What Trafigura’s £16m victory means for trade finance

On 23 June, the London High Court ruled that Singaporean commodities giant Trafigura could keep the £16 million it had been given in 2017 by Rasmala Trade Finance Fund, a Dubai-based fund. 

This ends a years-long legal dispute in which Rasmala – which has since been liquidated by its majority owner, Dubai Islamic Bank – alleged that Trafigura had been complicit in fraud involving Farlin Energy & Commodities, Rasmala’s client and Trafigura’s trading partner. 

The case, involving multiple entities in at least five different jurisdictions, lays bare the complexity of trade finance and the many ways in which fraud can pass unnoticed even despite companies’ best efforts. While Trafigura’s win is a hopeful sign for commodities traders, it serves as a reminder to all players in global trade to the prevalence of fraud and disputes in the industry – and the difficulties often involved in managing them. 

Rasmala Trade Finance Fund v Trafigura

Between 2017 and 2018, Rasmala gave £16 million to Trafigura in a series of five payments, which it believed honored as many contracts between Trafigura and Farlin, Rasmala’s client. Instead, Trafigura used the sum to pay down separate debt it was owed by Farlin; the contracts Rasmala believed were being honored had in fact been forged by Farlin. 

Farlin also forged a series of tripartite agreements which led Trafigura to believe that Rasmala had authorised this diversion of funds; Rasmala’s signature on these documents had also been faked, according to the High Court judgment. Rasmala believed the payments were financing coal trades between Trafigura and Farlin under a Murabaha structure, an Islamic finance tool similar to traditional loans but which involves the financier actually purchasing an asset and selling it to the customer at a mark-up. 

Initially, Rasmala argued that Trafigura had been complicit in Farlin’s fraud, which the trade finance fund only became aware of in 2019 after a tip by a Farlin employee. Closer to the trial, however, Rasmala abandoned most of the fraud allegations and instead accused the Trafigura employee who had managed the relationship with Farlin of knowing about the fraud and acting negligently. Rasmala also argued that Trafigura had been unjustly enriched by the payments, which were made by mistake, meaning Rasmala was owed back the sum.

The High Court found that despite some signs that could have tipped them off to inconsistencies – such as abnormal SWIFT payment codes and unusual payment practices – Trafigura had acted in good faith and could keep the payments. The Justice criticised Ramsala’s ‘cynical’ approach to alleging fraud, stating in the judgment that ‘it is not acceptable to allege fraud because the plea can be justified, unless there is a genuine belief that the allegation is true. It is not acceptable that an allegation of fraud is made for tactical reasons just because the plea can be justified.’ 

The judgment shows the difficulties inherent in trade finance fraud cases, both due to the high burden of proof and the requirements of English law. For example, the court’s judgment found that ‘it does not matter that it may not have been Rasmala’s fault that its signature was forged on the TPAs, or that it may have been negligent for Trafigura not to have picked that up (as long as it was acting in good faith)’.

“Under English law, particularly in the context of mistaken payments, the equitable doctrine of ‘change of position’ provides a recognised defence to restitution claims,” said Alexander Peters, Chief Financial Officer at Torq Commodities and TFG Editorial Board member. Because Trafigura acted in good faith and had no knowledge or grounds to suspect Farlin’s fraud, “Trafigura has successfully invoked this principle by demonstrating that, as a result of its reliance on the validity of the transactions, it changed its position in a manner that would render restitution unjust. Accordingly, this entitles Trafigura to retain the funds.”

A broader issue

While the litigation was happening, Dubai Islamic Bank, the majority owner of Rasmala Trade Finance Fund, filed for Rasmala’s liquidation, alleging the fund had not communicated well with investors. Rasmala had been fighting the petition since it was filed at the end of last year, but started voluntarily winding down a month ago. 

The fund had been involved in several other legal battles at the same time as the one with Trafigura, including legal action against borrowers it says failed to pay back loans; it has also been accused by a Saudi investor of not accurately disclosing its financial performance.

Trafigura, on its part, has also been embroiled in a lengthy battle with TMT Metals, a metals trader it accused of perpetuating a multi-million pound fraud scheme over nickel trading in 2022 through “misrepresentation and presentation of a variety of false documentation”. The trial is set to begin in November; the High Court recently denied an application by the defendants to amend their case. Earlier this year, Trafigura itself was convicted of bribery in a Swiss court and fined £119 million.

Commodities fraud: a trade finance issue? 

That such long-lived, extensive deception – stretching over nearly a year and involving multiple contracts and several million pounds – could have been done relatively simply, by just forging a single signature on a contract, shows how vulnerable the trade finance industry still is to fraud. 

The movement to digitalise some trade documents, such as Bills of Lading, is gaining traction and is hoped to reduce forgery and fraud in the shipping industry. However, there is a long way to go to reduce fraud risk in other areas, especially – as here – between institutions. 

Rasmala had multiple protections against fraud or default, including credit insurance, personal and corporate guarantees, and a promissory note from Farlin, GTR reports; it was also entitled to a title to the coal (as is mandated by the Murabaha structure), which it of course never received as the coal was never traded. Despite this, both Rasmala and Trafigura lost significant sums in their transactions with Farlin, showing that in some cases, even extensive contingencies are not fully effective. 

The broader type of fraud involved in the case, teeming and lading fraud, involves the allocation of a payment for a different purpose than originally claimed; in this case, it wasn’t used by a single employee to embezzle funds, but rather by Farlin to make up for defaulting on previous debts. Commodities trade, with its paper-based documents and complicated invoice regimen, is one of the industries that is most vulnerable to this type of fraud; trade finance providers and insurers are often worst hit by the collateral damage.

Fraud is an almost inherent part of trade; as technology evolves to make fraud harder, criminals’ methods become more sophisticated and attempt to bypass the new safety measures. The Trafigura case shows the importance for companies of acting in good faith and taking reasonable measures to prevent fraud; as the High Court ruled, holding them responsible for not picking up on minor discrepancies would be holding commodities traders to an unreasonable standard. It is trade finance providers, then, that could step up to the plate and improve their fraud prevention measures, even towards trusted clients and their suppliers. They are often the ones to bear the brunt of fraud – even when it comes to legal arbitration – so it is in their best interest to be on the front lines of fraud prevention.