How Citigroup helped lift the lid on Trafigura’s nickel nightmare

On Oct. 27, Citi pulled the plug on financing any more of the deals. That set off a cascade of events: Trafigura inspectors went off to check containers that were supposed to hold nickel, only to find they didn’t. At an early January meeting in London, Gupta confirmed the scale of Trafigura’s exposure and offered to settle the amount over time. But the company decided instead to go to court. Last week, it won a $625 million freezing order in a UK court against Gupta and his companies.

This account of the alleged fraud — one of the largest ever in the metals industry — is based on court filings obtained by Bloomberg as well as interviews with people familiar with the matter. It lays bare the shortcomings of Trafigura’s controls, which allowed payment of hundreds of millions of dollars to Gupta’s companies without always having confirmed the contents of the cargoes it was buying.

It also points to a potential worry for the wider metals markets: Trafigura had already sold nearly $100 million of the “nickel” cargoes on to other companies. And it reveals the involvement of some of the world’s largest banks, from Citi, which was helping to finance the transactions, to HSBC Holdings Plc and Barclays Plc, through which some of the money flowed.

Trafigura said it made efforts to reduce its exposure to the companies after “a number of red flags.”

“This was a systematic fraud perpetrated after a long and legitimate business relationship dating back to 2015 that involved misrepresentation and widespread falsification of primary and supporting documentation,” a spokesperson said. “Any fraud is an opportunity to review and tighten systems and procedures and a thorough review is underway.”

Citi, HSBC and Barclays declined to comment.

Bloomberg has made multiple attempts by phone and email to reach Gupta and companies owned by, or otherwise linked to him for comment, but did not receive any response. Gupta didn’t attend the London court hearing and the freezing order could still be overturned at a later date. However, he argued to Trafigura at a meeting in November 2022 that discrepancies in the cargo were not his fault but that of his business partner in India, and therefore that he had not committed fraud, according to a Trafigura legal filing.

While Trafigura’s deals with Gupta centered around buying and selling nickel cargoes, at their essence the transactions were a form of financing extended by the giant commodity trader.

Trafigura would buy nickel in the form of cathodes and briquettes from Gupta’s companies with an agreement that it would later be bought back by them, or by an alternative buyer nominated by them, or sold in the open market. The prices of the sale and the purchase were set so that Trafigura earned a fixed interest rate on the deal, as if it were simply lending money. In the legal filings, Trafigura describes the transactions as “transit finance.”

Such deals are common in commodity trading, providing a means for bigger companies with cheaper funding costs to earn a profit by lending their money to smaller companies. The practice has become even more important for the industry after several large banks pulled back from commodity-trade financing following a series of high-profile controversies and blow ups.

In theory, transit finance and similar repurchase or “repo” deals are safer than a regular loan, because the ownership of the underlying commodities changes hands. That is, of course, as long as the underlying commodities exist.

And such financing transactions usually rely heavily on hard copies of documents — such as shipping receipts called “bills of lading” — making them particularly susceptible to the risk of fraud.

Red flags

Trafigura had dealt with companies linked to Gupta since 2015. However, the relationship “began to deteriorate” over the course of 2021 and 2022, as Trafigura’s exposure grew, according to a court filing.

The total volume of the nickel involved increased “substantially,” as did the length of time for which Trafigura was being asked to finance it. In some instances, Gupta’s companies started paying Trafigura not in cash but by offering further cargoes of nickel.

If any of this raised red flags for Trafigura, it didn’t stop the trading house from continuing to send money to Gupta. In June 2022 alone, according to a court document, the trading house paid $147.3 million to companies linked to Gupta. The payments continued until at least mid-September, the court document shows.

By that time, India’s Central Bureau of Investigation — the country’s equivalent to the FBI – had already announced a fraud investigation into Gupta in July. But it was when Citi, which had been helping to finance Trafigura’s trades with Gupta, grew uncomfortable that the alleged fraud began to unravel.

Read more: Trafigura’s nickel nemesis was already notorious in metal circles

The US bank “ceased supporting trades” with Gupta’s companies from Oct. 27, a court filing shows.

The date stands out in the global metals calendar because it was during LME Week — the industry’s largest annual gathering when traders, miners and bankers descend on London for a jam-packed week of meetings, seminars and parties. Earlier that week, Citi had hosted a two-day conference for its commodities clients in London.

Nickel informant

It’s not clear why Citi made the decision, or what it communicated to Trafigura. But over the coming weeks, Trafigura gradually uncovered the scale of the problem it was facing. In early November, the company met an “informant” who told it that not all of its cargoes contained nickel.

When it raised the issue with Gupta, he acknowledged as much, according to a court filing. The businessman told Trafigura that the cargoes might actually contain less-valuable nickel alloy rather than pure nickel, and explained the discrepancy as “an effort to avoid a ban on shipping nickel of Russian origin,” the court filing shows. (There are no international sanctions preventing the shipping of Russian nickel, though some banks refuse to finance it.) On Nov. 15, he told Trafigura that its containers actually held 20,000 tons of nickel alloy and 5,000 tons of “other materials.”

Finally on Dec. 22, Trafigura’s inspectors arrived at the port of Rotterdam, hunting among the brightly-colored containers for its cargoes of nickel. They opened eight: they did not contain nickel, or even nickel alloy. A further 117 containers inspected in the Netherlands, United Arab Emirates and Taiwan over the coming weeks contained anything but nickel.

The issue came to a head in London on Jan. 7, when Gupta met Socrates Economou, Trafigura’s head of nickel. At that meeting, according to Trafigura’s court filings, Gupta acknowledged that Trafigura’s exposure was in excess of $500 million, and “presented a plan for the proposed settlement of this amount over a period of time and by various methods.”

At that point, Trafigura decided instead to pursue Gupta in court. Economou is leaving the company, Bloomberg has reported – although Trafigura has said it doesn’t believe any of its employees was complicit in the fraud.

“It appears overwhelmingly likely that Trafigura has been the victim of a widespread and systematic fraud. It was deceived and paid monies over on a false basis,” Trafigura’s lawyers said in a filing. The company contracted with the defendants “to purchase nickel, paid for nickel, but was not supplied with nickel.”

The revelation of the alleged fraud is a blow for Trafigura’s metals traders, who — despite being some of the world’s biggest players in everything from copper to zinc — have recently been outshone internally by Trafigura’s energy traders.

Trafigura is still unpicking the full extent of the alleged fraud. It has so far inspected at least 156 out of a total of 1,104 containers, without finding nickel in any of them.

The details in the court filings lay bare the procedural shortcomings that allowed Trafigura to build up such a large position in what turned out to be non-existent nickel.

In one document, the company’s lawyers conceded that many of the bills of lading contained discrepancies, for example not showing the “HS” code that is used to identify the good being shipped. They also noted that Trafigura did not always insist on getting a “certificate of analysis,” verifying the contents of the cargo, before paying for them.

They acknowledged that such failings could be used by Gupta to argue that Trafigura didn’t really care what was in the containers, and understood that it was effectively lending money to Gupta. But they said such an argument would be “strongly disputed” by Trafigura.

HSBC, Barclays

The court filings also show the involvement of other banks, in addition to Citi. Trafigura detailed payments it had made between January and September 2022 to several companies controlled by or linked to Gupta totalling $391 million. Those payments were made to accounts held by Gupta’s companies at HSBC, Barclays, Singapore’s United Overseas Bank Ltd., and Malayan Banking Bhd. and RHB Bank Bhd. of Malaysia.

For the nickel industry, the fallout from the alleged fraud may be only just beginning. The filings also show that Trafigura sold some of the supposed nickel on to third parties, raising the prospect that other market players may soon discover that they too have bought containers full of “nickel” that in fact contain something else.

In addition to $535 million it paid Gupta’s companies for cargoes it now believes to be worthless, Trafigura also sold $93.9 million of cargoes it had bought from Gupta’s companies to other companies. It believes it will be exposed to claims from these companies as it seems “likely” that the cargoes it sold do not contain nickel, Trafigura’s lawyers wrote.