THE PERILS OF COUNTERPARTY RISK ANDREW HUTCHEON

25 JUNE 2015

Watson Farley & Williams 2015 Slide 2

Introduction

• Bill of lading fraud

• OW Bunker update

• Sanctions • Qingdao warehouse fraud

Watson Farley & Williams 2015

Bill of lading fraud

• Fraud: • False representation made:

• Knowingly; or • Without belief in its truth; or • Recklessly, careless whether it be true or false (Derry v Peek (1886))

• Bill of lading vulnerable to documentary fraud

• Common examples:

• Fake (forged) bill • False date • Switched bill of lading • Mis-description of goods

Slide 3

Watson Farley & Williams 2015

Bill of lading fraud

• WARNING: Increase in use of fraudulent bills of lading (January 2015, The Standard Club)

• Use of letters of indemnity • Forwarder’s Certificate of Receipt (FCR’s) • Warehouse certificates

• Some tips:

• Know your bill of lading – form/paper etc • Look out for obvious errors • Check for inconsistencies against other documents • Clear chain of custody with trusted counterparties

Cont.

Slide 4

Watson Farley & Williams 2015

OW Bunker update

• Background • Sale of bunkers in chain from physical supplier through to OWB who contract

with vessel owners/charterers • Financing agreements with banks secured partly on assigned receivables • Operations in 29 countries, 50 subsidiaries worldwide and 8% global market

share of bunker trade • Steep drop in oil prices in 2014 • Allegations of fraud in Singapore subsidiary ($125 million) and risk

management failure ($150 million) • Some entities file for bankruptcy in Denmark on 7 November 2014 • Proceedings around the world

• Issues arising for shipowners/charterers: • Do third party suppliers have lien over fuel and/or ship – a question of local law • Demands for payment by both OWB and third party suppliers – interpleader

proceedings / settlement?

Slide 5

Watson Farley & Williams 2015

OW Bunker update

• Issues (cont) • Threats of arrest from suppliers • Future bunkers supplied by OWB • Charterers’ failure to pay OWB

• Clash between insolvency and maritime law

• Lessons learned

• BIMCO standard bunker agreement • Development of use of interpleader proceedings • Focus on risk of charterers creating supplier liens • Still learning!

Cont.

Slide 6

Watson Farley & Williams 2015

Sanctions

• Key (financial) sanctions regimes: • UN • EU • US

• Countries covered include:

• Iran (relaxation of sanctions) • Russia & Ukraine (continuation and extension of sanctions) • Cuba, Egypt, Ivory Coast, Libya, Syria, North Korea, Sudan • Restrictions on types of activity with sanctioned country and/or named

companies or individuals

• Complexities: • Extraterritorial effect and prohibition of compliance with foreign sanctions • Facilitation • Knowledge

Slide 7

Watson Farley & Williams 2015

Sanctions

• Penalties: • Fines and jail terms • Civil law consequences – illegality • Insurance cover

• Mitigation:

• Detailed knowledge and assessment of the sanction • Carry out full due diligence on counterparties (KYC) and require confirmations from

counterparties they have done the same • Sanctions clauses • Licences

• Sanction busting behaviour: Iranian oil from Iraq? • Are Russian sanctions working? • But: Bank Mellat v HM Treasury – claim for damages caused by unlawful Financial

Restrictions Order • Other legal actions and challenges

Cont.

Slide 8

Watson Farley & Williams 2015

Qingdao warehouse fraud

• Background • Suspicions that certain Chinese metal trading groups

had been pledging and re-pledging the same or in some cases non-existent copper and aluminium metal stocks to secure “financing”.

• May/June 2014 – port authorities were denying access to warehouses in Qingdao and Penglai ports and police investigations were underway into the alleged frauds

• Chinese and western banks and innocent traders are facing exposure of billions of dollars

• Numerous claims have been issued in London, Singapore and China

Slide 9

Watson Farley & Williams 2015

Qingdao warehouse fraud

• Financing of metals held in warehouses • Metal stocks are sold to banks pursuant to repo

transactions or pledged pursuant to tripartite Collateral Management Agreements (entered into by a bank a warehouse and a trading group)

• “Practice” of blank endorsed warehouse receipts • Mercuria Energy v Citibank • Tendering a blank endorsed warehouse receipt was

not deemed good delivery under s.29(4) Sale of Goods Act 1979. The warehouse certificate had to be accompanied by an attornment from the warehouse operator to effect good delivery

• Effect on metal / commodity financing?

Cont.

Slide 10

Watson Farley & Williams 2015

WFW Offices

Slide 11

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