Trafigura hunts missing $500 million in Mongolian fuel fraud, trading sources say
Lex Oil owes over half of missing $1.1 bln, sources say
Probe over remaining $500 mln continues, sources say
Second major fraud to Trafigura alarms bankers, sources say
By Dmitry Zhdannikov and Robert Harvey
LONDON, Nov 19 (Reuters) -Swiss trading house Trafigura is trying to track down $500 million in Mongolia following a year-long probe of staff and associates over a billion-dollar fraud scheme at its local fuel supply business, according to three trading sources familiar with the case.
The Mongolia case, the second large-scale fraud Trafigura has uncovered in the past two years, has rattled bank trade financiers who are now questioning the strength of oversight at one of the world's biggest energy and commodity traders, two banking sources who work with Trafigura and lend money to the company said.
Trafigura said last month it had made provisions of $1.1 billion after discovering what it described as "misconduct" at its Mongolian unit, including manipulation of data and concealment of overdue receivables.
The company said its principal counterparty in Mongolia recognized it owed Trafigura "a substantial proportion" of the $1.1 billion but gave no further detail and did not name the counterparty.
Lex Oil was Trafigura's main local counterparty, the three trading sources familiar with the case and Trafigura's Mongolia operations told Reuters. They spoke to Reuters on condition of anonymity because they were not authorised to speak publicly about the matter.
Lex has acknowledged to Trafigura it owed the company over half of the $1.1 billion while the remaining $500 million is still unaccounted for, the three sources said.
Trafigura has not accused any counterparty or individual of fraud as the investigation is still ongoing, the three sources said.
Lex did not respond to a request for comment.
Trafigura said the probe into the misconduct was still ongoing.
Asked about risk oversight at Trafigura, a company spokesman said that since the Mongolia case had been discovered, Trafigura performed a risk review of its global network. The company identified higher-risk locations and the review of those places resulted in no significant findings, the spokesman said. The spokesman did not give details on which countries were considered higher risk locations.
Trafigura has over $77 billion in open credit lines from around 150 banks that it uses for trade in oil, gas and metals, according to its annual report.
The company said last month it would likely need to restate comparisons with previous years in its 2024 financial statements due to what it had uncovered in Mongolia.
That came after Trafigura took a charge of nearly $600 million in early 2023 after discovering it had been the victim of a nickel supply fraud.
The potential size of the Mongolian loss is large relative to the country's consumption of about $1 billion worth of fuel every year, according to U.S. government data.
The government of Mongolia did not reply to a request for comment.
The Mongolian fuel business has generated high margins for Trafigura, which blended various imported fuels and also made money on loans to the cash-strapped local coal and fuel distribution industries, according to the three trading sources.
Trafigura began its internal probe in 2023, when it first discovered irregularities. The company later brought in an external auditor to complete the investigation, the three trading sources said. It did not disclose the name of the external auditor.
Reuters was unable to ascertain the name of the external auditor.
Trafigura said last month the misconduct occurred over five years and involved "manipulation of data and documents, resulting in inflated sums being paid by Trafigura, and deliberate concealment of overdue receivables".
PARTNERSHIP
Trafigura became Mongolia's key fuel supplier around 2014, according to the three trading sources. The government declined to comment. Trafigura says they were one of the top suppliers of Mongolia.
The firm specialised in blending Russian diesel with supplies of jet kerosene from Singapore to produce winter diesel for Mongolia, where temperatures drop well below freezing in winter months.
Mongolia's coal industry is the top consumer of the fuel, used in heavy machinery to produce coal for export to China.
Trafigura and Lex established a partnership in 2019, the three trading sources said. Trafigura provided credit to Lex to supply local customers.
Mongolian importers such as Lex were also involved in supplying Trafigura with Russian diesel, the three trading sources said.
The Swiss trader then blended the Russian fuel with Singaporean jet and sold the blend back to the Mongolian companies such as Lex. Trafigura loaned them the money to finance the fuel purchases, according to two of the three trading sources.
Trading houses like Trafigura provide trade finance in some countries where international banks would struggle to offer credit due to internal compliance rules around operations in higher risk countries.
The scheme crumbled in 2020 when the COVID pandemic halted Mongolian coal exports to China, reducing the country's mining activity and fuel consumption, the three trading sources said.
Lex Oil, however, continued to import and blend the fuel, building up debt to Trafigura while expanding its storage facilities and lending to local importers, according to the three trading sources.
Lex did not respond to a request from Reuters for comment about how it accumulated its debts to Trafigura.
As Mongolia's fuel consumption dropped, Lex Oil charged diesel consumers for storing unused fuel, which continued for over two years between 2020 and 2022.
A number of Mongolian businesses defaulted on their debts to Lex Oil due to lack of income during the pandemic, the three trading sources said. Reuters was unable to identify the names of the companies which defaulted.
Trafigura only discovered the debts and defaults in 2023 when it did additional reviews of its offices following the nickel fraud, one of the three trading sources said.
Trafigura declined to comment on what triggered additional checks of the Mongolian offices.
In 2023, Trafigura's executives travelled to Mongolia to meet local officials but were unable to get help to recover the debts, according to two of the three trading sources.
Trafigura declined to comment on its contacts with Mongolian authorities. The government of Mongolia declined to comment.
"What Trafigura thought they had in Mongolia somehow disappeared," one of the three trading sources said.
Reporting by Dmitry Zhdannikov and Robert Harvey; Editing by Simon Webb and Sonali Paul
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