Trafigura Seeks to Recover $500 Million in Mongolian Fuel Fraud Scheme.
Swiss trading firm Trafigura is currently engaged in efforts to recover $500 million in Mongolia, following an extensive year-long investigation into its employees and associates related to a billion-dollar fraud scheme within its local fuel supply operations, as reported by three trading sources familiar with the situation.
This case in Mongolia marks the second significant fraud incident that Trafigura has identified in the last two years, raising concerns among bank trade financiers who are now scrutinizing the effectiveness of oversight at one of the largest energy and commodity trading companies globally, according to two banking sources who collaborate with Trafigura and provide financial support to the firm.
Last month, Trafigura announced that it had set aside $1.1 billion in provisions after uncovering what it termed "misconduct" within its Mongolian division, which included data manipulation and the concealment of overdue receivables.
The company announced that its primary counterparty in Mongolia has acknowledged a significant obligation to Trafigura, amounting to a considerable portion of the $1.1 billion. However, no additional details were provided, and the identity of the counterparty was not disclosed.
According to three trading sources familiar with the situation and Trafigura's operations in Mongolia, Lex Oil served as Trafigura's principal local counterparty. These sources requested anonymity as they were not authorized to discuss the issue publicly.
Lex has reportedly confirmed to Trafigura that it owes the company more than half of the $1.1 billion, while the status of the remaining $500 million remains unclear, as indicated by the three sources.
Trafigura has not leveled any allegations of fraud against any counterparties or individuals, as the investigation remains ongoing, according to three sources. A representative of the company stated that following the discovery of the Mongolia case, Trafigura conducted a comprehensive risk assessment of its global operations.
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This assessment pinpointed locations deemed to be of higher risk; however, the review of these areas yielded no significant findings, as noted by the spokesman. Specific details regarding which countries were classified as higher risk were not disclosed.
According to its annual report, Trafigura maintains over $77 billion in open credit lines from approximately 150 banks, which it utilizes for trading in oil, gas, and metals.
The company announced last month that it would likely need to revise its financial statements for 2024 to reflect adjustments in comparisons with prior years, following revelations from its operations in Mongolia.
This announcement followed Trafigura's decision to take a nearly $600 million charge in early 2023 after it was revealed that the company had fallen victim to a nickel supply fraud.
According to U.S. government data, the potential loss in Mongolia is significant when compared to the country's annual fuel consumption, which is approximately $1 billion.
The Mongolian government has not responded to inquiries for comment.
Trafigura's operations in the Mongolian fuel sector have yielded substantial profit margins, as the company blended various imported fuels and profited from loans extended to the financially struggling local coal and fuel distribution sectors, as reported by three trading sources.
Trafigura initiated an internal investigation in 2023 upon uncovering irregularities. Subsequently, the company engaged an external auditor to finalize the inquiry, according to three trading sources. The identity of the external auditor has not been revealed.
Last month, Trafigura reported that the misconduct spanned five years and entailed "manipulation of data and documents, leading to inflated payments made by Trafigura, as well as intentional concealment of overdue receivables."
Trafigura emerged as a principal fuel supplier in Mongolia circa 2014, as reported by three trading sources. The government has chosen not to provide any comments on this matter. Trafigura asserts that they rank among the leading suppliers in Mongolia.
The company focused on the integration of Russian diesel with jet kerosene sourced from Singapore to create winter diesel for Mongolia, where winter temperatures can plummet significantly below freezing.
The primary consumer of this fuel in Mongolia is the coal industry, which utilizes it in heavy machinery for coal production intended for export to China. In 2019, Trafigura and Lex formed a partnership, as reported by three trading sources. Trafigura extended credit to Lex to facilitate the supply to local clients.
According to the same sources, Mongolian importers like Lex also played a role in supplying Trafigura with Russian diesel. The Swiss trading firm subsequently blended this Russian fuel with jet kerosene from Singapore and resold the mixture to Mongolian companies, including Lex. Trafigura financed these fuel purchases through loans, as indicated by two of the three sources.
Trading firms such as Trafigura often provide trade financing in regions where international banks may hesitate to extend credit due to stringent compliance regulations concerning operations in higher-risk nations.
This arrangement began to unravel in 2020 when the COVID-19 pandemic disrupted Mongolian coal exports to China, leading to a decline in mining activities and fuel demand, according to the three trading sources.
Despite these challenges, Lex Oil persisted in importing and blending the fuel, accruing debt to Trafigura while simultaneously expanding its storage capabilities and extending loans to local importers, as noted by the three sources.
As fuel consumption in Mongolia decreased, Lex Oil began charging diesel consumers for the storage of unused fuel, a practice that persisted for more than two years from 2020 to 2022.
Several businesses in Mongolia defaulted on their obligations to Lex Oil due to a lack of revenue during the pandemic, according to three trading sources.
Trafigura became aware of these debts and defaults in 2023 while conducting further reviews of its offices in the wake of the nickel fraud incident, as reported by one of the three trading sources.
Trafigura refrained from commenting on the reasons that prompted the additional scrutiny of its Mongolian offices. In 2023, executives from Trafigura visited Mongolia to engage with local officials but were unsuccessful in obtaining assistance for debt recovery, as indicated by two of the three trading sources.
According to one of the three trading sources, "What Trafigura believed they had in Mongolia somehow vanished."
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