A bank largely owned by the Russian government has Cargill Inc. in its crosshairs.
The state-owned bank's quest is centered around the $2 billion failure of a privately owned Russian bank, Rost Bank, in 2017.
National Bank Trust, an arm of Russia's central bank, alleges in New York federal court that Rost Bank's owner committed fraud through several of his affiliated companies in the British Virgin Islands — and that Cargill and about 20 other global trading firms abetted that fraud.
Minnetonka-based Cargill says such claims are balderdash. The Russian bank's allegations are "replete with errors, false assumptions and fundamental misunderstandings," Cargill said in a U.S. court filing.
The legal battle hinges on a series of complex commodity financing deals that highlight an often overlooked and obscure business in Cargill's global empire: structured trade finance. For Cargill, it often involves financing to banks in less developed financial markets.
A lawyer for National Bank Trust claims in a federal court filing that Cargill and other traders — including global grain giants Louis Dreyfus and Bunge — were aware of the fraud or "turned a blind eye" to it.
In a court filing, Cargill said the bank is seeing "imaginary problems" in legitimate trade deals.
In May, National Bank Trust — which recoups losses from failed lenders — submitted a fraud conspiracy claim in a British Virgin Islands court against Cargill and the other traders to recover Rost Bank's $2 billion loss. In April, it also won a U.S. court order in New York to subpoena several U.S. banks for records from the trading companies, including Cargill, pertaining to the alleged fraud.
Cargill is fighting to quash the subpoena, calling it an overly intrusive "fishing expedition."
The legal row comes at a tense time when Russia's invasion of neighboring Ukraine, condemned by much of the world, has led to increasingly frayed relationships between Russia and western companies.
In the war's early days, Russian missiles struck an empty Cargill vessel in the Black Sea. In March, Cargill announced plans to halt loading Russian grain onto Cargill ships.
The war in Ukraine has prompted western countries to sanction financial firms with ties to the Kremlin, including the Central Bank of the Russian Federation. National Bank Trust, which holds nationalized banks' assets, is not specifically sanctioned.
In legal filings, Cargill's lawyers have sought to kill the subpoena by sowing doubt that the Moscow financial institution will even be allowed to pay its own attorneys in the British Virgin Islands, given sanctions.
Russia targets errant bankers
Mikail Shishkhanov controlled Rost Bank and B&N Bank, two troubled banks taken over by the Russian government in 2017. Shishkhanov is also a target of National Bank Trust's fraud claim in the British Virgin Islands, as are ten companies he allegedly controlled there.
Shishkhanov's B&N bank was a customer of Cargill's. Both of his banks went down in a wave of privately owned Russian bank failures in the 2010s.
Cargill was B&N's largest partner, providing $802 million in financing, National Bank Trust said in a U.S. court document. Louis Dreyfus was second, extending $665 million, and Bunge third at $434 million.
"What often happens is [the bank becomes] a vehicle for the owners of the bank to get money to themselves," Matthew Schmidt, associate professor on the University of New Haven's national security faculty, said of private Russian banks.
"When that process gets to be so extreme that the bank can't cover its obligations, then the way you solve that is by nationalizing the bank."
Russia has been pursuing the owners of dead banks in foreign courts, scoring a big victory in 2020. A London court ordered three former owners of a collapsed Russian bank to pay $900 million, concluding they had used the bank and offshore shell companies to enrich themselves.
The Washington, D.C.-based law firm Steptoe & Johnson represented National Bank Trust in that London suit — and is doing the same in the case against Shishkhanov, Cargill and the other trading companies.
The "Diamond Forca" Deal
Neil Dooley, a lawyer in Steptoe's London office, laid out an example of Shishkhanov's purported scheme involving Cargill in a U.S. court filing.
In a baroque deal initiated in November 2016, a Cargill subsidiary known as Midwestern Trading Group bought about $44 million in Russian crude oil and diesel fuel from another Cargill entity. As described by court documents in New York, fuel was to be transported from two ports — one in Latvia and another in Russia — to a terminal in the Netherlands.
But the fuel never left port, though a flurry of credit extensions ensued, Dooley wrote. On Dec. 27, 2016, Shishkhanov's B&N Bank financed Midwestern's purchase of oil and fuel from Cargill with a $43.6 million letter of credit.
Days earlier, in a parallel transaction, Cargill's subsidiary Midwestern loaned $42.9 million to a British Virgin Islands shell company known as Diamond Forca, which was controlled by Shishkhanov. The loan effectively paid back what Midwestern owed to B&N for the letter of credit.
National Bank Trust claims Shiskhanov's Diamond Forca took those loan proceeds and deposited them in a bank in Armenia, at which point, attorneys say, the record on those funds goes dark.
But that following June, days before Midwestern's loan came due, Diamond Forca triggered a domino of money transfers, involving a litany of financial firms with close ties to Shishkhanov.
It's likely Shishkhanov used the money for personal benefits and to "recycle" it to conceal bad loans, National Bank Trust claims. Shishkhanov could not be reached for comment.
Ultimately, after the dust settled, Cargill could claim $750,000 in profit on the Diamond Forca deal, owing to the difference between loan amounts, National Bank Trust claims.
Cargill declined to comment, citing the ongoing litigation.
In U.S. court filings, Cargill does not dispute the B&N bank and Midwestern transactions, but it refutes National Bank's contention that they were fraudulent.
They were "legitimate structured trade finance" transactions between Cargill and B&N Bank, Cargill said in a filing. National Bank Trust's claims indicate "a misunderstanding of the structured trade finance transactions at issue."
Experienced international traders "routinely buy and sell goods on the high seas without any expectation that the goods will be delivered," Cargill added.
Structured trade finance is a complicated financing tool centered on commodity trades and aimed at developing countries. Traders such as Cargill provide liquidity to their customers — usually foreign banks — on better terms than they might get via traditional lending.
Moussa Diop, associate professor at the University of Southern California's Sol Price School of Public Policy, said structured trade finance involves lending against goods, rather than a balance sheet, and is a common tool for lending to high-risk companies.
"There is nothing nefarious about structured trade finance," Diop said. "It's really to finance merchants and facilitate trade."
Did traders turn a blind eye?
Shishkanov's alleged fraud left a hole in B&N bank's balance sheet that was filled with credit supplied by his other bank, Rost, National Bank Trust claims. Thus, Rost was "left holding the proverbial bag," losing $75 million on the Diamond Forca deal.
Rost Bank's overall $2 billion in losses allegedly stemmed from multiple transactions B&N made with the traders.
In a court filing, Cargill called National Bank Trust's "hypothesized 'fraud' " a "complex daisy chain of transactions, none of which — viewed separately or together — relate in any way to any of the structured trade finance transactions that Cargill conducted."
Cargill has long been a force in structured trade finance, occasionally facing problems in post-Soviet nations.
In Ukraine, there was a wave of bank failures in the 2010s that left Cargill scrambling — successfully — to recoup structured finance credit it had extended. A similar story played out in a deal Cargill made with a big Azerbaijan bank that filed bankruptcy in 2017.
A court battle over foreign subpoenas
In January, attorneys for National Bank Trust sought a subpoena over financial records spanning 2013 to 2017 with half a dozen U.S.-based banks, including JPMorgan and Citibank.
Cargill and Louis Dreyfus are fighting this request, which allows litigants in court cases outside the U.S. to secure documents held in America. Cargill says the documents are "confidential."
In U.S. District Court for the Southern District of New York, the subpoena has stalled in a jurisdictional quagmire.
National Bank Trust's attorneys initially filed the subpoena request in U.S. court, pointing to a pending British Virgin Islands lawsuit. But Cargill has sought to quash the subpoena by both reminding the court of the bank's ties to the Russian government during a time of war and framing the British Virgin Islands as the wrong venue for any legal fight.
Moreover, Cargill says the company to date has not been served with a lawsuit, claiming the Russian bank's attorneys have "merely taken the bare minimum steps to create the appearance of a pending proceeding."
In court documents, Dooley, the lawyer representing National Bank Trust, maintains the bank's attorneys have received approval from a British Virgin Islands judge to serve defendants and that "proceedings are underway."