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International Investment Group (IIG), which specialises in trade finance lending to small and medium-sized companies in emerging markets, has had its license revoked by the US Securities and Exchange Commission (SEC) following what the regulator calls “a string of frauds”.

As investment advisor to the Trade Opportunities Fund (TOF), the Global Trade Finance Fund (GTFF), and the Structured Trade Finance Fund (STFF), IIG offers institutions and other investors the opportunity to invest in diversified trade finance portfolios, originally through fund products and subsequently through other types of investment vehicles, such as collateralised loan obligations.

Through its trade finance arm, IIG Trade Finance, IIG makes loans to small to medium-sized businesses, usually commodities exporters located in emerging markets, such as Latin America. According to the company’s website, these loans typically consist of US dollar-based structured trade finance credit facilities with a maturity of up to 36 months, supported by numerous individual short-term transactions.

Trade finance funds have proliferated in recent years, as investors look at ways to diversify their investment portfolios, capitalising on emerging market growth. They are also filling the gap left as banks, which have traditionally dominated the market, have become more selective in the types of clients and deals they finance, as a result of high onboarding costs compared to the revenue opportunities of relatively small-scale loans, along with the cost of compliance with post-crisis regulations such as Basel III, know your customer and anti-money laundering requirements.

While not market-rocking – the amount sold in fake loan assets to clients by IIG was around US$60mn, according to the SEC – the case illustrates the risks inherent to alternative trade finance. On its website and in investor prospectuses, IIG touts its risk control strategies, which include portfolio concentration limits at the borrower, country, and commodity level, as well as a “robust” credit review process for borrowers. However, a series of defaults, including on a US$30mn loan by TOF to a South American coffee producer and a US$30mn loan to an unnamed seafood producer, soon saw the firm getting into trouble.

As the SEC documents relating to this case show, IIG engaged in a typical Ponzi scheme approach. Beginning around 2007, IIG allegedly hid losses in the TOF portfolio by overvaluing troubled loans and replacing defaulted loans with fake “performing” loan assets. When it was necessary to create liquidity, including to meet redemption requests, IIG would sell the overvalued or fictitious loans to new investors and use the proceeds to generate the necessary liquidity required to pay off earlier investors, the SEC says.

The SEC report goes on to say that by 2013, TOF was suffering serious liquidity problems due to investor redemption requests, as well as repayment obligations on loans the fund had taken from international development banks. To meet these liquidity needs, and allegedly to continue to conceal TOF’s losses, IIG issued US$220mn of collateralised loan obligations (CLO) that were structured, arranged and placed by Deutsche Bank Securities. IIG, which served as the investment adviser to the CLO, then used some of the capital from the CLO to acquire existing trade finance loans from TOF. Subsequently, it issued bonds to investors, backed by the cash flows from the CLO.

The SEC finds that the CLO then made new loans to at least seven Panamanian shell companies secretly owned by IIG, which were then transferred to pay TOF’s liabilities. IIG valued the fake assets in the tens of millions of dollars on the books of the CLO.

By 2017, the notes issued by the CLO began to mature, and TOF was still strapped for cash. IIG then set up two new funds, GTFF and STFF, and the alleged web of fictitious liquidity grew wider, with investments made into both new funds used to purchase fake loan assets from TOF and the CLO.

“This case shows that even sophisticated professional investors can fall victim to Ponzi schemes,” says Daniel Michael, chief of the SEC’s complex financial instruments unit.

IIG has consented to a bifurcated settlement with the SEC, which imposes a preliminary asset freeze, but reserves the issue of any monetary relief for further determination by the court upon motion of the SEC.

Calls by GTR to IIG in New York and to its affiliate IIG Bank Malta for comment went unanswered.