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Who laundered money for the Gupta acolytes and used the opportunity to cash in on State Capture? A new investigative report, ‘The Enablers’, co-authored by Open Secrets and Shadow World Investigations, details the role of bankers, accountants, consultants and lawyers in State Capture. Submitted to the Zondo commission, the report details case studies which are the focus of the next five weeks of Unaccountable. Open Secrets starts with the role of Nedbank and the Bank of Baroda.

Nedbank, like all banks that have appeared before the Zondo commission so far, have preferred to present themselves as victims of State Capture. Nedbank’s Chief Executive, Mike Brown, appeared at the Zondo commission along with other bank executives in 2018 to testify to political pressure placed on the banks by Cabinet to keep Gupta accounts open. All South Africa’s banks were at pains to tell the commission that they retain the right to close the accounts of any client, and that they constantly undertake rigorous due diligence on their clients and their accounts.

What Brown did not discuss, and the commission has thus far not publicly probed, was Nedbank’s long-running relationship with the Bank of Baroda and how this continued long after they had closed their own Gupta-linked accounts.

Baroda — a State Capture bank

The Indian state-owned Bank of Baroda was central to much of the money laundering for the Gupta criminal enterprise. While evidence is still emerging regarding the full extent of Baroda’s complicity in the State Capture project, and the motivations for their conduct, it clearly facilitated multiple suspicious transactions that even the bank’s employees flagged as questionable.

These transactions often appeared to be cases of “round-tripping” whereby large sums of money would be transferred between companies owned by the Guptas or their associated companies. Round-tripping is a common money-laundering tool. The transfers themselves were often inter-company loans — usually with no clear commercial or legal purpose (and sometimes even in the absence of a loan agreement) and thus apparently done to obscure the origin of money and the real purpose of the transaction.

The Organised Crime and Corruption Reporting Project (OCCRP) identified a total of 231 transactions between companies owned or controlled by the Guptas where “inter-company loan” was stated as the reason for the transfer — these were the transactions that amount to R4.5-billion.

Many of these transactions were linked to the now infamous sale of Optimum Coal Mine to Gupta-linked firm Tegeta in 2016. The bank fundamentally failed to conduct the lawful due diligence required of it in this case. These violations included a consistent failure to file suspicious activity reports with the FIC. In addition, Baroda had failed to identify where parties were related, to verify the source of funds being received, and to identify each party to a transaction. They also failed to identify other risk factors like the fact that Salim Essa was a shareholder in nearly all of the companies involved in the transactions.

It was these serious violations of FICA and the know-your-client rules that led the FIC to impose an R11-million fine on Baroda before the bank closed its South African operation entirely. The small fine is indicative of a systemic problem in the regulation of banks, namely, low fines that are disproportionate to the legal transgressions and public cost in question.

The Bank of Baroda was also vital to the creation of elaborate loan-back systems that were used to launder funds linked to the Estina Vrede Dairy Project. Along with FNB and Standard Bank, Baroda provided a range of other banking facilities to Estina as the small company diverted provincial government funds meant for a rural dairy farm into the accounts of Gupta front companies based in Dubai.

Crucially, evidence gathered in a joint investigation by journalists at OCCRP and The Hindu suggest that junior officials at the Bank of Baroda did flag many of the suspicious transactions linked to this and other transactions. Documents cited in their investigation showed that suspicious activity reports required by FICA were generated on a daily basis. Yet senior executives at the bank reportedly stepped in to quash them, ensuring that the suspicious transactions were at least in part hidden from the regulators. This suggests a premeditated intention to assist in covering up suspicious transactions, rather than a mere compliance failure.

New evidence, included in The Enablers and now in the hands of the Zondo commission, also shows that employees of Baroda’s Johannesburg branch received benefits directly from the Gupta enterprise. These included in particular arrangements for a Cape Town holiday, and assistance with obtaining visas and other familial matters. We suggest that Baroda’s conduct in relation to Gupta companies has to be viewed with these private benefits in mind.

Nedbank facilitates the facilitators

The information above has led many to paint Baroda as the central “enabler” in the Gupta enterprise. This overlooks one important catch — because the Bank of Baroda was a foreign bank, it required a South African sponsor bank in order to operate. Enter Nedbank.

One of the “big Four’ South African banks, Nedbank controls more than R1-trillion in assets. It is a corporate giant and its executives have been publicly vocal about the continuing costs of State Capture, particularly the harm done to SOEs. They have been less frank about their role in the system they call State Capture.

As a foreign bank, Baroda could not clear transactions on its own; rather Nedbank cleared those transactions and relied on “clearing accounts” to do so. This is typical of correspondent banking. As Baroda’s correspondent bank, Nedbank allowed Baroda to use its infrastructure for all financial transactions. Investigators at OCCRP have alleged that the nature of the relationship between Nedbank and Baroda enabled both banks to avoid responsibility for identifying and reporting suspicious transactions related to all of these accounts.

The Financial Intelligence Centre Act (FICA) requires banks to know their customers and verify their identity, as well as to do up front and ongoing due diligence on these clients and their transactions. Crucially, banks must use this information to identify and report suspicious transactions to the Financial Intelligence Centre (FIC). This system is crucial to stop the banking system being used for money laundering and to facilitate other crimes.

According to OCCRP, the Baroda-Nedbank system worked in such a way that neither bank had access to all the information they may have needed to exercise the due diligence demanded by FICA. Nedbank did not have sufficient information to conduct due diligence on transactions that occurred between Bank of Baroda accounts, as they did not have full access to the details of these transactions. At the same time, Baroda did not have access to information about the origin of money transfers to Baroda accounts that came from external banks.

If these gaps in information are an inevitable result of a correspondent banking relationship of this nature, then there is clearly a significant deficiency in the anti-money laundering legal framework. Nedbank should have to answer to whether they saw nothing wrong with such a system, and whether their compliance department ever reported any concerns about it, given their due diligence obligations in terms of the law.

Nonetheless, the gaps in knowledge seemed to have enabled dubious transactions. Tegeta’s purchase of Optimum is a good example. The transaction involved Eskom making a late-night and highly irregular decision to prepay Tegeta for coal so as to give them the capital they needed to complete the purchase of Optimum. Nearly R600-million was paid for this purpose into a Tegeta account with FNB. From there, a total of R800-million was transferred to a Tegeta account with Baroda the next day. Baroda could thus claim that they did not have full access to information about the accounts held at FNB, while Nedbank could claim that they had insufficient knowledge about how the money was transferred between different Baroda accounts once there, or how the money was used for collateral or inter-company loans for the purpose of laundering money.

Nedbank’s conduct with regard to their relationship with Baroda should be scrutinised for an additional reason. Along with the other big South African banks, Nedbank closed its own Gupta-linked accounts in 2016, citing corruption and money-laundering concerns. CEO Mike Brown told the Zondo commission that as a result, the bank came under pressure from senior ANC officials, including Mosebenzi Zwane and other Cabinet Ministers.

In the circumstances, it is curious, even inexplicable, that Nedbank decided to continue acting as Baroda’s correspondent bank. Nedbank only terminated this relationship in 2018, long after widespread reporting had indicated that Baroda’s South African business was dominated by Gupta companies. In fact, the bank was still engaged in this relationship in 2017 when CEO Mike Brown was bemoaning the state of SOEs and failures of governance, and publicly offering to help new President Cyril Ramaphosa.

When asked about this after Open Secrets first wrote about it in 2018, Nedbank simply said that it had “fulfilled its regulatory and reporting obligations in assessing the risks of being the Bank of Baroda’s clearing bank and… that the Bank of Baroda, as a regulated entity in the South African banking system, was responsible for its own clients”.

As journalists and investigators, there is little else we can do to extract more information from a bank like Nedbank. This is why we have recommended that the Zondo commission must use the powers available to it to obtain this information and summon the bank’s executives to appear before it and answer critical questions about their role in facilitating criminality.

Nedbank Transnet’s interest-rate swaps

When Nedbank executives do appear before the commission, they will have more to answer to than just their relationship with Baroda.

The story of Transnet’s purchase of 1,064 locomotives is one of the most notorious instances of extracting rent from large-scale capital expenditure from an SOE. The contract cost was escalated by R16-billion with the help of consultants working at Regiments Capital, and most of this was paid to the Gupta networks as kickbacks — after being siphoned through front companies in Dubai and Hong Kong.

While much focus on Transnet has been on the kickbacks from the deal directly, the pay-offs associated with the loans obtained by Transnet are equally important. For the 1,064 locomotive deal, Regiments facilitated and arranged a R12-billion syndicated loan for Transnet from a consortium of banks.

Nedbank was one of the banks party to the loan — it contributed R3-billion. Other participants included Bank of China R3-billion; Absa R3-billion; Futuregrowth R1.5-billion; and Old Mutual Specialised Finance R1.5-billion.

Negotiations with the banks began in August 2014 and the contract was signed on 1 December 2015 with an agreement to pay floating (market-based) exchange rates. Just two days later, on 3 December, the head of Transnet’s Treasury, Phetolo Ramosebudi (also the brother of a trader at Regiments Capital), recommended that the interest rate be swapped to a fixed rate. This was a deviation from usual Transnet procedure. It was also inexplicable that a decision was made to revise the terms of a loan, with the accompanying costs, only days after signing the original 1 December 2015 agreement.

The very next day — 4 December 2015 — Regiments stepped in and executed an “interest-rate swap” for R4.5-billion of the R12-billion loan. In March 2016, Regiments conducted a second interest rate swap for the remaining R7.5-billion. An interest rate swap agreement occurs when a company with a market-based or “floating” interest rate wants to make more predictable loan repayments. To do so, it agrees to pay a higher fixed interest rate by signing a contract with a third party, which would usually be a bank or other financial services company willing to take on the risk and swap its floating rate for a fixed interest rate.

On both occasions, the bank that agreed to the interest rate swap was Nedbank. For the first swap in December 2015, instead of paying the (then) floating rate of 9.1%, Transnet was required to pay an interest rate of 11.15%. The total rate paid went up to 11.83% because Regiments’ fees were included or “folded in” to the deal. The rate for the second swap on 1 March 2016 was even higher at 12.27%.

The deal generated significant profits for Nedbank and Regiments. In the first swap, Nedbank made R28.2-million as a cut of the fees, and in the second more than R46-million. Regiments earned R162-million and R335-million from these deals respectively. By February 2019, it was estimated that the swaps had cost Transnet more than R780-million in additional interest payments to Nedbank — for these two swaps alone.

Nedbank has since defended its participation in the swaps as standard business practice, claiming that there was “nothing untoward” about the deal. However, there are a range of factors that cast serious doubt on this denial. First, a whistleblower who spoke to OCCRP indicated that Nedbank was the only bank willing to undertake the swap. This was because other banks found the sudden shift from Treasury’s internal treasury department to an unknown external consultant inexplicable.

Not only was the sudden role of Regiments a surprise, but those familiar with these financial markets described the proposed rates and fees as “excessive”, “a rip-off”, “laughable”, “unimaginable” and “an end game to extract ludicrous fees”.

Transnet’s new executives have also told the Zondo commission that the second swap in March 2015 was undertaken at rates significantly higher than the market rate because of the need to fold in Regiments’ fees and the fact that the deal was done without a competitive bidding process. Nedbank has not yet cross-examined this evidence at the commission.

Finally, Nedbank’s compliance department wrote to Phetolo Ramosebudi in mid-March 2016 to request that Transnet confirm that it was satisfied with the value and pricing of the swap even though it was priced significantly higher than the mid-market rate at the time. This request seemed to be an effort to obtain consent for transactions that had taken place months before.

Time for answers

It is imperative that Nedbank and other implicated banks are held to account for their conduct. We believe that the Zondo commission is in a unique position to begin this process. Now armed with detailed evidence, the commission should urgently use its legal powers to summon Nedbank’s executives to appear before it and respond to questions regarding their relationship with Baroda and their role in the Transnet interest-rate swaps.

Where the commission and other legal authorities find wrong-doing, the question then must become how much Nedbank should pay back, and whether any executives and employees should face individual criminal or civil action. It is only this kind of hard accountability that will ensure that the enablers of State Capture do not blithely continue to ignore their role in State Capture.

Key questions:

Open Secrets has called on the Zondo commission to summon each bank, accounting firm, consultancy and legal professional implicated in State Capture to publicly answer, at minimum, the following questions:

Were they knowing participants in the illicit and illegal activities in question? If not, did they satisfy the duties required by the law and their professions to stop becoming unwitting accomplices to criminal activity? Why did they not identify the obviously suspicious nature of many of the transactions sooner, and if they did, why did they not act to stop them sooner? Do they acknowledge that a reasonable and responsible professional in their position should have done more to identify the criminal intentions behind many of the transactions and deals that they facilitated? How much have they profited from these transactions, and how much of this illicit gain has been repaid, if any? What punitive actions have they taken against individual executives and employees identified as being complicit in illegal or unethical activity? Further, what structural reforms have they enacted at their firms to prevent similar conduct in the future? DM

Open Secrets is a non-profit organisation which exposes and builds accountability for private-sector economic crimes through investigative research, advocacy and the law. Tip-offs for Open Secrets may be submitted here.

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