Fraud in commodity trading

As the world was going in and out of Covid-induced lockdowns in different parts of the world last year, a huge commodity fraud is alleged to have taken place in Turkey. Well, the fraud is real but the perpetrators & accomplices are yet to be identified and therein lies the mystery.

So what was the issue? Mercuria Energy, a commodity trading firm based in Switzerland got an order for supplying copper blisters to China. In turn, Mercuria placed an order on a Turkish firm Bietsan Bakir for supplying 10,000 MT of copper blister and sending them directly to China. Orders were executed to the extent of around 6000 MT in 300 odd containers. Even as the containers were at sea, documents were submitted to Mercuria who paid around 90% of the value of the invoices, said to be US $ 36 million. When the containers were destuffed at Lianyungang port in China later, it was found that the cargo in all the containers was painted copper-colored pavement blocks/bricks and NOT copper blisters.

Mercuria realised that they had been victims of one of the biggest frauds in copper trade ever. Then, when they checked the cargo insurance policies submitted by Bietsan Bakir,(and endorsed to them, no doubt) they got a second shock. Out of seven policies/certificates of insurance, only one was genuine while the rest were faked. Mercuria filed a legal case against the supplier in Turkey alleging that – 1) Originally copper was stuffed into the containers by the suppliers, inspection of quality & quantity was carried out by independent surveyors. 2) Then the truck/trailer drivers were asked to come the following morning 3) In the dead of night, some employees of Bietsan Bakir, broke open the seals of the containers in the compound, took out the copper and replaced it with painted pavement blocks.

Investigations are on, some people have been taken into custody and rumours say that some invoices for purchase of pavement blocks was found in the supplier’s premises. ( Circumstantial evidence?). The complete truth may or may not come out even after investigation but the question which springs to mind is why did Mercuria bring in this hypothesis of copper being originally loaded, surveyed and then clandestinely stolen? They could well have alleged that the supplier never loaded copper in the containers and only stuffed them with painted bricks. Were they trying to give a clean chit to the surveyors whose reports were on record? Seems a mammoth task — load copper, get survey done, beak container seals, remove copper, replace with painted bricks, affix duplicate container seals …………. and to do this for 300 containers, one can well imagine! What if the surveyors had collaborated with the suppliers? That will be another angle for investigation.

Confining the discussion to cargo insurance, it is clear that since insurance policies were fakes, created by the supplier/their employees, nothing would be recoverable under them. Specific interest to all would be the lone insurance policy which was genuine. Will this policy get triggered? Let us examine the possibilities:

It is presumed that the insurance policy was on ICC-A 2009 terms and an incident of theft in transit would stand covered. However, the insurer would definitely wait for the investigations to be completed before moving ahead with settlement. The following are some of the possibilities which could emerge on how painted bricks were stuffed into the container in place of copper blisters & how the treatment of the claim under the policy could differ:

a) As per the narration of Mercuria i.e – Originally copper was loaded into the containers, surveyed & then some employees of the supplier ( with or without involvement of outsiders) carried out the switch and made away with the copper. The supplier, as an organisation was not involved in the fraudulent acts. The points to be considered are – 1) Whether it is a loss in transit? Answer is YES. Duration clause speaks about inception of cover as ” When goods are first moved in the warehouse for the purpose of immediate loading”. So here goods have been duly loaded, so cover can be said to be on. 2) Whether the act of theft, falls under the exclusion of ‘Willful misconduct’? As it is not the act of the supplier Bietsan Bakir (the assured) but some of its errant employees acting with criminal intent, this exclusion will not apply and the claim will be payable.

b) Originally copper was loaded into the containers, survey done, then the copper removed and replaced by painted bricks by the supplier themselves or with the full knowledge of the supplier. It is obvious that in this eventuality, though the transit has commenced, the exclusion for ‘Willful misconduct of the assured’ would come into play and the claim will not be admissible.

c) The fraud was committed by the supplier themselves. Copper was never loaded into the containers and the surveyors collaborated with them. The original loading into the containers were that of painted bricks only . Obviously no claim — Subject-matter ( copper) was never loaded into the containers and so the question of commencement of transit will not arise. Of course, willful misconduct of the assured would be paramount.

The intent is not to cast aspersions on any of the parties involved viz. Mercuria, Bietsan Bakir or the surveyors but to lay bare the possibilities. Will be following the investigation with interest. Views welcome.