Hong Kong-listed Brightoil Petroleum Holdings on Thursday (17 September) published the key findings of the Forensic Review by RSM Corporate Advisory (Hong Kong) Limited (RSM) regarding certain oil trading transactions of Brightoil Petroleum (S’pore) Pte. Ltd. (BOPS) and Shenzhen Brightoil Group Co Ltd. (SZBO), owned and controlled by Dr. Sit, the ultimate controlling shareholder of Brightoil at the time.
This is a Supplemental Report that builds upon the knowledge and findings of the primary forensic investigation report dated 31 January 2020, it said.
In the report, RSM investigates further into issues in BOPS’ trade analysis with SZBO and its credit limit given to customers and structured/financing deal arrangements that were flagged up by Brightoil’s former auditors PricewaterhouseCoopers to be of concern:
In this review, RSM sought the additional available information with respect to the financial year ended 30 June 2018 from the current management of the Group to arrive at the findings and observations that was discussed in the Supplemental Report. Given the circumstances as described below, RSM believes these additional findings and observations did not lead to any determination and/or comment about the Subject Transactions and other back-to-back transactions more conclusive than that mentioned in the Primary Report.
First, the outstanding receivables due from the Subject Customers of USD1.34 billion were still substantial as at 30 June 2018, which was higher than USD1.309 billion as at 30 June 2017. Even though settlement was recorded for some of the outstanding receivables of the Subject Customers as at 30 June 2017, BOPS continued trading with 6 of the Subject Customers during the second half of 2017 and hence the situation of the doubtful receivables did not improve at all.
Secondly, RSM noted the phrase “financing deals” was used interchangeably with the phrase “structured deals”. In particular, as discussed in the Supplemental Report, RSM noted that: i) financing deals were financing related,
ii) financing deals could be differentiated from normal trading deals,
iii) attempts were made to mimic operational arrangement of normal trading deals in financing deals, and
iv) there could be no intention to take physical possession of cargo in financing deals; but it is unclear whether this meant paperwork-only trade as well as whether there would be any change on beneficial ownership.
Together, from the description of the structured/financing deals, there were various characteristics of trading of financial instruments rather than the intention to take physical delivery in the trading of tangible products. Alternatively, these observations raised further doubts as to the difference as well as objective between these structured/financing deals and the “real” trades of oil products in the normal course of business of an oil trading company.
Thirdly, RSM noted that BOPS entered into various back-to-back transactions with each of the 12 Subject Customers, which were later known to us as structured/financing deals. These structured/financing deals were, majority if not all, loss-making before taking into account the discounts provided by SZBO. RSM found evidences that some of these structured/financing deals were conducted for financial arrangement purposes but, unfortunately, there were no precise indications as to which parties enjoyed direct benefits from such arrangements. In addition, owing to the pre-arranged and back-to-back nature of the transaction flow in structured/financing deals, the management could have presumed that the exposure to credit (and legal) risks in these structured/financing deals would be minimal, and hence allowing unsecured but high open credit to these customers. The credit risks finally turned out to be significant which resulted in substantial receivable amount long outstanding as at 30 June 2018.
RSM raised a further question as to what had gone wrong and caused the deviation(s) from the structured plan and arrangement including but not limited to which parties held onto the monies which were supposed to flow in the structured/financing deals and why a customer would fail to make settlements in structured/financing deals as “structured”.
Finally, RSM considered that there were still significant limitations associated with the investigation, such as the lack of communication with the relevant counterparties and former employees of BOPS, the scope of this review was limited to the available information and documents provided by the current members of the Group. Should additional information become available in the future, considerable amendments to the Primary Report and/or the Supplemental Report may be required.
A full copy of the report published by Brightoil on HKSE is available here.
Earlier developments of Brightoil (since late 2017 to date) can be found in the search results here.
Photo credit: Manifold Times
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