As Singapore’s Hontop Energy becomes the latest oil trader to be embroiled in a fraud scandal, accused of creating elaborate fake trades and forging documents in order to obtain finance, GTR examines what went wrong in a sector already under intense pressure.
Allegations against Hontop are a worrying development for the city state’s financial sector. The recent collapses of fellow traders Agritrade, Hin Leong and ZenRock – also amid allegations of fraud – had already left banks wary of providing further finance to the sector despite regulators’ attempts to reassure the market.
The case starts with court documents filed at the start of July by the Singapore branch of Malaysian bank CIMB. The bank is seeking to have Hontop, a trading house specialising in the sale of crude and petroleum products, placed under judicial management after what it calls “astonishing allegations” of fraud.
CIMB’s challenge focuses on two transactions, both involving back-to-back sales of oil. In each example, the bank had agreed to finance purchases of crude oil from Malaysian trader Sugih Energy which would then be sold on to BP at a profit.
According to the court documents – an affidavit from Loh Desmond Tjit Leong, CIMB’s head of trade finance in Singapore, and other relevant material – suspicions first arose after the bank did not receive payment of the two invoices.
He says that after investigating the two transactions, it became clear Hontop “had concocted and masterminded complex synthetic transactions with their trading partners to fraudulently obtain trade financing”.
The first transaction is still under internal investigation by CIMB. In November 2019, it agreed to issue a US$32mn letter of credit to support the sale of 476,000 barrels of crude. The bank paid the invoice presented by Sugih, but problems arose when its own invoice – sent to BP – was not paid.
BP told the bank it had not received payment for the cargo and that CIMB appeared not to have been presented with “material details” about the agreement. The bank was “apparently a victim of [Hontop’s] fraudulent conduct”, BP added.
The second transaction is more complex, and described in more detail. Initially, in December 2019, the bank had refused to issue a letter of credit for the transaction – a back-to-back sale of 1 million barrels of crude from Sugih to Mitsui & Co Energy Trading – on the grounds that Mitsui was not an approved buyer.
Within eight hours, the transaction had been amended so that BP was the buyer, with several members of staff from BP’s crude oil trading team named on an email summary presented as proof of the agreement.
Given BP’s status as a creditworthy and trusted buyer, CIMB agreed to issue two letters of credit with an overall value of just over US$70mn.
In January, however, a BP staff member informed the bank it had not entered into any contract for the sale, and was not aware of the transaction. BP explained to CIMB that it did not believe any payment was due and reiterated that fraud had likely taken place – findings the affidavit describes as “astonishing allegations”.
The bank says that if the deal summary was a fabrication, as BP says, then it is likely the contracts were also forged.
“In addition, this raises questions as to what happened to the Russian crude oil which the company allegedly purchased from Sugih or if there even was such a transaction in the first place,” it adds.
There are other irregularities around the transaction. Further investigations carried out by the bank’s legal team centred on a previous back-to-back trade, which involved Sugih purchasing the same cargo from metals trader Wanxiang Resources Singapore.
When contacted by CIMB, Wanxiang said it had been “interposed” into an already-completed transaction – the sale of oil from Hontop to Sugih – and that it was “surprised that the same cargo was sold by Sugih back to [Hontop]” later on.
Wanxiang also told the bank’s investigation that invoices, contracts and payment messages related to that trade had been “materially altered from the original and/or forged”. For instance, invoice totals and cargo descriptions did not match across equivalent documents provided by Sugih and Wanxiang.
CIMB says that if Wanxiang’s testimony is accurate, the three trading houses “were involved in a round-tripping exercise” and that Hontop “was clearly aware of the circularity nature [sic] of this transaction”.
Wanxiang and Sugih are not accused of any wrongdoing. It has since emerged that the BP staff named have been placed on leave while internal investigations are carried out, but are also not accused of any wrongdoing.
Ultimately, CIMB is seeking to reclaim just under US$105mn from Hontop, though court documents say the trader has outstanding liabilities to other banks totalling over US$468mn plus a further US$60mn to unsecured creditors.
CIMB says that unless payment on trade and other receivables valued at around US$720mn are recovered, Hontop would not be able to meet its outstanding liabilities. In the bank’s view, Hontop filings show it has “admitted that it is insolvent (or likely to be insolvent) and unable to pay its debts”.
It has requested that two employees of RSM Corporate Advisory – a Singapore-based accountancy and audit firm – be instated as interim judicial managers.
“At this juncture, the bank would prefer not to take the draconian measure of placing the company in liquidation, which the bank sees as a last resort after restructuring efforts have been exhausted,” it says.
“Instead, the bank verily believes that the interests of the creditors would be better served by the appointment of judicial managers.”
The affidavit says Hontop is blaming a former general manager, Gao Youjian, who it says was acting without proper authorisation of the company and its board when drawing down trade finance facilities. The company does not accept liability for improper conduct.
Industry-wide moves to clamp down on fraud in the commodities trading sector are also on the horizon.
A July 2 joint statement from the Monetary Authority of Singapore (MAS), Enterprise Singapore, the Accounting and Corporate Regulatory Authority and the Association of Banks in Singapore says the sector is collaborating on “a set of best practices for the commodities industry”.
MAS assistant managing director for banking and insurance, Ho Hern Shin, says: “MAS strongly supports the development of best practices in commodity financing to promote transparency and trust in the sector.
“These practices will strengthen banks’ lending standards and facilitate continued lending to trading companies.”