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Debt and corruption in Tanzania allegations

Mar 20 '16 | By La Afrique Media | Views: 48 | Comments: 0

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 allegations

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.”

 

Read more:  African Research Institution

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