Commodity Trading Giant Trafigura Faces $1.1 Billion Loss in Mongolia
Trafigura Group, a behemoth in the world of commodity trading, has been rocked by a crisis in a distant corner of its empire. The company, which handles enough oil to supply France three times over, has admitted to facing a potential loss of up to $1.1 billion in Mongolia. This staggering figure is linked to suspected fraud by its own employees, who allegedly manipulated payments while concealing a massive amount of overdue debts.
A Shocking Revelation
The news came as a bombshell to both insiders and outsiders, given the relatively small size of Mongolia’s oil market. With a consumption of about 35,000 barrels a day, worth roughly $1 billion a year, Mongolia accounts for less than 0.3% of Trafigura’s total oil trade. The scale of the likely loss is all the more astonishing when considering that there are over 100 countries that use more oil than Mongolia.
Internal Controls Under Scrutiny
Trafigura’s CEO, Jeremy Weir, expressed bitter disappointment at the situation and assured that the company was investigating the matter. However, the incident raises questions about Trafigura’s internal controls and why it took almost a year to fully disclose the situation. This debacle follows last year’s revelation that Trafigura had fallen victim to a massive alleged nickel fraud, further tarnishing the company’s reputation.
A Profitable Niche Turns Sour
Trafigura had enjoyed a profitable niche in Mongolia, supplying about a third of the country’s oil products. The operation turned over hundreds of millions of dollars every year, with profits typically in the tens of millions. However, the company’s employees in Mongolia allegedly manipulated data and documents to misstate calculations for charges like customs and freight, leading to the massive loss.
Complex Web of Credit and Debt
The situation in Mongolia is complicated by the fact that Trafigura supplied oil on credit to local distributors, who then sold it to fuel retailers. The wholesaler, Lex Oil LLC, would take Trafigura’s oil products and sell them on, while hedging transactions added another layer of complexity. The result was an ever-changing exposure to Lex Oil and its network of buyers in Mongolia, which ultimately ballooned to hundreds of millions of dollars.
A Delayed Response
Trafigura’s board brought in forensic accountants, and senior management got involved, but it took more than eight months for the company to disclose the full extent of the problem. The response in Mongolia contrasts with its actions over the nickel fraud, when Trafigura moved swiftly to take legal action against the alleged fraudster.
A Lesson Learned?
The incident serves as a harsh reminder of the importance of strengthening internal controls and governance. As Jean-Francois Lambert, a consultant and former commodity banker, notes, “The key question is how quickly and effectively one learns from mistakes and implements corrective measures.” Trafigura’s ability to prevent similar incidents in the future will be closely watched by outsiders.
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