The travails of the Gupta family in the past week read like a truth-is-stranger-than-fiction movie script. The doors of established banks have been slammed in their faces, family members have resigned en masse from their company and board positions, and allegations of a clandestine, late-night flight out of the country have surfaced.
Despite apparent banking woes, the Gupta’s Tegeta Exploration and Resources was still able to conclude a R2,1-billion mining acquisition of the Optimum Coal mine (See Optimum deal despite bank woes)
Nevertheless, one of the biggest questions, among many other unanswered ones, remains: Why would financial institutions, including the country’s major banks, cut ties with the Guptas, and their associated businesses?
Jean Pierre Verster, an analyst at 36One Asset Management, said the banks’ decisions could boil down to the concept of a politically exposed person. This is a category of customers who pose higher risks for banks than other clients, he said.
Under the Financial Intelligence Centre Act (Fica), banks and other financial services companies have to ascertain the source of funds flowing through the accounts of their customers. This can be difficult to do in the case of politically exposed clients.
Following several reports about and allegations involving the family, the banks may have taken a view that the Gupta family is too politically exposed and too high a risk to do business with, Verster said.
Fica does not currently deal with a politically exposed person. But Murray Michell, the director of the Financial Intelligence Centre, said that as far back as 2005, the FIC issued guidance notes to banks on client identification and verification, which included dealing with politically exposed persons.
The guidance notes were extended in 2013 to help local financial institutions implement international standards for combating money laundering and terror financing. These standards are developed and monitored by the globally recognised Financial Action Task Force.
Parliament’s standing committee on finance is deliberating amendments to Fica.
The amendment Bill enters the concept of both foreign and domestic politically exposed persons into law, said the treasury’s spokesperson, Phumza Macanda, as well as the concepts of beneficial ownership, and enhanced and on-going due diligence of people in this category, which the financial institutions will be required to do.
The amendment Bill goes further in its definition of politically exposed persons than the internationally used term. Michell said the concept is generally attributed to a person who holds public office. But the amendment Bill includes people in the private sector, referred to as a prominent influential person.
“The measures in the Bill relating to persons in prominent positions are meant to enhance the due diligence responsibilities of accountable institutions,” said Michell.
Financial crime risk
But it does not mean that prominent persons are necessarily presumed to be involved in financial crime. He said institutions will still be able to do transactions with prominent persons, but will have to ensure that they understand the exact nature of their client to manage potential financial crime risk.
Requiring banks to identify beneficial ownership – in other words, determining who actually owns or effectively controls corporate entities in particular – is key to greater transparency in the financial system.
Michell said in many cases, including corruption where criminals wish to obscure the ownership or control of funds in the financial system, a corporate vehicle to do transactions with accountable institutions at an arm’s length will be used.
Macanda said that although the Act in its current form does not specifically require accountable institutions to conduct enhanced due diligence on politically exposed persons, there is “nothing preventing them” from applying additional measures in cases in which they consider a particular customer, product or service to be posing a risk to the institutions in line with their own risk assessment and appetite.
As a result of the speculation about the banks’ reasons, the managing director of the Banking Association South Africa, Cas Coovadia, released a statement stressing that each bank took their decision separately.
Banks are one of the most stringently regulated sectors in the country, and must conduct business in a manner that does not introduce risks into the economy, he said.
Fica and its impending amendments, along with anti-money laundering regulations, were part of the array of regulations banks must adhere to. “Clients of banks must also follow regulations related to these aspects, and it is incumbent on a bank to ensure its clients do abide by these regulations,” he said.
Last Friday, Gupta family members resigned all executive and nonexecutive positions held in Oakbay Investments. It is the holding company for the family’s businesses, including the listed entity, Oakbay Resources and Energy. The company has other interests, include the New Age and broadcaster ANN7.
This followed what Oakbay’s chief executive officer, Nazeem Howa, described in an interview with Bloomberg as an “unprecedented” move by all four major banks to end relations. Other services companies, namely the auditors KPMG and JSE sponsor Sasfin have also given Gupta-linked companies notice.
The family has said that this is part of an orchestrated political attack on them. But the Guptas have garnered controversy for their ability to access generous support from the state.
Oakbay Resources and Energy’s 2010 purchase of Shiva Uranium, which was financed in part by a favourable loan from the Industrial Development Corporation (IDC), is one such example.
The accrued interest on the IDC’s loan was later converted into a 3,57% stake in Oakbay Resources and Energy. Despite questions about the soundness of the investment, the IDC has maintained that the rationale behind its investment is solid.
Reasons for resignations
In light of recent developments, the IDC said it respected the reasons given for the resignation of the three directors. But it will “await their response in terms of how they are going to resolve services with banks and auditors as required by the Companies’ Act, especially for a JSE-listed company”, the IDC said.
Besides the banking services and related challenges, the business fundamentals of the company had not changed, the IDC said.
The group’s survival is at stake if it is unable to secure banking services. “If they can’t get a banker, the viability of the business will be threatened,” said Azar Jammine, the chief economist of Econometrix. He added that there is a real risk of job losses.
Oakbay Investments did not respond to the Mail & Guardian’s questions, but Howa told Bloomberg this week that without resolving the matter with the banks, jobs are at risk and “drastic measures” will have to be taken by at least one of Oakbay’s businesses, possibly this week.
But Jammine said the departure of the Gupta family as directors could address the corporate governance concerns of auditing firms.
Despite reports that the Gupta brothers, Atul and Ajay, left the country on the family’s private jet last week, Howa told Bloomberg that “they have not fled the country”.
Optimum deal done despite bank woes
The apparent battle by the Guptas to regain banking services has not stopped Oakbay Investment’s acquisition of Glencore’s Optimum Coal Mine, through its subsidiary, Tegeta Exploration and Resources.
Along with Oakbay, Tegeta is jointly held by Mabengela Investments, whose largest shareholder is Duduzani Zuma. But last week he said he would exit his investments and step dowm from all Oakbay companies.
The mine’s business rescue practitioners, Piers Marsden and Peter van den Steen said on Thursday that the R2.1-billion deal had been concluded.
“All outstanding obligations in respect of the sale of the assets of Optimum Holdings to Tegeta Exploration & Resources have been performed and the transaction will become effective on 15 April 2016,” they said in a statement.
They added that Optimum Coal Mine will operate as a going concern under the operational control of the business rescue practitioners until they are satisfied that Optimum is no longer financially distressed.
Glencore placed the mine, which supplies coal to Eskom, into business rescue after the utility slapped it with some R2-billion in penalties relating to the coal supply agreement. Eskom also refused to amend the agreement requiring Optimum to supply it with coal at R150 a tonne, contributing to Optimum’s losses.
Creditors were reportedly owed about R2.5-billion and approved the sale last Friday. Eskom has stated publicly it will not renegotiate the fine or the coal price.
Questions have emerged regarding how the deal would be financed, particularly in light of the Gupta’s recent banking woes.
There has also been speculation over how Tegeta will turn the mine into a sustainable business, given that mining giant Glencore was unable to.
But, according information from the Competition Tribunal, Oakbay’s Nazeem Howa testified that by changing mining practices and increasing coal production, with the intent of exporting some of it, Tegeta believed it could make the mine profitable.