Updated: Jun 22
How did Trafigura, one of the world’s largest commodity trading companies, fail to check the cargo in its shipments, against which it was lending money? A representative at the company last month stated that Trafigura had been a victim of ‘systemic fraud,’ where the company is currently stood to lose $577 million, as the situation continues to unfold in London courts.
A common feature within commodity trading involves a trader buying a commodity, in this case nickel, from another trader, with an agreement to either: sell it back to the trader, to a party nominated by the trader, or onto the open market. In this instance Trafigura: the buyer, acts as a lender, by leveraging it’s lower cost of funds, and collects an interest margin on the transaction. Since the transactions are paper-based, and reliant on shipping documents and warehouse records, the buyer is inherently vulnerable to document fraud. This has been the case in the past where the cargoes involved are already in transit, making inspection impractical.
The counter party in question is Prateek Gupta, an Indian businessman that Trafigura has been doing business with since 2015. In total Trafigura had purchased 25,000 tonnes of nickel, or, $577 million of high-grade nickel from companies tied to Gupta. Trafigura had on-sold $93.9 million worth of nickel to 4 third parties. In October last year when the third parties that Trafigura had on-sold this nickel to began checking the containers they’d bought from Trafigura they became aware that the shipments did not contain the high-grade nickel ore and in-fact contained carbon steel, which is worth a fraction of the price of nickel. High-grade nickel ore sells for over $25,000 a tonne yet carbon steel is worth a mere $1,000 a tonne.
On the 8th of February; after Trafigura had inspected 156 of the 1,104 containers, of which none of the containers contained the high-grade nickel. A $625 million global freezing order was placed on bank accounts tied to Prateek Gupta and 7 companies tied to him. The freezing order will remain in place for an undisclosed time, however Gupta has until the 6th of April to contest the freezing order. He intends to challenge the decision having stated: ‘a robust response to the allegations is being prepared.’
A member of Trafigura’s in-house council: Mitzi Reza Ispahani, admitted in a witness statement that Trafigura had failed to identify that ‘many’ of the bills of lading had incorrect HS codes. HS codes are used to identify the goods inside of a container. In this case the contractual description mentioned that the 1,104 containers in the shipment were supposed to contain high-grade nickel. Yet Trafigura had paid out against the bills of lading that contained HS codes which did not match the contractual description of this high-grade nickel. This leaves the question as to why compliance at Trafigura signed off on this internally. This red flag is something which compliance would seemingly be unable to miss which could imply that it is possible that an internal member at Trafigura was acting as a financier and a front for Gupta, who last year was accused of ‘criminal conspiracy’ by the State Bank of India.
As other large commodity players tentatively follow this case, we may see another hurdle added to the compliance departments of commodity trading companies as they are under a watchful eye in the coming months as this situation unfolds. This could ultimately increase the times and costs of cargo shipments. We may also see further consolidation within the commodity trading industry as reputable players consolidate their business whilst those lacking integrity, such as which Prateek Gupta is accused of, stand to lose out. This case really highlights the importance of integrity, transparency and compliance within the shipping industry; and exemplifies that the the win-at-all-costs mentality within cowboy commodity trading houses which disregard red flags, is coming to an end.
By George Stratford