A lender owned by Russia’s central bank has accused some of the world’s biggest commodity traders, including Cargill, the Louis Dreyfus Company and Bunge, of complicity in an alleged US$3.2bn trade finance fraud aimed at circumventing Russian capital requirements.

The allegations were made in a New York court filing by National Bank Trust (Trust Bank), a “bad bank” holding the distressed assets of a collapsed banking group formerly owned by Russian businessman Mikail Shishkhanov.

The Central Bank of Russia sank billions of dollars into bailing out Binbank (also known as B&N Bank) and Rost Bank in 2017. The toxic assets of the two banks and other failed lenders were later merged into Trust Bank, which has since sought to claw back losses it attributes to former managers of the group.

Trust Bank’s investigations have revealed what it says is a “convoluted” multi-year scheme using letters of credit (LCs) which enabled companies allegedly linked to Shishkhanov to “surreptitiously loot” Rost Bank. A spokesperson for Trust Bank says the total alleged losses arising from the scheme are still being assessed.

In a January court filing in a New York district court, Trust Bank claims 14 traders arranged 122 LCs, collectively worth US$3.2bn, between 2013 and 2017 for fictitious trades where no goods were actually shipped.

Topping the list of traders Trust Bank claims were complicit in the scheme is Cargill, who allegedly arranged 24 LCs totalling US$802.3mn. The lender says Louis Dreyfus benefited from 26 LCs with a value of US$665.2mn and Bunge 14 LCs worth US$304.8mn.

Other traders who it argues organised a significant amount of financing under the alleged scheme include Geneva-based Quadra Commodities and Sanjeev Gupta’s Liberty Commodities. Trust Bank claims all the traders knew or turned a blind eye to the fraudulent rationale behind the transactions.

The lender alleges that in each case, the trader involved used the LC proceeds to immediately provide a loan to one of several Shishkhanov-linked companies registered in the British Virgin Islands (BVI), pocketing the difference between the amount received under the LC and the amount loaned to the BVI company.

The alleged aim of the scheme was to get around Russian regulations that would have required the bank to reserve an amount equivalent to 100% of the value of loans given to related entities. The rules also place limits on the amount that can be loaned to related parties.

By making the loan to the commodity traders, which then immediately on-lent the money to the related parties, the bank was able to disguise the transactions as providing low-risk credit to a “respected international trading group”. In reality, it was an unsecured loan to a company connected to Shishkhanov with no evidence as to its creditworthiness, the filing claims.

Trust Bank says it plans to file a lawsuit in the BVI against the traders, under a Russian law that allows fraud victims to seek redress from parties found to have caused “damage” to a legal entity.

The bank alleges that the proceeds from the loans were “likely” used “for the personal benefit of Mr Shishkhanov and his associates” and to “recycle and to be used to service other loans”.

“This is a process that is called ‘balance sheet management,’ which is a euphemism for misstating accounts by concealing bad debts,” the filing claims.

“The traders and conduit companies engaged in an unlawful scheme intended to give the impression that Binbank was involved in profitable arm’s length lending arrangements with the traders to finance commodities trades,” Neil Dooley, a London solicitor representing Trust Bank, says in a witness statement filed in New York.

“In reality, [Trust Bank] believes that there were no commodities trades. The scheme involved transactions between related companies, the purported parties to the trades not appearing on bills of lading, unexplained inconsistencies in shipment sizes, and lack of confirmation that goods were ever actually exchanged.”

The statement adds that Trust Bank “believes that the traders were aware of the fraudulent nature of the import credit agreements, or that the traders turned a blind eye”. The traders should compensate the bank because the alleged scheme was only possible with their active involvement, “even if the traders did not have actual knowledge of the underlying fraud”, the filing says.

Trust Bank is seeking an order allowing it to subpoena a raft of lenders, including BNY Mellon, Deutsche Bank, JP Morgan and Standard Chartered. To aid its claim in the BVI, it wants records of all transactions over US$50,000 between the traders and BVI companies connected to Shishkhanov between June 2013 and September 2017.

Cargill, Bunge and Quadra did not respond to emails and phone calls seeking comment. Louis Dreyfus and Liberty Commodities declined to comment.

In a March 10 letter to Judge Paul G. Gardephe, who is hearing the case, Cargill flagged it will challenge Trust Bank’s attempt to procure its bank records by arguing that the BVI does not have jurisdiction to hear the claim and that “applicable sanctions” may prevent the lender from launching its suit.

Efforts by GTR to reach Shishkhanov were unsuccessful. Questions sent via a London lawyer representing him in separate ongoing litigation in the English courts were not answered.

A spokesperson for Trust Bank tells GTR: “We are confident that the US court will impartially and carefully consider [the bank’s] position.”


Rost Bank left ‘holding the bag’

Trust Bank’s filing details an example which Trust Bank says is typical of how all the LCs and back-to-back loans worked.

It says that in November 2016 Cargill Financial Solutions (Cargill FS) agreed to supply Midwestern Trading Group Inc., another wholly-owned Cargill entity, with some 135 million metric tonnes of gasoil for US$44.6mn, financed by a discounted LC issued by Binbank for US$43.6mn.

Trust Bank believes that the trade was fake. It says that while the vessels named in the deal documentation did sail between the export port of Riga and the import port in the Netherlands that November, the documents contained several red flags.

They included that the parties on the bills of lading were not those listed in the supply agreement, the supply agreement was “unusually short for a transaction of this nature” and that no record of actual delivery could be located.

In parallel with the LC, Midwestern inked a loan agreement with Diamond Forca Ltd, a BVI entity “believed to be affiliated with” Shishkhanov. Under the deal, Midwestern agreed to loan Diamond Forca US$42.9mn as soon as the LC proceeds were received by its sister company Cargill FS.

The loan agreement was also conditional on Binbank waiving security guarantees from Cargill Inc. and Credit Suisse which secured the LC issued for Midwestern.

Midwestern then assigned its rights under the Diamond loan to Binbank, meaning – Trust Bank claims – that neither Cargill entity carried any risk in the transaction, although the trader made a US$750,869 profit from the difference between the LC and the loan to Diamond.

In comparison, Trust Bank claims, Binbank was left without any security and only the right to “claim against Diamond, a BVI company with no known assets… and no obvious means to repay the loan… The only rationale for Binbank to take on this risk was because that it (or more likely senior management controlled by Mr. Shishkhanov) also controlled Diamond”.

In order to repay the loan, Diamond sourced the funds from Binbank through a US$75mn loan to Rost Bank in June 2017. That money was ultimately loaned to Diamond – through layers of BVI companies allegedly affiliated with Shishkhanov – which used part of it to repay Midwestern. A day later, Midwestern repaid Binbank the same amount.

Rost Bank was never repaid by Diamond and became insolvent before it could repay the loan to Binbank. It ultimately paid the sum the following year with part of a multi-billion US dollar bailout package received by Russia’s central bank, along with other loans made in similar circumstances.

“Rost was left holding the proverbial bag,” Trust Bank claims.

So far Trust Bank has reportedly recouped several hundred million dollars for the central bank’s coffers, including through a 2019 settlement agreement with Mikhail Gutseriev, Shishkhanov’s uncle. The bank “is currently pursuing various claims against Mr Shishkhanov in Russian courts, amounting to several billion US dollars”, a spokesperson says.

But those efforts have been complicated by sanctions imposed on Russia’s central bank following last year’s invasion of Ukraine. Other ex-owners of bailed out banks and a British MP have urged western countries to directly sanction Trust Bank to prevent recovered funds from fuelling Moscow’s war efforts. Some lawyers representing the lender in the Netherlands and Cyprus resigned in the wake of the conflict, the Wall Street Journal reported last year.

In its filing, the bank claims sanctions on the central bank imposed after Russia’s invasion of Ukraine “do not extend to its ownership” of Trust Bank.