Trafigura shocked the corporate world last week when it booked a $577mn writedown and revealed it had been the victim of a “systematic fraud”.
But industry insiders were more surprised at the man the commodity trader identified as being behind the alleged perpetrator companies: Prateek Gupta, a 43-year-old Indian businessman who has traded with Trafigura for years despite his chequered reputation.
After discovering shipments of nickel bought from Gupta-linked companies contained no trace of the valuable metal, Trafigura has launched legal action and secured a $625mn freezing order against the Dubai-based metals trader and his business empire.
Court documents seen by the Financial Times show the alleged fraud has drawn in Wall Street bank Citigroup, which financed the trades, and UK lender Barclays, where Gupta’s companies held accounts that received Trafigura funds. They also reveal that Trafigura sold on potentially fake nickel cargoes in 11 trades worth $94mn, potentially affecting a far larger pool of the commodity trading industry.
As new details of the case emerge, the inquest now begins into why one of world’s biggest commodity traders placed such faith in a man whose reputation was well known among trade financiers, and why its risk management procedures fell so short.
Early warning
Trafigura started trading with Dubai-based TMT Metals, controlled by Gupta since 2016, more than a decade ago. It provided “transit finance” to TMT and other Gupta companies, buying nickel from Gupta’s companies before selling it back to the companies or into the open market at a later date, charging interest for the duration of its transportation.
TMT was a reliable counterparty for years until early signs something might have been amiss appeared in 2021, when transit times for containers ballooned along with volumes of nickel traded. Some shipments took more than 300 days, many times more than necessary for any global shipping route, according to one person familiar with the matter.
A further warning came last July, when flashes appeared on the due diligence screens of Trafigura’s risk management teams after authorities in New Delhi accused Gupta of defrauding the State Bank of India and four other lenders.
But court filings show it was not until October, when Citi moved to stop financing the trades between Trafigura and Gupta’s companies, that the commodities house began to investigate in earnest.
Ian Milne, who was responsible for trying to recover debt from Gupta’s UD Trading for trade finance fund TransAsia Private Capital between 2018 and 2020, said he was “flabbergasted” that Trafigura’s controls had not brought an earlier halt to its relationship with Gupta.
“I was amazed to see Trafigura were dealing with someone of his reputation,” Milne said. “He has been a persona non grata for many years.”
Jonas Rey, chief executive of Swiss corporate intelligence firm Athena Intelligence, told the Financial Times he had investigated TMT in 2015 and 2016 over an alleged scheme involving a network of companies trading between themselves, each with different bills of lading and their own financing.
“Their reputation was horrendous,” he said. “TMT Metals was blacklisted from most credit and insurance companies as they were such a high-risk entity.”
Gupta began his career as a trainee at his father’s metals 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 a number of Indian banks.
Several traders said they had also been wary of Gupta’s ties to Sanjeev Gupta, the metals magnate whose GFG Alliance group of companies is under investigation by the UK’s Serious Fraud Office.
Sanjeev Gupta, who is not a relative of Prateek’s, is a former Ushdev shareholder, according to Indian corporate filings.
GFG Alliance said it “has for years had no business or relationship with Prateek Gupta or Ushdev and is in no way connected to any of the activities Trafigura’s announcement referenced”.
Container checks
Trafigura said it had started an investigation into the trades with Gupta’s companies after “a number of red flags” became apparent, although it declined to specify when.
An “informant” told Trafigura in November that one or two of the purchased containers contained something other than nickel, according to the court documents.
When the trading house confronted Gupta, he told Trafigura’s head of nickel and cobalt trading Socrates Economou that they contained 20,000 tonnes of cheaper nickel alloy and 5,000 tonnes of other materials, rather than high-grade nickel metal.
Gupta tried to blame his business partner in India for the discrepancies and even suggested the contents were different to avoid a ban on shipping Russian nickel, despite no such ban having been in force.
When Trafigura inspectors checked containers in November, they found carbon steel, a low-value metal worth less than $1,000 per tonne versus roughly $26,500 for nickel.
At a meeting in London in early January, Gupta proposed settling the sum it owed Trafigura, but the commodities trader decided instead to pursue a fraud claim and freezing order.
Later in January, Trafigura cracked opened 117 containers in the Netherlands, the United Arab Emirates and Taiwan to find none contained nickel in any form.
Trafigura has said there is no evidence any of its employees were complicit in the fraud. Economou is leaving the company.
Mammoth trades
Commodity traders were stunned by the scale of business that Trafigura undertook with Gupta’s companies.
The supposed 25,000 tonnes of nickel cargo are equivalent to about 1,104 containers of the metal, or more than 10 per cent of the annual imports of China, the dominant global consumer. So far, Trafigura has only checked 156 boxes.
Industry insiders warn that the commodities trading industry needs to change outdated ways of doing business if it is to escape a repeat pattern of large-scale scandals.
They say the fact that the process of buying and selling raw materials still largely depends on paper documents makes it particularly susceptible to fraud.
“If the industry continues to rely on paper-based systems and email as its primary form of communication, it will continue to have these problems,” said Simon Collins, a former head of Trafigura’s metals and minerals business who now runs commodity trading software platform TradeCloud.
Trafigura said the alleged fraud “involved misrepresentation and widespread falsification of primary and supporting documentation”, adding that “any fraud is an opportunity to review and tighten systems and procedures and a thorough review is under way”.
Gupta did not respond to multiple requests for comment. Citi and Barclays declined to comment.
Wider fallout
Now, the questions turn to how exposed other traders, financiers and insurers are to one of the metals industry’s largest frauds and whether Trafigura can claw back any of its losses.
After Citi pulled financing, Trafigura used cash from its own balance sheet to continue the trades. To some degree, that will help insulate its $73bn worth of credit lines from the 140 lenders on which it relies to move oil, gas and metals around the world, as other banks are not exposed.
But the scandal may prompt banks to increase scrutiny and auditing of the company’s risk management procedures. “It makes it even worse for Trafigura that they financed it with their own cash,” said Rey at Athena Intelligence.
Corporate filings show one business with exposure to the scandal is an investment vehicle of Artis Finance, a trade finance start-up backed by TDR Capital, a private equity firm with a stake in the UK’s Asda supermarket group.
Artis’s website describes the entity — Artis LoanCo1 — as a “ringfenced company that supports midmarket trader and corporates through robust, receivables-based financing” and states that “only the most meticulously risk-assessed and commercially viable transactions make it through to the Artis Investment Committee”.
“I can confirm that Artis LoanCo is a secured lender to TMT Metals for receivables financing, but we are not in a position to comment further as we are still gathering facts, undertaking internal reviews and we await a formal statement from TMT,” said the company’s chief executive Waldo de Vleeschauwer.
Trafigura is yet to decide whether to claim insurance, but if it does, providers would have to decide whether to accept its claims.
Gunvor, another commodity trader, was previously stung by its exposure in the tens of millions of dollars to Ushdev, a Gupta-linked company that went insolvent, but its insurer Euler Hermes paid out, helping to minimise losses, according to three people familiar with the matter. Gunvor declined to comment.
Industry observers say Trafigura may also struggle to recoup money through legal action given the complexity and ownership structure of the web of companies it says is behind the alleged fraud.
“I’m not sure they will get much money back from litigation as there’s not much to go after,” said Milne, who now works at MonetaGo, a fintech business that tackles financing fraud. “Sure, Gupta has a lot of money out there, but most of it is not in his name.”
Additional reporting by Stephen Morris, Ian Smith and Joshua Franklin