A model law governing warehouse receipts has been adopted by the UN, potentially opening up new sources of finance for commodity producers in developing countries and helping to curb fraud.

Proponents of the model law say it will be of particular use in developing countries that are rich in agricultural commodities and storage facilities, but lack a legal framework to give banks confidence to use warehouse receipts as security for financing.

The model law was developed by UNIDROIT, a UN body dedicated to harmonisation of private international law, and the UN Commission on International Trade Law (UNCITRAL). The latter organisation adopted the final text on June 26, following UNIDROIT’s adoption in mid-May.

The law provides a framework for “all the essential aspects necessary to regulate the private law side of a warehouse receipts system” and with a focus on financing, according to UNIDROIT.

The final text is expected to be published later in the year, with a guide to enactment to follow in 2025.

The model law caters to both civil and common law jurisdictions and is designed to be implementable without needing significant additional work by local legislators.

Warehouse receipts are issued by warehouse operators to the owners of stored goods. They can also be negotiable documents, meaning title to the goods can be bought and sold while the commodities remain in storage, or pledged to financiers in exchange for a loan.

UNIDROIT said in 2023 document that “a supportive legal framework is widely regarded as a prerequisite for a well-functioning warehouse receipts system that can foster transactions and facilitate access to finance, especially in the agricultural sector and with particular importance for small entrepreneurs”.

The model law will also enable the use of electronic warehouse receipts.

The text “contemplates the issuance and transfer of both paper-based and electronic warehouse receipts on a medium-neutral and technology-neutral basis”, UNCITRAL says in a statement.

“This allows the use of central registries, distributed ledgers, platforms and other technologies for managing the electronic warehouse receipts.”

Similarly to the Model Law on Electronic Transferable Records (MLETR) – widely used as a template for digitalising traditional trade documents such as bills of lading – the warehouse receipt model requires a “reliable method” for the issuance of warehouse receipts.

A draft of the model law dated February this year defines an electronic warehouse receipt as one issued when a reliable method is used to identify the receipt, render it “capable of being subject to control from its creation until it ceases to have any effect or validity “and “retain[s] the integrity” of the document.

The model law “provides a modern and balanced blueprint for commercial law aspects of the use of warehouse receipts”, UNCITRAL legal officer Luca Castellani wrote on LinkedIn after the adoption of the text.

“Adoption offers a real opportunity to transform the warehouse receipt business through fintech, thus providing access to finance to more business – especially micro, small and medium-sized enterprises – at lower cost.”

More frequent use of electronic warehouse receipts may also help curb their exploitation by fraudsters. Paper warehouse receipts can be duplicated and pledged to multiple lenders, or issued for commodities that do not exist or are owned by another party.

Warehouse receipts have featured in several high-value frauds that have ensnared banks and insurers in recent years, including the giant Qingdao metals fraud of 2014; an almost US$300mn case involving photocopied warehouse receipts that stung commodity trader ED&F Man and Australian lender ANZ;  a 2022 case involving aluminium stored in China; and a US$5.7mn grain fraud in Ukraine.

In addition to MLETR, UNCITRAL is close to completing a model law for negotiable cargo documents, while UNIDROIT has also developed a model law on factoring.