Credit Suisse agreed to pay $547 million to resolve a bribery and fraud scheme involving investments and financing arrangements for $850 million loan for the EMATUM tuna fishing operation. The fallout has dealt the Mozambique economy a crippling blow.
Credit Suisse Group AG, a global financial institution, and its London-based European subsidiary, Credit Suisse Securities (Europe) Limited (CSSEL) on October 19 resolved a wide-ranging bribery and fraud scheme involving investments and financing arrangements for an $850 million loan for a tuna fishing project in Mozambique. To resolve the violations, Credit Suisse agreed to pay a total of $547 million in penalties, fines and disgorgement as part of comprehensive criminal and civil resolutions in the United States and the United Kingdom.
— Michael Volkov (@mikevolkov20) October 27, 2021
Credit Suisse entered into a three-year deferred prosecution agreement coupled with the filing of a criminal information charging it with conspiracy to commit wire fraud. CSSEL entered a guilty plea to a one-count information charging it with wire fraud conspiracy.
Under the settlement agreement, Credit Suisse will pay approximately $175.5 million to the United States and will pay restitution to investors based on a future proceeding. Credit Suisse also reached parallel resolutions with the SEC and the United Kingdom’s Financial Conduct Authority (FCA), and Switzerland’s Financial Market Supervisory Authority (FINMA). Credit Suisse agreed to pay $200 million to the FCA and to forgive $200 million in debt to the Mozambique government.
Credit Suisse entered a separate settlement with the SEC and agreed to pay nearly $100 million for fraudulently misleading investors and violating the FCPA’s books and records, and internal controls provisions.
Credit Suisse’s resolution follows the entry of guilty pleas by three CSSEL bankers: in July 2019, Andrew Pease pleaded guilty to conspiracy to commit wire fraud; in September 2019, Surjan Singh, pleaded guilty to conspiracy to commit money laundering; and, in May 2019, Detelina Subeva also pleaded guilty to conspiracy to commit money laundering.
Inside the Tuna Bond Scheme
The bribery and fraud scheme involved two bond offerings and a syndicated loan that raised funds on behalf of state-owned entities in Mozambique. These transactions raised over $1 billion to perpetrate a hidden debt scheme, pay kickbacks to the former Credit Suisse investment bankers and their intermediaries, and to bribe corrupt Mozambique government officials.
Between 2013 and 2017, Credit Suisse, through CSSEL defrauded investors related to Empresa Mocambicana de Atum (EMATUM), a state-owned entity created to develop a fishing project. Credit Suisse defrauded investors by making material misrepresentations and omissions involving: (1) the use of loan proceeds; (2) the payment of kickbacks to CSSEL employees and bribes to Mozambican government officials; and (3) the existence and maturity dates of debt owed by Mozambique, including another loan arranged by Credit Suisse to another Mozambican state-owned entity, ProIndicus.
Credit Suisse investment bankers diverted loan proceeds to pay themselves kickbacks totaling approximately $50 million and bribes to Mozambican government officials totaling approximately $150 million.
Red Flags Ignored
The bank also admitted that it identified and ultimately ignored significant red flags prior to and during the financing of EMATUM. Specifically, Credit Suisse learned of significant corruption and bribery concerns associated with a contractor affiliated with the project. Subsequently, in 2015, Credit Suisse learned that EMATUM was having financial difficulties and faced a significant risk of defaulting on the loan.
In the face of these risks, Credit Suisse arrange to restructure and exchange the original EMATUM security into a bond with a longer maturity date. During this process, Credit Suisse employees raised significant bribery and corruption concerns amid serious concerns as to the use of the original loan proceeds.
Credit Suisse conducted a market valuation of the EMATUM tuna fishing project and learned that there was a significant shortfall of between $265 million and $394 million between the funds raised and the market value of the EMATUM tuna fishing project assets. Credit Suisse never disclosed this information to investors during the restructuring and the exchange. Some of Credit Suisse’ fraudulent conduct was revealed in April 2016, and the price of the EMATUM securities to fall in value.
Where The Chips Fell
Applying DOJ’s Corporate Enforcement Policy, the Justice Department found: (1) Credit Suisse did not receive voluntary disclosure credit; (2) Credit Suisse received only partial credit for its cooperation with the DOJ investigation because it significantly delayed production of relevant evidence relating to recordings of Credit Suisse telephone calls; and (3) Credit Suisse agreed to enhance its compliance program and internal controls, and to provide enhanced reporting on its remediation and compliance program. Based on all of these factors, Credit Suisse earned a 15 percent discount from the bottom of the U.S. Sentencing Guidelines range.
The Credit Suisse case highlights the significant impact that global corruption and fraud can have on developing economies. Mozambique’s economy suffered serious harm from the scheme, which started to unravel when the IMF uncovered problems with the financing and accounting for the tuna fishing project. The Mozambican people have suffered real and significant harm directly as a result of this criminal scheme.
Additionally, the Credit Suisse case underscores the broad application of the FCPA – in particular, the books and records and internal controls provisions. The SEC’s enforcement action flows from the FCPA provisions, as well as its securities fraud authority.
The scheme related to three interconnected transactions involving a syndicated loan and two securities offerings, which included (1) a 2013 $622 million syndicated loan to ProIndicus, a Mozambican state-owned entity for which Credit Suisse provided $504 million in financing—and an extension of payment terms in a later, related transaction; (2) a 2013 $850 million offering of interest-bearing loan participation notes (“LPNs”) marketed and sold to the international bond market to finance debt offered to a second Mozambican state-owned entity known as Empresa Mocambicana de Atum S.A. (“EMATUM”), to which Credit Suisse also provided $500 million in financing; and (3) a 2016 bond offering by the Republic of Mozambique, which occurred after Credit Suisse discovered several irregularities and risks associated with the EMATUM offering, that allowed investors to exchange their LPNs for new sovereign bonds issued directly by the government of Mozambique. The-then Minister of Finance signed a guarantee on behalf of Mozambique for the ProIndicus and EMATUM LPN transactions. Mozambique has since disputed the validity of the guarantees.
Three Credit Suisse bankers took advantage of this situation to arrange substantial kickbacks of approximately $50 million and the payment of bribes to various Mozambican corrupt government officials totaling approximately $150 million. The Credit Suisse bankers were able to carry out this scheme as a result of Credit Suisse’s deficient internal accounting controls and deliberate ignorance of significant due diligence information raising significant red flags as to the role of several individuals and entities in the transactions.
“The Master of Kickbacks”
For example, Credit Suisse turned up scores of red flags during an enhanced due diligence relating to Privinvest, the sole contractor for the tuna fishing industry contract. Credit Suisse conducted the due diligence internally and hired a due diligence firm to review Privinvest and the board of directors of ProIndicus. The due diligence process uncovered significant bribery concerns relating to a key affiliate of Privinvest, who was “heavily involved in corrupt practices” and “viewed kickbacks as an acceptable part of his everyday business strategy.” Credit Suisse had previously designated this same individual as “an “undesirable client.” A Credit Suisse senior executive objected to the affiliate’s participation with Privinvest and the Mozambique project.
The subsequent report prepared by the due diligence firm, which was reviewed by multiple executives, including compliance, risk and other functions, described this same executive as a “master of kickbacks” and included other findings, such as: “All sources we spoke to about [Privinvest Affiliate] were confident of his past and continued involvement in offering and receiving bribes and kickbacks” and “without exception … have raised concerns about the integrity of [Privinvest Affiliate’s business practices,” and that “[he] was heavily involved in corrupt practices.” Similar observations and conclusions were contained in the due diligence report. Despite all of this information, Credit Suisse went forward with the Privinvest Affiliate’s participation.
In 2016, Credit Suisse learned that EMATUM would not be able to pay back its debt, and then offered a restructuring exchange of the original bonds for Mozambique-guaranteed sovereign debt. The offering materials prepared by Credit Suisse did not disclose to investors the true nature of Mozambique’s debt and the extent of missing funds. In a related SEC enforcement action, VTB Bank, a UK-subsidiary of the Russian bank, agreed to pay more than $6 million related to its role with Credit Suisse in arranging the exchange offer.
In April 2016, Mozambique disclosed several hidden transactions and the true nature of its guaranteed debt. Mozambique also disclosed that it had misrepresented its public and publicly-guaranteed indebtedness to the IMF. It and other international donors halted financial support to Mozambique and, in turn, the country defaulted on the bonds.
This article is republished here with permission from Michael Volkov. It originally appeared in two parts on his blog, Corruption, Crime and Compliance.