Recent fraud damages that could have been prevented

Recent fraud damages that could have been prevented

May 2023

Singapore-based trading house Trafigura thought it bought nickel cargoes worth hundreds of millions of dollars. The shipments comprised about 1,100 containers of a material that was supposed to be nickel. What actually happened in this case shows how important ‘monitoring’ in combination with ‘secure settlement’ is when trading goods internationally.

The case: fraud on a large scale

It all started by simple human error or oversight. A technologically well devised system would have picked up any discrepancies. As Mirza Reza Ispahani, in-house legal counsel at Trafigura, later declared during the first hearings of what is likely to become a very lengthy court case: “It is not presently clear to me why this was not picked up by Trafigura at the time and why Trafigura paid out against bills of lading that contained the HS codes which did not match the contractual description of the material”.

A component of a good settlement system should have comprised milestones automatically obliging inspections. Trafigura having to manually keep tab on these operational ‘to do-s’, forgot to insist that certificates of analysis were provided for each trade, “even though this was required under the contracts”, according to Ispahani.

Another observation at a (very) late stage was that it appeared that the client had made the bookings “in a way that the cargo has the longest voyage possible to get the maximum benefit of financing” (operations department Trafigura). A good tracking system would have highlighted this at a much earlier stage.

To make a bad situation worse: ‘In the spring of 2022 as nickel prices surged, Citibank — which was providing an USD 850mn line of credit to Trafigura to finance these transactions — started to become concerned about the size of the nickel deals and the length of time it was taking for the buybacks to occur.’ (FT, 27th Feb 2023). As a result of its own internal investigation the Bank terminated its credit line to Trafigura. The latter now had to fund the positions from its own balance sheet.

When the fraud was finally discovered and the culprit (the metals trader Prateek Gupta) partially owned up, he offered LoCs from Silver Bank a small lender based in Mauritius. Considering the potential amounts at stake (in excess of USD 500mm) this was hardly going to give any comfort. Gupta had sold the cargoes to Trafigura and subsequently brokered deals with third party buyers, leaving Trafigura exposed.

After the first inspections had been carried out, more clients started to complain. One of these reported: “the goods are completely wrong” and that “it is a fraud, not a simple quality problem” (Xiamen C&D Aluminum Co). In the meantime more and more containers having the ‘wrong materials’ were arriving at various destinations, globally. Some of the in the total 1100 containers are still at sea and are destined to arrive late May.

How could this have been prevented?

Although it may seem a difficult question to answer, as the case is not without complexity, the answer is actually quite simple: if the buyer and the seller were to have interacted through a well-designed settlement system comprising a tracking capability governed by pre-agreed milestones all reflected on a very clear ‘dash-board’ overview, none of this would have happened.
‍Firstly, the contractual terms would have been linked to milestones reflecting the obligation to carry out inspections. Without the milestones being completed and evidence uploaded, no settlement would have taken place. Secondly, any discrepancies in the bill of lading would have been picked up, as these would have been monitored through the system; and thirdly, to protect parties, the funds would have been kept in escrow with the Baltic Exchange until it would have been clear that all obligations would have been fulfilled in the manner that was agreed between parties.

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