In January this year, Crédit Agricole lost a bid before the Singapore International Commercial Court to claw back US$23.6mn it paid to energy trader PPT under a letter of credit (LC) applied for by since-collapsed commodities trader ZenRock. The French lender argued that it should not have to honour the LC because it had been the victim of a fraudulent scheme to obtain double financing. The court disagreed, finding that PPT did not have actual knowledge of the fraud, which it found was orchestrated by ZenRock.

Baldev Bhinder, managing director of law firm Blackstone & Gold, a Singapore-based law firm specialising in energy and commodities, tells GTR why he thinks the judgement’s narrow definition of fraud under the law may be a missed opportunity to have traders verify and ascertain the trades that they lend their names to when participating in round-trip commodities trades.


GTR: What issues do you have with the judgement?

Bhinder: The headline issue that I see is whether recklessness in the context of round-tripping transactions could amount to fraud. The law is quite clear that if a trader’s hands are dirty, if it knew that there was fraud, naturally, the trader shouldn’t get paid under an LC. But where it’s grey is this idea of recklessness – an indifference to the truth or falsity of the statements being made – where a trader has closed its eyes to something where there were red flags.

I feel that standing behind the truth and authenticity of a trade is the bottom-line requirement we should expect of traders. This is pronounced in the context of oil trading, where it is not uncommon to buy and sell oil without the title documents – the original bills of lading. So the big question then is how does a trader know it’s actually buying cargo? All they receive is an invoice from someone and they pay money on that, in conjunction with a letter of indemnity, which is essentially a warranty by the seller to the buyer, or its bank, as to title, and a promise to deliver the originals bills of lading when located. This warranty is backed with an indemnity if it’s breached – hence the term letter of indemnity. But without the actual bill of lading itself, the trader is taking a punt, like buying a house and not getting the housing deed behind it. You can only sell what you have in the first place.

What’s the reckless behaviour here? There are a few factors, in my view, which go to the heart of the trade claimed under the letter of credit.

In a pre-structured deal like this, where the beneficiary served the role of a conduit trader, didn’t negotiate the contracts, did not receive original bills of lading and probably didn’t even know its seller, I think more needs to be expected of such a beneficiary to stand behind the trade it conducted and authenticate its title. Further, the beneficiary did not question its purpose in the trade even though it knew that ZenRock was doing a round trip of the trade back to itself and. more critically, the beneficiary knew that ZenRock did not want Crédit Agricole to see that circular trade. Another critical factor is the inflated pricing of the cargo above market value: the court accepted the beneficiary’s evidence that it did not know the value of its sales contracts were inflated several times. As a lawyer that deals with oil traders regularly, I find that remarkable.

The court held that round-tripping was a legitimate flow, since the unlawfulness related to a fabricated contract that ZenRock created further down the chain that did not involve PPT. I agree with that – there’s nothing objectionable about round-tripping in itself. Sophisticated traders have long done synthetic trade structures backwards and forwards, but one key caveat is that each party knows the nature of the trade – this includes their banks. The moment banks are precluded from the true nature of the transaction chain, we are rewarding dubious behaviour.

I struggled to see any purpose that the beneficiary was serving in this chain – it gave reasons for its business model, like credit-sleeving, but I don’t think the facts supported the rationale. So to what standard do we hold the reckless conduit trader who was inserted to obscure a trade flow and who is unconcerned with the authenticity of the underlying trade? With respect to each other, traders can create whatever contracts they want, but the moment they represent that trade to a third party like a bank or an insurer, surely they need to stand behind the robustness of the trade? The long-held policy reasons for letters of credit acting as cash need to be balanced with perhaps a new policy, of tightening trade structures to minimise double financing.


GTR: Does that mean the idea of recklessness does not currently exist in Singaporean law in this context?

Bhinder: The standard definition of fraud is making a statement that is false or without belief in its truth, ie, dishonesty, or making a representation without caring whether it is true or false, ie, recklessness. The court in this case, however, was of the view that recklessness, albeit a ground for fraud for demand guarantees, does not extend to letters of credit. Actual dishonesty of the fabricated contracts is needed, which was not made out against PPT in this case.

The court in this case had competing jurisprudence – a Singapore Court of Appeal case of Brody, favouring actual knowledge in letters of credit, and another Singapore Court of Appeal case of Arab Bank, where recklessness was accepted under a demand guarantee. I can’t see a sound basis to have a narrower test of fraud for letters of credit and another wider one including recklessness for demand guarantees and the tort of deceit. This is an area worthy of further consideration and jurisprudence.


GTR: Does this judgement fit in with how the law has been applied in the past, in similar disputes between traders and banks?

Bhinder: It is consistent with how it was in the past. So the law on the fraud exception to the LC payment law is actually very narrow. That’s always been on the side of the beneficiary. It’s very hard for a bank to get out of that. There’s a policy reason behind that as well, because you want the mechanics of LCs to work. You want to have assurance that when a person opens an LC, payment is going to be made under it. If a bank believes that it shouldn’t pay, then it needs to prove fraud.

So it is consistent, but that grey area of what is fraud and the recklessness of the beneficiary has not been aired.


GTR: Does this judgement have implications for similar cases that may come before the courts in Singapore?  Could it discourage banks that are in similar predicaments to Crédit Agricole from challenging payment of an LC on the basis of fraud?

Bhinder: I think any bank has an uphill task when seeking to injunct payments under a letter of credit. Off the top of my head, there were two cases in Singapore, Lambias and Beam Technology, both of which involved forged documents and not completely innocent beneficiaries when presenting documents.

Ultimately this case only reinforced the need for banks to get better visibility over the trade flow although, realistically speaking, the trader is best placed to provide that. I think since the 2020 trade fraud cases, banks have been trying to get more visibility on the trade flow and initiatives like the Trade Finance Registry should help in identifying double financing quickly.

Crédit Agricole was approached for comment by GTR but declined. A lawyer who represented PPT in the case did not respond to a request for comment on the company’s behalf.