2 August 2017

Mozambique: Kroll Makes Minor Amendments, but Substance of Audit Report Unchanged

Maputo — At the request of the auditing company Kroll Associates, the Mozambican Attorney-General's Office (PGR) has republished the executive summary of the report of the audit into the Mozambican security-related companies Ematum (Mozambique Tuna Company), Proindicus and MAM (Mozambique Asset Management) to take account of complaints made by Abu Dhabi Mar, Privinvest and Palomar Capital Advisors

Abu Dhabi Mar owns the shipyard in the French port of Cherbourg where the fishing boats and patrol vessels covered by the Ematum and Proindicus contracts were built. Privinvest is a shareholder in Abu Dhabi Mar, and was the contractor for the three Mozambican companies. Palomar is a subsidiary of Privinvest.

Through their lawyers these companies contacted Kroll to complain about the audit report. As a result, Kroll has made a handful of minor changes to the audit report, none of which affect the substance of the report.

The main change clarifies what Kroll now calls “the distinct and separate roles of Abu Dhabi Mar and Privinvest (i.e., the “Contractor”) and Palomar”.

The contractor, Kroll says, in the amended paragraphs, “has had a role in: structuring the projects; introducing Credit Suisse as a lender; agreeing the Contractor Fees (to discount the interest rate payable by the Mozambique Companies on the loans); providing funds to the Mozambique Companies to cover operational expenditure and share capital; and funding loan repayments”.

As for Palomar, the report now states it “had a role in: arranging the MAM loan agreement arranging the MAM loan agreement alongside VTB Capital; contracting with the Mozambique Companies and the Ministry of Finance to restructure the ProIndicus and EMATUM loan agreement (and receiving fees for doing so); and (for ProIndicus) taking responsibility for generating revenues and contracting to receive a proportion of any future revenues”.

Kroll also clarifies that its mention of potential violations of the Mozambican Commercial Code, because of limited invoice information, refers to the three Mozambican companies, and not to Abu Dhabi Mar, Privinvest or Palomar.

Kroll adds that the report is based on the information provided by Ematum, Proindicus and MAM, and that it asked MAM to provide “relevant documentation from Palomar, on the basis of the contractual relationship between the parties”. It did not interview anyone from Palomar.

None of this affects the main findings of the report, and Kroll remains unable to account in full for the more than two billion US dollars which Ematum, Proindicus and MAM borrowed, with government guarantees, from Credit Suisse and VTB in 2013 and 2014. The report blames the three companies for the gaps in information, stating that they only provided “limited financial data, including incomplete trial balances and bank statements for certain periods, and incomplete supporting documentation, such as loan facility agreements and supplier contracts. As a result, it became apparent that a significant amount of the information originally envisaged to be held by the Mozambique Companies in Mozambique was not available”.

Since the three companies were unable, or unwilling, to provide the complete bank account information requested by Kroll, the auditors had to go to the banks. Via the Bank of Mozambique, it requested “details of local Mozambique bank accounts held by the Mozambique Companies. These requests included bank statements and, where relevant, supporting documents for certain transactions”.

But even the banks failed to cooperate fully. Kroll said that, by the time of submitting its report, it had not received responses from all Mozambican banks, “and issues have been identified regarding the effectiveness of search criteria applied by certain local Mozambique banks”.

“It should be noted”, Kroll says, “that, in reaching the conclusions set out in this report, Kroll has not had access to full and complete documentation, including internal confidential documents of the parties involved, nor has it met with all key personnel of the parties involved. The main challenge in completing the Independent Audit was the lack of documentation available from the Mozambique Companies. 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.”

There remains a massive discrepancy between the amount paid for assets and services, as stated on invoices, and an independent valuation of those assets.

The invoices, as cited by Kroll, are summary in the extreme. The report says “Kroll was informed by an industry expert that invoices should include a clear and detailed description of all assets and services provided. The invoices provided to Kroll do not provide sufficient detail to gain comfort that the documents accurately reflect the true price of these assets and services, and therefore do not allow accurate accounting records to be maintained by the company”.

The changes in the report make no difference to Kroll's comparison of the prices on the invoices from the contractor with the prices estimated for the same goods by an independent expert - and the differences amounted to 713 million dollars. “This difference may be explained in additional documentation from the Contractor that has not been provided to Kroll”, the report adds. “However, at the conclusion of Kroll's Independent Audit the differences remain unexplained and warrant further consideration”.

The discrepancies between the invoices and what the Kroll independent expert believed should have been paid are enormous. Thus, according to the invoices, each of the 24 fishing vessels (three trawlers and 21 longliners) purchased for Ematum cost 22.3 million dollars. But the independent expert estimated that each of the boats should have cost no more than two million dollars. So each vessel cost 20.3 million dollars more than Kroll's expert considered the true cost should have been.

Similarly with the 36 DV-15 Interceptor patrol vessels purchased by Proindicus. On the invoices, each of these boats cost 7.2 million dollars. The independent expert thought the real price should be two million.

Also unchanged is Kroll's damning assessment of the “inadequate” procedures for issuing government guarantees. Kroll noted that “no documentation was provided to evidence that any assessment took place” before the guarantees were signed.

“There does not appear to have been a documented or clearly understood process for issuing government guarantees”, the report added. “This was complicated by the fact that the Mozambique Companies were incorporated as private companies”. Kroll was informed that Companies set up as state owned bodies with loans treated as lending to the Government of Mozambique “would have been subjected to greater scrutiny by the Ministry of Finance”.

Kroll clearly regarded the “private” nature of the three companies as fictional. “As the shareholders for each company are either directly or indirectly owned by the Mozambique State, the companies may be considered to be state owned companies rather than as private companies”, the report says. It noted that Privinvest also refers to Ematum, Proindicus and MAM as “state owned companies”.

It is expected that the full audit report will be published within about three months of the publication of the summary. The International Monetary Fund (IMF), and other partners, have made it clear that here can be no resumption of normal financial relations with Mozambique until the full Kroll report s available, and until the gaps in information as to what happened to the two billion dollars are filled in.

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