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How to Launder Money in the Copper Market (1)

by J. Orlin Grabbe

When I worked at Barclays Metals Derivatives, which dealt derivative products on the London Metals Exchange (LME) and arranged structured financing packages for mining companies, Yasuo Hamanaka--the Sumitomo trader recently fired for $2.6 billion in "copper-trading losses"--was a well- known figure.

The LME doesn't deal in gold or silver. Copper and aluminum are the major metals, but also traded are lead, zinc, tin, and nickel.

Although Barclays was a trading competitor to Sumitomo, my business associate John Burns tried to sell Hamanaka a series of options calculated to avoid a financial melt-down of his trading portfolio if the price of copper moved in extremes in either direction. Hamanaka mostly scoffed at the idea.

Hamanaka would often enter the copper market with large-size trades, and slam the copper price in this direction or that. The logic of the pattern of trading would often appear mystifying, creating paranoid uncertainty as to Sumitomo's intentions in the minds of its competitors and counterparties. But it all makes a little more sense when you realize Hamanaka was not only meeting the considerable copper- trading needs of the Sumitomo empire, but also conducting a major money-laundering operation for funds arising from the Southeast Asian heroin trade. Hamanaka was dealing in white copper.

The press has lumped this affair into the convenient category of that of one more rogue trader operating without proper management supervision. This in itself is nonsense. First of all, the operating assumption of both the press and the investigating authorities should be that upper management knew very well what was going on, as is usually the case. Second of all, the "trading losses" are related to missing heroin money. Sumitomo is not about to announce that "a large sum of heroin money entrusted to our care is missing.". Not a chance.

So the loyal Hamanaka takes the fall for "copper- trading losses".

(to be continued)