27 June 2017

Mozambique: Kroll Audit - Credit Suisse Bleats and Misrepresents Kroll

Maputo — The bank Credit Suisse, deeply implicated in the scandal of Mozambique's “hidden loans”, has claimed that auditors from the company Kroll Associates exaggerated the amount the bank was paid in fees.

Credit Suisse was the lead bank in the loans of 850 million US dollars to Ematum (Mozambique Tuna company), and of 622 million dollars to the security company Proindicus.. The third “hidden loan”, to MAM (Mozambique Asset Management), did not come from Credit Suisse, but solely from the Russian bank VTB.

According to the executive summary of the audit report from Kroll, published on Saturday, the bank fees on the Ematum loan were 13.7 million dollars, and on the Proindicus loan slightly more than 10.113 million dollars

But in addition to the fees charged by the banks themselves, there were also “contractor fees”, which the banks deducted from the loan sums. The Kroll report states “Of the total USD 2 billion loan proceeds, USD 199.7 million was deducted by Credit Suisse and VTB for Arrangement Fees (USD 58.8 million) and Contractor Fees (USD 140.9 million)”.

The Contractor, the Lebanon-based Privinvest group, explained to Kroll “that the Contractor Fees (or “Subvention Fees”) were introduced to allow the lending banks to achieve a return at an interest rate more accurately reflecting Mozambique's risk profile. Credit Suisse explained that the Contractor Fees were effectively passed on to syndicate loan members or, in the case of EMATUM, to note investors that purchased the debt”.

Credit Suisse, cited by the Bloomberg news agency, accuses the report of being “incorrect and misleading”, and claims “Banking fees for Credit Suisse totaled 23 million dollars - - roughly 2.3 percent of the total financings and is in line with comparable emerging-market financing transactions.”

This figure may be correct - but it ignores the issue of “contractor fees”, for which Credit Suisse itself was one of Kroll's sources.

The report also cites one of Mozambique's commercial banks, Moza Bank, which acquired a slice of the Proindicus loan. Kroll notes: “An example of the explanation provided by Credit Suisse is identifiable in transaction documents provided by Moza Banco relating to a USD 20 million tranche of the ProIndicus loan (purchased by Moza Banco). The trade confirmation documentation shows that although Moza Banco purchased USD 20 million of the loan, the bank was only required to pay Credit Suisse USD 18.2 million as they received USD 1.8 million of the Contractor Fees”.

The audit lists the contractor fees paid by the contractor to Credit Suisse for the Proindicus loan as 48.824 million dollars, and 45 million dollars for the Ematum loan. When the Ematum loan was restructured in 2016, a further 4.142 million dollars was supposedly paid to Credit Suisse as an “arrangement fee”.

In the same restructuring an arrangement fee of over two million dollars was to be paid to VTB. But whether these payments were actually made is unclear. The report notes “Kroll has not been provided with any evidence to support the payments to Credit Suisse and VTB Capital”.

This is one of the many gaps in the audit report caused by the refusal of the Ematum, Proindicus and MAM managements to cooperate fully with Kroll. “The main challenge in completing the Independent Audit was the lack of documentation available from the Mozambique Companies”, the report states. “Kroll spent a considerable amount of time requesting and liaising with representatives of the Mozambique Companies to obtain documentation and information that was, in some cases, either ultimately incomplete or not provided at all”.

A far more serious indictment of Credit Suisse is its failure to undertake any due diligence when it agreed to lend almost one and a half billion dollars to two Mozambican companies which had only recently been set up, and thus had no business record at all.

Initially, Credit Suisse seems to have been aware of the difficulties. Kroll found that “a document prepared by the Ministry of Finance suggests that Credit Suisse imposed a number of “preceding conditions” that needed to be met before it would approve the loan financing, including the requirement to have the loan agreement approved by the Bank of Mozambique and checked by the Mozambique Administrative Court and that the “operation” needed to be reported to the IMF”.

Credit Suisse was entirely correct. Such huge loans should indeed receive the go-ahead from the Bank of Mozambique and from the Administrative Tribunal, and it would be standard practice to report them to the IMF. But none of this was done.

Instead the government, then under President Armando Guebuza, simply issued guarantees for the loans. Had Credit Suisse done its homework, it should have known that these guarantees raised further problems. For, under the Mozambican constitution, debts on this scale must be authorized by the country's parliament, the Assembly of the Republic, but the Assembly was kept completely in the dark about the loans and heir guarantees.

The annual budget laws approved by the Assembly always include a clause that sets a ceiling on loan guarantees. The guarantees for the Ematum, Proindicus and MAM loans smashed through those ceilings in both the 2013 and 2014 budget laws.

The failure to disclose the loans to the IMF had drastic consequences. When the true extent of these government-guaranteed loans became public knowledge in April 2016, the IMF suspended its programme with Mozambique. All other western partners followed suit. In particular, the 14 donors that provided direct support to the Mozambican state budget suspended all further disbursements, plunging Mozambique into a deepening financial crisis.

So how did Credit Suisse overcome its initial scruples? Kroll could not find the answer to this. “Documentation provided suggests that these conditions were “overcome” so that no court or Bank of Mozambique approval was required and no reporting to the IMF was needed”, the report states. “Further documentation is needed to confirm how the lending proceeded without meeting the required conditions”.

Credit Suisse thus stands accused of overriding its own principles, and throwing money at companies that showed no sign of viability.

For the driving force behind Ematum, Proindicus and MAM was not any tried and trusted business, but the Mozambican State Security and Intelligence Service (SISE), and the man appointed chairperson of all three companies was SISE official Antono do Rosario. “Person A” cited in the report is clearly Rosario, and he told Kroll that he had no prior experience in implementing projects of this nature.

It appeared to Kroll that “the key individuals responsible for the day to day operation of the Mozambique Companies do not possess the skills necessary to perform their function”.

Nor was there any likelihood of the companies becoming operational, let alone profitable. Kroll “has not identified a coherent business plan to bring the assets for the Mozambique Companies to an operational status which would enable them to generate revenue in the foreseeable future”, the report remarked. “Further, meetings with senior management from the Mozambique Companies did not provide any further understanding about future plans to make the assets operational”.

Kroll could only conclude “that the lack of leadership, combined with an unqualified, inexperienced and ineffectual project management team, has contributed significantly to the failure of the Mozambique Project”.

Yet Credit Suisse was prepared to entrust one and a half billion dollars to people who had no idea how to run the companies. It is hardly surprising that the companies are now defaulting on the loans, and that debt campaigners, in Mozambique and in Europe, are calling for the debt to be entirely scrapped.

Mozambique

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