A series of scandals in Singapore, including a startling admission of financial irregularities by one of the country’s most successful businessmen, is threatening the city-state’s ambition to become the world’s leading commodity trading hub.
The blow-ups in close succession of Hin Leong Trading — whose billionaire founder Lim Oon Kuin confessed to hiding $800m of losses — ZenRock Commodities Trading and Agritrade International have raised serious questions about the strength of Singapore’s regulatory framework and oversight of trading houses.
The corporate collapses have also highlighted structural risks such as the lack of transparency underpinning the global commodities trade, which remains critical to the small, open economy of Singapore.
Critics say the country’s rules, monitoring and enforcement of many of the privately owned companies involved in the sector are weak.
Driven by an overriding desire to be a business-friendly destination, they say Singapore has been hesitant to introduce stricter rules that might discourage companies from incorporating in the city, which competes directly with London, Geneva and Houston.
“I believe there are legitimate concerns about whether resources for regulatory enforcement have kept pace and whether our regulators are too conservative,” said Mak Yuen Teen, an accounting professor at the National University of Singapore. “My sense is that regulators here are less willing to test the law and will only prosecute in ‘sure win’ situations.”
Others take a different view, arguing that no amount of regulation could have stopped the failures, particularly any involving financial impropriety. Commodity trading blow ups are hardly unique to Singapore, they add, pointing to the recent debt crisis at Dubai-based Phoenix Commodities.
“The fact that Singapore has been the epicentre of [these collapses] reflects the fact that it is the epicentre of trading in the region,” said Craig Pirrong, a finance professor at the University of Houston and author of reports on commodity trading. “It’s not as if Singapore doesn’t have laws against fraud and isn’t capable of rigorous enforcement.”
Singapore’s location straddling the shipping lanes that connect China with global markets has helped turn the tiny city-state into one of the world’s biggest commodity hubs — and a natural home for traders, which the country has courted with low corporate tax rates and other benefits.
All of the world’s major oil traders, including Trafigura, Glencore, Vitol and Mercuria, have offices in Singapore. They rub shoulders with the trading arms of oil majors BP and Shell and a group of aggressive local players that have carved out strong positions in markets such as bunkering, or marine fuel. It is these local traders that have struggled in 2020.
“We have had a crazy couple of months in the oil market,” said Christophe Salmon, chief financial officer at Trafigura. “When we see such price movements it is also always the companies that either speculate or lack proper risk management frameworks that get into trouble. That’s what we have been seeing in south-east Asia.”
Indeed, it was the crash in oil prices caused by the Saudi-Russia price war and the coronavirus epidemic that triggered the liquidity crunches at Hin Leong and ZenRock Commodities. This, in turn, led to the discovery or admission of financial irregularities.
In the case of Hin Leong, it was hiding losses from trading in futures markets and selling off oil inventories that had been pledged as collateral for loans, according to legal filings in Singapore. For ZenRock, it was using the same cargo of oil to obtain loans from several banks, according to claims made by HSBC, one of its lenders, in court documents.
Both companies are now being run by independent third parties that are trying to hammer out a debt restructuring agreement with their lenders. They are also under investigation by the police.
Hin Leong and ZenRock did not respond to calls and emails seeking comment.
ZenRock has blamed its financial difficulties on the steep decline in crude oil prices and a tightening credit market “exacerbated” by banks’ increased caution, according to local media reports.
Prof Mak says the failure to hold companies and directors to account for their conduct has contributed to the string of collapses. “We certainly do not have much of a record in putting directors who break laws into jail or even disqualifying them,” he said.
In 2018, the white collar crime unit of the Singapore police launched an investigation into suspected “false and misleading statements” made at Noble Group, the commodity trader that came close to collapse in a debt and accounting crisis. To date, no charges have been made.
Noble, which was listed in Singapore, has always defended its accounting. Allegations about the company accounts first surfaced in 2015.
Enterprise Singapore, the government agency that promotes trade in the city state, said commodities trading was regulated under the Commodity Trading Act and the Securities and Futures Act.
“Trading companies that are suspected to have contravened Singapore laws may be investigated and dealt with in accordance with our laws,” it said. “Failure to comply with [commodities trading] regulations may result in an offence punishable by fine or imprisonment or both.”
Bankers also note that Hin Leong did not have to file annual results even though its revenues exceeded $20bn in 2019, according to court documents. This is because of its classification as an “exempt private company”, defined as a business with fewer than 20 shareholders and no corporate investors. “How can a $20bn revenue company not be a public interest entity?” asks Prof Mak.
Hin Leong’s creditors, which include HSBC, ABC and Société Générale as well as local banks DBS, OCBC and UOB, are owed almost $4bn.
Singapore’s Accounting and Corporate Regulatory Authority said “most private companies adopt the accounting standards that are similar to those prescribed for listed companies and the international accounting standards . . . [they] are also required to make disclosures that are comparable to listed companies in Singapore, as well as companies incorporated overseas”.
The recent failures in Singapore have also shone a light on broader issues with commodity trading. These include aggressive lending practices and archaic paper-based systems that are vulnerable to abuse and forgery.
Baldev Bhinder, managing director of Singapore-based law firm Blackstone and Gold, said the people who vilified the city-state for the recent collapses should also look at the part played by the banking sector.
“The spotlight is on the traders for some sharp and shoddy practices but it is also on the banks for some better lending practices,” said Mr Bhinder.
He added: “I am always struck as to how companies of all shapes and sizes sometimes get access to a startling amount of financing.”
Commodity trading is a capital-intensive business — it cost tens of millions of dollars to fill up an oil tanker — and fees from lending to local players such as Hin Leong and ZenRock can be up to two and half times higher than from deals with sector leaders such as Vitol and Trafigura, according to industry executives.
A veteran industry banker says he was stunned to discover Agritrade International, a relatively small trader that collapsed in February, had been granted $1.54bn of credit from 26 different lenders.
“This is a really staggering number,” he said, adding that he hoped regulators in Singapore would set up a credit registry so that banks could check on banking facilities granted to commodity traders by other lenders.
The Monetary Authority of Singapore, the country’s financial regulator, said it promoted “transparency and fair-dealing by banks in relation to their customers and counterparties”. “In their credit risk management, banks are expected to apply judicious credit assessments on individual borrowers and not rely on broad-based sector de-risking,” it said.
For Trafigura’s Mr Salmon, the problems in Singapore also highlighted the need for global electronic platforms to process documents that underpinned commodity trading.
The buying and selling of raw materials is still largely a paper-based process with banks relying on bills of lading or warehouse receipts as title documents and security for financing goods.
“One of the ways to mitigate fraud is through tighter systems. A comprehensive blockchain solution could take years but electronic bills of lading could be an important step forward,” said Mr Salmon.
Whatever solutions are chosen, bankers and industry executives say the pressure is on the authorities to show they can handle the restructuring or liquidation of the collapsed traders and take firm measures to prevent it happening again. Otherwise Singapore may fail to realise its ambitions to be the world’s premier commodity trading hub.
“I have no doubt that Singapore will make an example (or examples) pour encourager les autres,” said Prof Pirrong. “It has a reputation for meting out pretty rough penalties for a variety of crimes.”
This article was amended to reflect the fact that allegations about Noble Group’s accounts first surfaced in 2015, not 2014.