A recent fraud ruling against fuel trader Winson Oil underlines that commodity traders must be wary of warning signs when entering into structures such as circular transactions, experts say.
Winson had turned to the Singapore courts to recover around US$60mn from Standard Chartered and OCBC, due under letters of credit (LCs) for the sale of gasoil cargoes to Hin Leong in March 2020.
The sales were part of a circular series of trades, starting and ending with Hin Leong. It emerged following the collapse of Hin Leong – which was later found to have carried out systemic duplicate financing and other trade finance fraud – that the underlying shipment of goods had not in fact taken place.
Winson filed two lawsuits against the banks after they refused to make payment, but Singapore’s High Court ruled last year that Winson had behaved recklessly when seeking payment under the LCs, and therefore was acting fraudulently when it made representations to the two lenders.
Appealing that decision, Winson sought to argue that recklessness to the truth should not be sufficient to invoke the fraud exception under an LC – a deliberately narrow clause for a product that is otherwise independent of the underlying trade.
However, Singapore’s Court of Appeal last week stood by the initial decision.
Red flags
Blackstone & Gold, a Singapore law firm that specialises in commodity trading, says the facts of the Winson case are unique, but that there are “key themes for traders and lenders to understand”.
“Creative structures like repos, circular and sleeving arrangements in oil trading put a trader further away from the actual physical cargo being traded and the critical original bill of lading (BL), increasing the risk of fictitious trades,” it says in an analysis of the appeal verdict.
“The case is a timely reminder that the buck doesn’t always stop with the bank.”
The Winson case emphasises that traders will not be “rewarded for burying their heads in the sand” when there are red flags associated with the underlying movement of goods, Blackstone & Gold says.
In oil trading, counterparties rely on letters of indemnity (LOIs) where original bills of lading are not quickly available.
They are often deployed in arrangements where traders generate small margins by buying and immediately selling cargoes as part of a longer chain of transactions. That was the case for Winson’s sales to Hin Leong.
But the Blackstone & Gold analysis says an LOI “contains heavy representations as to the essential feature of the trade – that cargo was shipped pursuant to valid BLs and that the seller has and will pass good title to that particular cargo”.
“The risk/reward paradigm has shifted, and recklessly indifferent traders might find themselves facing a huge unpaid exposure for what is effectively a margin of a few dollars per ton.”
In the Winson case, there were several specific red flags cited in the Court of Appeal judgment.
When OCBC informed Winson it did not believe goods were actually shipped, the trader swiftly prepared fresh invoices and LOIs rather than seeking to understand why the bank had raised concerns.
Winson also sought payment despite receiving no loading documents or inspection certificates, the quantity of fuel loaded was changed on the copy BL after the vessel had already sailed, and there were WhatsApp messages from a Winson director asking OCBC to “check if the title is clean”.
A source close to the case tells GTR they believe it is significant the Court of Appeal took these red flags into account, with the judgment even citing some that had not been highlighted in the initial verdict last year.
For instance, the cargo’s carrier, Ocean Tankers, was effectively controlled by – and shared an office with – Hin Leong. Winson should therefore have been able to retrieve original BLs quickly, particularly once challenged by OCBC, rather than rely on LOIs.
The source says the judgment suggested there “should have been no need to use LOIs in the case”, and the fact Winson did not question the lack of original BLs after OCBC’s rejection “was odd”.
“This, coupled with how Singapore is small and all parties were based here, made Winston’s conduct inexplicable,” the source says.
Those contextual factors and red flags ultimately led to the Court of Appeal’s decision to rule against Winson.
Captain Mathiew Rajoo, a partner at Dennis Mathiew law firm, says in a briefing on the case that it emphasises beneficiaries under an LC – despite not being obliged to investigate the authenticity of trade documents – must be aware “their responses and reactions in the face of red flags will be scrutinised”.
The fraud exception
Winson’s defence also argued that considering recklessness to amount to fraud would represent a widening of the fraud exception under an LC, potentially weakening its usefulness as a trade finance product.
In a 2022 judgment, the Singapore International Commercial Court backed energy trader PPT Energy in a comparable claim against Crédit Agricole CIB.
In that case, PPT’s sale was part of a fraud scheme orchestrated by commodities trader ZenRock. The court found that while PPT was not an “innocent bystander”, it was also not an active participant in the fraud and did not have “blind eye” knowledge of it.
As a result, the bank was not permitted to rely on the fraud exception and refuse payment, the court ruled.
That ruling was later overturned, but due to a breach of warranty; the Court of Appeal said the bank’s fraud-related argument would “significantly undermine the whole system of documentary credits”.
An industry source says they believe allowing non-payment under an LC due to recklessness – rather than actual knowledge of fraud – could pose challenges for commodity traders.
Speaking on condition of anonymity, they say that reliable cash flow is vital for traders because margins on trades are generally small, and so non-payment under an LC could prove highly damaging – particularly if it later emerges that the transaction was legitimate.
A better approach would be for the bank to make payment initially and investigate whether wrongdoing occurred at a later stage, they suggest.
But another source close to the Winson case, speaking on condition of anonymity, says that in their view the latest ruling “corrects” the decision in the PPT case.
“That decision tried to narrow the fraud exception to exclude recklessness, but this ruling brings it back in line with what fraud has always been, and what the test for fraud should be,” they say.
The source adds that creating a distinction between the fraud exception under an LC and the tort of deceit – where a bank has already made payment, but subsequently sues to recover the funds – could have unintended consequences for how lenders approach future disputes.
“It would be incongruous to have two different tests, with one wider than the other, as that would affect which recourse a bank is likely to take if there is fraud involved,” they suggest.
“A stricter test for the fraud exception could incentivise banks to pay out under an LC even if they have grounds to suspect it is fraud, and then pursue a claim in deceit afterwards. Frankly, that does not make sense from a legal or practical perspective.”
Winson, OCBC and Standard Chartered did not comment when contacted by GTR.
