Corporate Due Diligence Failures and Systemic Risk in Commodity Finance: Lessons from the Credit Suisse-Gupta Case

The collapse of Greensill Capital in 2021 and its catastrophic impact on Credit Suisse serves as a stark reminder of the vulnerabilities inherent in commodity finance when due diligence is neglected and organizational priorities diverge from risk management principles. For institutional investors, the case underscores the dangers of overreliance on opaque structures, inadequate oversight, and the erosion of internal accountability. By dissecting the failures that led to Credit Suisse's $1.2 billion loss, this article proposes a framework to mitigate systemic risks in high-risk sectors.

The Greensill-Gupta Nexus: A Recipe for Disaster

Credit Suisse's involvement with Greensill Capital began in 2017, when its asset-management division launched supply-chain finance funds marketed as low-risk, short-term debt instruments. These funds were structured around securitized loans backed by invoices from Gupta's steel empire, particularly Liberty Commodities. Despite early red flags—such as the 2016 blacklisting of Liberty Commodities by Credit Suisse's commodity trade-finance unit—executives ignored warnings and expanded exposure. Internal risk teams were pressured to continue purchasing Greensill-originated securities, even as the firm's ties to Gupta and its reliance on speculative revenue projections became increasingly problematic.

The structure of these funds was inherently fragile. While marketed as low-risk, the underlying assets included loans based on potential future revenues rather than verifiable invoices. This created a false sense of security, compounded by the withdrawal of critical trade credit insurance in late 2020. By March 2021, Greensill's collapse triggered a freeze on the $10 billion in Credit Suisse-backed funds, leaving the bank to recover only $5.9 billion.

Systemic Failures: Governance, Culture, and Conflicting Priorities

The Greensill affair was not an isolated incident but a symptom of deeper governance failures at Credit Suisse. Internal communications revealed a culture where risk teams were sidelined in favor of business development goals. Senior executives, including the Swiss division's general counsel, were repeatedly warned about Gupta's influence and Greensill's opaque operations but failed to act. Regulatory inquiries later confirmed a “lackadaisical attitude toward risk” and a “fundamental failure of management and controls.”

Conflicting priorities exacerbated the crisis. While the commodity trade-finance unit raised concerns about Gupta's legitimacy, the asset-management division prioritized growth in high-yield products. This siloed approach allowed risks to fester, with no cohesive strategy to address cross-divisional exposures. The absence of a unified governance framework meant that formal agreements to limit Gupta-related investments were routinely ignored.

A Framework for Enhanced Due Diligence in High-Risk Sectors

To avoid similar disasters, institutional investors must adopt a proactive, multi-layered approach to due diligence in commodity finance. The following framework offers actionable steps:

1. Cross-Functional Oversight Committees
   Establish independent committees comprising risk, legal, and compliance experts to review high-risk investments. These committees should have the authority to override business-unit pressures and enforce strict exposure limits.

2. Third-Party Due Diligence and Transparency Audits
   Engage external auditors to validate the authenticity of supply-chain assets and verify the legitimacy of borrower documentation. For commodity finance, this includes verifying shipping records, inventory levels, and revenue projections.

3. Dynamic Risk Assessment Models
   Deploy real-time monitoring systems to track changes in borrower creditworthiness, market volatility, and insurance coverage. Stress-test assumptions in commodity-linked structures, particularly those relying on future revenue streams.

4. Strengthening Legal and Regulatory Safeguards
   Ensure that investments are structured with robust legal protections, including enforceable covenants and insurance backstops. Avoid overreliance on single insurers or underwriters, as seen in Greensill's case.

5. Cultural Reforms and Accountability Metrics
   Embed risk-aware cultures within organizations by tying executive compensation to long-term risk outcomes. Implement whistleblower protections and anonymous reporting channels to surface concerns early.

Investment Implications and Cautionary Advice

For institutional investors, the Greensill-Gupta case highlights the perils of chasing yield in opaque markets. Commodity finance, while potentially lucrative, requires rigorous scrutiny of counterparty risk, collateral quality, and governance structures. Investors should avoid investments where due diligence is outsourced entirely to third parties or where internal warnings are systematically ignored.

In high-risk sectors like commodity finance, diversification is critical. Allocating capital to a diversified basket of physical commodities (e.g., ) or ETFs with transparent holdings can mitigate exposure to single-point failures. Additionally, investors should prioritize firms with strong regulatory track records and transparent governance frameworks, particularly in emerging markets where regulatory oversight is often weak.

Conclusion

The Credit Suisse-Gupta case is a cautionary tale of how systemic governance failures and conflicting priorities can amplify risks in commodity finance. For institutional investors, the lesson is clear: due diligence must be rigorous, independent, and culturally ingrained. By adopting a framework that emphasizes transparency, dynamic risk monitoring, and cross-functional accountability, investors can navigate high-risk sectors without repeating the mistakes of the past. In an era of increasing complexity and interconnected markets, vigilance is not just a best practice—it is a necessity.