Fighting fraud and forgery in commodities trading

ON THE surface, oil trader Hin Leong was shaping up to be a company that would put Singapore on the commodities map. 

In 2019, the group posted a net profit of US$78.2 million for its fiscal year and raked in revenues of close to US$20 billion. 

But trouble was brewing behind the scenes. 

Hin Leong filed for bankruptcy in April 2020, marking the collapse of one of the world’s largest oil trading companies. 

In mid-August that year, founder Lim Oon Kuin – better known as OK Lim – was charged in court, after investigations by the Commercial Affairs Department into Hin Leong’s business activities. 

Interim judicial managers claimed the company had grossly overstated its assets and attempted to conceal significant losses – including about US$800 million in derivatives trading losses. 

Hin Leong is just one example of a case that has rocked Singapore’s commodity scene and threatens to dislodge the city-state as a key player in the global commodity trading community. 

Other notable commodity-related scandals in the Republic include an alleged US$1.1 billion nickel fraud case involving Ng Yu Zhi’s Envy Global, and the US$768 million loss by Singapore-based commodity trading company Trafigura after it discovered the nickel cargoes it paid for actually contained worthless rubble.

Baldev Bhinder, managing director of Singapore-based specialist commodities and international trade law firm Blackstone & Gold, said that the “cash is king” mantra is notable in the current trading landscape. 

“Sometimes this need for liquidity is driven by a need to plug up a financial hole in the company; sometimes it’s a plain Ponzi scheme; and sometimes it’s a systematic channelling of funds between various companies unrelated to the actual trading,” he said. 

“These practices can go on undetected for a while, and it’s typically when there is a liquidity crash or withdrawal of bank lines somewhere in the chain that exposes the house of cards.”

With a string of fraud cases, Singapore’s commodities trading scene could be in need of an overhaul – particularly in terms of financing regulations and trading rules.

A complex, manual industry

Across the globe, competition is rife within the commodities trading sector. Players often find themselves having to offer different pricing structures for a product or service, or capitalise on a surge in demand for a particular commodity, to oust their peers. 

Athreya HD, financial services partner at the consulting practice of Mazars Singapore, said commodities trading often involves “complex transactions with multiple parties across different jurisdictions”. 

Companies grappling with slim profit margins may resort to fraudulent activities to augment profits or conceal losses, he adds. Collusion between traders, brokers and multiple intermediaries within the global supply chain could also introduce vulnerabilities that fraudsters exploit to deceive financial institutions.

Athreya notes that certain commodities are more susceptible to fraud due to their characteristics, market dynamics and global demand. 

“Niche commodities such as rare metals with fewer counterparties make it a tight-knit industry and, thus, a syndicated market,” he said.

He added that complex financial instruments, such as futures and options, help to make a commodity more vulnerable to fraud via market manipulation, insider trading or false reporting. 

Observers also noted that most paperwork for commodities trading has not yet been digitised, making it harder to track and detect wrongdoing.

Saket Bhartia, managing director for forensic investigations and intelligence at risk and financial advisory firm Kroll, said fraud cases in the sector often occur because most of the documentation is still in hard-copy form, and processes are manual. 

He notes that sectors that have been hit by trade fraud cases are oil and gas, metals and minerals, and agricultural products. 

Bhartia adds that these sectors often have high volumes, low margins, complex supply chains, and opaque transactions – all of which create opportunities and incentives for fraudsters to manipulate prices, invent trades, forge documents or misappropriate funds. 

Based on several investigations done by Kroll’s forensic investigations and intelligence division, he said that fraud in the sector is done using methods including forging documents such as bills of lading, double-pledging the same cargo, round-tripping transactions that do not involve any physical movement of goods, overvaluing goods, and obtaining loans or lines of credit based on fake collaterals.

The start of an industry-wide revamp

In response to the slew of fraud in the local commodities space, banks have tightened their belts and imposed limits on financing companies in the sector. 

For instance, 28 banks teamed up to finalise a code of best practices for trade financing for the commodities sector in November 2020. This laid out key principles regarding prudent commodity trade financing practices and provided a benchmark for banks’ lending standards in the sector. 

On their part, local lenders have increased scrutiny over companies in the commodities space, and invested in digitalisation initiatives to safeguard against fraud. They are, however, not shying away from the sector altogether. 

Sriram Muthukrishnan, head of global transaction services product management at DBS, said the bank continues to provide support to the commodity sector while maintaining “robust underwriting standards and due consideration of the code of best practices for commodity financing”. 

Elaine Lam, head of global corporate banking at OCBC, said the lender continues to support its clients in the commodity trading sector, as the space remains “vitally important” to the growth of economies and countries. 

She added that OCBC continues to strengthen its know-your-client processes and conduct stringent credit assessments to guard against fraud. The bank has also put its money into several digitalisation efforts to reduce the risk of fraud and manual errors in trade finance.

Lim Chen Chen, UOB’s head of group structured trade and commodity finance, said the bank continues to support the commodity sector, but “remains disciplined” in its underwriting standards in financing. 

All three local lenders did not respond to queries from The Business Times on the largest amount they have lent, and the maximum amount they are now willing to lend, to commodity trading companies. Credit Suisse and HSBC also declined to comment for this story. 

Several companies, too, have added layers of protection and checks and balances to their internal processes. 

Trafigura, for instance, outlined an extensive risk management system in its 2023 annual report – with mitigations and actions listed for key risks including finance and liquidity, digital infrastructure and cybersecurity, and counterparty and credit. 

The company keeps more than one-third of its committed facilities unutilised at all times under normal market conditions, and has immediately available cash of at least US$2 billion on hand at all times. 

Its transactional financing base also allows underlying assets to be marked to market, in order to match liquidity needs for any related margin calls.

Glencore in 2022 also established a dedicated global market conduct compliance team specific to its oil department, and expanded monitoring and surveillance of its oil department communications and transactions. 

The company also said it revamped its business model by “significantly reducing” the use of business-generating intermediaries, and enhanced controls across the group. 

Not to be outdone, Singapore’s government agencies and regulators here have also stepped up their efforts to guard against fraud.  

A spokesperson from Enterprise Singapore said that Singapore’s commodities sector has “remained resilient” despite challenges that have cropped up over the past few years, including price volatility and supply chain disruptions on the back of the Covid-19 pandemic. 

“Notwithstanding these challenges, Singapore remains an attractive global trade hub, with some 400 global traders choosing Singapore to anchor their business activities,” the spokesperson said, noting that the likes of Colombian state oil company Ecopetrol and the Abu Dhabi National Oil Company have set up operations in the city-state in recent years. 

Initiatives to digitalise trade financing to reduce paper-based processes, increase sharing of information to reduce duplicative financing, and increase adoption of best practices to ensure prudent lending, have also been introduced in Singapore, the spokesperson added. 

These will ensure that only companies with good credit-worthiness will continue to be able to access bank financing. 

In response to queries from BT, an MAS spokesperson said the regulator is “strongly supportive” of the industry’s initiatives to strengthen banks’ risk management capabilities and bolster resilience in Singapore’s trade finance ecosystem. 

“These initiatives will strengthen banks’ lending practices and facilitate continued lending to trading companies,” the spokesperson added. 

What’s next? 

Blackstone & Gold’s Bhinder said there is rarely “one smoking gun” to detect trade fraud, but suggests that more attention could be paid to a company’s balance sheet at the start, followed by a closer examination of the trade itself. 

He notes that although Singapore has made headlines for the slew of fraud cases in the sector, the issue is not unique to Singapore. 

“I don’t think the current system is too lax, but too much weight may be placed on the balance sheets and the track record of the borrower, rather than a critical assessment of the borrower’s growth story and scrutiny of the trade flow,” said Bhinder.

He reckons that loans to commodity traders only swell after a lender has had a track record with a particular company for several years. 

“No bank will start out with massive lines to customers. The problem is that some of these fictitious trades might go undetected for a long time and so give an appearance of a healthy turnover,” he said.

He warned that lenders operating in a competitive trade finance market such as Singapore should be guarded against the “many human biases at play”, including the dangerof groupthink which could lead to a concentration of liquidity among certain clients. This, in turn, raises the risk of what Bhinder termed “catastrophic collapses” for over leveraged companies.

“It’s no surprise that most frauds tend to be catastrophic, affecting several lenders at the same time,” he said. 

Mazars’ Athreya said the recent cases underscore the need for a comprehensive review of regulatory frameworks, and that mandating periodic independent audits of internal control frameworks is also crucial.

“Stricter licensing procedures and enhanced due diligence on counterparties are imperative,” he noted. He stressed that international cooperation is key, as sharing information and expertise between regulatory bodies can help tackle fraud cases that are often similar to “cross-border fraud puzzles”. 

Athreya also called for regulators to increase fines and penalties for fraudulent activities and hold individuals and the management accountable through prosecution. Such penalties can prevent companies and individuals with a history of fraud from operating in the industry, he said. 

“To solidify our status as a leading commodities hub, Singapore must demonstrate a commitment to regulatory compliance, transparency and ethical conduct,” he said, adding that a multi-faceted approach will not only help attract major commodity players but also solidify the city-state’s reputation as a reliable and trustworthy commodities hub.