Former Mozambique Finance Minister Manuel Chang
By TZ Business News Staff and Agencies.
NAMES of senior members of the Mozambique ruling party, FRELIMO, appear in a court document in the United States of America, where prosecutors want at least one of the big name politicians from the African nation to face trial for defrauding American investors.
Manuel Chang , Mozambique’s former Minister Finance, was arrested at O. R. Tambo International Airport in Johannesburg Dec. 29 in South Africa as he prepared to travel to Dubai. He was nabbed on an American arrest warrant through Interpol.
Chang is to be extradited to the Unites States. The former finance minister is allegedly the main character in a $2 billion fraudulent loan to two state-owned companies in Mozambique and $200 million bribes to Government officials which have aggrieved American investors.
The fraudulent loan and bribes were implemented through the bank Credit Suisse (CS), according to news distributed by Afritax. Some former CS employees have also been arrested.
The Voice of America quotes Mozambican commentator Fernando Lima as noting that the public in Mozambique has largely applauded the arrests, while the ruling Frelimo party has been silent.
“There is a sentiment of huge enthusiasm and joy, which causes a lot of irritation on the other side, meaning people related to the Frelimo party,” he told VOA “…It caused this huge, huge embarrassment for the current government. And up to now, which is also very, very surprising, no Mozambican authorities have said anything related to the arrest of Mr. Chang. Neither the government, neither Frelimo party, neither the attorney general’s office, or our parliament.”
It sounds like a Hollywood caper: A group of investors and officials convince European banks to loan a total of $2 billion to a resource-rich African nation trying to rebuild after a bruising civil war.
The money promptly disappears, and then this caper turns tragic. The government doesn’t learn of the loans until three years after they happen. It defaults on the loans, and that triggers an economic crisis: the currency tumbles, prices rise, hospitals run out of basic supplies and key roads go unrepaired. Thousands of people contract cholera – an easily preventable and treatable illness that is often caused by a breakdown of health services.
But this isn’t Hollywood. This is allegedly Mozambique, according to an indictment that has resulted in the arrests of at least four figures in recent days, including a former finance minister. The men are now awaiting extradition to the U.S. for their role in defrauding U.S. investors when seeking the loans, VOA has reported.
Mozambique, among the world’s poorest nations, borrowed about $2 billion from 2013 to 2014 to buy tuna-fishing boats and a coastline protection system, but only disclosed the bulk of the debt to the International Monetary Fund in 2016, prompting the lender to halt funding. Chang, who was arrested Dec. 29 in South Africa, presided over the deal at the time.
The website Development Discourse says Manuel Chang has received an indictment from the U.S. Department of Justice detailing charges linked to three loans to Mozambican state companies: “The allegations relate to those three loans,” the website quotes lawyer Rudi Krause as saying by phone , referring to debts taken on by the parastatals Ematum, ProIndicus and Mozambique Asset Management. The US Department of Justice may in the meantime use the charges to get Chang to provide more information for the investigation, according to Darias Jonker, an analyst at Eurasia Group.
“The U.S. will probably use these initial charges as leverage over Chang, thereby coercing him to cooperate with international investigations,” he said in a note Dec. 31. “This process is likely to answer key questions that were never adequately addressed by the independent audit of the scandal.”
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 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.
The US says the eight charged people “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.”
The loans were organized by CS and the Russian bank VTB and sold to investors, including in the United States, and the 8 charged people “conspired to defraud investors and potential investors” by misrepresenting the use of the money and Mozambique’s ability to pay, and through the paying of bribes and kickbacks.
Charges can be brought in the US because US investors were defrauded, because US investors were to pay through CS New York branch, and because many of the bribe payments were made through corresponding banks in New York. For example, in 2013 and 2014 Pearse received 14 kickback payments which were simply transferred from one UAE bank to another, but each payment was denominated and dollars and routed through the UAE banks’ correspondent in New York.
Banks accused of securities fraud on Ematum exchange
“To hide from the public and the IMF the near bankruptcy of the project companies”, the indictment says, Boustani, Pearse and Subeva proposed that the original Ematum bonds be exchanged for new bonds issued directly by the government. Government accepted the proposal in 2015 and hired CS and VTB to conduct the exchange, and chose as advisor Palomar, which was owned by Privinvest and Pearse and then employing Pearse and Subeva, who had left CS.
In particular, when the original Ematum bonds were exchanged for government bonds in 2016, the exchange documents prepared by CS, VTB, Pearse and Subeva failed to disclose the existence of the still secret Proindicus and MAM loans, and thus contained “false and misleading information”.
At a meeting in New York on 15 March 2016 to deal with exchanging the Ematum bonds one of the redacted Mozambicans “provided false and misleading information to investors regarding Mozambique’s economic prospects, debt level, and its ability and intention to meet its Ematum debt obligations”.
The exchange of bonds took place on 6 April 2016, and the indictment says, this was based on “false and misleading information”, and the accused are charged with securities fraud.
Chang, IMF and guarantees
Chang is specifically cited on two key issues. On 22 December 2012 he wrote to “Privinvest co-conspirator 2” a letter forwarded to CS “employee 1” in which he explained that “the financing of this project [Proindicus] is still constrained by the IMF imposed limitations on the Government for Mozambique to accept commercial credit for commercial projects.
Therefore, we have devised an alternative solution whereby an SPV [Special Purpose Vehicle] … will be formed.”
On 26 December 2012 Boustani sent an e-mail saying it was “imperative” that Chang sign the Proindicus loan guarantee. He did so on 28 February 2013. and in late 2013 he was paid at least $5 million from a bank account in the UAE, through the United States, to a bank account in Spain.
Avoiding CS controls
The three CS former senior employees are charged with conspiring to circumvent CS “internal controls to enrich themselves and win the Proindicus business for [CS], including through the payment of bribes to Mozambican officials … with the intent, at least in part, to benefit [CS].”
CS wanted competitive bids for the Ematum contract, but Boustani said this could not be done because it has been arranged due to “high level connections” between Privinvest and the government. Concerns were raised by the CS compliance department that one of the Privinvest people they were dealing with was already on file at CS as “an undesirable client” and a “master of kickbacks”. The indictment notes that his involvement continued and the CS compliance department “failed to pursue its inquiry further.”
The indictment says CS “imposed conditions that Mozambique would have to meet to receive a loan. Some of those conditions, however, carried a risk of exposing the existence of the Proinidcus projects to the Mozambican public and members of Mozambique’s government beyond the circle of government officials who are part of the fraudulent scheme.” So the three accused simply removed the conditions from the loan.
Two conditions removed were to require approval of the Attorney General (Boustani said “they will never accept to inform the attorney general”) and to inform the IMF about the loan. CS apparently never checked.
Pearse and Subeva, then still employed by CS, used their personal e-mail to set up the Ematum project which Singh submitted without their names. Fake competitive bids were created for the project. Singh then led the due diligence process in Mozambique, while Pearse and Sueva provided answers to government officials for due diligence meetings. Pearse then made $4.5 million in payments to Singh.
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.
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 money 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.
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 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, according to Mozambique’s 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.” Click here for The full FMO statement: bit.ly/FMO-Moz-CS; The full US indictment is posted here: bit.ly/ChangIndict