Missed Signals: Behind Trafigura’s $577m loss on non-existent nickel

Trafigura shocked the corporate world last week when it posted a $577 million write-down and revealed it had been the victim of “systematic fraud”.

But industry insiders were more surprised by the man the commodities trader identified as behind the suspected culprit companies: Prateek Gupta, a 43-year-old Indian businessman who, despite his patchy reputation, has been trading with Trafigura for years.

After discovering that shipments of nickel purchased from Gupta-affiliated companies contained no traces of the precious metal, Trafigura took legal action and obtained a $625 million freeze order against the Dubai-based metal trader and his business empire.

Court documents provided to the Financial Times show the alleged fraud affected Wall Street bank Citigroup, which financed the deals, and British lender Barclays, where Gupta’s companies held accounts that received Trafigura funds had drawn. They also reveal that Trafigura potentially sold $94 million worth of counterfeit nickel loads in 11 stores, potentially affecting a far larger commodity trading industry pool.

As new details of the case emerge, the investigation begins into why one of the world’s largest commodity traders placed so much faith in a man whose reputation was well known among trade financiers and why his risk management procedures were so inadequate.

Early warning

Trafigura began trading Dubai-based TMT Metals, which has been controlled by Gupta since 2016, more than a decade ago. It provided “transit finance” to TMT and other Gupta companies by buying nickel from Gupta companies before later selling it back to the companies or on the open market and charging interest for the duration of the shipment.

TMT was a reliable competitor for years until 2021, when signs began to appear that something might be amiss, when container transit times skyrocketed along with the volumes of nickel being traded. Some shipments took more than 300 days, many times longer than required for a worldwide shipping route, according to a person familiar with the matter.

Another warning came last July when flashes appeared on the due diligence screens of Trafigura’s risk management teams after New Delhi authorities accused Gupta of defrauding the State Bank of India and four other lenders.

But court records show the resource house only began serious investigations in October, when Citi stopped financing deals between Trafigura and Gupta’s companies.

Ian Milne, who was responsible for trying to collect debts from Gupta’s UD Trading for trade finance fund TransAsia Private Capital between 2018 and 2020, said he was “baffled” that Trafigura’s controls had not ended the relationship with Gupta sooner.

“I was amazed to see that Trafigura was dealing with someone of his reputation,” Milne said. “He’s been persona non grata for many years.”

Jonas Rey, chief executive of Swiss corporate intelligence firm Athena Intelligence, told the Financial Times he investigated TMT in 2015 and 2016 over an alleged scheme involving a network of companies that traded with each other, each with different bills of lading and own financing.

“Their reputation was horrendous,” he said. “TMT Metals was blacklisted by most credit and insurance companies for being such a high-risk business.”

Gupta began his career as a trainee at his father’s metal trading company, Ushdev International, where he became Managing Director in 2008. The company, which was partly owned by UD Trading, became insolvent in 2018 after defaulting on loans from several Indian banks.

Several traders said they were also suspicious of Gupta’s links to Sanjeev Gupta, the metals magnate whose GFG Alliance group of companies is under investigation by Britain’s Serious Fraud Office.

Sanjeev Gupta, who is not related to Prateek, is a former Ushdev shareholder, according to Indian company records.

The GFG Alliance said it “has had no business or relationship with Prateek Gupta or Ushdev for years and is in no way associated with any of the activities to which Trafigura’s announcement relates.”

container controls

Trafigura said it had launched an investigation into dealings with Gupta’s company after “a number of red flags” became apparent, although it declined to say when.

A “whistle-blower” told Trafigura in November that one or two of the containers purchased contained something other than nickel, according to court filings.

When the trading house confronted Gupta, he told Trafigura’s head of nickel and cobalt trading, Socrates Economou, that they contained 20,000 tons of cheaper nickel alloys and 5,000 tons of other materials instead of high-grade nickel metal.

Gupta tried to blame his business partner in India for the discrepancies, even suggesting that the content was different to avoid a ban on Russian nickel shipments, even though no such ban was in effect.

When Trafigura inspectors checked containers in November, they found carbon steel, a low-value metal costing less than $1,000 a ton, versus around $26,500 for nickel.

At a meeting in London in early January, Gupta proposed paying the sum it owed Trafigura, but the commodities trader decided instead to pursue a fraud lawsuit and a freezing order.

Later in January, Trafigura cracked open 117 containers in the Netherlands, United Arab Emirates and Taiwan and found none contained nickel in any form.

Trafigura said there was no evidence any of its employees were involved in the scam. Economou leaves the company.

mammoth acts

Commodity traders were amazed at the scale of deals Trafigura made with Gupta’s companies.

The assumed 25,000 tons of nickel cargo equates to about 1,104 containers of the metal, or more than 10 percent of annual imports from China, the dominant global consumer. So far, Trafigura has only ticked 156 boxes.

Industry insiders warn that the commodities trading industry must change outdated business practices if it is to avoid a repeating pattern of large-scale scandals.

The fact that the process of buying and selling commodities still largely relies on paper documents makes it particularly vulnerable to fraud.

“If the industry continues to rely on paper-based systems and email as its primary means of communication, it will continue to have these issues,” said Simon Collins, a former head of Trafigura’s metals and minerals business who now runs the commodities trading software platform TradeCloud .

Trafigura said the alleged fraud “included misrepresentations and widespread forgery of primary and supporting documents,” adding that “every fraud is an opportunity to review and tighten systems and procedures, and a thorough review is underway.”

Gupta did not respond to multiple requests for comment. Citi and Barclays declined to comment.

Wider fallout

The question now is how exposed other traders, financiers and insurers are to one of the biggest scams in the metals industry and whether Trafigura can recover some of its losses.

After Citi stopped funding, Trafigura used cash from its own balance sheet to continue the business. To some extent, that will help expand its $73 billion in credit lines.

But the scandal could prompt banks to scrutinize and scrutinize the company’s risk management procedures. “It makes it worse for Trafigura that they funded it with their own money,” Athena Intelligence’s Rey said.

Company documents show that one company exposed to the scandal is an investment vehicle of Artis Finance, a trade finance startup backed by TDR Capital, a private equity firm with a stake in British supermarket group Asda.

Artis’ website describes the company – Artis LoanCo1 – as “a dedicated company that supports mid-market merchants and corporations with robust, asset-based financing” and states that “only the most accurately risk-assessed and commercially viable transactions make it to the Artis investment committee.” “.

“I can confirm that Artis LoanCo is a secured lender to TMT Metals for receivables financing, but we are unable to comment further as we are still gathering facts, conducting internal reviews and awaiting a formal statement from TMT “, said the company boss Waldo de Vleeschauwer.

Trafigura has yet to decide whether to use insurance, but if it does, providers would have to decide whether to accept their claims.

Gunvor, another commodities trader, had previously been stung by its tens of millions of dollars exposure to Ushdev, a Gupta-affiliated company that went bankrupt, but his insurer Euler Hermes paid out and helped minimize losses, according to three people familiar to The Ground. Gunvor declined to comment.

Industry watchers say Trafigura may also struggle to recover money through legal action, given the complexity and ownership structure of the web of companies allegedly behind the alleged scam.

“I’m not sure they’re going to get a lot of money back from litigation because there’s not much to do,” said Milne, who now works at MonetaGo, a fintech firm that fights funding fraud. “Sure, Gupta has a lot of money out there, but most of it isn’t in his name.”

Additional reporting by Stephen Morris, Ian Smith and Joshua Franklin