When it emerged that Bank of China’s Singapore branch had filed a High Court lawsuit against BP, accusing the company of engaging in fraudulent oil transactions, eyebrows were raised across the trade finance sector.

Following the collapse of energy trader Hin Leong in April 2020 – amid allegations of multiple financing, invoice forgery and other fraudulent activity – there have been a string of court cases filed against oil trading houses in Singapore, as banks scramble to claw back lost funds.

However, Bank of China’s claim against BP appears to be the first time since that scandal that fraud accusations have been filed against an oil major. By contrast, larger traders have characterised the latter half of 2020 as a “flight to quality”, as banks restrict credit to all but the top end of the market.

BP has already said it “strongly refutes the allegations of Bank of China and will defend its position”, and that no further comment will be provided while the matter is ongoing.

The case relates to oil trades between Hin Leong and BP in January 2020. According to the lawsuit, seen by GTR, those transactions formed a “fictitious purchase scheme”.

Initially, Bank of China alleges, BP had emailed Hin Leong to propose two circular trades. It says that in both cases, BP would purchase gasoil from Hin Leong then immediately sell it back at a fractionally higher price.

Transactions of that type are “quite common” and not necessarily indicative of fraudulent activity, says an industry source who asks not to be identified due to the sensitivity of the case.

“It’s more of a repossession arrangement to generate liquidity for Hin Leong,” they say, explaining that if the oil price goes up and the cargo is sold again, both sides of the transaction could end up in profit. “For BP, it’s a dream deal,” they add.

But according to Bank of China, the cargo itself did not exist in the first place – and when Hin Leong’s financial troubles meant it was unable to make payment for the repurchase leg, the bank was left out of pocket and unable to seize any underlying asset.


Circular trades

The bank’s lawsuit centres on three letters of credit (LCs) provided in favour of BP, each of which would facilitate the purchase of 500,000 barrels of gasoil from Hin Leong. The LCs were issued between January 23 and 30, 2020.

Bank of China says it was not informed by Hin Leong or BP that those transactions were part of a sale and buy-back arrangement.

In each case, the bank agreed to make payment to BP after the company presented a sales invoice from Hin Leong and a letter of indemnity (LOI). LOIs are often used by fuels traders in lieu of original shipping documents.

At that point, however, Bank of China was unable to collect payment from Hin Leong, which had fallen into financial distress after founder and chairman Lim Oon Kuin revealed it had suffered undisclosed losses of US$800mn.

According to the lawsuit, the bank now believes that the trades with BP are an example of fraudulent activity outlined in a damning report from Hin Leong’s court-appointed judicial managers, PwC.

PwC says the company’s activity was underpinned by an accounting process whereby funds received from one customer would be allocated to a previous customer’s account in order to inflate receivables balances and cover up losses.

Operating in a similar way to pyramid or Ponzi schemes, this process has to be continually repeated to avoid those losses ever becoming visible in the company’s accounts, it says.

Bank of China says it has subsequently been informed by PwC that the cargo underpinning the three LCs issued in favour of BP did not exist.

As a result, it says that when BP presented those LCs for payment, it either “knew that they were false when it made them or was reckless, not caring whether they were true or false”.

That means BP was, in the bank’s view, “unjustly enriched” by payment of those LCs and that Bank of China is entitled to damages totalling US$125.7mn.


Legal questions

One important question in other fraud lawsuits has been whether the complainant can prove that the seller was aware of any misrepresentations in trade documents.

An August paper by Singapore law firm Blackstone & Gold, not related to the Bank of China case, explains that: “It is simply not enough to allege a fraud, even if there are admissions of double financing in the chain. Even a duplicate BL [bill of lading] may be insufficient to demonstrate that a seller knew its BL was fake at the time of presentation.”

As a result, a bank is obliged to pay even if there is third-party fraud involved, providing the beneficiary did not have knowledge of that fraud.

“Policy considerations dictate that the wheels of international trade must move in favour of a seller who is not guilty of fraud,” the law firm adds.

Another factor in the Bank of China case could be the role of Ocean Tankers, a shipping company also owned by the Hin Leong group, which has been accused of supporting the company’s fraudulent activity by providing forged documentation where required.

The industry source says that if BP had played a role in arranging freight or logistics in its trade with Hin Leong, it would be expected to mitigate potential forgery around bills of lading.

“In this case, it’s simply a circular trade where BP has no involvement in any logistic leg at all, so that makes it easy for Hin Leong to commit fraud,” they say.

Bank of China is also claiming damages totalling US$187.2mn from Hin Leong, which covers the three allegedly fraudulent transactions plus other credit facilities extended to the company.