When Credit Agricole SA and HSBC Holdings Plc issued a payment guarantee for a $76.5 million fuel purchase from a Singapore trader in March, they unwittingly became the latest victims in a series of trade finance scandals that have led to more than $9 billion in potential losses for global lenders.
At the same time that Hin Leong Trading Pte. was pledging the fuel to back the loan, it allegedly agreed to sell the same cargo to another trader, who sought letters of credit from three banks including Credit Agricole.
This line of credit merry-go-round was among many allegedly fraudulent tools used by Hin Leong, one of Singapore’s biggest oil traders before its spectacular collapse in April that left 23 banks on the hook for $3.5 billion, according to a report from court-appointed managers.
For banks financing the opaque world of commodities trading in Singapore, Hin Leong isn’t an isolated case. The trading hub has seen a clutch of failures in the past year with lenders struggling to reclaim loans, alleging they were tricked by forged documents and by traders pledging cargoes to multiple banks. The two latest lawsuits show lenders including HSBC and CIMB of Malaysia exposed to about $640 million in potential losses.
“It’s tumbling down like a house of cards – everybody is caught in the whirlwind,” said Robson Lee, a corporate finance law partner at Gibson, Dunn & Crutcher LLP’s Singapore office.
In a June 25 statement, Hin Leong founder Lim Oon Kuin said he was unfit to respond to the allegations in the report from the judicial managers. HSBC and Credit Agricole declined to comment.
Fight Back
Rather than flee the $18 trillion trade finance business, most banks are now taking steps to fight back. Singapore lenders are considering a central database to track collateral, according to a person familiar with the matter, while banks including ABN Amro Bank NV are stepping up vigilance. ING Groep NV and HSBC, two of the biggest players in the space, are turning to technology such as blockchain to limit fraud.
The losses are mounting, with Hin Leong just the latest case of trade finance gone awry:
- ING accused Agritrade International Pte. in a lawsuit of “overlapping” shipping lists to get financing from several banks for the same cargo. About 18 banks face combined losses of $670 million.
- HSBC accused Zenrock Commodities Trading Pte. of carrying out “highly dishonest transactions” by using the same cargo for various loans. Banks are owed $166 million.
- CIMB Group Holdings Bhd said in a filing last week that Hontop Energy conducted “suspicious” oil deals. The trader owes $473 million.
- Hontop, Zenrock, Agritrade didn’t return calls seeking comment.
Banks and other creditors face about $9.26 billion in potential losses from these and other failures over the last six years, all of them involving some form of alleged fraud, forgery, multiple cargo pledges or questionable accounting, based on a Bloomberg News tally.
HSBC reported a $700 million increase in expected credit losses in April at its commercial banking division in Asia, primarily linked to Singapore. Standard Chartered Plc set aside $956 million against potential losses, partly due to the coronavirus pandemic and defaults by commodity traders. At ABN Amro, two client cases accounted for 460 million euros ($521 million) in provisions, including one tied to a “potential fraud case in Singapore.”
Both banks are owed money by Hin Leong, whose financing scheme was among the biggest and most elaborate of all, a new report shows.
Some 60 letters of credit amounting to $1.5 billion were used to finance cargo that either didn’t exist or was pledged to multiple buyers, according to an investigation by PricewaterhouseCoopers LLP, the court-appointed managers. In all, 273 letters of credit were spread among 23 banks, which have low chances of recovery with assets worth 7% of liabilities.
“The company fabricated documents on a massive scale,” PwC wrote in the June report, adding that the company’s transgressions were routine and pervasive, misleading banks into extending credit.
In the world of trade finance, exporters and importers rely on credit lines to protect themselves against risks such as currency fluctuations, non-payment and political instability. When it works, the short-term financing provides a relatively safe way for banks to generate a quick profit as the lending covers sea voyages lasting just a few weeks.
100% Illegal
The financing doesn’t work when the same barrels of oil or other commodities are used to get financing from multiple lenders, or when the cargo used to back the loans doesn’t exist.
“Double financing is 100% illegal because a borrower is wrongly representing to different banks that it has security over the same goods,” said Baldev Bhinder, a commodities specialist and managing director of BlackStone & Gold Llc, a Singapore law firm. “But banks have challenges in on-boarding a live transaction quickly.”
BLOOMBERG.COM
July 8, 2020
