trafigura The group is a giant in commodity trading. On any given day, enough oil is handled to meet three times the entire needs of France. Its global reach extends from U.S. crude oil export infrastructure to fuel stations in more than 20 countries in Africa, Asia and Latin America.

But in a remote corner of the empire, far from the attention of top brass in Geneva and Singapore, a crisis has been brewing for some time.

Last week, the company admitted that it was facing losses of up to US$1.1 billion in Mongolia, which were partly linked to suspected fraud by its own employees. Trafigura alleges staff manipulated payments by hiding a pile of overdue debts, allowing the situation to spiral out of control for years without raising any red flags.

For people inside and outside Trafigura, this statement was a bombshell. Most shocking was the magnitude of the potential loss relative to the size of Mongolia’s oil market. According to data from the US Energy Information Administration, more than 100 countries, including Luxembourg and Nepal, use more oil than Mongolia. Its consumption, approximately 35,000 barrels per day, is worth approximately US$1 billion per year. According to Trafigura, Mongolia accounted for less than 0.3 percent of the oil it traded.

This account is based on interviews with eight people with direct knowledge of Trafigura and its activities in Mongolia, who requested anonymity due to the sensitivity of the matter. Last week, Trafigura CEO Jeremy Weir said the company was “bitterly disappointed” by the situation and felt isolated by its Mongolia business, and that the company’s investigation was still ongoing.

The announcement, which confirms an earlier report by Bloomberg, represents a painful follow-up to last year’s revelation that Trafigura was the victim of a massive alleged nickel fraud.

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This debacle once again shines a harsh light on the company’s internal controls and raises questions about why it took almost a year for the situation to be fully disclosed. To outsiders, it reinforces the commodity trader’s fast-and-loose reputation in the months after some of the biggest players, including Trafigura itself, pleaded guilty to corruption charges in the United States.

Speaking privately, nine bankers, including the company’s major lenders, said they were stunned by the magnitude of the potential loss and wanted to know how Trafigura would prevent it from happening again. Still, many said the loss was unlikely to affect the company’s ability to borrow money.

“The question, as always, is how quickly and effectively one learns from mistakes and implements corrective measures,” said consultant and former commodity banker Jean-Francois Lambert. “Not only by redeploying or laying off staff and initiating a long recovery process, but also by strengthening the company’s management, internal processes and controls.”

Profitable niche

Trafigura had for years enjoyed a profitable niche in Mongolia, relying entirely on oil and diesel imports; largely by rail from Russia and occasionally from China.

The company supplied about a third of Mongolia’s petroleum products and had a particularly large position in diesel. Rosneft PJSC and Gunvor Group were its main competitors. The operation brought in several hundred million dollars each year, according to people familiar with the matter, with profits often running into the tens of millions of dollars.

This was a sweet little deal for the world of commodity trading, where margins are often 1 percent or less.

In Ulaanbaatar, Trafigura’s employees were working at the Landmark, a glass-encased building on the edge of the central business district overlooking a new park being built by mining giant Rio Tinto. Next door is the Soviet-era Bayangol Hotel.

Trafigura’s main oil trader in Mongolia was Jononbayar Erdenesuren, who has been with the company since 2012. Jononbayar was known in Ulaanbaatar’s close-knit business community for his tough approach to business and the parties he threw for friends and contacts.

Being landlocked makes the Mongolian market vulnerable to disruptions, and in late 2023 the country faced fuel shortages. While citizens were queuing to buy gasoline and diesel, the government began to examine the situation of oil stocks in the country.

Some people familiar with the matter suggested that the crisis helped expose Trafigura’s financial deficit in the country.

But the trade body was also going through its own period of scrutiny in the wake of the nickel scam. When the company took a closer look at its biggest credit risks, one small market stood out.

credit fuel

Selling oil in Mongolia is complicated. International companies such as Trafigura do not have import licenses and are therefore unable to supply products directly to the local market, instead relying on local distributors. Trafigura’s main counterpart was a company called Lex Oil.

The Mongolian company would buy Trafigura’s oil products and sell them to fuel retailers. Most importantly, Trafigura provided the oil on credit, with an agreement that Lex Oil would pay for it after deducting customs and freight duties in the future.

What makes the picture even more complicated: while the wholesaler itself is providing credit to its own customers, hedging transactions have added another layer of complexity. The result is ever-changing access to Lex Oil and its network of buyers in Mongolia.

What Trafigura’s accountants in Singapore and Geneva failed to fully understand was that those risks had grown to hundreds of millions of dollars even though the invoices had not been paid when they were due, a person familiar with the matter said.

A person who answered the phone at Lex Oil’s office said no one was available to answer Bloomberg’s questions and the company did not respond to an emailed request for comment.

The problem was finally detected late last year. Trafigura said it had detected “deliberate concealment of overdue receivables” by its staff, but said the alleged misconduct was not limited to concealing debt. The company also said its employees manipulated data and documents to misstate calculations for charges such as customs and freight. This is believed to have been going on for about five years.

Trafigura did not name any employees in its statement and said only that it had taken “appropriate disciplinary measures.” According to sources familiar with the matter, Jononbayar is among the suspended employees.

A representative for Jononbayar declined to comment, saying he was still an employee of Trafigura and bound by a confidentiality agreement.

eight months

As the extent of the problem became apparent, Trafigura’s board appointed forensic accountants. The company’s top management stepped in, and one of the top executives, Jose Larocca, flew to Mongolia in February to meet with Lex Oil.

Bloomberg reported the same month that Trafigura was experiencing trouble in its Mongolian oil business and was facing potential losses of hundreds of millions of dollars. The company said at the time that it had recently agreed debt repayment plans with oil products customers in Mongolia and that “its counterparts in emerging markets have a good track record of successfully repaying their debt.”

Even after the report, it would be more than eight months before Trafigura revealed the full extent of the problem.

The reaction in Mongolia contrasts with Trafigura’s actions regarding the nickel scam, where it moved to take legal action against alleged fraudster Prateek Gupta. He took the decision to freeze it, but almost two years later, no funds have yet been recovered. (Gupta disputed Trafigura’s version of events, arguing that the trade body was complicit in Trafigura’s actions.) The court case, meanwhile, shed a harsh light on Trafigura’s own processes and exposed internal communications that the company may have preferred to remain private.

The head of nickel and cobalt trading left the company, and several senior metals executives also left the company in the coming months; but Trafigura has repeatedly said it does not believe anyone at the company was complicit in the nickel fraud.

One reason the company did not immediately pursue legal action over the oil loss in Mongolia was that the facts of the case had not yet been clearly disclosed, a person familiar with the matter said. The company says the investigation is still ongoing.

In June, when Trafigura published unaudited results for the half-year ending in March, the word “Mongolia” was not even mentioned. The company reported a sharp increase in overdue receivables, but incoming chief financial officer Stephan Jansma explained that high commodity prices and interest rates meant “importing countries will experience problems with their payment profiles from time to time”.

A Trafigura spokesman said in a statement on Thursday that the statements “reflect management’s estimates of potential losses to certain counterparties and countries at the time.” “Due to an external investigation, we were not in a position to make any comments regarding Mongolia.”

annual accounts

Trafigura was preparing to close its annual accounts in late September when Weir announced in January that he would hand over the CEO role to gas magnate Richard Holtum. It was time to decide what to do about the headache in Mongolia.

The company had already taken some measures. He halted new business in the country, suspended Jononbayar and terminated the contract of Singapore-based Mongolian president Mikhail Zeldovich. (Zeldovich declined to comment.)

The company still hopes to receive some money from Lex Oil, whose debt represents more than half of its $1.1 billion, according to a person familiar with the matter.

“A significant portion of the total exposure was deemed owed to Trafigura by our primary counterparty in Mongolia. “We plan to subject the counterparty to the obligation to repay,” Trafigura said.

Ultimately, the company decided to record a “conservative” provision of US$1.1 billion in its financial results and publicly confirm the alleged misconduct.

Some bankers heard about the possibility of a provision for Mongolia during informal meetings with Trafigura employees in September, according to people familiar with the matter. But even lenders expecting a fee were shocked by the US$1.1 billion figure.

“In September 2024, no employee at Trafigura had the knowledge or authority to discuss the amount of the total judgment related to our Mongolian oil business,” the company said.

Commodity financier Orhan Güneş, who runs trade finance platform TradeQraft, said major credit relationships were unlikely to be affected.

“The critical issue is that after this and the nickel incident, they have spent their credit on these things and I think they are aware of it,” he said. “Trafigura has very robust risk management tools and professionals, so they will take serious precautions.” BLOOMBERG