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A London insurance broker is no longer liable for part of a £31.3mn loss suffered by Dutch bank ABN Amro in a commodities finance arrangement that came unstuck.

In a December 2 judgement, the UK Court of Appeal reversed a High Court ruling last year that found trade risk specialist Edge Brokers was liable for £3.3mn owed by two underwriters to ABN Amro.

The two underwriters, Ark Syndicate Management and Advent Capital Holdings, had initially argued successfully that they were kept in the dark about an add-on to the policy taken out by ABN Amro and should not be required to pay out.

The add-on, inserted in 2015, effectively tacked on a form of trade credit insurance to what was primarily a marine cargo insurance policy.

But the appeals court ruled that a non-avoidance clause in the policy, which barred underwriters from refusing to honour the policy in cases of non-disclosure or misrepresentation, meant that the underwriters could not skirt liability.

The dispute erupted in 2016 when two family-owned cocoa bean traders, Transmar and Euromar, defaulted on repurchase (“repo”) deals under which ABN Amro purchased cocoa products from the two entities through a special purpose vehicle called Icestar.

Transmar, headquartered in New Jersey, was a significant mid-size cocoa trader and processor which supplied products to confectioners such as Hershey and Mars. Euromar was a closely linked entity managed by the founder’s son and registered in Germany.

Transmar filed for Chapter 11 bankruptcy at the end of 2016, owing some US$359mn to major banks including ABN Amro, Société Générale and BNP Paribas.

ABN Amro was forced to sell the cocoa that the companies had failed to repurchase, but some of the products were of poor quality and the bank suffered a £31.3m loss.

In 2018 three executives of Transmar and Euromar were found guilty of fraudulently misrepresenting available collateral in order to receive hefty lines of credit from its lenders and were sentenced to between three months and three years in prison.

 

An ‘unusual’ clause

In 2015, at ABN Amro’s instruction, Edge’s David Mullen had inserted a clause into the policy which extended the bank’s cover to a situation where one of Icestar’s customers could not repurchase a product at the higher price or at all, meaning the bank might lose the transaction premium.

Brain Beattie of Royal Sun Alliance Insurance, the lead underwriter, told Edge it did not need to inform the rest of the underwriters providing the cover.

The High Court heard that because the underwriters were told that the renewed policy was the same as the one that had just expired, they did not read it and discover the new clause.

The clause covered credit risk and was not dependent on the physical state of the goods, which the court heard was unusual in a marine cargo policy.

At the High Court trial in 2020, ABN Amro conceded it did not conduct quality checks on the goods it was purchasing from Euromar and Transmar. The underwriters claimed that if the bank had checked the cargo and paid the market price for them, it would have still been able to collect a profit even when the two traders collapsed.

In January 2018 ABN Amro filed a civil suit in New York against the Johnson family, which controlled Transmar, and several executives from the company.

The suit was joined by lenders Société Générale, BNP Paribas, Natixis, Macquarie Bank, Bank Hapoalim, MUFG and Israel Discount Bank. They claimed that Transmar’s fraud was so brazen and deliberate that the lenders could not have uncovered it by exercising regular due diligence.

ABN Amro exited the commodities and trade finance sectors in August last year, in part after exposure to alleged financing fraud including the Hin Leong scandal in Singapore.

A spokesperson for the bank declined to comment. Edge did not respond to a request for comment. Ark Syndicate Management and Advent Capital Holdings did not immediately respond when contacted.