Mzi Khumalo faces penalties that could reach R130-million for stashing offshore the benefits of a botched empowerment deal, which saw him acquire, and quickly sell, a large stake in Harmony Gold three years ago.
In an apparent violation of exchange control regulations that has attracted no visible attention from regulatory authorities until now, Khumalo, helped by Deutsche Bank and a complex asset swap, managed in 2002 to use the proceeds of the deal to gain access to more than R700-million in foreign currency, effectively taking his profits offshore.
If the Reserve Banks bases its calculations on that amount alone, the likely penalty is in the region of R70-million.
That capped an extraordinary saga in which, according to a series of forensically detailed accounts on the financial news website Moneyweb, he effectively “hijacked” plans to sell 6,8% of Harmony to several relatively broad-based empowerment groups through a company called Simane.
According to Moneyweb, in late 2001 Khumalo quietly took control of Simane and bought out its original shareholders, mostly for derisory amounts. It seems he was able to do this because the other shareholders were short of cash from the outset and he was able to use his own resources to gain massive leverage.
As the Harmony share price shot up on the back of a weaker rand, he sold many of the shares, or placed them in complex loan structures — despite being obliged by the terms of the Simane deal to hold on to them.
He then borrowed money from Deutsche, in a deal backed by a complex currency hedge, to buy the shares back briefly, before reselling them, moving the proceeds overseas at the same time.
Khumalo’s true profits have never been disclosed, but at times the shares he owned were worth R2-billion. At least R600-million is thought to have been moved overseas.
According to Moneyweb and informed sources, the transaction was made possible by the alleged connivance of two Industrial Development Corporation officials, both of whom received substantial rewards. Muvhango Netshitangane was given a R6-million “loan” by Khumalo, and resigned before a disciplinary inquiry could be held, while Andile Reve left the corporation to become CEO of the Mettalon Group. Investigations by the Scorpions into how they helped their patron appear to have come to naught.
This was a source of intense frustration for the late Brett Kebble, who had fallen out with Khumalo over an earlier deal. Kebble felt he was being unfairly targeted by then-prosecutions chief Bulelani Ngcuka, while Khumalo, who describes himself and Ngcuka as “close family friends” went unscathed.
But Khumalo now needs cash at home, and seems to be tripping over his own buccaneering legacy as he tries to lay hands on it.
In 2002, through his offshore companies, he bought the assets that now form the core of Metallon Gold: five Zimbabwean mines bought from Lonmin for the bargain price of $15,5-million (then about R150–million), and the Agnes mine in Mpumalanga, bought from United Kingdom-based Cluff for R30-million. He also bought a stake in Cluff itself.
Rebuffed last year by investors on the Toronto Stock Exchange, where he initially planned to list the company, Khumalo now wants to float Metallon Gold in Johannesburg. Some of the proceeds, he has suggested, could help to alleviate a cash crunch that has halted construction on his 150-room, R300-million Cradle Hotel at Zimbali, on the KwaZulu-Natal North Coast.
But to meet local listing requirements, he needs to bring his companies’ complex offshore holding structure in line with South African regulations, and to repatriate assets. He has complained in press reports this week that “red tape” at the Reserve Bank is holding up the listing, saying he may take his company public in London instead.
He told Business Report the Reserve Bank had valued the assets in question at $200-million (about R1,3-billion), and wanted to levy a 10% penalty — about R130-million — on that amount.
He may have hoped to use the threat of listing offshore to put pressure on the bank to cut a more favourable deal, but he seems, in the process, to have made his first public admission of breaking forex rules.
The “red tape” is Reserve Bank circular D405, which allows individuals and companies that have used improper foreign loans and “loop structures” to move funds offshore, to get their affairs in order. But they have to pay a price: assets that remain offshore when these structures are unwound are subject to a 10% levy, while those brought back into the country attract a 5% charge.
This offer — which the bank made available in parallel to the Treasury’s forex amnesty for a limited time — was designed to help bring the ocean of grey money shifted overseas by South Africans back into the regulatory net.
Khumalo’s deal with Deutsche was a particularly complex example of the practices employed to get around forex laws, implemented at a time of deep uncertainty about the future of the currency, when Deutsche was implementing similar structures for Sasol and Nampak. These were at the centre of the Myburgh inquiry into the collapse of the rand. They were also the subject of a settlement between Deutsche and the Reserve Bank, which saw the former move to reverse the negative effect of those deals on South Africa’s forex reserves.
Deutsche spokesperson Colin Brown would not comment on the structure created for Khumalo, which sources say closely resembles those structured for the big multinationals.
The Sasol and Nampak deals, he insisted, had not been illegal. “It was the spirit of it that was questioned,” he said. Asked whether Deutsche still offered similar products locally, he refused to comment. But he said the combination of asset swaps and currency hedges involved was “a pretty vanilla product in any developed economy”.
“I’m quite sure people won’t do anything that would attract suspicion,” he added.
Two former Deutsche employees now work for Metallon. Greg Hunter, a former Deutsche gold analyst, is CEO at Metallon Gold, and Richard von Seidel, who helped create the complex hedge that backed the forex deal, works at the group’s Johannesburg head office.
Metallon spokesperson Nonkqubela Maliza denied Khumalo that had broken forex rules. Told that the Reserve Bank must think otherwise if it wants 10% of his offshore assets, she said: “no that is for repatriating assets, not taking them out”.
However, the levy is only charged on the repatriation of assets taken out of the country illegally in the first place.
Metallon declined to answer detailed questions ahead of the Mail & Guardian’s deadline, saying it would prefer to do so in an interview and no one was available at short notice. Attempts to contact Khumalo through Metallon were unsuccessful.