Commodity traders in DoJ’s sights as probes tarnish boom times


The past year has been one of the best on record financially for big commodity traders that took advantage of the storm whipped up by the coronavirus crisis to rack up huge profits in the oil market.

The same cannot be said of efforts to cast off a reputation for shady business practices that has dogged the industry since the days of Marc Rich, the godfather of modern commodity trading.

In the latest incident to cast a shadow over the sector, a Gunvor employee who became an agent for the company in 2018 pleaded guilty in a New York court to paying more than $22m in bribes to win business in Ecuador between 2012 and 2020. He faces up to 20 years in prison.

The incident underscores the challenge of supervising risk-hungry traders and the dangers of using agents or intermediaries to win business in resource-rich countries. It also highlights the heightened interest in the sector by the Department of Justice and other US regulators, which is expected to become even more intense under Joe Biden’s administration.

“Expect more scrutiny and increased enforcement,” said Kim Zelnick, partner at Freshfields Bruckhaus Deringer. “The DoJ really means business. Combating corruption is a priority, and they are going to go looking where there is a real risk and an incentive for people to engage in misconduct.”

Gunvor is one of a small group of companies, including Vitol, Glencore and Trafigura, that help power the global economy by linking supply of raw materials with demand. They have surfed a wave of globalisation and emerging market growth to build businesses that have revenues larger than many banks.

Last year Vitol, the world’s largest independent oil trader, earned record profit of almost $3bn on revenues of $140bn. Trafigura, Gunvor and Glencore also enjoyed record trading results.

However, the business of linking oil producers and consumers often involves operating in countries that have been hotbeds of corruption, or where it is difficult to secure business without agents who work on commission and network with government officials to help land deals.

These relationships have been a repeated source of legal problems for the sector, which has been trying to open up and become more transparent.

Vitol agreed at the end of last year to pay more than $160m as part of a deferred prosecution agreement with the US DoJ after it admitted to bribery schemes in Brazil, Ecuador and Mexico involving employees and agents.

Authorities are also investigating Glencore and Trafigura on similar allegations in Brazil. Glencore has said it is cooperating with the investigation while Trafigura has denied the allegations. Glencore is also facing a wider DoJ investigation.

“Given the tremendous size and impact of the natural resource and energy industries, it’s natural to see an increase in attention from US regulatory authorities,” said Matthew Kluchenek of law firm Mayer Brown.

Others view the US scrutiny as being more cynical.

John MacNamara, a former trade finance banker who now runs consultancy Carshalton Commodities, said the profits generated by the big commodity trading houses had made them a target for US regulators, which have wrung tens of billions of dollars from the banking sector in fines and settlements over the past decade for manipulating Libor, currency and other markets.

“The well is beginning to run dry as the banks finally got their act together. But the government’s need for money remains,” he said. “And so who is their next target? It is the traders. Are they guilty? They are probably guilty in the same sense that the banks used to have lots of practices that you would not want to write home about.”

A series of fraud cases last year involving oil traders in Singapore has made banks even more nervous of lending to companies that depend on access to large credit lines to buy and sell millions of barrels of crude.

“It does make us a bit gun-shy,” said one senior trade finance banker. “We can’t go all in with these companies.” The banker said his company was braced for more lurid headlines to emerge from DoJ and Brazilian Car Wash investigations.

For Gunvor, the scheme uncovered by the DoJ marks a setback in its efforts to move on from a previous investigation. The Geneva-based company paid $95m in 2019 to settle a long-running bribery case involving payments to middlemen in West Africa.

In the wake of that settlement Gunvor co-founder and chair Torbjorn Tornqvist said he never wanted to find himself in the same position again, and the company last year announced it would cease working with agents for “business origination and development purposes”.

Rivals have also cut back their use of intermediaries or stopped using them altogether. Trafigura ended the use of agents for business origination and development in 2019, while Glencore has replaced intermediaries in some countries with its own staff who work on government contracts.

Vitol said this month it was working hard to “mitigate compliance risks” across its business.

Anti-corruption campaigners, however, say the recent bribery and corruption cases cast “serious doubt” on the credibility of such claims.

Court documents in the Gunvor case describe how employee-turned-agent Raymond Kohut and two consultants plotted to conceal the bribery and money-laundering scheme from compliance personnel at Gunvor in late 2019 and early 2020.

“This isn’t a question of rogue employees but these practices are really fundamental to the way the sector has done business in the past,” said Natasha White of Global Witness. “We really welcome the fact that the US is taking an increasingly strong stance and call other jurisdictions to do the same.”

Gunvor said it had terminated its relationship with the “intermediary agent” for compliance reasons before being notified of the DoJ investigation.

“Gunvor takes compliance very seriously and maintains a zero-tolerance approach, which is why the company has since also banned outright the use of agents for business development purposes,” it said in a statement. “Gunvor has been fully co-operating with the DoJ investigation and will continue to do so.”

Bankers say there is no doubt business practices have improved markedly since the swashbuckling days of Marc Rich but lessons still needed to be learned.

“In the 1980s in emerging markets you did not get out of the airport unless you came out with the brown envelope,” said MacNamara. “There has been a steady move away from that but challenges remain.”


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