Singapore’s commodity finance market has endured a turbulent year. A liquidity crisis brought on by low oil prices and the Covid-19 pandemic exposed gaps in several traders’ balance sheets, which in turn gave rise to accusations of double financing and other types of fraud. John Basquill examines what went wrong in the city state’s commodities market, and what banks are doing to stop it happening again.
2020 did not start smoothly for commodities traders in Singapore. As Covid-19 spread across the globe in the first half of the year, national lockdowns and other containment measures prompted a drastic slowdown in goods trade volumes.
An already precarious oil market saw prices drop substantially, in some cases to historic lows and, as a result, many oil traders experienced a squeeze on liquidity. For a handful of trading houses, cracks started to show in their balance sheets.
From March onwards, stories emerged of Singapore-based trading companies that were in financial difficulty, in some cases with outstanding liabilities to banks of millions or billions of dollars. Troublingly, as banks sought to recover their funds, they started to uncover evidence of suspicious transactions.
First to fall was commodities giant Agritrade International, which in March was accused of “massive, premeditated and systematic” deception by an ING court filing. Shortly afterwards Hin Leong collapsed, signalling the demise of one of Asia’s largest independent trading houses. As its founder and chairman admitted to vast undisclosed losses, banks scrambled to recover funds and discovered fraud on a jaw-dropping scale.
Over the following weeks, three other oil traders – ZenRock, Hontop and Sugih Energy – also found themselves accused of fraud by lenders who feared being left out of pocket. Details varied, but allegations generally centred around multiple financing, where two or more banks would be duped into financing the same trade transaction.
In some cases, it appeared that financing had been obtained for cargo that traders did not actually own, or even that did not exist in the first place. Fraud was not restricted to the issuance of letters of credit either; inventory finance and factoring programmes were also exploited.
One consequence has been a sense of nervousness across the commodity finance sector. GTR reported in May that multiple banks, including ABN Amro, were reviewing their corporate and institutional banking activities with a view to de-risking where necessary.
The Monetary Authority of Singapore (MAS) has responded by reassuring lenders that the oil trading sector remains resilient and is urging banks “to apply judicious credit assessments on individual borrowers and not rely on broad-based sector de-risking”.
In August, however, ABN Amro announced it would cease all trade and commodity finance activities, citing its exposure to Hin Leong as well as a scandal involving German payment processor Wirecard. The wind-down is expected to take place over the next three to four years, with the bank forecasting 800 job cuts.
At the same time, Société Générale confirmed it would close its Singapore-based trade commodity finance unit, moving operations to Hong Kong and cutting ties with smaller traders – a decision that was also reportedly prompted by the collapse of Hin Leong.
BNP Paribas has suspended all new commodity trade finance deals pending a review of its activities in Europe, the Middle East and Africa – though the bank is not believed to have had any exposure to Hin Leong.
That is not to say the banking sector as a whole is moving away from commodity finance. Glencore’s chief financial officer, Steve Kalmin, suggested in August that “a flight to quality” was underway, with larger commodities traders remaining in a strong position for obtaining financing.
“I think it’s healthy generally for the industry and healthy for transactions,” Kalmin said. “You can argue that the pendulum had gone a bit too loose in some respects.”
Hin Leong uncovered: a “vicious cycle” of fraudulent trade
At the time Hin Leong collapsed, its exposure to banks and other lenders was estimated to stand at around US$3.5bn, as it emerged the company was able to keep obtaining more liquidity from banks despite serious questions over the underlying trade activity.
A review of the company’s activities and finances carried out by interim judicial managers PwC – submitted to Singapore courts in June and seen by GTR – paints a damning picture of a company that had become reliant on fraudulent transactions and forged documents “on a massive scale”, simply to keep repaying earlier debts.
“As constant liquidity was needed to conceal accumulated losses, the company obtained financing from banks through a variety of financing schemes structured around the sale and repurchase of cargo at a loss,” the PwC review says.
“Not only did these schemes appear to have no commercial benefit for the company apart from the generation of additional liquidity, some of these schemes also involved the use of forged documents, non-existent inventory, or the sale of the same inventory to multiple parties.”
Underpinning it all was an accounting process that PwC describes as “similar to what is known as ‘teeming and lading’”, where funds received from one customer are allocated to a previous customer’s account in order to inflate receivables balances and cover up losses.
Operating in a similar way to pyramid or Ponzi schemes, this process has to be continually repeated to avoid those losses ever becoming visible in the company’s accounts.
“In order to sustain this scheme, the company needs to ensure that it can continue obtaining funds from banks through discounting or other forms of financing to generate liquidity and cover up the losses,” the report explains.
“This creates a vicious cycle, whereby financing is required to sustain the scheme, which gives the false impression of the company’s financial health, which in turn allows the company to obtain further financing, thereby perpetuating the scheme.”
In practice, Hin Leong obtained financing by a variety of means. In some cases the company arranged transactions where it would sell a cargo to another party, then immediately buy it back at a lower price.
There were sometimes multiple companies involved, with Hin Leong selling cargo to one trading company then re-purchasing the same cargo from another. Despite being loss-making, each transaction would produce another injection of liquidity through financing extended by banking partners.
Occasionally the company would sell more cargo than it actually had, or sell and re-purchase cargo that never existed in the first place.
Detecting those discrepancies was difficult, however. Vessels would typically be chartered by Ocean Tankers, also owned by the Hin Leong group, meaning supporting documentation was being supplied by another arm of the same overarching company.
Hin Leong’s fraudulent financing was not restricted to bank-issued letters of credit. The company is also accused of overstating its inventory balances in order to access other lines of finance, alongside forging sales invoices to secure factoring facilities from banks.
The PwC report says Hin Leong pledged cargo it did not own or that did not exist, exaggerated the quantity of cargo that it did own, and sold inventory that was supposed to be held as collateral for another party, all in order to obtain inventory finance.
PwC also sets out Hin Leong’s techniques for exploiting factoring facilities, with fabricated sales invoices used to secure early payment from a bank offering receivables purchase facilities – giving the company an injection of liquidity despite there being no legitimate underlying trade.
In order to facilitate these fraudulent transactions, Hin Leong “fabricated documents on a massive scale”, the report says. PwC has already identified forged bank statements, bills of lading, sales contracts and invoices, deal settlement slips and other documents.
As of June this year, the judicial managers had identified export contracts presented to 15 banks, in relation to 58 import letters of credit, that were “not supported by any underlying sale transaction”.
Document fraud: turning to technology
Once these practices had come to light, it became clear to banks that better systems were needed to keep track of what financing had been provided to support specific trade transactions.
A group of 14 major banks, led by Standard Chartered and DBS Bank, have already responded by clubbing together to construct a blockchain-based registry of trade finance transactions. As of early October, the registry – which runs on a platform developed by Singapore-based technology firm dltledgers – is at proof-of-concept stage following pilot testing that started four months earlier.
A joint statement from the two lead banks describes the registry as “a secure central database for the banking industry to access records of trade transactions financed across banks in Singapore”.
Details associated with trade documents are submitted to the platform, which can then determine whether financing is being sought multiple times for the same cargo. “This mitigates against duplicate financing from different bank lenders for the same trade inventory, leading to greater trust and confidence among banks and traders alike,” the statement says.
The registry is also supported by government innovation agency Enterprise Singapore, with the Association Banks of Singapore acting as an advisor.
The 12 other banks involved are ABN Amro, ANZ, CIMB, Deutsche Bank, ICICI Bank, Lloyds, Maybank, Natixis, OCBC, Rabobank, SMBC and UOB.
The Monetary Authority of Singapore (MAS), which regulates the city state’s banking and finance sector, says it is “glad to see the banking industry coming together, collaborating with government agencies and technology partners, on this important initiative”.
“A digital trade registry strengthens trade financing banks’ ability to avoid duplicate financing, and facilitates more sustained credit flow in trade financing,” adds Ho Hern Shin, the authority’s assistant managing director for banking and insurance.
According to dltledgers documentation seen by GTR, the aim of the project is to let each participant bank “validate whether or not another financial institution has already submitted a particular title instrument for financing purposes”.
Those title instruments could be bills of lading, charter party bills of lading or letters of indemnity, it says. Rather than submit those documents in full, banks upload pre-agreed sets of information from those documents onto the platform.
Data submitted includes the type of financing being sought, loading and vessel information and the identity of the exporter and importer. That information is encrypted and not visible to other participants, sitting within each bank’s own node – in other words, that bank’s part of the network.
The registry can then compare data uploaded by different banks, flagging up any indications that double financing is being sought on a single transaction but without sharing potentially sensitive data.
“Without a central repository, lenders in Singapore are blind as to whether bills of lading or physical cargo have already been pledged and financed,” dltledgers says.
However, industry insiders question whether a trade finance registry can effectively address trade finance fraud without the involvement of buyers, sellers, traders or shipping companies.
“I can’t see how it would work unless the relevant counterparties are directly linked to the registry and can validate themselves,” says a Singapore-based source who requested not to be identified. “For any system without independent validation from buyers, you cannot guard against fraudulent sales invoices.”
Another question raised is how the platform could identify instances where financing is only sought once, but the value of cargo is inflated or does not exist in the first place.
Samuel Mathew, global head of documentary trade at Standard Chartered, confirms that the registry project currently only intends to tackle attempts at duplicate financing, rather than other types of trade finance fraud.
“In the future phases… we may expand the scope of the platform to enable capabilities such as authenticating validity or authenticity of shipping documents by way of real-time API integration with third-party shipping companies and platforms,” he tells GTR.
Sriram Muthukrishnan, global head of trade product management at DBS Bank, acknowledges there is “still much more to be done”.
He tells GTR: “The future roadmap envisages the involvement of other key industry participants such as shipping companies, ports and customs authorities to contribute to the enrichment of the trade finance registry’s validation capabilities.”
PwC accusations against Hin Leong
A suspicious Hin Leong transaction described by PwC relates to cargo on board a vessel travelling from Tanjung Pelepas in Malaysia to Rotterdam in the Netherlands. Several parties have since declared an interest in that cargo.
According to PwC, the same individual cargo appears to have been involved in several separate transactions running in parallel.
First, in mid-March, Hin Leong agreed to sell 780,000 barrels of ultra-low sulphur diesel to Unipec, supported by a letter of credit issued by Crédit Agricole.
Later in the month, Hin Leong obtained financing from Société Générale to sell 780,000 barrels of oil to trading giant Glencore, which it would re-purchase immediately. Letters of credit supporting the two transactions were issued by Rabobank and DBS Bank.
Around the same time, Hin Leong also agreed to sell a similar cargo, on board the same vessel, to Trafigura. The cargo would be sold on to Winson Oil, then re-purchased by Hin Leong. In that case letters of credit were issued by Natixis and OCBC Bank, though details of the Trafigura-Winson sale are not known.
Bills of lading used to support all three trading arrangements “bear the same vessel name and aggregate cargo”, and differ only in date. Unipec, Glencore, Trafigura and four banks have all since submitted claims to that cargo or requested additional documentation.
CIMB claim against Hontop Energy
Court documents filed by the Singapore branch of Malaysian bank CIMB accuse trading house Hontop Energy of fraudulently obtaining trade finance for a December 2019 transaction.
CIMB had initially refused to issue a letter of credit for a back-to-back sale of 1 million barrels of Russian crude oil from Sugih to Mitsui & Co Energy Trading, on the grounds that Mitsui was not an approved buyer.
Within hours, the transaction details 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 2020, 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 suggested fraud had likely taken place.
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.
Natixis claim against Sugih Energy
Natixis court documents say Sugih requested a letter of credit in November 2019 to support a US$64mn back-to-back oil sale.
The transaction involved Sugih selling 1 million barrels of crude to Hontop. Hontop would then sell the same cargo onto BP at a slightly higher price.
The bank says Hontop presented evidence that the transaction was real, including a bill of lading showing the cargo was onboard Hong Kong-flagged oil tanker New Honor.
At the same time, the invoice presented by Sugih for the sale to Hontop affirmed it had agreed to the transaction, that the cargo had been onboarded to the vessel via a ship-to-ship transfer close to the Brazilian coast, and that the shipment was being delivered to China.
Natixis released the funds – a final bill of US$67.5mn – to Standard Chartered, which was providing banking services to Sugih.
However, when Natixis sought to recover the funds from BP, following the on-sale, the oil major informed the bank it had no record of the transaction ever being agreed.
Natixis says Sugih has since “repeatedly failed to explain or demonstrate to [Natixis] that the cargo was shipped on board the vessel and delivered”.
The bank says it now believes the actual cargo was much smaller – under half a million barrels – and that Sugih did not have the right to sell to Hontop in the first place. Natixis says it now believes Sugih and Hontop “conspired to defraud” the bank in order to obtain financing.