it may lead to repeated disposal of goods and damage to their own rights and interests.

Financing trade easily triggers issues at the intersection of civil and criminal law, commonly including contract fraud and occupational crimes. When criminal clues are found, according to the "Several Specific Issues in Current Commercial Trial Work" by the Supreme People's Court, if the legal facts of commercial and criminal cases differ, they should be tried separately; if they are exactly the same, the commercial case may not be accepted or the prosecution may be dismissed; if partially related, it must be decided whether to suspend the commercial case trial based on whether the commercial case must rely on the criminal case judgment. In practice, once criminal offenses are involved, enterprises not only face civil disputes but may also face criminal investigations, which undoubtedly increases the complexity and uncertainty of dispute resolution and seriously affects normal business operations.

In financing trade, the credit status of participants is crucial. If the financing party has poor credit and cannot repay the financing funds on time, the funding party will suffer financial losses. In models such as pallet trade and entrusted procurement, the credit risk of the financing party is particularly prominent. For example, in some cases, the financing party, due to poor management or malicious fraud, fails to fulfill repayment obligations, causing the funding party's capital chain to break and even face bankruptcy risk. Therefore, before engaging in financing trade, enterprises must thoroughly investigate the financing party's credit record, financial status, and operational capability, and take necessary credit risk prevention measures, such as requiring guarantees or purchasing credit insurance.

Market price fluctuations have a significant impact on financing trade. In bulk commodity trade, if the price of goods drops sharply, it may cause the value of the financing party's collateral to shrink, failing to cover the financing amount. At the same time, changes in market demand may also affect the sale and circulation of goods, increasing inventory pressure and capital occupation costs for enterprises. For example, in industries such as steel and coal, market prices are greatly influenced by macroeconomic conditions and policy regulation. If enterprises conduct financing trade at high prices, once prices fall, they will face huge market risks. Therefore, enterprises should closely monitor market dynamics, reasonably control trade scale and inventory levels, and use hedging tools to reduce market risk.

Operational risk arises from irregular operations and management loopholes in the transaction process. In the circulation of goods documents, issues such as document loss and information errors may occur, affecting ownership transfer and goods delivery. In internal management, if the use of company seals, financial document management is irregular, or key personnel have moral risks, operational risks may also arise. For example, in some enterprises, due to poor seal management, illegal persons have stolen seals to sign false contracts, causing significant losses to the enterprise. Therefore, enterprises should establish sound internal management systems, strengthen monitoring and management of transaction processes, and improve employees' risk awareness and operational standards.

1. Clarify Contract Nature and Terms

When signing financing trade contracts, enterprises should clarify the nature of the contract and avoid vague expressions. Contract terms should detail the rights and obligations of all parties, transaction processes, methods of goods delivery, payment times, and liability for breach of contract. Especially for clauses involving financing arrangements, key elements such as interest rates, repayment methods, and guarantee methods should be clearly defined to ensure the contract terms are operable and enforceable.

2. Due Diligence on Contract Counterparties

Before signing contracts, enterprises should comprehensively review the counterparty's qualifications, credit status, and operational capabilities. For financing parties, focus on their financial status, liabilities, and repayment ability; for partners, assess their business reputation, industry standing, and past transaction records. Relevant information can be obtained through enterprise credit information disclosure systems, third-party credit rating agency reports, and on-site inspections.

1. Standardize the Circulation of Goods Documents

Enterprises should establish standardized systems for the circulation of goods documents to ensure the authenticity, completeness, and validity of ownership certificates. For key documents such as warehouse receipts and bills of lading, operations must strictly follow legal provisions and industry practices. When receiving and delivering documents, carefully verify whether the document information matches the actual goods to prevent document fraud and ownership disputes. At the same time, documents should be properly preserved and archived to provide effective evidence when needed.

2. Strengthen Supervision of Goods Storage

Choosing reputable and qualified storage enterprises is key to strengthening supervision of goods storage. Enterprises should sign detailed storage contracts with storage companies, clarifying the rights, obligations, and responsibilities of both parties, especially regarding custody, inventory, and warehouse entry and exit. Regular on-site inventory checks should be conducted to verify the quantity and quality of goods and ensure their safety. If storage companies are found to have irregular operations or poor management, timely measures should be taken, such as requiring rectification or replacing the storage company.

1. Negotiation and Mediation

After a financing trade dispute occurs, enterprises should first try to resolve the issue through negotiation and mediation. Negotiation and mediation are flexible and efficient, allowing both parties to reach an acceptable solution in a short time and reduce dispute resolution costs. Enterprises can appoint professionals to communicate with the other party, understand their demands and positions, seek common interests, and reach a settlement through negotiation. If negotiation fails, third-party mediation institutions can be invited to intervene, such as industry associations or chambers of commerce mediation centers, to mediate under their guidance.

2. Litigation and Arbitration

When negotiation and mediation cannot resolve disputes, enterprises should decisively adopt litigation or arbitration. When choosing between litigation and arbitration, comprehensive consideration should be given to contract provisions, the nature of the dispute, and actual circumstances. Enterprises should select the appropriate dispute resolution method based on their needs and actual situation.

In recent years, the State-owned Assets Supervision and Administration Commission (SASAC) and other departments have introduced a series of the latest regulations targeting financing trade. In 2017, SASAC issued the "Notice on Further Investigating the Risks of Financing Trade Business of Central Enterprises," which explicitly requires central enterprises to comprehensively and thoroughly investigate the risks of financing trade business, strictly prohibiting the conduct of "empty turnover," "single transactions," and other false trade activities. In 2021, the "Guiding Opinions on Strengthening Debt Risk Management of Local State-owned Enterprises" emphasized that local state-owned enterprises must strictly control financing trade and strengthen debt risk management. These regulations aim to enhance supervision over financing trade, standardize corporate business conduct, and prevent and resolve financial risks. The latest regulations further clarify the definition, characteristics, and prohibited behaviors of financing trade, increase accountability for violating enterprises and responsible persons, and require enterprises to strengthen internal controls and risk management, establishing sound risk monitoring and early warning mechanisms. In December 2023, SASAC issued the "Notice on Regulating Trade Management of Central Enterprises and Strictly Prohibiting All Forms of False Trade" (SASAC Finance Review Regulation [2023] No. 74), explicitly banning financing trade. It comprehensively reviewed various scenarios of possible false trade in central enterprise trade business and summarized them into ten scenarios, referred to as the "Ten Prohibitions." Because false trade lacks commercial substance and may disrupt market order, trigger financial risks, cause tax revenue loss, and damage the image of central enterprises, SASAC strictly prohibits all central enterprises from engaging in any form of false trade business. The "Ten Prohibitions" stipulated in Document No. 74 are distilled and summarized by SASAC based on practical experience and hold important guiding significance for directing trade business development and fulfilling state-owned asset supervision functions.

1. Strengthen Compliance Management

Enterprises should establish and improve compliance management systems, incorporating financing trade business into the scope of compliance management. Set up dedicated compliance management departments or positions responsible for reviewing and supervising financing trade business. Develop compliance operation manuals that clarify the operational procedures and risk prevention points of financing trade business, strengthen compliance training for employees, and enhance employees' compliance awareness and risk prevention capabilities. Regularly conduct compliance reviews of the enterprise's financing trade business to promptly identify and correct violations, ensuring that business activities comply with the latest regulations and legal requirements.

2. Optimize Business Structure

Enterprises should optimize their business structure according to the latest regulations and their own development strategies, reducing reliance on financing trade business. For financing trade businesses that do not align with the enterprise's main business development direction or carry high risks, they must be decisively cleared and exited. Increase investment and development in core businesses to enhance the enterprise's core competitiveness and profitability. At the same time, actively explore innovative business models, expand new profit growth points, and achieve sustainable development. In the process of optimizing the business structure, fully consider market demand, industry development trends, and the enterprise's actual situation to formulate reasonable business adjustment plans.

3. Strengthen Risk Monitoring and Early Warning

Enterprises should establish and improve risk monitoring and early warning mechanisms to conduct real-time monitoring and dynamic assessment of financing trade business risks. Utilize information technology to collect and analyze market information, financial data, counterparty information, and other data related to financing trade business to promptly identify potential risk points. Set risk warning indicators and thresholds; when risk indicators reach warning thresholds, promptly issue warning signals to remind enterprises to take corresponding risk response measures. Strengthen tracking and analysis of risk warning information, assess risk development trends, and provide scientific basis for enterprise decision-making.