Legal questions emerge as Singapore oil trader denies BCP fraud allegations

The Singapore branch of jet fuel trader China Aviation Oil (CAO) is resisting bank claims of fraud around a US$19mn sale to scandal-hit ZenRock, giving rise to legal questions over who should absorb the cost of third-party fraud.

The claim relates to the purchase of 260,000 barrels of gasoil in January by ZenRock, a Singapore commodities trading house that has since collapsed amid allegations of fake trades and double financing.

Court documents seen by GTR show that the Dubai branch of Banque de Commerce et de Placements (BCP), a Geneva-headquartered financial institution, issued a letter of credit to CAO in January this year to support the sale.

BCP says that in keeping with that letter of credit, it transferred US$19.1mn to CAO in March after the company presented the bank with the sales invoice and a letter of indemnity.

However, the bank has since claimed that either “no cargo was shipped and/or delivered” to ZenRock, meaning CAO’s presentation of documents was fraudulent, or that CAO presented documents mistakenly as a result of fraud elsewhere in the transaction.

CAO strongly refutes suggestions it acted fraudulently. It says the cargo was shipped from Melaka in Malaysia on January 27, aboard the Petrolimex 18 – a Vietnam-flagged tanker – and that the payment it received was from the letter of credit’s confirming bank, not BCP.

The trader says it will “vigorously resist and refute any and all of BCP allegations, as well as BCP’s claim made against the company”.

“The company has been advised that there are good grounds to successfully defend BCP’s claims,” it adds. “The company presently takes the view the BCP allegations are entirely unmeritorious and misconceived.”

According to CAO, a statement of claim from BCP had initially been expected by August 18, but the bank sought an eleventh-hour extension until August 26.

As of press time, it is not clear whether that claim has yet been filed. Representatives from Rajah & Tan, the law firm representing CAO, declined to comment when contacted.

The case has already given rise to important legal questions over who can reclaim funds in the case of third-party fraud.

Singapore firm Blackstone & Gold says that, legally speaking, fraud arises when a seller presents documents to a bank that it knows are untrue.

In cases where there are misrepresentations in documents –  such as backdated bills of lading (BLs) or inaccurate certificates – the “key enquiry is whether the seller (as beneficiary under the letter of credit) can be said to be aware of these misrepresentations”, says managing director Baldev Bhinder in a paper published on August 26.

Whether the seller was aware documents were fraudulently produced must then be supported by evidence.

“It is simply not enough to allege a fraud, even if there are admissions of double financing in the chain,” the paper says. “Even a duplicate BL may be insufficient to demonstrate that a seller knew its BL was fake at the time of presentation.”

As a result, a bank is obliged to pay even if there is a third-party fraud involved, providing the beneficiary did not have knowledge of the fraud.

“Policy considerations dictate that the wheels of international trade must move in favour of a seller who is not guilty of fraud,” the law firm adds.

In the BCP case, the transaction in question was a back-to-back sale whereby ZenRock would purchase the cargo before immediately selling it onto a third party. That party is not named in the BCP allegations or the CAO response.

ZenRock remains mired in scandal after it emerged in May that HSBC had applied to Singapore’s High Court to have the company’s management removed. In that application, HSBC singled out two back-to-back transactions that it says involved fraud by ZenRock.

The first was a US$35mn purchase of oil from Azerbaijan’s Socar, to be sold onto the trading arm of French oil giant Total. The second was a US$16mn purchase of crude from China’s Rongsheng Petrochemical which would also be sold onto Total.

HSBC says closer inspection of the transactions showed “highly irregular” trading activity by ZenRock, potentially indicating that financing had been sought for circular or non-existent sales.

However, CAO is not named as a party in that document, other than as ZenRock’s tenth-largest unsecured creditor.

CAO is also not mentioned in court documents alleging fraud in transactions involving Hin Leong, Hontop or Sugih Energy, and though the company was cited by Singapore police in charges against Hin Leong founder Lim Oon Kuin, it is not accused of any wrongdoing.

The post Legal questions emerge as Singapore oil trader denies BCP fraud allegations appeared first on Global Trade Review (GTR).

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