Trouble in Paradise
What follows is a long and complicated story I have been following for more than a year. It involves one of the largest oil traders in the world in a multi-year program to evade international trading sanctions.
During my work on this unfolding scandal, I have made use of a personal network of contacts, some of whom extend back to my time in US intelligence.
Let’s start with a massive paper dump.
On November 5, 2017, the so-called “Paradise Papers” were released. As with the “Panama Papers” of a year earlier, the German newspaper Süddeutsche Zeitung (SJ) became the center of attention. The Paradise leak involved about 13.4 million documents from two offshore service providers – Bermuda-based Appelby and Asiaciti Trust – along with registers of 19 tax havens (or “tax paradises”).
The volume of data placed the leak just below the total in the Panama Papers, which remains the largest breach ever. The Panama Papers had comprised documents from Panamanian law firm/corporate service provider Mossack Fonseca.
Due to the vast amount of paperwork requiring review in both the Panama and Paradise releases, SJ brought in hundreds of media and financial forensic investigators under the aegis of the International Consortium of Investigative Journalists (ICIJ).
“Paradise” has information on how more than 120,000 individuals and companies had utilized offshore tax havens and conduits to move funds, create holdings, and/or circumvent domestic regulations worldwide.
The next two installments of ECRG Intelligence consider only one of these, the major global commodity trader Glencore. I have had occasion in ECRG Intelligence to consider this company before. Then the issue had been the trader’s use of bribes and suspect payoffs to control “phantom barrels” of oil in international exchange.
I followed several avenues to explore how Glencore had been pulling this off. What emerged is the largest series of oil evasions I have ever encountered.
Last October, I ran into a former colleague while in Europe. We had been involved in a few intriguing energy intelligence operations over the years but had fallen out of touch. Over an afternoon, we compared notes and he advised me of the impending release of what would become the Paradise Papers. It marked the first time I had heard of the breach. My colleague, on the other hand, was part of the ICIJ network reviewing the documents.
The conversation provided some necessary connections on what I have considered for some time to be a major geopolitical oil scandal. Now almost six months later, I believe enough of the points have been connected to lay it out.
It involves Glencore in the most dramatic (and ongoing) perversion of the international trading fabric I have ever seen. In the process, it thrust the Swiss trader squarely into the center of serious geopolitical tensions.
More Holes Than Swiss Cheese
We begin with a major acquisition in Australia. Back in 2013 Glencore was defending against a sanctions evasion. At the time, it had obtained government approval to acquire mining giant Xstrata. That buy (valued at more than US$90 billion) vaulted Glencore into being the third largest mining company in the country, one of the largest global coal producers, and at the center of a massive evasion of international sanctions.
The Xstrata purchase was the latest in a series of Glencore evasive plays stretching back a decade. Here’s how it was laid out. All of the following comes either from documents contained in the Paradise Papers or from sources who have reviewed those documents.
According to the Paradise Papers, Glencore is the secret major shareholder in SwissMarine Corp. Following that release, The Australian Financial Review subsequently identified material mis-statements and omissions in bank applications and financial agreements prepared by SwissMarine in 2013 which led some analysts to conclude that international anti-money laundering laws may have been violated.
At the time, Greek shipowner Victor Restis, SwissMarine’s second largest shareholder, was in jail awaiting trial for fraud, money laundering and embezzlement. But he remained a SwissMarine director.
SwissMarine’s board approved bank account forms and an application to join NASDAQ OMX Commodities Clearing House in Stockholm which deleted Mr Restis from both the list of directors, and from the list of major shareholders, while explicitly denying that any director was under investigation for fraud or money laundering.
Copies of the bank applications are contained in Appleby files of Bermuda-based law firm Appleby, obtained by SJ and the ICIJ. Those papers reveal Glencore’s hidden links to the sanctions scandal, which unfolded as Western intelligence agencies worked in 2012 and 2013 to identify companies trading with Iran.
The documents show that Glencore secretly funds and helps operate a “ghost fleet” of 167 bulk cargo ships through SwissMarine. None of this was known in 2012 when Glencore and Xstrata announced merger plans. Even today, SwissMarine owns 11 Capesize vessels (large vessels carrying coal and iron ore) while chartering another 156 ships.
Yet investigators quickly ran into a vexing question. Glencore has its own subsidiary, ST Shipping, that operates ships under a tax-free deal with Singapore. So why would a commodities trader need or want a secret holding in another shipping fleet?
Ships Passing in the Night
In its early days Glencore was known as Marc Rich & Co AG. Rich had, to put it mildly, a shady reputation, notably for buying oil from Iran during the 1979 Teheran hostage crisis. As a contact put it, “Marc Rich knew how to deliver on time and in massive amounts. You know how hard it is to get tankers of oil in and out of a sanctioned country? Marc Rich knew how to do it. It is all in the shipping.”
In February 2001, Glencore had just begun paying kickbacks to the Iraqi government for oil shipments in a breach of the UN’s Oil for Food program, according to the 2005 Volcker Report. For its part, Glencore denied any knowledge that its agents paid up to $25 million in kickbacks.
On February 2 and February 28, 2001, two Iraqi oil shipments bound for the US were diverted to Singapore and Croatia, where Glencore stood to make up to $7 million in extra profit (Once again, Glencore denied any intention to breach UN Oil For Food rules).
Between these two diverted shipments, on February 20 2001, Bermuda law firm Conyers Dill & Pearman lodged an application to register SwissMarine. Glencore declined to say why it decided to launch a shipping venture at that time. Glencore and Restis Group, one of the 10 biggest ship-owning businesses in Greece, teamed with four former Cargill commodities traders in the new company.
By 2004 SwissMarine was grossing $1 billion a year in freight revenue.
The Volcker Report detailed the strict instructions Glencore gave to its bankers never to divulge its connection with Iraq oil sales. Glencore imposed similar levels of secrecy on its new shipping company. Glencore held its stake in SwissMarine through a Swiss company, Sidhalu SA. Appleby Bermuda provided three SwissMarine directors to represent Sidhalu.
Fast-forward to November 2012, when multiple sources in the shipping market were saying that Dimitris Cambis, a Greek professor with no previous shipping experience, had just bought eight ageing supertankers through a web of front companies for $204 million.
On February 27 2013, Reuters journalist Jonathan Saul reported in London that “officials involved with sanctions” had shown him shipping documents which indicated that some of Cambis’ tankers were being used to ship Iranian oil to China to beat US sanctions.
Two days later in New York another Reuters reporter, Louis Charbonneau, broke another story: “Glencore bartered with firm linked to Iran nuclear program.” He said he had been shown a report by a Western intelligence agency which revealed that since 2011 Glencore had a barter deal with Iran Aluminium Company (Iralco) to exchange thousands of tons of alumina in exchange for processed aluminium.
The report said that from mid-2012 Iralco had been supplying aluminium to Iran Centrifuge Technology Co (TESA), which was on the UN sanctions list and had been making uranium enrichment gas centrifuges for the nuclear program.
I have personally reviewed the underlying documents at issue.
Meanwhile, Glencore told Charbonneau the trade was legal and it had no knowledge of the link to Iralco until the EU banned alumina sales in December 2012. At that time, the company declared, it “ceased transactions.”
On March 13, 2013, the US Treasury blacklisted Cambris, 14 of his companies and his eight tankers, for helping Iran avoid oil sanctions.
Thus far, the story consisted of two still separate elements: Glencore’s deals in aluminium; and Cambris’ tankers. I can now personally attest to the fact that both of these revelations are based on Western intelligence reports.
Matters began coming together on May 1, 2013. The US interest group United Against Nuclear Iran (UANI) announced that it had been provided documents revealing that Victor Restis, his shipping firm EST, and the failing Greek bank FB Bank (which Restis controlled) had been part of the Iranian tanker scheme.
In a later court filing, UANI would be more specific, claiming that “by at least mid-2010, Restis was conspiring with Cambris to devise a web of business entities and relationships to buy crude oil from Iran and sell it to Chinese buyers.”
I have two sources who have confirmed this relationship. And Glencore was about to find itself under additional pressure. The Xstrata deal was finalized on May 2. Unfortunately for the Swiss trader, by May 23, Reuters’ Charbonneau had been provided with another bombshell (once again, the substance of this report I can confirm from an intel source). He reported that a confidential UN Panel of Experts report had concluded the aluminium swap deals by Glencore and Trafigura could have been a way to get around international sanctions against Teheran over its nuclear program.
On July 19, 2013, Restis sued UANI for $2 billion in defamation damages, claiming its documents were forgeries. Four days later Restis himself was arrested by Greek police and charged with bank fraud, embezzlement and money laundering.
Restis’ lawyers said the Iran sanctions claims had been devastating to Restis’ business, leading to the cancellation of a billion-dollar IPO on Nasdaq, while Restis’ shipping company, Enterprises Shipping and Trading SA, had been put on a blacklist of companies said to trade with Iran – triggering difficulties with banks refusing to process its funds.
Glencore now faced both sides of the Iran sanctions story. The aluminium trading on the one hand and the allegations about Restis and the oil tankers on the other, had an obvious overlap – SwissMarine. At minimum, the risk was that SwissMarine could be blacklisted, just as EST had been. But this was only if the secret of the shareholdings became public knowledge.
In June 2013, before Restis’ arrest, SwissMarine had filed a “Know Your Customer” form with Standard Chartered Bank which listed Restis owning 24.1% of the company.
In October 2013 SwissMarine had to apply to join the Nasdaq OMX Commodities Clearing House in Stockholm, which was critical to the bunkerage and forward freight agreement contacts that SwissMarine used. It also had to set up a bank account.
Copies of SwissMarine’s application to DNB Bank ASA Caymans branch and to Nasdaq were sent to Glencore’s Appleby nominees on the SwissMarine board (and, as it happened, right into the subsequent Paradise Papers breach).
In the DNB form, Restis’ name had been cut from the list of directors. SwissMarine listed Sidhalu SA as the only shareholder with more than 20 per cent and made no reference to Glencore or to Restis’ holding. SwissMarine’s Nasdaq application included Restis in the list of directors but listed only Glencore as the ultimate beneficial owner of more than 30 per cent, despite Restis’ contractual right to three of the nine board seats.
Victor Restis, still a SwissMarine director, was in prison in Greece at the time and his name did not appear on the filings. Despite a February 2014 statement from a SwissMarine executive, the deletion was hardly inadvertent.
Rather, it seems that SwissMarine had revised the way it calculated share capital for the Standard Chartered Bank paperwork. It now included the “cash-settled employee shares,” thereby reducing Restis’ stake to 18.15%, which meant it did not have to be declared.
The link between Glencore and Restis was never made public. Meanwhile the Appleby directors did not appear to be aware that Mr Restis was in prison.
Restis was released on bail on December 3, 2013. He repaid the €15.8 million loans and three years later the charges against Restis, his mother Bella and 15 others were all dismissed by the Greek Supreme Court.
The UANI defamation case was dismissed in March 2015 after the US Department of Justice intervened to claim that for UANI to disclose its sources and other details that Restis’ lawyers were demanding would threaten US national interests. It fuelled the belief that the information on Restis’ alleged email accounts had come from US intelligence.
“As to Mr Restis,” Glencore told the Financial Review, he “is one of a number of other shareholders in SwissMarine which is a non- controlled investment of Glencore. Glencore has no other commercial relationship with Mr Restis.”
Well, the newspaper went on to say that was not quite accurate. While Restis remains on the SwissMarine board, the Appleby documents show he is also chairman of SwissMarine Services SA, an independent company where Glencore is the largest shareholder, which has a commissionaire agreement with the shipping group.
Glencore evaded both Iraqi and Iranian shipping sanctions for over a decade, using corporate structures which themselves were fraudulent.
But that is hardly the end of the story. The Russian connection is yet to come. That’s the subject of the next ECRG Intelligence.