Singapore has long been known as the ideal location for a commodity trading house due to its light regulation, low taxes and a view of one of the busiest shipping routes globally.
That well-earned reputation is now marred by a slew of financial scandals and failures. The most recent is the bankruptcy of the legendary marine fuel trader, Hin Leong Trading Pte who admitted to hiding around US$800 million (S$1.13115 billion) in losses as well as selling off oil inventories which were backstopping loans.
Only weeks prior to the failure of Hin Leong, the palm oil and coal mining corporation, Agritrade International Pte collapsed as it was mired in fraud allegations. At around the same time, an oil trader connected to a Chinese refiner, Hontop Energy Pte entered receivership even as it blamed plummeting demand due to the COVID-19 pandemic.
Only a few years ago, the Singapore-listed firm, Noble Group Ltd, which used to be Asia’s biggest commodities house, was forced into a court-sanctioned restructuring amidst allegations of aggressive accounting practices.
An accounting professor specialising in corporate governance at the National University of Singapore, Mak Yuen Teen said: “The collapse of commodities traders like Noble, Hin Leong and Agritrade hurts our reputation.”
Speaking to Bloomberg, he pointed out “Our rules, monitoring and enforcement for companies are weak – and we are now paying a heavy price,”
For observers like Professor Mak, Singapore’s regulatory and legal oversight of trading houses is now in question regarding its strength. Substantial amounts of financing by banks are required by trading houses for them to buy, blend, store and transport raw materials.
The necessarily secretive and risky modus operandi of the traders who strive to succeed on razor thin margins are the problems. It is just coincidental that most of these traders choose to operate in the country.
Regardless, collateral damage happens across the system when a trading house goes bust.
Singapore is no stranger to financial scandals. In 1995, Barings Bank was thrust into bankruptcy when the original rogue trader, Nick Leeson’s made unauthorized bets on the Japanese stock futures.
Since then, many other commodity scandals emerged. These include Mitsubishi Corp. trader incurring US$314 million (S$443.84 million) loss in 2019 as well as China Aviation Oil incurring US$550 million (S$777.42 million) loss in 2004.
According to Trade and Industry Minister Chan Chun Sing in a Bloomberg TV interview last week, he opined that the wider market will not be affected by Hin Leong’s collapse and the country’s reputation has not yet been dented.
The spokesperson for Enterprise Singapore stated that the government is forceful against unlicensed and illegal trading activity, which incurs penalties such as imprisonment and fines.
Apart from that, the country’s clear and tested set of insolvency laws allow for companies to orderly wind down, which can prevent systemic contagion, the spokesperson added in the email. Thus, the country remains an attractive spot for trading houses.
From zinc to oil traders, all of them said that their bankers were pulling back short-term loans. Financing costs have increased and banks are demanding more collateral and they will not issue letters of credit to some smaller firms in certain cases. Lenders said that they are lending primarily only to the biggest traders and cutting short-term loans to some clients so that exposure risk can be minimized.
Trading firms all over world have been enticed by Singapore to rent office space and hire well-educated local workers. Corporate tax rates for traders are only 5 per cent, which is lower than the 13 per cent rates offered in Switzerland itself.
Thus, Enterprise Singapore website states that between 60 per cent to 80 per cent of the top global oil, metals and agricultural companies are in the island country.
For three years, Singapore regulators have attracted criticism for being slow to react to problems. Noble has drawn criticism from an ex-employee and short-sellers like Muddy Waters when the authorities launched an investigation in 2018.
The investigation did not yield any chargers or allegations. According to an email by a Singapore Police Force spokeswoman, investigations are still running and no additional information is available currently.
Hin Leong is currently under investigation after the company disclosed to creditors that its early-April’s liabilities were US$4.05 billion (S$5.72 billion) against an asset backdrop of just US$714 million (S$1.009 billion). This means there is a deficit of US$3.34 billion (S$4.72 billion).
On Tuesday (28 April), PricewaterhouseCoopers LLC has been approved by Singapore’s High Court as interim judicial manager of Hin Leong. With this, the company’s finances and negotiations with creditors will be handled by PricewaterhouseCoopers LLC.
Due to its classification as an “exempt private company” with less than 20 members without any corporations holding beneficial interest in its shares, Hin Leong does not need to file financial statements. In its 2019 financial year, the company announced revenue of more than US$20 billion (S$28.27 billion).
“How can a company with $20 billion revenue and this amount of assets and liabilities be an exempt private company? This is a serious deficiency in our regulation. There are so many stakeholders who will be affected by this,” Professor Mak lamented.