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Breaking down bank fraud at Transmar

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Introduction to the case

Scheme centred on falsifying borrowing base reports

Three former high-ranking executives at cocoa supply and trading company Transmar Commodity Group Ltd. were sentenced to serve prison time for conducting a long-running fraud scheme in which they falsified financial information to secure and maintain a US$400 million* credit line for the cocoa company.

Peter G. Johnson, who was Transmar’s former CEO, president, and Chairman of the Board of Directors, his son, Peter B. Johnson, a Transmar officer who also oversaw its European affiliate, and former Vice President of Finance, Thomas Reich, were all sentenced to serve prison time for their involvement in the scheme.

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Details of the fraud

Transmar was a family-run cocoa commodity trading company founded by Peter G. Johnson in 1980. At its height, it was one of the world’s largest cocoa processors with more than 350 commercial customers, including big industry players like Hershey Co., Mars, Nestle SA, and Ghirardelli Chocolate Co.

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From at least 2014 to December 2016, Transmar maintained a credit facility from a group of banks that varied from approximately $250 million to $400 million.

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To secure and maintain these credit facilities, the banks required Transmar to submit borrowing base reports, which indicated the collateral—such as cash, receivables, and inventory—that qualified for financing.

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The credit agreements between Transmar and the banks restricted what was deemed eligible for inclusion in the calculation of collateral for the borrowing base reports.

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The former executives submitted borrowing base reports that knowingly misrepresented Transmar’s eligible collateral, which allowed the company to appear financially stronger than it really was.

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Transmar filed for Chapter 11 bankruptcy protection on Dec. 31, 2016, and at the time, it owed the banks approximately $360 million.

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In January 2018, eight commodity financing banks sued executives of Transmar for defrauding them of $360 million.

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How did the fraudsters commit the crime?

Incentive to commit fraud

According to a 2016 United Nations report, cocoa processing was capital-intensive with high sunk costs and primarily driven by an increase in commodity prices like cocoa beans and energy.

As cocoa processors primarily competed on costs, Transmar had difficulty maintaining its market share and was pricing its cocoa lower in order to undercut its competitors. Manipulating the borrowing base reports allowed the company to secure additional capital during times of increased demand, while remaining solvent during financially strained times.

Falsified financial documents and circular transactions

The banks that extended credit to Transmar required it to regularly submit borrowing base reports as a condition to continued credit extension. These reports were meant to reflect and quantify the available collateral that qualified for financing under the credit agreements between Transmar and the banks. The financial institutions relied on these reports to determine the amount of credit to continue extending to Transmar.

Under Peter G. Johnson’s leadership, several employees were directed to inflate the borrowing base reports and related documents to make it appear that Transmar had sufficient eligible collateral to sustain the amount of credit extended from the banks.

The reports included misleading information such as amounts for inventory that had already been sold, receivables that had already been collected, and fake receivable amounts.

Transmar also recorded circular transactions—sales transactions with third-party companies which received funds from its European affiliate to pay for the purchase.

The banks claimed that the former executives maintained two separate financial books and records to conceal their fraud.

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What was the outcome?

Over time, the gap between Transmar’s outstanding credit amount and its actual eligible collateral became too large. The house of cards came crashing down and Transmar filed for bankruptcy in December 2016.

Following the bankruptcy filing, one of the banks that had provided a credit facility noted significant discrepancies in the value of Transmar’s collateral. Further investigation revealed Transmar’s inaccurate and falsified borrowing base reports dating back to 2014.

Email evidence also found that the former executives often discussed the scheme internally, commenting on the circular transactions and discussing the deletion of emails, ultimately proving they were aware of and condoned the fraud.

The trio eventually pleaded guilty to one count of conspiracy to commit bank fraud and wire fraud affecting a financial institution.

In 2018, Peter G. was sentenced to 36 months in prison and 24 months of supervised release. Peter B. was sentenced to 30 months in prison, 24 months of supervised release, and ordered to forfeit $1.79 million. Reich received three months in prison.

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How could this have been prevented?

Internal fraud is often hard to detect and takes time to uncover—but the consequences are highly damaging to a business’ bottom line and reputation. The Transmar case can teach business leaders some important ways to prevent internal fraud:

Fraud prevention is a continuous process that needs to evolve as new threats develop. A recurrent audit conducted by an independent third-party can provide a clear view of potential gaps and ensure the trustworthiness of financial reporting.

Peter G. served as both CEO and Chairman of the Board of Directors. Appointing a chairperson who is separate from the CEO mitigates the risk of a conflict of interest.

In this case, Transmar’s two accountants were directed by Peter B. and Reich to overstate the company’s assets in the borrowing base reports. Both accountants reported directly to Reich. A whistleblower program, operated by an independent party, can assist in holding executives and upper management accountable and could have played a significant role in flagging this fraud.

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How BDO can help

Whether it be tied to fraud risk management, compliance with environmental, social, and governance (ESG) criteria, anti-money laundering (AML) strategies, or anti-corruption controls, BDO’s Risk Advisory team can help you build programs to prevent and detect fraudulent activity in your organization.

When fraud does occur, we can help you confidently navigate the investigation and the resulting litigation, if any. By choosing BDO, you benefit from a multidisciplinary network of fraud examiners, financial forensic professionals, and data scientists behind your case.

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*All amounts expressed in U.S. dollars unless otherwise stated.

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