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After Hin Leong, Is Singapore Still A Premier Commodity Trading Hub?




Ian Teo Expert Opinion

About the Author:

One of the founding directors of Helmsman, Ian is an authority on commodity trading and shipping law. He regularly advises shipowners, bunker traders, and commodity trading houses.

He was one of the first senior accredited shipping and maritime law specialists appointed by the Singapore Academy of Law. Ian was recognised by Euromoney Expert Guides as one of the world’s 30 Best of the Best Shipping Lawyers. In 2016, Best Lawyers Singapore named Ian as Trade Lawyer of the Year. Recently, he was named a “Disputes Star” by Benchmark Litigation and recognised by Who’s Who Legal as a recommended transport lawyer.

Qualified to practise in Singapore, England and Wales, Ian read law at the National University of Singapore (LL.B) and obtained his LL.M at Cambridge University. Awarded the Justice Tan Ah Tah Prize in his PLC class, Ian is a member of the adjunct faculty at the Singapore Management University, School of Law, a Fellow of the Chartered Institute of Arbitration, and an Adjunct Fellow of the NUS Centre for Maritime Law. He contributes to academia regularly, and has published in Lloyd’s Maritime & Commercial Quarterly.

It has been a tumultuous year for commodity traders, especially in Singapore. The economic conflict between Saudi Arabia and Russia did not help the depressed oil prices, and COVID-19 has also played a part. In Singapore, we were additionally hit by a spate of commodity trading and related debacles, accompanied by eye-watering losses.

Recently, allegations of wrongdoing have been made against a number of commodity traders in Singapore: Hontop – forging documents and creating fake trades to obtain financing; Zenrock – multiple financing for the same cargo; Agritrade – multiple financing with duplicate bills of lading; Hin Leong –fictitious trades and hiding derivative losses over a period of ten years. The potential losses arising from these allegations are said to be in the hundreds of millions and even billions.

The bunker industry also has its fair share of problems. 2018, Coastal Oil left behind losses of more than US$300 million; two employees were charged. Clarence Chang (BP) and Koh Seng Lee (Pacific Prime) were recently convicted of corruption charges. 2014, collapse of Danish bunker powerhouse, OW Bunker, with losses in excess of US$250 million. OW Bunker’s collapse was said to have originated in part due to trading activities in its Singapore subsidiary, Dynamic Oil Trading.

In the aftermath of these fiascos, stakeholders bemoan the lack of controls, the vulnerability of trade financers, and the complexity of the fraudulent schemes. Traders speak of uncommitted lines being cancelled, committed facilities terminated, and recount narratives of banks requiring huge cash margin as security.

As a commodity trading law specialist, I bemoan the potential reputational repercussions to Singapore as a commodity trading hub and the knee-jerk visceral “de-risking” from the commodity sector by financers. There are murmurings that these recent incidents will cause long lasting impact on Singapore’s ability to attract commodity traders. I wonder if the situation in Singapore is as dire as some naysayers are saying.

I do not think so. Singapore, the biggest commodity trading hub in Asia, and one of the biggest in the world, will not lose its premier position amongst traders and banks because of these trading debacles. Commodity trading frauds are not uncommon. There have been many examples over the years in many countries. No doubt, the number of cases are increasing, and the losses bigger. Could this be a function of the exponential growth in world trade and in particular the growth of Singapore as a commodity trading hub?

As one of the biggest trading hubs in the world with corresponding trade volumes and contracts, one may not be entirely surprised by the fact that there are errant traders in Singapore. These problems are not necessarily a failure of the local system. Put another way, the same errant traders may have done the same thing elsewhere. Having said this – being a major trading hub, the onus is on Singapore to put in place measures, policies and laws to prevent, detect and in the appropriate cases, to punish wrong-doing.

I have been thinking: do we have the legal infrastructure – both hard and soft – in place to facilitate the continued growth of Singapore as a world-class commodity trading hub and to deal with errant traders?

In terms of prevention and enforcement, Singapore has an impeccable reputation. It has a modern and sophisticated police force. In terms of regulations dealing with commodity trading, it is fair to say that paper trading (derivatives) is relatively more regulated then physical trading. The thinking, perhaps, is that the potential for exponential systemic losses is higher for paper trades. The recent events show the potential for huge losses in (fictitious) physical trades.

One may legitimately ask if the enforcement agencies have the expertise to adequately understand and fully investigate complex trading fraud. Expertise comes with experience. The Singapore authorities have prosecuted a number of commodity trading related crimes. The Coastal Oil and Pars Ram Brothers cases are examples. Compared to these earlier cases, the enforcement agency moved faster in the Hin Leong case – charges were brought less than six months after the bottom fell out.

So far, criminal charges usually take the form of cheating and forgery offences in the Penal Code. The Penal Code is more than a hundred years old. Is it effective to deal with sophisticated and complex multi-billion commodity trading fraud? Some stakeholders are calling for tougher actions and a shake-up of the trading sector. One may ask if we need purpose-made legislation to deal with commodity trading offences.

Ironically, notwithstanding the time and effort to uncover and unravel the fraudulent acts, the alleged misdeeds are surprisingly simple – forged pieces of papers. These Penal Code offences carry serious sentences. Jail term can go up to 10 or 15 years. Substantial fines can also be imposed. In my opinion, the criminal law regime is adequate to deal with these crimes. Stripped of the so-called sophistication and complexity, we are essentially talking about acts of cheating and forgery (forged invoices, forged bills of lading, and forged contracts for example).

Interestingly, back in 2018, the Singapore Infocomm Media Development Authority (IMDA) already started development of TradeTrust – to establish a set of globally-accepted standards and frameworks that support the exchange of electronic trade documents. TradeTrust when fully implemented will go a great distance towards eliminating issues of forged documents in international trade. This is a bold and commendable initiative – setting standards on a global-scale. Previous attempts at digitalising trade documents were not notable successes. It will not be easy, and the harmonisation of laws and technical standards will be challenging. The nature of international trade is such that it involves different countries and legal systems. Nonetheless, the initiative is timely, and necessary. As a major commodity trading hub, it is also apt that Singapore takes the lead in this regard.

In response to the recent trading fiascos, international banks in Singapore have formed a working group to propose guidelines for commodity trade finance. This initiative has received clear government support – from agencies like the Monetary Authority of Singapore (MAS) and Enterprise Singapore (ESG), Accounting. The work is ongoing. There is a suggestion that a central registry for collateral pledged for loans be set up, to improve transparency. Ultimately, guidelines formulated by banks must have the support of their customers – the trading houses. The challenge lies in balancing the interests of the banks and the traders, and the traders’ desire to keep financing costs as low as possible.

Back to the issue of trade financing drying up. It is not surprising that the banks are reacting by turning off the tap. However, the collapses in Singapore are not the sole cause of the banks’ problems with trade finance. The overall market conditions themselves also played a substantial part. One hopes that banks have short memories. As a trade lawyer, I remember very well the ebbs and flows of trade finance activities in the last 20 years. This is not the first time banks shut down their trade finance desks. I await in anticipation the re-opening of the trade finance desks in due course.

The question is whether these commodity trading debacles will have serious long-lasting effects on Singapore as a commodity trading hub. I think not. Singapore’s position as a regional and international commodity trading hub is firm. It is well-supported by a network of service providers, including shipping, legal and banking. The government support in terms of tax incentives and the strong business, political and legal landscape are also very powerful factors. We can and do expect Singapore to survive. This is an ongoing process – the rogue will come up with new and creative scams and the law will continue to battle the rogue. Not only will Singapore survive and maintain its position as a leading commodity trading hub, it will come up stronger and better.

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