On 30 November 2015, a landmark judgment saw Standard Bank fined US$25.2 million and ordered to pay the government of Tanzania US$7 million in compensation for allegedly failing to prevent bribery. Nick Branson considers whether this level of reparations is appropriate, and how those implicated might be held to account for their actions.
Many Tanzanians welcomed the deferred prosecution agreement (DPA) between the UK’s Serious Fraud Office (SFO) and Standard Bank as it appeared to add weight to the crusade against corruption launched by the newly-elected president, John Magufuli. Only three days earlier, Magufuli had suspended Rished Bade, the commissioner general of the Tanzania Revenue Authority (TRA), and ordered investigations into tax evasion at Dar es Salaam port.
Others, however, dug into the statement of facts, unearthing a mountain of information on hitherto low-profile financiers and civil servants, and provoking questions over the country’s US$600 million sovereign note private placement, a debt issue managed by Standard Bank, now ICBC Standard Bank Plc. Suspicions have been raised at a time when Tanzania is thought to be planning a US$700 million Eurobond, and neighbouring Kenya grapples with persistent allegations regarding its own US$2 billion bond.
The DPA suspended an indictment against Standard Bank for its alleged failure to prevent bribery, citing section 7 of the Bribery Act 2010. The Bank was fined US$25.2 million, in addition to US$7 million in compensation, payable to the Government of Tanzania.
The case relates to a US$6 million payment made by Stanbic Bank Tanzania on 1 March 2013 to a “local agent” in Tanzania, Enterprise Growth Market Advisors (EGMA). Stanbic entered into an agreement with EGMA in August 2012. At the time, Stanbic was a sister company of Standard Bank, and worked with the latter to access the debt capital markets.
Lord Justice Leveson concluded that “although the potential for corrupt practices to affect this type of business were well known, Standard Bank, which did not have adequate measures in place to guard against such risks, relied on Stanbic to conduct appropriate due diligence in relation to EGMA; Standard Bank made no enquiry about EGMA or its role.”
According to the statement of facts agreed as part of the DPA, among other oversights, the bank “failed to identify and therefore deal adequately with the presence in this transaction of a politically exposed person”. One of EGMA’s directors was Harry Kitilya, then commissioner general of the TRA. A clear potential conflict of interest exists if a man responsible for raising revenue moonlights by offering to “facilitate” borrowing by the Tanzanian government. Kitilya retired in December 2013, five months before the bond was issued.
Although there was “no evidence that EGMA provided any services in relation to the transaction”, the company was paid US$6 million. This was raised by increasing the cost of the transaction from 1.4% (US$8.4 million) to 2.4% (US$14.4 million).
Tanzanians have been quick to question the extent of this practice. In conversation with the author, Professor Ibrahim Lipumba, former national chairman of the opposition Civic United Front (CUF), argued that “if a 1% kickback was involved in this US$600m loan, what about comparable borrowing in recent years? Over the past four fiscal years Tanzania has borrowed over US$2.5 billion.”
On 1 February 2016, Zitto Kabwe MP, a former chair of the public accounts committee (PAC) and leader of the opposition Alliance for Change and Transparency (ACT-Wazalendo), raised this issue in parliament. Kabwe called for the Controller and Auditor General (CAG) to audit bond sales amounting to 6.8 trillion Tanzanian Shillings between 2011/12 and 2015/16.
A new legal instrument
By contrast, the international media focused on the ground-breaking nature of the case and quoted the SFO’s director, David Green QC, who hailed the “landmark DPA” as “a template for future agreements.” Ben Morgan, joint head of bribery and corruption at the SFO, commended “the decision of the bank in question to participate in DPA negotiations”.
Under a DPA, a corporation is charged with a criminal offence, but criminal proceedings are suspended provided the accused company meets certain conditions. The SFO may resume prosecution within three years, should Standard Bank fail to comply with the terms of the agreement. After that period, the SFO will discontinue proceedings.
DPAs have enjoyed significant growth in the US, primarily as a punitive instrument, whereas the UK variant includes a degree of compensation. Another difference is that British DPAs must be confirmed by a judge in open court, who must deem them to be in the interests of justice with terms that are fair, reasonable and proportionate.
Given the costs involved in mounting legal proceedings against corporations based in London, DPAs may be deemed appropriate where the public interest is not best served by the SFO mounting an uncertain and lengthy prosecution. This is particularly pertinent for accusations relating to Bribery Act, where there is little case law, and where the alleged infraction did not take place on UK soil. DPAs are, however, not without risk.
Marking your own homework
The DPA in question was the result of Standard Bank reporting an incident to the UK authorities. Four members of Stanbic reported concerns when almost US$6 million in cash was withdrawn from EGMA’s account over the course of nine days in March 2013. On 18 April 2013, Standard Bank’s solicitors, Jones Day, reported a potential breach to the UK’s Serious and Organised Crime Agency (SOCA) – now the National Crime Agency – and on 24 April 2013 to the SFO. Standard Bank instructed Jones Day to investigate and disclose its findings to SFO, which it did on 21 July 2014.
The DPA rests primarily on that internal investigation, supplemented by interviews conducted by the SFO. This evidence was determined to be sufficiently robust to be presented in a criminal court. Yet, without further examination, it remains impossible to know whether what occurred was an isolated incident or routine practice in investment banking.
When a law firm, held on retainer by a bank to limit its potential exposure to legal proceedings, is also reliant on the same bank that provide documentation to support an investigation, questions will inevitably be raised over whether that investigation can be as credible as one undertaken by the SFO. This, in turn, provokes debate over whether a criminal investigation conducted by the SFO might have unearthed additional evidence of use to British or Tanzanian authorities looking to “follow the money” or prosecute individuals involved.
Questions abound about what triggered the decision by Standard Bank to self-report, with speculation as to whether it jumped or was pushed. In a video interview, Tanzania’s chief secretary, Ombeni Sefue, stated that “the Bank of Tanzania in its usual inspection responsibilities identified that something was wrong in Stanbic in Dar es Salaam. And when this was taken up to the Board of Standard Bank, they realised that something was wrong and they reported it to the Serious Fraud Office.”
On 20 January 2016, Zitto Kabwe expressed the view that Standard Bank “falsified information voluntarily given to [the] SFO in order to get a small fine.” Under the DPA, Standard Bank was required to state that it had not provided the SFO with misleading or incomplete information and that it would notify the SFO if it becomes aware of further relevant material.
Brian Cooksey, who monitors governance trends in Tanzania, thought the basic lessons from this case were being missed. According to Cooksey, if Standard Bank’s “plausible deniability” strategy ensures that senior bank officials are let off extremely lightly for their involvement in the deal, then we may have to brace ourselves for more of the same. Cooksey told ARI:
“In the BAE Systems radar scam, BAE eventually repaid the total value of the project to the Tanzanian government in a plea-bargain not dissimilar to this deferred prosecution agreement.”
At a recent meeting with the SFO, officials there confirmed that the DPA does not preclude the Tanzanian authorities from taking legal action against the individuals named in the statement of facts. Although some of these figures have died and others have left the country, those implicated can nevertheless be pursued in Tanzanian courts.
Financial crime cannot be properly investigated without international cooperation, and the SFO emphasised that it stands ready to assist should the Tanzanian authorities demand it. This request could be initiated by one of two channels: the director of public prosecutions (DPP), Biswalo Mganga, or the Prevention and Combating of Corruption Bureau (PCCB).
In the meantime, the UK’s investigating authorities could have their own leads to pursue. On 11 December 2015, Andrew Feinstein, executive director of Corruption Watch UK, and a former chair of South Africa’s parliamentary accounts committee, wrote to the Financial Conduct Authority (FCA) requesting an investigation into UK-based individuals named in the statement of facts.
The SFO may yet discover further evidence of criminality, including evidence that the proceeds of crime were invested in the UK. A previous SFO investigation into the aforementioned BAE Systems deal prompted the resignation of the then attorney general, Andrew Chenge, over allegations about the provenance of money held in the offshore tax haven of Jersey. Chenge denied any wrongdoing. Despite having also been accused of involvement in subsequent scandals, Chenge was elected as presiding chairman of Tanzania’s parliament in January 2016.
Looking to Kenya?
Prosecuting those suspected of embezzlement was a prominent theme of the October 2015 elections. On the campaign trail, presidential candidate Magufuli promised to establish special anti-corruption courts, if elected. He has reiterated this pledge since taking office, and a team of experts is reportedly working on the issue.
A recent visit by Kenya’s chief justice, Dr Willy Mutunga, suggests that Tanzania may be looking to emulate its neighbour. Mutunga recently established a new Anti-Corruption and Economic Crimes (ACEC) Division of the High Court in Nairobi, and appointed ten additional magistrates to hear such cases. Kenya has yet to make much progress in eliminating graft despite anti-corruption courts having been set up over a decade ago.
Semkae Kilonzo, the co-ordinator of Policy Forum, a network of over 70 Tanzanian non-governmental organisations, told ARI that, for Magufuli’s proposal to prove feasible, the new tribunals must be integrated with existing policy:
“Tanzania has a comprehensive National Anti-Corruption Strategy and Action Plan (NACSAP). These courts must be established under that framework, following elaborate stakeholder consultations, if they are to be successful.”
Further concerns relate to the risk of duplicating existing structures, reducing the resources available for the everyday administration of justice and potentially creating a two-tier legal system. Kilonzo maintains that “the creation of a parallel structure will only increase the burden on an already overwhelmed judiciary”.
Indeed, Magufuli’s rush to establish a new means of trying those accused of graft may risk missing the bigger picture. Tanzania’s oversight bodies are still struggling to assert their independence. For Kilonzo:
“As long as the president remains responsible for appointing the judiciary, the DPP, and members of the PCCB, those committed to combating graft will be constrained by reporting hierarchies and the threat of political interference. Changes in this domain, coupled with the effective implementation of a new whistleblower law, would do far more to address corruption than specialised anti-graft courts.”
On 26 January 2016, Valentino Mlowola, the new PCCB director general, told journalists that investigations into the Standard Bank case had reached “the final stages”. He promised that “anytime soon you will see grand corruption suspects taken to court.” Separately, Stanbic may face a fine of 3 billion Tanzanian Shillings (approximately US$1.4 million).
Grounds for caution
Regardless of the compensation paid and the prosecutions that may follow, Tanzania has been saddled with a debt of US$600 million which may not have been borrowed at a favourable rate. It remains difficult to prove what would have constituted a reasonable deal for the country; what is certain is that the decision to proceed with a private placement was made following a closed bidding process.
Although Tanzania had obtained a preliminary credit rating in February 2011, reception given to the sovereign note was described as a “disaster” for the borrower on the opening day of trading.
A Reuters report stressed Tanzania’s failure to achieve a comparable deal to Zambia or Ghana, whose Eurobonds were being traded at an interest rate of less than 4%. Tanzania could almost certainly have raised money at a rate more competitive than the 6% offered by the Standard Bank placement. Corruption Watch UK has argued that potential savings could have reached US$80 million over the life of the bond.
Regardless of the rate obtained, questions remain as to why the private placement was so poorly managed, and what could have been achieved in its stead. As Davide Scigliuzzo noted for Reuters:
“The deal, which was led by Standard Bank, perplexed the financial community from the moment news emerged about it nearly two weeks ago, especially as Tanzania has an unofficial mandate with Citigroup for a public Eurobond.”
In the absence of a competitive bidding process it is hard to believe that the private placement represented good value compared to other means of commercial borrowing available to the government. Equally, it is conceivable that plans for the Eurobond were delayed as a result of the private placement and that Tanzania may therefore have forfeited an opportunity to borrow at a more attractive rate.
In conversation with the author, Mark Bohlund, Africa and Middle East economist at Bloomberg, explained that:
“A Eurobond would have offered Tanzania cheaper sovereign borrowing, as it applies more downward pressure on interest rates through an open and competitive bidding process (and the possibility of re-sale) than a bank loan. It also creates a benchmark yield, which helps local corporations to take on loans from foreign creditors. Eurobonds help to familiarise foreign investors with local advantages and risks, which should boost FDI over time. The downside is high level of transparency and accountability required by regulators both in the country of issuance and domicile of potential investors, in particular, Regulation S and 144/A. This can be a cumbersome process and entails specialist skills that are not always widely available in frontier market economies like Tanzania.”
Neither the absence of competition nor the (lost) opportunity cost was factored in to calculations regarding the compensation due to Tanzania.
One could argue that the alleged corruption would not have been possible had the country’s financial institutions exercised greater oversight of its borrowing needs.
In December 2010, the International Monetary Fund (IMF) noted Tanzania’s desire to seek “non-concessional external financing of up to US$1.5 billion” over the coming three years, while maintaining that “weaknesses in debt management capacity must be promptly addressed.” By May 2011, this had become “a matter of urgency”.
In July 2012, the IMF proposed that Tanzania “establish a new Debt Management Office (DMO) in the Ministry of Finance to consolidate public debt management functions”. It emphasised that “existing procedures… [do] not provide strong assurances on value for money in public borrowing, an issue of particular concern given planned large investments”.
By the time of the private placement by Standard Bank, the DMO’s “organisational structure [had] been submitted, but [was] pending final approval by the Executive branch”. The IMF’s most recent report notes that the “new department still needs to be staffed and become operational”.
Might Tanzania have gone to the market in a different way or at a different time, if such structures had been in place?
Debt management remains an issue in the country. Brian Cooksey emphasised to ARI the need to consider the transparency and sustainability of external commercial borrowing, given Tanzania’s deteriorating finances. “We should be asking: was the bond money used for new projects, or paying off old debts?”
Under plans proposed by the finance minister, Dr Philip Mpango, the government could raise 1.8 trillion Tanzanian Shillings (approximately US$800 million) on international markets in 2016/17. This would include borrowing to repay the bondholders and service the debt placed by Standard Bank. The first of nine repayments is due on the third anniversary of the placement, 1 March 2016.
No doubt President Magufuli hopes to prosecute those who benefited from a questionable deal which his government will be paying off until March 2020, six months ahead of the next general elections. The SFO has provided Tanzania’s authorities with some promising leads, and US$7 million in compensation from Standard Bank will surely help; but, one is left wondering whether the DPA falls short of addressing the root of the problem.