On 19 October 2021 the FCA confirmed in a Final Notice that it was fining Credit Suisse £147,190,200 over serious failings in its financial crime controls in the wake of the "tuna bonds" loan scandal. The FCA has also obtained an "an irrevocable and unconditional undertaking" from the bank to forgive $200 million of debt owed to it by the Republic of Mozambique. This forms part of the near £350 million fine levied against the bank by global regulators.
The FCA identified three transactions related to two infrastructure projects in the Mozambique that exposed the bank's weaknesses. One related to a coastal surveillance project and the other related to the creation of a tuna fishing industry within Mozambican waters. These projects were set up after the country discovered offshore natural gas.
Credit Suisse arranged, facilitated and provided funds for two loans to finance the projects amounting to over $1.3 billion. The loans were taken out by state-backed companies to buy equipment from Privinvest, a Gulf shipbuilder, without the required approval of the Mozambique Parliament. Critically, state guarantees were issued also without the approval of the country's Parliament. The loans were either syndicated to sub-participant banks, or packaged up and sold down as Loan Participation Notes which were exchanged by Mozambique for Eurobonds.
An audit in 2017 revealed $500 million of the loans could not be accounted for. Additionally, a Mozambique contractor was discovered to have secretly arranged kickbacks amounting to approximately $137 million, $50 million of which went to members of Credit Suisse's deal team. After the scandal was uncovered, donors such as the World Bank and IMF cut aid to the country, resulting in the collapse of its economy.
The FCA fined the bank for breaching the following Principles:
- Principle 2 (by conducting its business without skill, care and diligence);
- Principle 3 (by failing to take reasonable steps to manage and control its affairs); and
- SYSC 6.1.1R (by failing to maintain adequate policies and procedures to counter the risk it would be used to further financial crime).
The FCA highlighted numerous "extremely serious" failings by Credit Suisse which "continued over an extended period and involved senior individuals and control functions". These failings included "an insufficient challenge, scrutiny, and investigation in the face of various risk factors and warning signs in the transactions".
Examples of the risk factors and warning signs are listed below.
- Mozambique was a jurisdiction where the risk of corruption of government officials was high.
- The projects were not subject to public scrutiny and formal procurement laws.
- Credit Suisse understood that the Mozambican government did not provide a written opinion on the sovereign guarantee underpinning the loan from its Attorney-General.
- Allegations of ongoing corrupt practices in respect of a senior individual at the shipbuilding contractor were identified in an external due diligence report received by Credit Suisse before money was lent. Anonymous sources described him as “a master of the kickbacks”.
- A Credit Suisse senior manager expressed their serious reservations over the conduct risks posed by the combination of the senior individual at the contractor and Mozambique, but their views were not conveyed to Credit Suisse’s control functions at the time.
The fact that the FCA had previously told Credit Suisse about its concerns in relation to the issue in supervisory meetings and email correspondence and the bank's previous disciplinary history were found to be aggravating factors. However Mark Steward, Executive Director of Enforcement and Market Oversight, noted In the FCA's press release, that the fine would have been higher if Credit Suisse had not agreed to provide the debt write-off.
Comment
The FCA has been very active in taking enforcement action against firms for failure to implement adequate anti-money laundering controls. This case acts as a reminder that firms' obligations extend beyond anti-money laundering. Commercial lending is often viewed as lower risk for financial crime because the monies involved originate from the lender and accordingly there is no issue around source of funds. However, where lending takes place in circumstances which involve a high risk of corruption, firms must undertake appropriate due diligence.
The case is also notable for the innovative approach to penalty. As part of the agreed deal, Credit Suisse has agreed to a debt write-off of the first $200m of any sums claimed by Credit Suisse from Mozambique in ongoing civil proceedings and has been given a dollar for dollar credit for this in calculation of penalty. This does have the advantage of benefiting an impoverished state, however, it has to be said that this seems generous on the part of the FCA. Even if Credit Suisse obtained judgment against Mozambique, it is far from clear whether Credit Suisse would ever be in a position to enforce any or all of the judgment debt. Debt in highly indebted developing countries generally trades at a significant discount.