This noseweek has developed into something of a theme edition: featuring the art of simulation – making things appear to be what truthfully, they are not – or, at least, not quite. From our lead story all the way through to the amusing tale of how the Melissa of Melissa’s coffee shops and food stores once “doctored” her profile in a popular women’s magazine to fit the pastoral innocence required by the corporate image.
Two recent news events that have featured in the media elsewhere, follow the same theme and are worth a mention here.
Noseweek regulars will recall our shocking disclosures some while back about how Ansbachers, a division of the FirstRand group, designed a scheme that simulated legitimate offshore transactions but was, in fact, in contravention of currency control regulations and in fraud of the revenue, exposing clients to prosecution.
Many found our story unbelievable. It now emerges from a judgment by a full bench of the Supreme Court of Appeal, delivered in December, that at about the same time the Ansbacher deals were going down, other divisions of the same bank were secretly marketing to selected wealthy clients another elaborate scheme specially designed to simulate a legitimate bank loan but which was, in fact, a criminal scheme to defraud the revenue.
In case you didn’t believe us then, now you have the Appeal Court’s word for it:
From the Appeal Court judgment in the matter of the Commissioner of the South African Revenue Service vs NWK Ltd (the old North West Co-op, and still a major marketer of maize) we learn that, over a period of five years, from 1999 to 2003, NWK claimed deductions from income tax in respect of interest paid on a R96m loan ostensibly obtained from Slab Trading Company (Pty) Ltd, a subsidiary of First National Bank (FNB).
In reality, NWK had borrowed only R50m, but the bank had contrived a scheme to fake or simulate a much larger loan amount – and therefore interest payments on it – in order to be able to claim bigger tax deductions.
NWK’s finance director, Mr E Barnard, testified how, in January of 1998, two representatives of FNB, a Mr Louw and Mr McGrath, visited him and offered a “structured finance” loan facility to NWK. Shortly afterwards Louw and Mr J van Emmenes, also from FNB, wrote a memo to the general manager, group credit, FNB, on the proposal to offer a “structured finance facility” of R50m to NWK.
Presumably with the GM’s consent, the proposal was made formally two weeks later in a letter to NWK. It was said to be confidential and “proprietary” to FNB, and NWK was required to sign a confidentiality undertaking to preserve FNB’s “trade secrets and highly confidential and sensitive information”. [Indeed!] A diagram set out the complex suite of transactions that would constitute the “finance facility”.
(The whole structure is described, step by step, in the appeal judgment, and concludes with the judge’s observation: “The reader might well say ‘What a charade!’”)
The court agreed with the commissioner’s contention that the additional loan was a “mere paper exercise or simulation”.
For the use of its secret, exclusive scheme in defrauding the Receiver of Revenue of R15.8 million in tax, FirstRand charged NWK a special up-front fee of R697,518, which, had the scheme succeeded, would, we suppose, have been a bargain.
But, in the end, NWK ended up paying FNB’s fee plus double the tax: a nasty R32m – plus interest (which could amount to several more millions).
The taxman had originally wanted a 200% penalty, but NWK successfully argued in mitigation that FNB had approached NWK with the proposal, which was described as confidential and proprietary to FNB. and that NWK had relied on the expertise of the officials of FNB.
Noseweek readers might like to note that Henri Vorster, the lawyer who argued in favour of Ansbacher’s fraudulent offshore “structures”, was back in court arguing in defence of the scheme sold to NWK (and various other clients who have yet to be identified).
Our second judgment, which sounds deceptively mundane but deserves a great deal of attention, comes from the Southwark Crown Court in England. There, also in December, UK armaments company BAE Systems appeared for sentencing after pleading guilty to a charge of failure to keep accurate accounting records as required by the Companies Act. The sentence handed down by Justice Bean – the company was fined £500,000 and ordered to contribute £225,000 towards the prosecution costs – gives no indication of the serious issues involved. It speaks, rather, of the power of the defence industry worldwide – and of political expediency.
In short, if you want to know what happened to the British investigation of bribes undoubtedly paid by BAE to secure its share of the South African arms deal, read on.
The sentence handed down by Justice Bean in fact brought an end to a long-running corruption investigation by the UK’s Serious Fraud Office (SFO) into all BAE’s corrupt activities overseas.
The basis of the negotiated plea was that BAE would make an ex gratia payment to Tanzania of £30m, less any financial penalty imposed by the judge. In return, the SFO would terminate all ongoing investigations into BAE; there would be no further investigation or prosecution of any member of the BAE Systems Group for conduct before February 5, 2010; there would be no civil proceedings against any member of the BAE Systems Group in relation to matters investigated by the SFO; and no member of the BAE Systems Group would be named in any prosecution that the SFO might bring against another party.
[Extraordinary! Many, including concerned South African citizens, would argue that BAE got by far the better half of the bargain. No more investigation of the billions paid by BAE to secure its share of the 1999 South African arms deal – and no doubt many others since – all for a small payoff to Tanzania?]
Some background: in February 2010 BAE reached a global settlement with the US and UK authorities in respect of long-running and high-profile corruption investigations. In neither instance did the company plead guilty to corruption. In March, BAE concluded its plea agreement with the US Department of Justice for $400 million. In the UK, it was announced that BAE would plead guilty to a Companies Act offence, and that it had agreed a settlement of around £30m with the SFO. Two organisations, Corner House and the Campaign Against Arms Trade, sought judicial review of the charging decision on the basis that it failed to reflect the gravity and extent of BAE’s alleged bribery and corruption, and did not provide the court with adequate sentencing powers. However, the Administrative Court refused the application.
The long delay in bringing the case to court for sentence may have been prompted by two significant cases heard in the interim: Innospec and Dougall. The adverse comments made in those cases by sentencing judges at Southwark Crown Court may have prompted the SFO to consider its position carefully before committing the BAE matter to a court hearing.
In March 2010, Lord Justice Thomas sentenced chemicals company Innospec for corruption offences. He commented on the SFO’s approach to criminal plea negotiations, and questioned the use of the SFO’s civil powers for corruption cases and the legality of global settlements. The deal had restricted the judge to imposing a fine of $12m, which he felt was inadequate.
In April 2010 Robert Dougall came before the court expecting to be given a suspended sentence. He had cooperated extensively with the SFO and had entered into a plea agreement. However, Judge Bean did not feel that he was bound by the defendant’s expectations and sentenced him to 12 months’ immediate imprisonment. The sentence was subsequently overturned on appeal, but not without the Court of Appeal confirming that sentencing cannot be negotiated by the parties, but remains within the exclusive remit of the courts.
The BAE hearing in December began with the judge asking why there was no corruption charge when the obvious inference was that bribes had been paid by BAE’s agent in Tanzania. After hearing submissions, the judge had to accept that the prosecution had no evidence that BAE took part in a conspiracy to corrupt decision makers in Tanzania or that the agent had paid bribes.
The payments in question, which amounted to £12.4m, were described in the accounts as being “provision of technical services”, although it was submitted that a more accurate reference would have been “public relations and marketing services”. The judge commented that it seemed “naïve in the extreme” to believe that the agent was nothing more than a well-paid lobbyist. In reality, BAE was paying an agent in Tanzania (through a Tanzanian company and an offshore shell company), and was asking no questions about his use of its money. [A well-established technique for paying deniable bribes – see nose120 for how Siemens did it.] It was accepted in the basis of plea that “there was a high probability that part of the £12.4m would be used in the negotiation process to favour” BAE. The result was that Tanzania paid an inflated price for radar equipment, with the agent’s fees representing 30% of the contract price.
The judge sentenced BAE on the basis that the services had been wrongly described in the accounts in order to conceal the fact that the agent was receiving the payments to use as he wished in pursuit of the radar contract. He criticised the settlement agreement and said he was “surprised to find a prosecutor granting blanket indemnity for all offences committed in the past, whether disclosed or otherwise” – something the US Department of Justice had not done in its $400m settlement with BAE earlier in 2010. He said he was under “moral pressure” not to impose a greater fine, as this would reduce the amount to be paid to the people of Tanzania.
Anti-corruption campaigners have had a particular interest in the case and have regularly expressed unease about the SFO’s ability to bring BAE to justice.
UK lawyers have noted that the BAE sentence throws the future of plea negotiations into greater uncertainty, raising questions such as: What determines whether companies are charged with corruption offences? When is a Companies Act accounting offence an appropriate charge? Can cooperative defendants expect to go to prison? Is it merely a matter of time before a judge refuses to accept the terms or settlement figure in a plea agreement?
This account of the case is an abbreviated version of a report by Jonathan Pickworth and Neil Gerrard at DLA Piper UK LLP, which first appeared – and may be found – at www.InternationalLawOffice.com
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