Trafigura shocked the company world final week when it booked a $577mn writedown and revealed it had been the sufferer of a “systematic fraud”.
However business insiders have been extra stunned on the man the commodity dealer recognized as being behind the alleged perpetrator corporations: Prateek Gupta, a 43-year-old Indian businessman who has traded with Trafigura for years regardless of his chequered fame.
After discovering shipments of nickel purchased from Gupta-linked corporations that contained no trace of the valuable metal, Trafigura has launched authorized motion and secured a $625mn freezing order towards the Dubai-based metals dealer and his enterprise empire.
Courtroom paperwork seen by the Monetary Occasions present the alleged fraud has drawn in Wall Road financial institution Citigroup, which financed the trades, and UK lender Barclays, the place Gupta’s corporations held accounts that acquired Trafigura funds. In addition they reveal that Trafigura bought on doubtlessly faux nickel cargoes in 11 trades price $94mn, doubtlessly affecting a far bigger pool of the commodity buying and selling business.
As new particulars of the case emerge, the inquest now begins into why one of many world’s greatest commodity merchants positioned such religion in a person whose fame was well-known amongst commerce financiers, and why its threat administration procedures fell so brief.
A dependable counterparty for years
Trafigura began buying and selling with Dubai-based TMT Metals, managed by Gupta since 2016, greater than a decade in the past. It offered “transit finance” to TMT and different Gupta corporations, shopping for nickel from Gupta’s corporations earlier than promoting it again to the businesses or into the open market at a later date, charging curiosity at some point of its transportation.
TMT was a dependable counterparty for years till early indicators one thing may need been amiss appeared in 2021, when transit instances for containers ballooned together with volumes of nickel traded. Some shipments took greater than 300 days, many instances greater than vital for any world transport route, based on one particular person acquainted with the matter.
An extra warning got here final July, when flashes appeared on the due diligence screens of Trafigura’s threat administration groups after authorities in New Delhi accused Gupta of defrauding the State Financial institution of India and 4 different lenders.
However courtroom filings present it was not till October, when Citi moved to cease financing the trades between Trafigura and Gupta’s corporations, that the commodities home started to analyze in earnest.
Ian Milne, who was chargeable for making an attempt to get well debt from Gupta’s UD Buying and selling for commerce finance fund TransAsia Personal Capital between 2018 and 2020, stated he was “flabbergasted” that Trafigura’s controls had not introduced an earlier halt to its relationship with Gupta.
“I used to be amazed to see Trafigura have been coping with somebody of his fame,” Milne stated. “He has been a persona non grata for a few years.”
Jonas Rey, chief govt of Swiss company intelligence agency Athena Intelligence, instructed the FT he had investigated TMT in 2015 and 2016 over an alleged scheme involving a community of corporations buying and selling between themselves, every with completely different payments of lading and their very own financing.
“Their fame was horrendous,” he stated. “TMT Metals was blacklisted from most credit score and insurance coverage corporations as they have been such a high-risk entity.”
Gupta started his profession as a trainee at his father’s metals buying and selling firm Ushdev Worldwide, the place he turned managing director in 2008. The corporate, which was partly owned by UD Buying and selling, turned bancrupt in 2018 after defaulting on loans from quite a few Indian banks.
A number of merchants stated they’d additionally been cautious of Gupta’s ties to Sanjeev Gupta, the metals magnate whose GFG Alliance group of corporations is below investigation by the UK’s Severe Fraud Workplace.
Sanjeev Gupta, who shouldn’t be a relative of Prateek’s, is a former Ushdev shareholder, based on Indian company filings.
GFG Alliance stated it “has for years had no enterprise or relationship with Prateek Gupta or Ushdev and is under no circumstances linked to any of the actions Trafigura’s announcement referenced”.
Trafigura begins to analyze
Trafigura stated it began an investigation into the trades with Gupta’s corporations after “quite a few crimson flags” turned obvious, though it declined to specify when.
An “informant” instructed Trafigura in November that one or two of the bought containers contained one thing apart from nickel, based on the courtroom paperwork.
When the buying and selling home confronted Gupta, he instructed Trafigura’s head of nickel and cobalt buying and selling, Socrates Economou, that they contained 20,000 tonnes of cheaper nickel alloy and 5,000 tonnes of different supplies, reasonably than high-grade nickel steel.
Gupta tried accountable his enterprise accomplice in India for the discrepancies and even recommended the contents have been completely different to keep away from a ban on transport Russian nickel, regardless of no such ban having been in drive.
When Trafigura inspectors checked containers in November, they discovered carbon metal, a low-value steel price lower than $1,000 per tonne versus roughly $26,500 for nickel.
At a gathering in London in early January, Gupta proposed settling the sum it owed Trafigura, however the commodities dealer determined as a substitute to pursue a fraud declare and freezing order.
Later in January, Trafigura opened 117 containers within the Netherlands, the United Arab Emirates and Taiwan to search out none contained nickel in any type.
Trafigura has stated there isn’t a proof any of its workers have been complicit within the fraud. Economou is leaving the corporate.
Reliance on paper paperwork
Commodity merchants have been shocked by the size of enterprise that Trafigura undertook with Gupta’s corporations.
The supposed 25,000 tonnes of nickel cargo are equal to about 1,104 containers of the steel, or greater than 10 per cent of the annual imports of China, the dominant world client. To date, Trafigura has solely checked 156 containers.
Trade insiders warn that the commodities buying and selling business wants to alter outdated methods of doing enterprise whether it is to flee a repeat sample of large-scale scandals.
They are saying the truth that the method of shopping for and promoting uncooked supplies nonetheless largely will depend on paper paperwork makes it notably prone to fraud.
“If the business continues to depend on paper-based programs and e mail as its major type of communication, it is going to proceed to have these issues,” stated Simon Collins, a former head of Trafigura’s metals and minerals enterprise who now runs commodity buying and selling software program platform TradeCloud.
Trafigura stated the alleged fraud “concerned misrepresentation and widespread falsification of major and supporting documentation”, including that “any fraud is a chance to evaluate and tighten programs and procedures and a radical evaluate is below means”.
Gupta didn’t reply to a number of requests for remark. Citi and Barclays declined to remark.
Wider business fallout
Now, the questions flip to how uncovered different merchants, financiers and insurers are to one of many metals business’s largest frauds and whether or not Trafigura can claw again any of its losses.
After Citi pulled financing, Trafigura used money from its personal steadiness sheet to proceed the trades. To some extent, that can assist insulate its $73bn price of credit score traces from the 140 lenders on which it depends to maneuver oil, fuel and metals all over the world, as different banks aren’t uncovered.
However the scandal might immediate banks to extend scrutiny and auditing of the corporate’s threat administration procedures. “It makes it even worse for Trafigura that they financed it with their very own money,” stated Rey at Athena Intelligence.
Company filings present one enterprise with publicity to the scandal is an funding car of Artis Finance, a commerce finance start-up backed by TDR Capital, a personal fairness agency with a stake within the UK’s Asda grocery store group.
Artis’s web site describes the entity — Artis LoanCo1 — as a “ringfenced firm that helps midmarket dealer and corporates by strong, receivables-based financing” and states that “solely essentially the most meticulously risk-assessed and commercially viable transactions make it by to the Artis Funding Committee”.
“I can affirm that Artis LoanCo is a secured lender to TMT Metals for receivables financing, however we’re not ready to remark additional as we’re nonetheless gathering information, endeavor inner opinions and we await a proper assertion from TMT,” stated the corporate’s chief govt Waldo de Vleeschauwer.
Trafigura is but to resolve whether or not to assert insurance coverage, but when it does, suppliers must resolve whether or not to simply accept its claims.
Gunvor, one other commodity dealer, was beforehand stung by its publicity within the tens of thousands and thousands of {dollars} to Ushdev, a Gupta-linked firm that went bancrupt, however its insurer Euler Hermes paid out, serving to to minimise losses, based on three individuals acquainted with the matter. Gunvor declined to remark.
Trade observers say Trafigura may wrestle to recoup cash by authorized motion given the complexity and possession construction of the online of corporations it says is behind the alleged fraud.
“I’m undecided they are going to get a lot a reimbursement from litigation as there’s not a lot to go after,” stated Milne, who now works at MonetaGo, a fintech enterprise that tackles financing fraud. “Positive, Gupta has some huge cash on the market, however most of it isn’t in his title.”
Further reporting by Stephen Morris, Ian Smith and Joshua Franklin
