A judge in Singapore has rejected claims by Italian lender UniCredit that commodities giant Glencore helped defraud it of US$37mn as part of a back-to-back trade with scandal-hit trader Hin Leong.

UniCredit’s Singapore branch, in a suit filed in 2020 in the city-state’s High Court, alleged that Glencore’s Singapore division arranged a “sham” transaction in late 2019 in order to gain cheap working capital from the bank in the form of a letter of credit (LC).

The LC paid to Glencore was applied for by Hin Leong, an oil trader that collapsed in early 2020 amid allegations of fraud.

The trade involved Glencore selling 150,000 metric tonnes of fuel oil to Hin Leong and simultaneously buying it back at one minute past midnight on December 2. However when applying for the LC, Hin Leong told UniCredit that the goods were “unsold”, a fiction it maintained until its demise in order to avoid repaying the loan.

UniCredit argued that Glencore also made “fraudulent misrepresentations” to the lender when it presented documents for payment of the LC, because it mentioned only its initial sale of the fuel to Hin Leong, and not the simultaneous repurchase agreement.

But in a judgement handed down on October 21, Judge Andre Maniam ruled emphatically in Glencore’s favour, finding UniCredit had not proven any of the six causes of action it put forward during hearings in May and July this year.

“Glencore was entitled to the payment which it received from UniCredit under the LC,” Judge Maniam wrote. “Glencore did not defraud or deceive UniCredit; it did not conspire with Hin Leong to injure UniCredit; it was not unjustly enriched. UniCredit is not entitled to rescind the LC, or to recover the payment it made to Glencore.”

It is the second time this year that a judge in Singapore has denied a bank damages from a letter of credit recipient that took part in a trade where the true structure was kept secret from the financing bank.

In January a judge found that Japanese energy trader PPT, while not “an innocent bystander”, did not have “blind eye” knowledge of a circular financing fraud perpetrated against Crédit Agricole by commodities trader ZenRock and denied the French lender’s attempt to claw back its US$24mn loss from PPT.

Questions over the propriety of traders participating in circular or back-to-back trades which are hidden from financing banks were raised after the collapse of several traders, some of which were mired in fraud allegations, in the first six months of 2020.

The losses banks copped in those trades have triggered lawsuits against participants for alleged fraud and shipping companies for purported misdelivery of goods.


Transaction ‘not a sham’

In its case, UniCredit argued that the transaction between Glencore and Hin Leong was a “sham” because it was conceived as a way for Glencore to “optimise” its working capital and the goods were not delivered.

The bank claimed that a financing deal masquerading as a regular trade, “by definition, cannot be a genuine sale and purchase that the autonomy principle in LCs for the facilitation of international trade was intended to protect”.

It said Glencore wanted to take advantage of “the lower interest rate offered by [UniCredit] in commodity transactional financing (through an LC) as compared to the Glencore group treasury interest rate”.

But the judge said that in order for the deal to be a sham, both traders would have needed to share “a common intention that the purported rights and obligations under the sale contract were not to be real rights and obligations”, which he said UniCredit did not prove.

The LC issued by UniCredit required a full set of original bills of lading (BLs) for payment to be made, but the bank agreed to accept a letter of indemnity and invoice if the BLs were not available. However, the letter of indemnity only protected Hin Leong, not the bank.

Glencore never held the BLs – which were with a UK Glencore entity it had originally purchased the fuel from – and never transferred them to Hin Leong. UniCredit only sought the BLs in April 2020, when Hin Leong was already unravelling.

“UniCredit thus found itself without repayment from Hin Leong, without the goods, without the BLs, and without security over the goods or the BLs,” the judge wrote.

UniCredit argued that Glencore made false misrepresentations to the bank about agreeing to surrender the original BLs to Hin Leong. But the judge found Glencore’s statement “was true” and did not “impliedly represent to UniCredit anything about Glencore’s intentions”.

He wrote that there was a distinction between Glencore’s statement to UniCredit that the BLs would be located and transferred to Hin Leong, and the actual intentions between the traders, which were that the BLs would not necessarily be exchanged because Hin Leong would only hold title over the goods for a matter of seconds and never asked Glencore for the BLs.

The judge was satisfied by evidence given by Glencore that the company intended to surrender the BLs “if circumstances required it” and in any case, Glencore’s intentions “were irrelevant” to UniCredit’s obligation to pay Glencore because the documents it presented conformed with the LC.

He found that Glencore did not defraud UniCredit by not telling the bank about the simultaneous buyback contract, because it was not obliged to do so. Even if the trader had told the bank about the repurchase agreement, it is unlikely the lender would have acted differently because it would still be legally bound to make payment under the LC, he found.

A spokesperson for UniCredit declined to comment, including on whether the bank intends to appeal. Glencore also declined to comment.

The decision represents UniCredit’s second major court loss in a trade finance dispute this year. In April a judge in London rejected its attempt to recoup a US$24.7mn loss from shipping company Euronav after Gulf Petrochem, another energy trader that foundered in 2020, failed to repay money it owed for an LC.

In January UniCredit confirmed it was shutting down its branch in Singapore, along with those in Tokyo and Shanghai, as part of a plan to streamline the bank’s worldwide operations.