8 January 2019

Africa: Mozambique/Global - Who Pays for Transnational Corruption?

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Mozambicans Against Corruption
analysis

Editor's Note

The line-up of those involved in this $2.2 billion fraudulent loan deal, now implicated in a case in the U.S. District Court of the Eastern District of New York, is multinational. The five named individuals indicted include the former Minister of Finance of Mozambique, a Lebanese businessman representing Privinvest (an international shipping conglomerate in Abu Dhabi), and three London-based bankers, citizens of New Zealand, Great Britain, and Bulgaria, employed at the time of the loans by the giant Swiss bank Credit Suisse. Three more names are redacted in the indictment and 5 others, three Mozambicans and two additional employees of Privinvest, are cited but not named in the text of the indictment.

This indictment may result in convictions and/or financial forfeitures for some individuals, and will almost certainly result in more revelations and political fallout in Mozambique. But it is notable that neither Credit Suisse nor VTB, a Russian bank which bought into further marketing of these loans, are identified by name. Credit Suisse is one of the largest global banks. But while similar cases have sometimes resulted in penalties for the banks involved, critics note that similar strategies are not yet being contemplated for Credit Suisse, VTB, or Privinvest, by the U.S. Department of Justice or other relevant governments, and that the Mozambican people are still being held liable for these illegal debts.

This case is of interest not only for Mozambique, but as a case study of a pattern which is probably more a rule than an exception in today´s global economy. Whatever the results, the clear lesson is that only transnational cooperation can track down (and hopefully also penalize) transnational corruption.

This AfricaFocus Bulletin contains recent reports from two of the most regular and reliable sources of news and analysis on Mozambique: Joseph Hanlon´s News Reports and Clippings, and the English-language version of the Mozambican News Service, edited by Paul Fauvet. While the latest versions are often available first by email or through Facebook, they are also archived on the web and can be found with Google searches. Since court hearings are upcoming in Johannesburg and later in the month in New York, additional news may also be appearing in the financial press.

For previous AfricaFocus Bulletins on Mozambique,visit http://www.africafocus.org/country/mozambique.php For previous AfricaFocus Bulletins on debt and illicit financial flows, visit http://www.africafocus.org/intro-iff.php

Among other recent sources with relevant background and analysis:

(1) The Center for Public Integrity in Mozambique, in a press release on January 6, demanded that ¨the Government of Mozambique should immediately suspend the restructuring of [this debt,] which implies suspension of all agreements reached with the international creditors now holding title to these secret debts.¨ http://tinyurl.com/y9jqv4dr

(2) Jubilee Debt Campaign, UK, ¨What we have learned from the US indictment on odious loans to Mozambique,¨ Jan. 4, 2018 https://jubileedebt.org.uk - Direct URL: http://tinyurl.com/ychc8jl8

(3) ¨Following the donor-designed path to Mozambique's $2.2 billion secret debt deal,¨ by Joseph Hanlon, Third World Quarterly, October 2016 http://tinyurl.com/y72kgegm Puts the debts in the context of previous policy pressures on Mozambique by donors and creditors

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Mozambique 429 - US says Chang received $12 mn; full indictment report - News reports & clippings

5 January 2019

Editor: Joseph Hanlon (j.hanlon@open.ac.uk) To subscribe: http://tinyurl.com/sub-moz Previous newsletters and other Mozambique material are posted on http://bit.ly/mozamb

The full indictment is posted on http://bit.ly/ChangIndict

Chang received $12 mn says US indictment; 2 others on list not arrested yet

The indictment against Manuel Chang and others was published on 3 January. Two other senior Mozambicans have also been charged but their names are blacked out, as they have not yet been arrested. These two are alleged to have received $36.5 mn in "bribes and kickbacks". Chang is said to have personally received $12 mn. Three "Mozambican co-conspirators" who are not charged, presumably because they cooperated with the US Department of Justice, received $23 mn in bribes. But the largest payment, $45 mn, went to Andrew Pearse, the then Credit Suisse (CS) managing director who orchestrated the secret loan deal.

The indictment, issued by a Grand Jury at a US district court in New York on 19 December, shows the large amount of information already provided to the US department of Justice, including emails and other documents. These make clear the secret loans were corrupt for the start, going to the top.

Eight people are charged, the three Mozambicans, two senior people from the Abu Dhabi company Privinvest which received the money and was to supply ships and coastal protection equipment, and three senior people then at Credit Suisse.

Thus the indictment is not just against the Mozambicans who took the loans and received bribes, but also against CS senior officials for organising fraudulent loans and Privinvest for charging "inflated prices" which it then used "to pay bribes and kickbacks". The full indictment is posted on http://bit.ly/ChangIndict

Excerpt from the indictment

A. Overview

24. Through a Series of financial transactions between approximately 2013 and 2016, Proindicus, EMATUM and MAM borrowed in excess of $2 billion through loans guaranteed by the Mozambican government. The loans were arranged by Investment Bank 1 and Investment Bank 2 and sold to investors worldwide, including in the United States.

Over the course of the transactions, the co?conspirators, among other things, conspired to defraud investors and potential investors in the Proindicus, EMATUM and MAM financings through numerous material misrepresentations and omissions relating to, among other things: (i) the use of loan proceeds, (ii) bribe and kickback payments to Mozambican government officials and bankers, (iii) the amount and maturity dates of debt owed by Mozambique, and (iv) Mozambique´s ability and intention to pay back the investors.

25. Each of the companies entered into contracts with Privinvest to provide equipment and services to complete the maritime projects. The loan proceeds were supposed to be used exclusively for the maritime projects, and nearly all of the borrowed money was paid directly to Privinvest, the sole contractor for the projects, to benefit Mozambique and its people. In reality, the defendants JEAN BOUSTANI, ANDREW PEARSE, SURJAN SINGH and DETELINA SUBEVA, together with others, created the maritime projects as fronts to raise money to enrich themselves and intentionally diverted portions of the loan proceeds to pay at least $200 million in bribes and kickbacks to themselves, Mozambican government officials and others.

London Offices of Credit Suisse

Bribe planning came first

The indictment makes clear that the whole idea came from CS and Privinvest and that Privinvest had to "persuade Mozambican government officials" to accept the deal. The indictment says that "almost immediately [Jean] Boustani and [the redacted Mozambican] negotiated the first round of bribe and kickback payments that Privinvest would have to make for the benefit of Mozambican government officials for the project to be approved."

On 11 November 2011 the redacted Mozambican wrote an email to Jean Boustani, a senior executive at Privinvest: "To secure the project is granted the go-head by the HoS [Head of State, Armando Guebuza], a payment has to be agreed before we get there, so that we know and agree, well in advance, what ought to be paid and when." Boustani replied the same day that because of "negative experiences in Africa" Privinvest now had a policy that no money could be paid before a contract was signed. On 14 November 2011 the redacted Mozambican agreed that part of the bribes would be paid on signing and part when the project started.

But the Mozambican warned in the e-mail that by the time of project implementation "there will be other players whose interest will have to looked after, e.g. ministry of defense, ministry of interior, air force, etc". Money must be paid early because "in a democratic government like ours people come and go, and everyone involved will want to have his/her share of the deal while in office, becomes once out of the office, it will be difficult. So it is important that the contract signing success fee be agreed and paid in once-off, upon the signing of the contract."

In another e-mail exchange on 28 December 2011, it was agreed that $50 mn in bribes would go to Mozambican government officials and $12 mn in kickbacks for Privinvest co-conspirators. It took a further year of negotiation. The ProIndicus contract with Privinvest was signed on 18 January 2013, and the first bribes were paid five days later.

Will Credit Suisse wiggle out?

"The indictment alleges that the former employees worked to defeat the bank's internal controls, acted out of a motive of personal profit, and sought to hide these activities from the bank," Credit Suisse said in a statement, adding that the bank would continue to cooperate with authorities. But the indictment also makes clear how easy it was for Andrew Pearse, head of CS's Global Financing Group, and the others to bypass the bank's internal controls, and how little check there was on their activity.

CS is not charged in this indictment, but it will still be argued that the combination of pressure to lend and very light controls encouraged misconduct. The indictment also makes clear that CS and Privinvest pushed the loan and had to offer significant bribes before the Mozambicans would accept. So pressure will remain on CS to accept some liability for the $2 bn secret debt.

Britain declines to prosecute $ laundering & leaves it to the US

Many of the actions being prosecuted in the US case took place in London at the Credit Suisse (CS) branch there, and the three ex CS employees were arrested in London on 3 January. The Financial Times (FT, 11 Nov 2018) reported that the British Financial Conduct Authority (FCA) told CS in August 2018 that it had dropped its criminal probe into the secret loans. The FT commented that "the U-turn is a boon to the bank as the FCA was previously looking to use its criminal money-laundering powers in what would have been one of the first cases of its kind."

The FT notes that the FCA has yet to file charges in any criminal money laundering case.

Comment: The UK has taken harsh action against Mozambique because of the $2 bn secret debt, cutting off all aid directly given to government. By dropping the case against CS, it makes clear it will punish poor countries taking bribes, but not London banks giving bribes.

The people of Mozambique suffer twice - first from a corrupt government, and then by the UK cutting off aid to health and education. But in London, the corruptors go free - until the United States demands the arrests of the bribe givers.

It leaves the UK looking just like Mozambique, refusing to prosecute the guilty, and punishing the poor but not the rich.

But in Britain's case, the reluctance to prosecute CS and money laundering may be understandable. If the UK leaves the European Union, it will increasingly be dependent on illegal money to keep the economy afloat. And it will need the support of the big global banks. jh

Civil society says arrests "should embarrass" UK

"The arrest of three Credit Suisse bankers should embarrass the FCA, as it shows that the FCA decision failed to fulfil the organization's basic statutory standards, and suggests that UK regulators did not apply the necessary due care in handling the Mozambican debt case," said the Budget Monitoring Forum (FMO, Forum de Monitoria do Orçamento), a Mozambican civil society coalition. FMO adds that if FCA "internal constraints … affect their ability to take appropriate action against Credit Suisse," FMO is willing to assist.

"The nature of charges also reinforces our view that the Mozambican illegal debt crisis is a consequence of criminal activity spanning various jurisdictions including the UK, Norway, Netherlands, Switzerland and the UAE."

"FMO rejects Credit Suisse's attempts to distance itself from its former employees. As we have previously stated ,the failure of Credit Suisse to lay criminal charges against its former banker Andrew Pearse, responsible for the sovereign debt deals who joined the contractors benefitting from the illegal Ematum loans, suggests that illegal, immoral and negligent conduct was not by a rogue banker, but rather part of systemic Credit Suisse culture. "

The full FMO statement is below and at bit.ly/FMO-Moz-CS

Hidden Debts: Ematum - A Fraud from the Start

https://allafrica.com/stories/201901070064.html

Maputo, 6 Jan (AIM) - The scandal-ridden Mozambique Tuna Company (Ematum) was set up, not to catch tuna, but to divert funds into private pockets, according to the indictment drawn up by US prosecutors, investigating Mozambique's "hidden debts".

Tuna fishing boats sit in Maputo. Purchased from Privinvest, they have never been used for fishing.

Five people have so far been arrested on international warrants issued by the United States. They are: former Mozambican Finance Minister, Manuel Chang; three former executives of the bank Credit Suisse, Andrew Pearse, Surjan Singh and Detelina Subeva; and Jean Boustani, the lead salesman and negotiator for Privinvest, the Abu Dhabi based concern that was the sole contractor for Ematum and for two other fraudulent companies, Proindicus and MAM (Mozambique Asset Management).

The indictment makes it clear that Ematum was not a genuine fishing venture gone wrong, but a scam from beginning to end.

The fraudsters, having easily evaded the internal controls of Credit Suisse when negotiating the first illicit loan (to Proindicus), embarked on an even bigger swindle, seeking 850 million dollars for Ematum. In August 2013, Credit Suisse agreed to make up to 850 million dollars available for Ematum.

As Finance Minister, Chang signed the loan guarantee - Credit Suisse could lend the money, comfortable in the knowledge that if Ematum failed to repay, the government (i.e. the Mozambican taxpayer) would be liable for the whole amount.

The guarantee was entirely illegal - it violated the ceiling on loan guarantees in the budget law, and a clause in the Mozambican constitution which states that only the country's parliament, the Assembly of the Republic, could authorise such debt.

But in the event Credit Suisse seems to have had second thoughts - in September 2013, it only lent Ematum 500 million dollars. Ematum sought the rest of the money from a second bank, VTB of Russia.

The Ematum scheme, the indictment argues, was cooked up in May 2013 by Boustani, Pearse and Subeva. The fraudsters devised a project that had nothing to do with Mozambique's legitimate fishing needs: instead, the project was "a pretext to justify the maximum possible loan amount".

Part of the money was not for Ematum at all, but was intended to carry on paying for the earlier fraudulent scheme, Proindicus. Boustani sent an e-mail on 21 July 2013, saying "we will go for 800 million dollars so we keep a cushion for Proindicus interest payment next year".

On the same day, Subeva e-mailed "We should also keep a cushion for Proindicus of 17 million dollars so that we don't need to go back to MoF (Ministry of Finance) and they are on our side".

Pearse and Subeva were still employed by Credit Suisse, but they "sought to conceal their involvement in setting up the Ematum project by using personal e-mail accounts and removing all reference to themselves in the documents they prepared".

In an e-mail to Boustani in late July 2013, Pearse said "Pls bro don't just forward, but create new e-mail and attach the docs". Credit Suisse, he added, "is very sensitive to seeing our names involved".

Since Credit Suisse might wonder why the Ematum contract was going to Privinvest, the fraudsters, the indictment says, "created fake competing bids for contracts". Fully aware that there was no proper tender, Boustani e-mailed Pearse at the end of July, suggesting "Let's say they contacted South African shipyards and Spanish and Portuguese. Without naming them".

Surjan Singh then "included fake bid information" in a memorandum sent to Credit Suisse, "falsely asserting that the Privinvest proposal was deemed the most competitive one in comparison to bids from three other international companies".

Credit Suisse's internal procedures were so shoddy that it put Singh in charge of the due diligence for the Ematum loan. Singh, Pearse and Subeva, adds the indictment, "provided talking points and suggested answers to Mozambican government officials for due diligence meetings".

Surjan was richly rewarded, Between October 2013 and February 2014, Privinvest wired six payments, totalling 4.49 million dollars to Singh's account in the United Arab Emirates. These payments went via corresponding banks in New York - one of the many reasons for US prosecutors to take a direct interest in the scandal.

By 8 April 2014, Boustani had also paid seven million dollars to Chang, and bribed as yet unnamed Mozambican government officials to the tune of 36 million dollars.

The Ematum fishing boats, built in a Privinvest-owned shipyard in Normandy, did all arrive - but did virtually no fishing. The projections of vast revenues from the export of tuna proved no more than a fantasy. In 2018, it was reported that the boats did not even have fishing licences. From the new suspension bridge over the Bay of Maputo, there is an excellent view of the Maputo fishing port, and any passer-by can see all 24 Ematum boats lying idly at anchor.

In 2016, the original Ematum bonds (or "loan participation notes") were swapped for eurobonds directly issued by the Mozambican government. At the time it appeared as if this was a Mozambican idea - extending the maturity of the bonds, but increasing the interest on them.

But, according to the indictment, the idea came from the conspirators, including Boustani, Pearse and Subeva and was intended "to hide from the public and the IMF the near bankruptcy of the project companies, resulting from loan proceeds being diverted as part of the fraudulent scheme".

Although here was a new government in Maputo, and Chang was no longer finance minister, Mozambican officials did not smell a rat. They hired Credit Suisse and VTB to conduct the bond exchange. The adviser for the exchange was Palomar, a Privinvest subsidiary - and by now Pearse and Subeva had moved seamlessly from Credit Suisse to Palomar.

On 6 April 2016, the Ematum bondholders consented to exchange their bonds for Mozambican government Eurobonds. But the documents on which they based this consent did not mention the Proindicus and MAM loans, thus giving a completely misleading picture of Mozambique's foreign debt situation.

A couple of weeks later, thanks to an article in the "Wall Street Journal", the existence of Proindicus and MAM was suddenly revealed, and the Ematum/Eurobond investors realised they had been deceived.

The IMF too was angered to find that the government had concealed the scale of the country's debts, and suspended its programme with Mozambique. These events precipitated the financial crisis which came close to crippling Mozambique in 2016/2017. (AIM)

____________________________________________________________________________

Budget Monitoring Forum (FMO), Maputo

Media Statement On The Recent Arrests Of The Former Minister Of Finance Of Mozambique, Mr Manuel Chang In Johannesburg And Three Former Credit Suisse Bankers In London In Connection With The $2.3 Billion Illegal Mozambican Debt

5 January 2019

http://bit.ly/FMO-Moz-CS

The Budget Monitoring Forum (FMO) - a coalition of Mozambican civil society organisations working on public finance transparency and accountability - has noted reports of arrest, at the request of US authorities, of former Minister Manuel Chang in Johannesburg on 29 December 2018. We further have recorded the arrests of three former Credit Suisse bankers in London on the 3 January 2018.

FMO believes that the US initiated process is an opportunity for Mozambicans to get full disclosure on the illegal debts and recover all costs incurred by the Mozambican fiscus as a result of illegal and immoral conduct by international bankers, contractors, public officials, their relatives and collaborators in Mozambique. FMO also expects that this is a beginning of a global process, which will culminate in holding - all responsible parties accountable for their respective roles in this crisis. We fully endorse the proposed criminal sanctions, as they will serve as a deterrent for corrupt activities in Mozambique and beyond.

Mozambicans demonstrate in South Africa outside extradiction hearing for former Finance Minister Manuel Chang. Credit: https://www.facebook.com/CIP.Mozambique/

Recent developments confirm our long standing position that the $2.3 Billion debt was illegal as it did violated the Mozambican legislation. We have further argued that the entire process around the illegal debt - including the relationships between international bankers, various contractors and beneficiaries was intended to conceal criminal activity including money laundering.

FMO has long concluded that the criminal sovereign debt project, masterminded in concert with international banks, deliberately sought to divert much needed resources from the Mozambican people. As such we will continue to campaign against any debt restructuring proposals that do not consider the criminal nature of these transactions. Mozambican people should not bear the burden for collusive and illegal behaviour between the Government of Mozambique, and the international bankers.

Mozambicans have been paying a heavy price as resources are diverted for illicit purposes depriving our nation of crucial resources needed for sustainable economic growth and development. The beneficiaries of proceeds from illegal debt (politicians, contractors, international banks) should adsorb all costs associated with the Mozambican debt crisis - in addition to facing criminal sanctions being pursued by the US authorities.

The nature of charges also reinforces our view that the Mozambican illegal debt crisis is a consequence of criminal activity spanning various jurisdictions including the UK, Norway, Netherlands, Switzerland and the UAE.

Recent arrests validate our position as outlined in the statement (18 November 2018) that the UK's Financial Conduct Authority (FCA) should pursue criminal sanctions against Credit Suisse for the role played by the UK regulated Bank in Mozambique's illegal debt crisis. We remain dismayed by the approach adopted by the UK authorities and lawmakers in holding Credit Suisse accountable for its actions.

The arrest of three Credit Suisse bankers should embarrass the FCA, as it shows that the FCA decision failed to fulfill the organization's basic statutory standards, and suggests that UK regulators did not apply the necessary due care in handling the Mozambican debt case. We expect the FCA to reconsidertheir decision and continue to pursue action against UK regulated entities implicated in this scandal. FMO representatives are willing to make themselves available to assist FCA to augment internal constraints which might affect their ability to take appropriate action against Credit Suisse, and other implicated parties in the illegal debt project.

FMO rejects Credit Suisse's attempts to distance itself from its former employees. As we have previously stated the failure of Credit Suisse to lay criminal charges against its former banker - Andrew Pearse, responsible for the sovereign debt deals who joined the contractors benefitting from the illegal Ematum loans - suggests that illegal, immoral and negligent conduct was not by a rogue banker, but rather part of systemic Credit Suisse culture. FMO is relieved that our views around Mr Pearse and others have found expression in the legal action led by US authorities.

While FMO is encouraged by recent action to hold various parties accountable for illegal debt, we will continue with our global campaign, as announced in November to encourage other regulators and governments to take appropriate corrective action against implicated parties. We call on other jurisdictions and implicated countries to follow the US lead and pursue charges against institutions and individuals who were party to the grand corruption project, the illegal debt project. FMO demands that:

Mozambican people should not be expected to repay illegal debts, especially as there is concrete evidence of criminality.

Any claims arising out of illegal debts must be brought against the International Banks, contractors, and any other beneficiary of proceeds from the illegal debt

For media enquiries, please contact: Denise Namburete, FMO, d.namburete@nweti.org.mz, 00 258 82 30 28 001 Jorge Matine, FMO, jorgematine.jm@gmail.com; 00 258 84 67 17 432

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