Russia’s VTB Capital and Credit Suisse have agreed to pay fines to the United States and British authorities for their role in a business fraud, which has been known as the “hidden debts” scandal since 2013 in Maputo, Mozambique.
According to reports, after the final ruling on the case the US Securities and Exchange Commission (SEC) announced that Credit Suisse has agreed to pay almost $475 million to the United States and British authorities “for fraudulently misleading investors and violating the Foreign Corrupt Practices Act (FCPA). Russia’s VTB Capital, currently under sanctions, will pay a $4 million penalty.
According to reports on the “hidden debts” scandal, many United States investors had lost money in what was described as a $2 billion loan scam involving two banks, the Credit Suisse and the Russia’s VTB bank. The secrecy and corruption surrounding the loans dealt devastating blows to Mozambique’s credibility and reputation. It was the Wall Street Journal first revealed the hidden debt in April 2016.
The fraud and corruption involved millions of dollars in bribes to sign off on about $2.2 billion in loans from Credit Suisse and the Russian VTB bank to Mozambican government agencies to buy fishing trawlers and military patrol vessels in 2013 and 2014. It involved three security-linked Mozambican companies, Proindicus, Ematum (Mozambique Tuna Company) and MAM (Mozambique Asset Management).
The loans were only possible because of guarantees issued illegally by the government of the time under the then president Armando Guebuza. The loans and the guarantees violated the 2013 and 2014 budget laws, and the Mozambican Constitution.
“A London-based subsidiary of Russian bank VTB separately agreed to pay more than $6 million to settle SEC charges related to its role in misleading investors in a second 2016 bond offering,” the US Securities and Exchange Commission announced in a statement.
“VTB Capital consented to an SEC order finding that it violated negligence-based antifraud provisions of the federal securities laws. The VTB agreed to pay “without admitting or denying” the charges of “misleading investors in a second 2016 bond offering,”
According to the SEC order, “the second offering as structured by VTB Capital and Credit Suisse allowed investors to exchange their notes in an earlier bond offering for new sovereign bonds issued directly by the government of Mozambique”.
“The SEC found that the offering materials distributed and marketed by Credit Suisse and VTB Capital failed to disclose the true nature of Mozambique’s debt and the high risk of default on the bonds. The offering materials further failed to disclose Credit Suisse’s discovery that significant funds from the earlier offering had been diverted away from the intended use of proceeds that was disclosed to investors. Mozambique later defaulted on the financings after the full extent of ‘secret debt’ was revealed,” the SEC press release reads.
On October 19, VTB Capital said in an official media release that it had entered into a settlement with the United States Securities and Exchange Commission (SEC) to end the SEC’s investigation into VTB’s involvement in a series of transactions with the Republic of Mozambique. VTB did not admit or deny the allegations in the SEC’s order.
In its order, the SEC expressly recognizes that VTB had no knowledge of or involvement in the corrupt kickback scheme hatched by Mozambican officials and others. The SEC also did not find that VTB engaged in intentional misconduct or fraud.
Instead, the SEC’s findings with respect to VTB center on alleged disclosure failures in a single transaction: the 2016 EMATUM Exchange offering. Specifically, the SEC has found that VTB was negligent because the offering materials contained misleading statements by Mozambique and omissions that VTB failed to prevent. These alleged disclosure failures, the SEC found, relate to (1) the full nature of Mozambique’s indebtedness, and (2) VTB’s role as a lender on two earlier transactions.
The SEC order recognizes the difficult position which VTB was put in by senior Mozambique officials during the offering process, and that VTB itself was defrauded by Mozambique officials. Neither VTB nor any of its personnel were charged with criminal conduct by the United States Department of Justice. No VTB personnel were charged by the SEC in today’s order.
VTB takes the settlement seriously and fully cooperated with the SEC investigation. The settlement announced today marks the end of the SEC’s investigation into VTB’s role in the Mozambique transactions. VTB seeks to hold itself to the highest standards and remains committed to ensuring that VTB clients have the information they need to invest in today’s markets.
VTB has for years, cooperated extensively with all government enquiries. VTB also tried for years to cooperate with the Mozambican government to find a constructive solution to the country’s debt situation. Those efforts to date have been unsuccessful. Accordingly, in 2020, VTB commenced legal proceedings in the English courts to recover the sums due to it. VTB expects to prevail.
VTB will pay a $4 million penalty and disgorge $2 million in fees.
Comment on behalf of VTB Capital:
“The settlement reached today marks the end of the SEC’s investigation into VTB’s role in the Mozambique transactions. As we have previously said, VTB took significant steps to ensure the accuracy of the Eurobond disclosure, which were met with resistance and pressure from a number of other parties engaged in the deal, as the SEC recognized.
“We’d like to emphasize that throughout the numerous international litigations and investigations related to the Mozambique loans, none of our employees have been charged with unlawful conduct.
“VTB operates in a completely open and transparent manner observing the highest levels of corporate governance and compliance in our daily operations, and we remain confident that VTB acted responsibly in this matter, notwithstanding an extensive scheme perpetrated by others. We are confident of our legal position and look forward to finding a solution in the remaining proceedings related to this situation,” according to the VTB Bank.