Commodity Trading II: Financing, Integrity and Sanctions — a part of the book Zug: The Making of a Global Hub by Dr Alexander Ressos.
Part D described the history, the actors and the economic weight of the commodity trade in Zug. Part E examines the legal framework within which the trade operates today. It has three chapters. Chapter I describes how the trade is financed: the instruments that banks and other lenders use, the security they take, the risks they face and the provisions of Swiss law that the practitioner must apply. Chapter II addresses the integrity of the trade: the law on the bribery of foreign officials, the criminal liability of companies under Article 102 of the Swiss Criminal Code and its application in the proceedings against Gunvor, Glencore and Trafigura, the anti-money-laundering framework and the obligations of transparency and due diligence. Chapter III sets out the Swiss sanctions regime, its application to the trade in Russian commodities since 2022 and the interaction between Swiss, European, British and American sanctions, together with the rules on export control. While the Geneva volume treats several of these subjects from the perspective of the Geneva traders and banks, this part focuses on the questions as they arise in Zug.
This part belongs to Zug: The Making of a Global Hub by Dr Alexander Ressos, published here in full, section by section.
Why traders borrow
A commodity trader needs money to buy the goods it sells. Between the moment it pays the seller and the moment it receives payment from the buyer, which may be weeks or months, the trader must… Read more Zug · Commodity Trading IIThe instruments of trade finance
The instruments of commodity trade finance range from the traditional to the complex. The oldest and still one of the most important is the documentary letter of credit. Read more Zug · Commodity Trading IIHedging, margin and liquidity
The financing of the physical trade is only one part of a trader's financial needs. Read more Zug · Commodity Trading IIInsurance: cargo, credit and political risk
Insurance complements the financing of the trade. Marine cargo insurance covers the loss of or damage to the goods in transit. Read more Zug · Commodity Trading IIThe bank's due diligence on the trader
A bank that finances a trader in Zug must satisfy its own regulatory obligations before it grants the financing. Read more Zug · Commodity Trading IIThe fraud exception in letters of credit
The independence of the letter of credit from the underlying sale is the foundation of its value: the seller is paid against compliant documents, whatever disputes may arise about the goods. Read more Zug · Commodity Trading IIZug and Geneva compared
The financing environment of the traders of Zug differs from that of their competitors in Geneva. Read more Zug · Commodity Trading IIThe banks and their retreat
The commodity trade of Switzerland was financed for decades above all by banks in Geneva, where several French, Dutch and Swiss banks maintained specialised commodity finance departments. Read more Zug · Commodity Trading IISecurity under Swiss law
The security that a lender takes in a commodity financing is usually governed by the law of the place where the goods are located and, for receivables, by the law chosen by the parties or the law… Read more Zug · Commodity Trading IIEnforcement and insolvency in Zug
When a trader in Zug defaults, its lenders and creditors must enforce their claims under Swiss law. Read more Zug · Commodity Trading IIFraud in trade finance
The history of commodity finance is punctuated by frauds whose typical forms the practitioner in Zug must know. Read more Zug · Commodity Trading IIThe documents of the trade
The documents on which commodity finance rests deserve closer attention, since their integrity determines the security of the lenders. Read more Zug · Commodity Trading IIPrepayments and the debts of producing states
The prepayment agreements between traders and state-owned producers have attracted the attention of the International Monetary Fund and of the organisations that monitor the debts of developing… Read more Zug · Commodity Trading IIFinancing and sustainability
The financing of the commodity trade has become subject to the sustainability policies of the lenders. Read more Zug · Commodity Trading IIWarehousing, collateral management and the control of goods
Where commodities are stored before sale, in tanks, silos or metal warehouses, the lender's security depends on the control of the goods in storage. Read more Zug · Commodity Trading IIPayment flows and the choice of currency
The commodity trade is conducted overwhelmingly in United States dollars. Since oil, metals and most agricultural commodities are priced in dollars, the payments for the cargoes pass through the… Read more Zug · Commodity Trading IIPrivate credit and the new lenders
The lenders that have filled the gap left by the retreating banks include trade finance funds, private credit funds and specialised commodity finance firms. Read more Zug · Commodity Trading IIPractitioner's note: structuring a financing for a trader in Zug
The practitioner advising a bank or a trader on a financing in which a Zug company is the borrower or the security provider should address the following points. Read more Zug · Commodity Trading IIThe risk profile of the trade
The commodity trade is exposed to corruption to a degree that few other industries match. Read more Zug · Commodity Trading IIThe bribery of foreign public officials
Swiss criminal law has prohibited the bribery of foreign public officials since 2000, when Switzerland implemented the Convention on Combating Bribery of Foreign Public Officials of the Organisation… Read more Zug · Commodity Trading IIThe criminal liability of the company: Article 102
Swiss criminal law was for a long time based on the principle that only natural persons can commit crimes. Read more Zug · Commodity Trading IIGunvor: the first commodity trader convicted
The first commodity trader convicted under Article 102 was Gunvor, one of the large oil traders of Geneva. Read more Zug · Commodity Trading IIGlencore: the Zug case
The case against Glencore International AG, the principal trading company of the group in Baar, is the most important application of Article 102 in the canton of Zug. Read more Zug · Commodity Trading IITrafigura: the first trial
The case against Trafigura, a trader headquartered in Geneva and Singapore, was the first case in which a commodity trader was tried before a Swiss court for bribery. Read more Zug · Commodity Trading IILessons for the compliance programme of a trader in Zug
The three cases define the standard that a trader in Zug must meet to avoid liability under Article 102. Read more Zug · Commodity Trading IIThe liability of individuals
The corporate liability of Article 102 does not replace the liability of the individuals who commit the offences. Read more Zug · Commodity Trading IIConfiscation and compensation claims
The penalties imposed on the commodity traders under Article 102 consisted mostly of compensation claims. Read more Zug · Commodity Trading IIWhistleblowing
Bribes paid to public officials are not deductible for tax purposes. The Federal Act on Direct Federal Taxation and the harmonisation law expressly exclude the deduction of payments of bribes within… Read more Zug · Commodity Trading IIThe role of the cantonal prosecutors
The large corruption cases in the commodity trade have been prosecuted by the Office of the Attorney General, which has jurisdiction over bribery of foreign officials and money laundering where the… Read more Zug · Commodity Trading IICorruption risk in the producing countries: the view from the other side
The corruption cases of the commodity trade have usually been described from the perspective of the traders and the prosecutors of the states where the traders are based. Read more Zug · Commodity Trading IIMoney laundering
The anti-money-laundering framework of Switzerland applies to financial intermediaries: banks, securities firms, insurance companies, asset managers, fiduciaries and other persons who accept, hold or… Read more Zug · Commodity Trading IITransparency of payments to governments
The Code of Obligations requires companies active in the extraction of minerals, oil, natural gas or primary forest timber that are subject to an ordinary audit to publish an annual report on the… Read more Zug · Commodity Trading IIInternal investigations and cooperation with the authorities
The counter-proposal to the Responsible Business Initiative, in force since 2022, imposes on companies that import or process minerals or metals from conflict-affected and high-risk areas, above the… Read more Zug · Commodity Trading IIPractitioner's note: a compliance check for a trader in Zug
The practitioner who reviews the anti-corruption and anti-money-laundering position of a trader in Zug should ask the following questions. Read more Zug · Commodity Trading IISanctions and Export Control — conclusion
Part E has examined the legal framework within which the commodity trade of Zug operates today. Read more Zug · Commodity Trading IIFrom neutrality to alignment
Chapter I of Part D described how the traders of Zug, in the Cold War, used Switzerland's non-participation in the embargoes of other states to trade where their competitors could not. Read more Zug · Commodity Trading IIThe measures that concern the commodity trade
The sanctions against Russia affect the commodity trade in several ways. They prohibit the purchase, import and transport of Russian crude oil and petroleum products, subject to the exceptions for… Read more Zug · Commodity Trading IIThe Swiss trade in Russian commodities before and after 2022
Before the invasion, Switzerland was the most important centre of the trade in Russian commodities. Read more Zug · Commodity Trading IIEnforcement: SECO and the Office of the Attorney General
The enforcement of the sanctions lies with SECO, which conducts administrative proceedings for minor violations, and with the Office of the Attorney General, which prosecutes particularly serious… Read more Zug · Commodity Trading IIThe reach of foreign sanctions
A trader in Zug must comply with Swiss sanctions. In practice, it must also take into account the sanctions of the European Union, the United Kingdom and the United States, because their reach… Read more Zug · Commodity Trading IIExport control
Beside the sanctions, the trade in certain goods is subject to export control. The Federal Act on the Control of Dual-Use Goods, Specific Military Goods and Strategic Goods, the Goods Control Act,… Read more Zug · Commodity Trading IIAsset freezes and the companies of Zug
The sanctions against Russia include the freezing of the assets of designated persons and entities and the prohibition of making funds and economic resources available to them. Read more Zug · Commodity Trading IILicences, exceptions and wind-down periods
The sanctions contain exceptions and allow SECO to grant authorisations in specified cases. Read more Zug · Commodity Trading IISanctions in contracts
The sanctions have transformed the contractual practice of the commodity trade. Trading contracts, financing agreements and charter parties now contain detailed sanctions clauses, which allocate the… Read more Zug · Commodity Trading IINeutrality and sanctions: the Swiss debate
The adoption of the European sanctions against Russia in February 2022 provoked a debate in Switzerland about the compatibility of sanctions with neutrality. Read more Zug · Commodity Trading IIThe shadow fleet and maritime risk
The price cap and the embargoes on Russian oil have given rise to a fleet of tankers that transport Russian oil outside the reach of Western services. Read more Zug · Commodity Trading IISanctions and the directors of Zug companies
The sanctions have a personal dimension for the directors of companies in Zug. A director of a company that violates the sanctions may be liable under the criminal provisions of the Embargo Act as a… Read more Zug · Commodity Trading IIGold, refining and Switzerland
The investigation into the trade in Russian gold by a Zug trader, described above, touches on an industry in which Switzerland plays a dominant role. Read more Zug · Commodity Trading IIPractitioner's note: sanctions screening for a trader in Zug
The practitioner who advises a trader in Zug on sanctions compliance should ensure that the trader's programme includes at least the following elements. Read more