/ 16 November 2018

Banks called out over Gupta heists

Ajay and Atul Gupta used banks to launder their money
Ajay and Atul Gupta used banks to launder their money, but the banks’ role is questionable. (Muntu Vilakazi/ City Press/Gallo Images)

The widespread looting and corruption by the Gupta family and its associates were enabled not only by political individuals but also by banks and other financial sector institutions, which aided the illicit activities of the family’s network of businesses.

This is according to The Bankers, the first volume of the Corporations and Economic Crimes report by the nonprofit Open Secrets.

Open Secrets focuses on the roles of the Indian state-owned Bank of Baroda and Nedbank, whose names have come up in many suspicious transactions that benefited the family.

The Bankers seeks to dispel the myth that criminality in the private sector is not widespread and the effect is not as serious as corruption in the public sector. More often than not, the two sectors collude.

“State capture is deeply woven into the fabric of the country’s history and it is not surprising that its latest manifestation has again revealed systematic attempts by private actors to repurpose public institutions for their own benefit,” reads the Open Secrets report.

“Just as private banks were essential to the continuation of apartheid, there is increasing evidence that contemporary state capture in South Africa and the related looting of state-owned enterprises by Gupta-linked companies could not have occurred without the help of banks.”

The imputation is that the Guptas would not have been able to launder money without what appears to be “banks helping them or turning a blind eye and ignoring their obligations to report suspicious transactions”.

For instance, the Bank of Baroda, which was the last bank to hold accounts linked to Gupta businesses, seems to have been critical in the powerful family’s money- laundering schemes.

The Guptas moved billions of rands between their businesses and companies owned by their associates as intercompany loans, often without any loan documentation or any evidence of business purpose, a concealing money trail known as “round tripping”. Some of these irregular transfers were flagged by the Baroda staff, who filled in suspicious activity reports as required by law, but senior managers allegedly stopped these reports and prevented them from reaching regulators, the organisation says.Open Secrets cites investigative journalism reports by the Organised Crime and Corruption Reporting Project, which showed that, between 2007 and 2017, about R4.5-billion was moved between more than 20 Gupta-linked front companies, which held accounts at Baroda.

Baroda was also party to the controversial sale of the Optimum coal mine to Tegeta, which was part-owned by the Gupta family and then-president Jacob Zuma’s son, Duduzane Zuma. The transaction was facilitated by a controversial prepayment by Eskom.

“Tegeta’s accounts at Baroda received large deposits totalling nearly R2.5-billion in 2016 from other Gupta-linked accounts. This included nearly R1-billion in three transactions from a firm run by Duduzane Zuma,” says Open Secrets, adding that attempts by the Bank of Baroda staff to flag the suspect transactions were again foiled by management.

“Much of the money coming in originated at Eskom, which was paying Tegeta exorbitant amounts for coal.”

The nonprofit also criticises Nedbank, which acted as Baroda’s local sponsor, which allowed it to operate in South Africa.

Open Secrets asks why Nedbank, which closed down its own Gupta-linked accounts for fear of reputational damage in 2016, continued its arrangement with Baroda until earlier this year “in the face of numerous suspicious activities linked to Gupta entities”. But that’s not where it ends. When other banks refused to be a financial partner to facilitate the purchase of Chinese locomotives by Transnet through Regiments, Nedbank agreed to being a counterparty to do an interest rate swap on Regiments loan from the floating rates to higher fixed rates. An interest rate swap is a contractual agreement between two parties to exchange, over an agreed period, two streams of interest payments.

The other banks had raised concerns because Transnet had outsourced its fund-raising and interest-rate management to Regiments instead of using its internal finance team.

Open Secrets says the deal not only resulted in huge profits for Regiments, because of the high interest rates it was charging, but also that Nedbank had made more than R74.2-million from these transactions.

“It [Nedbank] is wont to paint a picture of itself as a victim but the truth is more complicated.”

Open Secrets has called for reforms to the structures that hold private corporations accountable but often limit their investigations and cannot take action against those found wanting without relying on the National Prosecuting Authority.

The NGO says, with greater powers, changes would also have to be made to guarantee the independence of the regulators.

Nedbank stands by its actions

Nedbank says it fulfilled its regulatory and reporting obligations in assessing the risks of being the Bank of Baroda’s clearing bank and in acting as a counterparty to the interest rate swap transaction involving Transnet and Regiments.

Nedbank says that the Bank of Baroda, as a regulated entity in the South African banking system, was responsible for its own clients.

Neil McCarthy, head of corporate investment banking risk, said it would not have been appropriate to cut ties with Baroda based on their view of the reputational risk of directly banking Gupta entities.

Gerda Ferreira, head of forensics, said Nedbank had “erred on the side of caution, used our know-ledge, in general, to identify transactions and still reported them”.

Referring to Transnet, Brian Kennedy, managing executive of the corporate investment banking division, said there was nothing untoward about it doing a swap with a corporate or state-owned entity or for them to use advisers.

“You need to have credit appetite and credit limits that go up to 15 years and maybe not every bank would have had the credit appetite to do a 15-year swap with Transnet because if there are any issues that Transnet can’t pay then you are left with counterparty risk.”

In November 2017, there was a review of the transactions, which benchmarked them against other swaps with other entities and found that their pricing was appropriate. “In addition, all trades were approved by the Transnet CFO.”

Tebogo Tshwane is an Adamela Trust business reporter at the M&G