Kimarie Cheang Director and Head of China Practice, Singapore; Partner, Hong Kong
The Legal 500 Shipping Guide – Hot Topic: Fraudulently-issued Letters of Indemnity – Risks, Mitigation, and Prevention
Introduction – the contraction of Singapore’s Trade Finance industry
The recent spate of allegations of fraud or foul-play that have rocked Singapore’s beleaguered commodities market, and in particular the oil trading industry have brought to light the significant effect of various pervasive practices that are seemingly innocuous, but have potentially left the trade-finance banking industry reeling from billions of losses.
To name a few examples, the immediate short-term impact of the Hin Leong Trading (Pte) Ltd., Zenrock Commodities Trading Pte Ltd and Hontop Energy (Singapore) Pte Ltd sagas has seen various banks either ceasing their regional trade commodity finance operations, or exiting the trade and commodity financing industry altogether.
One only needs to look at ABN Amro Bank, who is ending all of their engagements in trade and commodity financing and shedding 800 jobs in the process, a decision that is at least in part linked to its overall exposure of around US$300 million to Hin Leong.
Likewise, Societe Generale SA (“SocGen”) was reportedly closing its trade commodity finance unit in Singapore and has halted fresh funding to trade finance firms in the region. Large Asian commodities trading clients with operations in Singapore would henceforth be handled by SocGen’s Hong Kong office, with SocGen ceasing ties with Singapore-based small and medium commodities trading firms.
Australia and New Zealand Banking Group has also reportedly decided to only service their existing commodity trading clients and will not take on any new business in commodity finance, following its exposure to Hin Leong Trading.
In this article, we will examine the role of letters of indemnity in international trade transactions, and the risks associated with its use in the commodities industry. We will conclude by looking at what steps can be taken by the industry as a whole to mitigate and prevent these risks.
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