Phantom Cargo and LC Fraud Mar 29, 2010 9:50:42 GMT 4
Post by sapuco on Mar 29, 2010 9:50:42 GMT 4
Global trade in phantom cargoes swindles banks of £500 million
Last May two investigators arrived at a nondescript office block overlooking an ugly dual carriageway in Rayleigh, Essex, and knocked on the door of a company bearing the nameplate Simetal.
Acting for a consortium of 17 international banks, including some of the biggest institutions in the City of London, the husband-and-wife team of investigators had come to interrogate the company's director, Milton Kounnou, about £190 million of the banks' money that appeared to have gone missing.
On paper Simetal, and its associated company, TSA Shipping, were major importers of metals - mainly aluminium and zinc - from the Middle East. For months they had been providing blue-chip banks, including Barclays, Citibank and ABN Amro, with bills of lading and other documents needed to satisfy the banks that cargoes shipped from the Middle East had arrived in Britain and elsewhere.
As a result, the banks had extended millions of dollars in credit to the exporter, Solo Industries, a smelting company in Dubai owned by a charismatic young Indian businessman, Madhav Patel. There was just one problem: it now appeared that many of the cargoes had never existed, while others were not nearly as valuable as the documents had stated. Worse, Solo had collapsed and Patel and his family had suddenly left Dubai for Britain.
The banks' investigators, Eric Ellen, the former director of the International Chamber of Commerce, and his wife Lin, wanted to know what light, if any, Kounnou could shed on the mystery. But no sooner had they crossed the threshold of Simetal than the alarm bells began ringing.
Instead of ranks of traders and the serried glow of computer screens, they found a few dusty filing cabinets and a printer which had been working overtime. Simetal did not actually buy and sell metals itself, explained Kounnou. It simply prepared the shipping documents necessary to support letters of credit issued by Solo's bankers in the Middle East.
According to Kounnou, he would be 'shocked' to discover that the documents were false and the cargoes never existed.
Five months later, that is still his answer and the banks are having to face the probability that they are the victims of one of the biggest frauds in the history of maritime finance.
Patel was brought up in Iran and educated at one of New Delhi's top public schools. After the fall of the Shah in 1979, his father, B.M. Patel, returned to India and established the Hamco Group, a mining and metals company listed on the Bombay Stock Exchange. At the same time, Patel set up Solo Industries and lived an executive lifestyle, shuttling between India, the Middle East and his luxury flat in Bayswater, London. Solo also kept an office at a prestigious address in the City.
When Patel's deals finally came under the spotlight in May he hurriedly left Dubai for London, where he was hauled before the High Court by Crédit Agricole, France's biggest bank. The case collapsed.
Soon afterwards he met a very worried Citibank, Barclays and ABN Amro in the City and assured them that he would sort the problems out. But no sooner was the meeting over than he fled again. That was in June. Despite a worldwide manhunt by the Serious Fraud Office, the City of London police and Interpol, he has not been seen since.
To add to the mystery, in August his number two, Solo's financial controller, Paul Thotten, was found dead in the southern Indian state of Kerala after appearing to swallow poison. Meanwhile, the disputed letters of credit continue to grow. The latest estimate puts the banks' losses at more than £300m, a sum that could rise to £500m, according to investigators.
'Every day we turn up fresh evidence of what appears to be false documentation. In retrospect it seems that Patel and his associates were turning this stuff out like confetti,' said one source close to the fraud inquiry.
In May Kounnou was arrested by the SFO. Investigators had found that, at the time of Solo's collapse, just four of its 159 bills of lading were genuine. Kounnou strenuously denied knowledge of the alleged fraud and was released on police bail without being charged. Last week he did not return calls from The Observer.
In the next fortnight, officers from the SFO are due to visit Dubai to take statements from 11 Middle Eastern banks, which together account for a third of the losses. But the biggest individual losers are Citibank, down £30m, followed by ABN Amro (£16m) and Barclays (£13m).
The half-billion-pound question is: how did a modest smelting plant in the Dubai port of Sharjah manage to deceive maritime, customs and banking authorities for so long and why - when suspicion began to fall on Patel - was he allowed to slip the police net?
To understand how Patel is alleged to have scammed the international banking sys tem, it is necessary to know something of maritime finance. Because of the time it takes for cargoes shipped from foreign ports to reach their destination, importers have to find a way of guaranteeing payment to exporters before the goods are received. The answer is a letter of credit - an instruction by the importer's bank to an overseas bank to pay the exporting company in advance. The banks naturally charge interest for this service.
Without such arrangements, world trade would grind to a halt. The problem is, for the system to work banks have to be reassured the cargoes actually exist.
In Solo's case, however, many of the cargoes were fictitious. According to investigators, they were loaded for customs purposes only to be surreptitiously removed before the ships left port. In other cases, boats were packed with aluminium scrap rather than the valuable lead silver alloy stated on the bills of lading. And in a third variation on the alleged scam, genuine cargoes were loaded only to be diverted to destinations other than those on the export declaration.
The result was an endless merry-go-round: container ships circling the globe in the illusion of healthy trade when in reality those cargoes which existed were worth a fraction of their stated value.
Letter of credit scams are nothing new. But usually it is the genuine importer who bears the grief when the banks come looking for their money. The beauty of Patel's scheme was that he controlled the exporter Solo and, secretly, the importers, too: a web of firms stretching from India and the Middle East to Britain, France, Switzerland and the Netherlands Antilles. When the music stopped, Patel left the banks squabbling among themselves as to who would pick up the losses.
In retrospect, the alarm should have been ringing in September 1998, when Indian tax authorities began investigating Hamco for suspected import and export fraud. The company's premises were raided, but it wasn't until June of this year that Patel's father was arrested.
Patel was quick to distance himself, but despite his assurances to the bankers, it is alleged that he was secretly preparing one final sting. Astonishingly, by the beginning of the year, Citibank, Barclays and ABN Amro had nearly doubled their exposure, according to banking sources.
When Patel's father confessed to defrauding Indian banks and implicated his son, Solo and various associates, the banks were horrified. But by then it was too late. Patel had fled.
The end result is that in London Simetal's bank accounts have been frozen. In Dubai police have arrested Patel's brother-in-law, Ashok Verma. And in Switzerland the Geneva prosecutor has launched a criminal investigation into Solo's dealings with Frobevia and Alcuivre, alleged front companies.
Meanwhile investigators hired by the banks hardest hit by the alleged fraud are scouring the world looking for Patel. Some reports put him in Brazil, others in the United States. And while accountants have begun asset-tracing, the fear is that any money that is left is already safely hidden in offshore accounts.
'Patel knows that half the world is looking for him and that it is only a matter of time before we find him,' said a source close to the investigation. 'If he is sensible he will try to strike a deal with the banks first. The question is, is there any money left?'
In their hearts, bankers already know the answer to that question. As they fight among themselves over who should pay for the letters of credit, the only issue now is whether they, or Patel, will blink first.
The banks caught on the hop between Essex and Dubai
Stands to lose £13 million as one of at least 17 blue-chip banks provided with bills of lading before extending millions of dollars in credit to the Dubai-based exporter for cargoes which never actually existed.
Stands to lose £30 million as one of the biggest individual losers from the maritime scam. The combined losses of banks in Britain and the Middle East are now put by investigators at between £300m and £500m.
Stands to lose £16 million from the half-billion-pound sting which has rocked the international banking system. The beauty of the fraud was that it was based on a system of paying up front crucial to world trade.