Over the past few years, Singapore’s commodities trading scene has been fraught with scandals. Lawyers in the commodities space have thus found themselves with their hands full, assisting clients in spotting potentially fraudulent activity, and also helping mitigate the impact.
Commodities fraud has emerged as a persistent problem in many parts of the world and, notably, in Singapore, whose position as a major port and its business-friendly laws have brought in many foreign companies over the years but has also attracted a significant amount of fraudulent activity.
Fraudsters have exploited Singapore’s accessibility to undertake trade-based money laundering schemes, according to Baldev Bhinder, managing director at Blackstone & Gold, a commodities-focused law firm.
“The reward of an easy margin and the low risk of detection incentivise the behaviour to take part in such schemes or, at the very least, to not ask questions about the veracity of the trades,” says Bhinder.
In a 2022 example, Italian bank UniCredit lost over $37 million after processing a financing application by Hin Leong, a Singaporean oil trader fraught with scandals. According to UniCredit, commodities multinational corporation Glencore was involved in a round-tripping arrangement, selling 150,000 metric tons of fuel oil to Hin Leong, and then immediately buying it back.
Hin Leong, in turn, obtained a $37 million loan from UniCredit through misleading representations. While UniCredit argued that Glencore failed to fully disclose details of the deal, the judge ruled in Glencore’s favour, finding no evidence that the company intended to conspire with Hin Leong.
The judgment raised questions for major banks, which are more likely than ever before to suffer large losses from trader insolvencies and, at the same time, to seek recoveries through litigation.
EASY MONEY
Liquidity is the driver of most frauds in commodities.
“As price arbitrage opportunities decreased, traders increasingly made themselves relevant by their ability to provide liquidity premised on the ability to raise financing,” Bhinder says.
By padding costs or quantities, these “traders” take out loans backed by overvalued receivables that they have no intention of repaying. The money swiftly exits the jurisdiction before the fraud is uncovered.
With international trade proliferating, criminals have loopholes to perpetrate fraud.
As in the UniCredit case against Glencore, the oil trading industry has been hit hard by commodities swindles.
Much of it has to do with the colossal monetary value in each transaction, according to Bhinder. A single shipment of crude can involve anything from $20 million to $100 million.
A common practice of the oil industry is using the payment “letters of indemnity” rather than official documentation of ownership, known as the bill of lading. That means “a whole chain of traders could be exchanging millions of dollars without anyone even knowing for sure if they owned the oil at any time,” he notes.
The market was once dominated by major oil companies, but today it involves traders of all different types and sizes, some existing solely as “credit sleeves” for other companies in the industry, says Bhinder.
The metals market, too, is not immune to commodities fraud.
Last year, Singapore-based commodities giant Trafigura suffered a whopping $577 million fraud perpetrated with fake shipments of nickel. A routine inspection at the port of Rotterdam revealed that a container supposed to carry several tons of nickel plates and cylinders was instead stuffed with worthless scrap metal.
The probe uncovered an elaborate scheme carried out by Indian businessman Prateek Gupta and his companies to sell Trafigura cargo that had already been loaded onto ships, only for most containers to contain counterfeit loads.
“Trade fraud doesn’t exist just in narrow silos within the SME market,” he says. “Sometimes a well-known large trader might be inserted into a trade flow it doesn’t understand for an easy margin. In doing so, it might unwittingly give the entire transaction a veneer of legitimacy on behalf of an unscrupulous trader engaging in dubious or fictitious trades.”
- Baldev Bhinder, Blackstone & Gold
“I think there was a newfound appreciation of the ease with which documents can be manipulated to create fake documents, trades or receivables,” Bhinder says, adding that traders must carefully scrutinise all documentation and verify transactions are legitimate.
“Trade fraud doesn’t exist just in narrow silos within the SME market,” he says. “Sometimes a well-known large trader might be inserted into a trade flow it doesn’t understand for an easy margin. In doing so, it might unwittingly give the entire transaction a veneer of legitimacy on behalf of an unscrupulous trader engaging in dubious or fictitious trades.”
SHELL COMPANIES
In Singapore, the use of nominee directors to operate shell companies and cover for trade fraud or money laundering schemes has come under scrutiny in recent news.
In April, 41-year-old Chinese national Zheng Jia, who served as a nominee director for over 380 companies, was fined S$8,500 for his role in laundering millions of dollars through two shell companies tied to internet scams.
A Singapore court ordered Zheng to pay the fine after he pleaded guilty to failing to exercise due diligence as a director and abetting another man for similar failures.
The authorities have heeded recommendations from the Financial Action Task Force (FATF) to reform laws in curbing vulnerabilities while maintaining regulatory efficiency, according to Bhinder.
For example, nominee directors and shareholders may soon be required to publicly disclose their representative status to the Accounting and Corporate Regulatory Authority (ACRA) and identify who nominated them to assume these roles.
HOW INVESTIGATIONS PROCEED
A law firm’s dual commercial and legal expertise goes a long way in investigating allegations of trade fraud, according to Bhinder. Thorough analysis calls for an understanding of how trade deals are structured and the vulnerabilities in these structures.
“It’s often the commercials of the deal that are the red flags. There is a great deal of synergy between the investigation skill set and the asset recovery work,” he adds.
Disputes related to commodities are becoming more commonplace in the logistics industry that moves food, fuel, and raw materials globally. Investigators examine shipping documents for inconsistencies, transaction records for fragmented information, and discrepancies between physical cargo ownership and paper trade agreements.
When it comes to pursuing asset recovery, speed and momentum are the name of the game, says Bhinder. Yet, local laws co-mingling commodities sometimes hamper security control over goods. He urged creditors to “stress test whether they have the necessary possession, control or local know-how to seize and sell the goods.”
Bhinder notes that third parties like vessel owners and warehouse operators holding goods under contract could become liable. Fabricated receivables or duplicate assignments can undermine reliance on a debtor’s accounts receivables.
While “the atomic bomb” of an injunction aims to surprise, Bhinder cautions they are “far too often, poorly understood and deployed, making it a rather blunt tool.” Global enforcement poses issues, and a costly injunction alone does not guarantee priority over debts or proprietary recovery rights.
Even if a debtor becomes insolvent before litigation concludes, Bhinder argues that an appointed liquidator examining directors and clawing back certain transactions retains power for recoveries. Laws supporting creditor funding could incentivise pursuing insolvency claims.
With the right expertise, investigations and legal manoeuvres may achieve partial victories even in complex transnational frauds.
