Deep Background

Due diligence might have been a little weak; $500 million is missing

A group of global banks is being criticized for allegedly failing to do adequate due diligence into Mozambican maritime projects for which the banks helped arrange $2 billion in loans, and from which $500 million is now allegedly missing.

Those are conclusions of an independent audit prepared for the nation’s chief prosecutor, a parliamentary report, and news accounts.

IMF Managing Director Christine Lagarde said the Mozambique deals, arranged by top officials in the government between 2013 and 2015, are “clearly concealing corruption.” In 2013, the country’s leaders, expecting a natural gas bonanza, took out $2 billion in loans that were kept secret from parliament and the IMF. When gas prices crashed, the loans, to three newly created firms run by Mozambique’s SISE intelligence agency, were revealed. The crush of repayment has crippled Mozambique’s feeble economy, according to news accounts and a Mozambican government report.

Credit Suisse and the Russian state-controlled VTB Bank failed either to discern or to disclose that Mozambican officials’ early claims for the planned project were shaky, according to news articles and a parliamentary investigative panel. Parliament’s report has not been released in its entirety, but a summary by leading Mozambique expert Joseph Hanlon quoted the panel as saying government officials’ rosy financial projections were “made on the basis of unsustainable and hypothetical assumptions.” The panel concluded the relationships among the three companies, affiliated entities and the banks were too close and “were not transparent,” the summary said.

The three maritime firms never had the ability to deliver on their early financial projections, and had neither management in place nor the required port or repair facilities, according to a June 2017 report by the Kroll investigative firm for Mozambique’s prosecutor. The banks say they followed all appropriate laws and rules in the transactions. They didn’t lend the $2 billion directly, but sold bonds and pieces of the loans to investors.

“Feasibility studies used to justify the loans were ridiculous, assuming Mozambique could sell tuna for four times as much” as its neighbors, the Guardian reported. The finance minister’s promise to the banks that the nation would guarantee the loans was illegal, which “should have been obvious because only parliament can guarantee loans,” the newspaper added. “Even the most cursory study would have shown that the [finance minister’s] guarantee…was not valid, and that the feasibility studies and repayment plans were nonsense. Furthermore, by keeping the loans secret, the banks did not reveal to the bond and loan holders that the $2bn loan package pushed Mozambique’s debt to unsustainable levels, making repayment highly unlikely.”

The paper added that a normal due-diligence study would have found the loans were “highly dubious. This is like lending to a gambler who says, ‘I am broke but will surely win next time.’”

A senior intelligence official who ran the project, António Carlos Do Rosario, refused to answer many of parliament’s questions about project finances, saying it was covered by national security. Do Rosario added in an online statement that he had thrown Kroll auditors out of his office “because they wanted details of questions about state security.”

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