(Bloomberg) — Trafigura Group is a commodity trading giant. On any given day it processes enough oil to supply France’s entire needs three times over. Its global reach extends from the U.S. crude oil export infrastructure to fueling stations in more than 20 countries in Africa, Asia and Latin America.
But in a remote corner of the empire, far from the attention of top executives in Geneva and Singapore, a crisis has been brewing for some time.
This week the company admitted to losses of up to $1.1 billion in Mongolia, partly due to suspected fraud by its own employees. Trafigura claims staff manipulated payments while hiding a mountain of overdue debt, allowing exposure to spiral out of control for years without raising any red flags.
The revelation was a bombshell for people inside and outside Trafigura. Most shocking was the size of the likely loss relative to the size of the Mongolian oil market. According to data from the U.S. Energy Information Administration, there are more than 100 countries that use more oil than Mongolia, including Luxembourg and Nepal. Consuming about 35,000 barrels per day is worth about $1 billion per year. For Trafigura, Mongolia represented less than 0.3% of all oil it traded.
This report is based on interviews with eight people with direct knowledge of Trafigura and its operations in Mongolia, who asked not to be identified due to the sensitivity of the subject. This week, Trafigura CEO Jeremy Weir said the company was “bitterly disappointed” by the situation and was confident it was isolated from its Mongolian operations. The company’s investigation is still ongoing.
This week’s announcement, which confirms an earlier Bloomberg report, represents a painful follow-up to last year’s revelation that Trafigura had fallen victim to a massive alleged nickel fraud.
The debacle once again shines a harsh light on the company’s internal controls and raises questions about why it took nearly a year for the situation to be fully disclosed. To outsiders, it reinforces the commodities trading’s fast-and-loose reputation, months after some of its biggest players – including Trafigura itself – pleaded guilty to corruption charges in the US.
In a private call, nine bankers, including at some of the company’s top lenders, said they were surprised at the scale of the potential loss and wanted to know how Trafigura will prevent it from happening again. Still, the loss is unlikely to impact the company’s ability to borrow money, some of them said.
“The key question, as always, is how quickly and effectively one learns from mistakes and implements corrective actions,” said Jean-Francois Lambert, a consultant and former commodities banker. “Not just by redeploying or laying off staff and initiating a long-term recovery process, but by strengthening the company’s governance, internal processes and controls.”
Profitable niche
For years, Trafigura had enjoyed a profitable niche in Mongolia, which was completely dependent on importing its petrol and diesel – largely by rail from Russia, and sometimes from China.
The company supplied about a third of Mongolia’s oil products, with a particularly large position in diesel. Rosneft PJSC and Gunvor Group were the main competitors. The operation generated several hundred million dollars annually, with profits typically in the tens of millions, according to people with knowledge of the matter.
It was a small but fine company for the commodity trading world, where razor-thin margins are often 1% or less.
In Ulaanbaatar, Trafigura’s employees worked from the Landmark, a glass-clad building on the edge of the central business district that overlooks a new park built by mining giant Rio Tinto Group. Next door is the Soviet-era Bayangol Hotel.
Trafigura’s top oil trader in Mongolia was Jononbayar Erdenesuren, who had been with the company since 2012. Jononbayar was known in Ulaanbaatar’s tight-knit business community for his tough approach to business and for the parties he organized for friends and contacts.
Being landlocked, the Mongolian market is vulnerable to disruptions, and in late 2023 the country was gripped by a fuel shortage. Citizens rushed to queue for petrol and diesel, and the government began scrutinizing the state of the country’s oil supplies.
Some people familiar with the matter suggested that the crisis contributed to the discovery of Trafigura’s financial hole in the country.
But the trading house also went through its own period of criticism after the nickel fraud. And as the company took a closer look at its largest credit positions, one small market stood out.
Fuel on credit
Selling oil in Mongolia is complicated. International companies such as Trafigura do not have import licenses and therefore cannot supply directly to the local market, but rely on local distributors. For Trafigura, the main counterpart was a company called Lex Oil LLC.
The Mongolian company would acquire Trafigura’s oil products and resell them to fuel retailers. Crucially, Trafigura supplied the oil on credit, with the agreement that Lex Oil would pay in the future after deducting customs and freight duties.
Complicating the picture further, the wholesaler also provided credit to its own customers, while hedging transactions added another layer of complexity. The result was ever-changing exposure to Lex Oil and its network of buyers in Mongolia.
What Trafigura’s auditors in Singapore and Geneva failed to understand was that these exposures had grown in size to many hundreds of millions of dollars even though the bills had not been paid when they were due, said a person familiar with the matter. case.
A person who answered the phone at Lex Oil’s office said no one was available to answer Bloomberg’s questions, and the company did not respond to an emailed request for comment.
The problem was finally discovered late last year. Trafigura says staff concealed “intentional delinquencies,” but the alleged misconduct was not limited to concealing the debt. The company also said its employees manipulated data and documents to misrepresent calculations for things like customs and freight charges. It is believed this has been going on for about five years.
Trafigura did not name any employees in its statement, saying only that it was taking “appropriate disciplinary action.” Jononbayar is among the employees suspended, according to people familiar with the matter.
A representative for Jononbayar declined to comment, saying he is still an employee of Trafigura and bound by a confidentiality agreement.
Eight months
When the extent of the problem became clear, Trafigura’s board called in forensic accountants. The company’s senior management got involved and Jose Larocca, one of its top executives, flew to Mongolia in February to meet with Lex Oil.
Bloomberg reported the same month that Trafigura had a problem in its Mongolian oil operations and was facing hundreds of millions of dollars in potential losses. The company said at the time that it had recently agreed debt repayment schedules with oil products customers in Mongolia and that it had “a good track record of successfully collecting debt from counterparts in emerging markets.”
Even after the report, more than eight months would pass before Trafigura made the full extent of the problem public.
The response in Mongolia is in stark contrast to actions related to the nickel fraud, when Trafigura took legal action against alleged fraudster Prateek Gupta. The country was issued a freezing order but has still not recovered any money almost two years later. (Gupta has disputed Trafigura’s version of events, arguing that the trading house was complicit in its actions.) Meanwhile, the lawsuit has shined a harsh light on Trafigura’s own processes and exposed internal communications that the company may have preferred to keep private.
The head of its nickel and cobalt business left the company, and over the next few months several other senior metals executives left, although Trafigura has repeatedly said it did not believe anyone within the company was complicit in the nickel fraud.
One reason the company did not immediately take legal action over the Mongolian oil spill was that it had not yet gotten a clear picture of the facts of the case, a person familiar with the matter said. The investigation is still ongoing, the company says.
In June, when Trafigura published unaudited results for the six months ending in March, the word ‘Mongolia’ was not even mentioned. The company did report a sharp increase in delinquencies, but new Chief Financial Officer Stephan Jansma explained that higher commodity prices and interest rates meant that “importing countries will have issues in their payment profiles from time to time.”
The disclosures “reflected management’s assessment of potential losses at that time for a number of counterparties and countries,” a Trafigura spokesperson said on Thursday. “As an external investigation was underway, we were not in a position to comment on Mongolia.”
Annual accounts
At the end of September, Trafigura was preparing to close its annual accounts when Weir announced he would hand over the CEO position to gas boss Richard Holtum in January. It was time to decide what to do about the headache in Mongolia.
The company had already taken action. It halted new operations in the country, suspended Jononbayar and terminated the contract of Singapore-based head of Mongolia Mikhail Zeldovich. (Zeldovich declined to comment.)
And it still hopes to recover some money from Lex Oil, whose debt represents more than half of the $1.1 billion, according to a person familiar with the matter.
“A substantial portion of the total exposure has been recognized as a debt to Trafigura by our main counterparty in Mongolia. We intend to hold the counterparty to their repayment obligations,” Trafigura said.
Ultimately, the company decided to include a “conservative” provision of $1.1 billion in its financial results and publicly confirm the alleged misconduct.
Some bankers heard about the prospect of a Mongolia facility during informal conversations with Trafigura employees in September, people familiar with the matter said. But even lenders expecting a charge were shocked by the $1.1 billion figure.
“As of September 2024, no employee at Trafigura had the knowledge or authority to discuss the size of a total provision related to our Mongolian oil operations,” the company said.
Major lending relationships are unlikely to be affected, said Orhan Gunes, a commodities financier who now runs trade finance platform TradeQraft.
“The critical issue is that after this case and the nickel case, they’ve used up their funds on things like that, and I think they’re aware of that,” he said. “Trafigura has very good risk management tools and professionals, so they will take serious precautions.”
–With help from Anna Shiryaevskaya.
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