Guptas, Nedbank skillfully extract money from South African state firm

In partnership with Nedbank, one of South Africa’s largest banks, companies controlled by or connected to the wealthy and politically-connected Gupta family via its lieutenants extracted more than 1 billion rand (US$ 67.2 million) from Transnet, a state-owned company charged with constructing rail, port, and other transportation infrastructure to serve South African citizens.

Credit: www.transnet.netCredit:

The operation, which took place during late 2015 and early 2016, was one of the most intricate schemes in a long story of private influence over the running of the South African state.

Private companies employing government-connected insiders manipulated Transnet’s operations to get it to carry out complex financial operations solely to generate consulting fees for the companies.

While other South African banks called the financial schemes "tainted" and "toxic" and declined to get involved, Nedbank signed on as the Guptas’ financial partner in trades involving loans that netted the Gupta-linked firms millions of dollars per transaction.

The scheme belies Nedbank’s recent portrayal of itself as a corruption fighter. Last year, it showily supported former Finance Minister Pravin Gordhan when he went to court to thwart the Guptas’ demand that the government force banks leery of the family’s reputation as money launderers to do business with them.

Eventually, crafty asset managers apparently decided to cut even the complicit Nedbank out of a portion of the deals, leaving more fees for themselves. This phase of the scheme involved defrauding Transnet’s pension fund, on which 51,000 pensioners rely.

The Transnet fraud might have stayed hidden but for documents turned over to the Organized Crime and Corruption Reporting Project (OCCRP) exposing collusion in the scheme by senior Transnet officials.

Astoundingly, Transnet's auditor, SizweNtsalubaGobodo (SNG), also counted the company on the receiving end of the millions as its client, even as its audit of the suspect transactions failed to uncover anything unproper.


The Guptas’ Rise

While the Gupta family has grown to be fabulously wealthy and powerful, its origins were modest.

According to a Sunday Times profile, Shiv, the father of Atul, Ajay, and Rajesh, once sold wheat flour, oil, and corn meal out of humble cooperatives in Saharanpur, a dusty city some 200 kilometers from India’s capital, New Delhi.

Indian businessmen Ajay and Atul Gupta in Johannesburg, South Africa on March 4, 2011. (Gallo Images/City Press/Muntu Vilakazi)Indian businessmen Ajay and Atul Gupta in Johannesburg, South Africa on March 4, 2011. (Gallo Images/City Press/Muntu Vilakazi) Led by Atul, the family relocated to South Africa in the heady days of the mid-1990s when apartheid fell and business opened to non-whites. The Guptas set up Correct Marketing, a computer parts firm, and it did well.

By 1997, they reached a milestone -- about 97 million rand (over $20 million) in revenue. Paying tribute both to their city of origin and their newly adopted continent, they renamed their firm Sahara Computers.

Fortune smiled on the family again in 2003 when Jacob Zuma, then a deputy president, became embroiled in an infamous arms deal scandal that revealed his relationship with two prominent brothers, Schabir and Shamim (Chippy) Shaikh. He still faces more than 700 corruption charges including racketeering, corruption, and fraud.

With the Shaikhs facing legal prosecution, Zuma needed a new set of wealthy supporters, and appears to have chosen the Guptas. Within a decade, Zuma’s son Duduzane had become tightly bound with the family business empire.

The Guptas and their associates were able to win lucrative government contracts, obtain bank loans on highly favorable terms, and use their political connections to dismiss and appoint senior public officials.

South African President Jacob Zuma (GovernmentZA, CC BY-ND 2.0)South African President Jacob Zuma (GovernmentZA, CC BY-ND 2.0) The scope of the Guptas’ alliance with now-President Zuma was on full display in 2015, when a series of officials -- including former Finance Minister Nhlanhla Nene -- were fired after clashing with Zuma over deals that involved the Guptas’ business interests.

As it turns out, the Guptas were also able to use their connections to direct millions of dollars from Transnet, a major state firm, into their pockets.


The rise of Regiments and Trillian

Ironically, the Guptas’ Transnet gambit was made possible by a company that declined to sell them shares. This was Regiments, a firm that, for years, had been closely connected to the ruling African National Congress (ANC) and, allegedly, its systems of patronage.

A boutique equities and securities investment firm, Regiments is run and co-owned by Litha Nyhonyha, one of the first licensed black accountants to gain prominence after the end of apartheid. Nyhonyha soon became a key ANC business ally, helping run critical entities, such as Thebe Investment Holdings, that were designed to assist the party in funding such needs as elections and events through institutions like the Batho Batho Trust.

Draft contracts obtained by OCCRP show that Elgasolve, a company run by Gupta’s key associate Salim Essa, offered to purchase 50 percent of Regiments Capital for 200 million rand ($14 million), promising that it would earn massive profits thanks to their involvement.

According to a High Court filling, Nyhonyha declined Elgasolve’s offer. But Regiments’ two other directors, traders Magandheran (Niven) Pillay and Eric Wood, appeared to be tempted. Pillay conceded that he met with the Guptas at their home with Wood, where it was explained that, if the other went through, he would become the company’s head. Ultimately, though, he would decline the offer.

By early 2016, Wood created a number of companies under an umbrella group called Trillian along with Gupta associate Salim Essa. Between them, Wood and Essa owned 85 percent of the new firm.

Internal documents obtained by OCCRP show that Trillian informally took over some of Regiments’ contracts and then formally acquired a division of the company, including 50 employees – and, notably, its trade in securities.

According to an affidavit seen by OCCRP, the intent was to run Trillian only until 2019 -- a period that corresponds to President Zuma’s current term in office.

A document trail examined by OCCRP indicates that before Trillian was even properly formed, Wood -- known as a prominent trader -- had been using Regiments’ securities desk to earn millions in collusion with the Guptas at the expense of Transnet.


Booking deals

As one of the country’s top three borrowers, Transnet, a state-owned freight transport company, proved an easy target for loan manipulation.

In 2015, Brian Molefe, the Transnet group chief executive and a known Gupta ally, appointed a man named Phetolo Ramosebudi -- whose brother was one of the Regiments traders who moved over to Trillian -- to lead Transnet’s treasury department. Among other tasks, he was responsible for driving the company’s funding strategy.

In what would become a key element of the scheme, on Dec. 3, 2015, Ramosebudi sent a memo to Transnet’s acting chief financial officer, Garry Pita, calling for unusual changes in the company’s securities trading policy. The memo is in the possession of OCCRP.

The memo made three key recommendations:

  • First, in a new approach, Regiments would handle Transnet’s large loans and interest rate risk management, rather than Transnet handling it in-house, as had been the normal practice.
  • Second, loans arranged by Regiments would use fixed interest rates, rather than the lower, market-based floating rates that had usually been arranged by the specialized, and highly skilled, Transnet team of treasury unit.
  • Finally, the memo called for Regiments’ consulting fees for executing the loans, which proved exorbitant, to be folded into the interest rates -- essentially hiding them from scrutiny.

South African market experts OCCRP spoke with weren’t willing to go on the record to characterize this new strategy, citing repercussions within their tight-knit community. But several specialists described the approach recommended in the memo as “excessive,” “a rip-off,” “laughable,” and “unimaginable.”

One expert described it as “an end game to extract ludicrous fees.”

“These kinds of deals don’t normally happen,” he said, “because state-owned entities [like Transnet] have their own internal units specializing in this.”

On the very next day after Ramosebudi sent his memo, Regiments carried out the first of a series of transactions on Transnet’s behalf using the new policies. as the counterparty. It involved borrowing 4.5 billion rand ($314 million) to buy a set of locomotives from China. (The deal benefited the Guptas and would later become scandalous in its own right.)

Then, in a transaction arranged on behalf of Regiments, as instructed by Eric Wood, Nedbank stepped in as a counterparty to do an interest rate swap on the loan from the floating rates to higher fixed rates.

An interest rate swap is a contractual agreement between two parties to exchange, over an agreed period, two streams of interest payments. It is usually done when a company with a variable interest rate wants a more predictable loan payment and swaps its floating rate for a fixed rate with a counterparty -- usually a bank or investment firm -- that’s willing to take the risk, or vice versa. Such rate swaps are not regulated by the Johannesburg Stock Exchange (JSE).

But in these deals, Transnet ended up paying consistently higher rates than they would have had they not made the swap -- and then paid large fees to Regiments on top of that for arranging the deal.

“No invoice is created,” quotes the affidavit of a whistleblower, referring to the fees folded into the interest rates.

Because Transnet’s outsourcing of these arrangements under such terms was unprecedented, Nedbank was the only bank willing to go along. According to the same affidavit obtained by OCCRP, other banks approached with the same offer found it “strange” that an external consultant would perform transactions on financial instruments that Transnet’s internal team would have done directly in the past, describing it as “tainted and toxic.”

OCCRP obtained copies of the transactions which show the difference between the floating rate Transnet’s loans should have had and the fixed rate Regiments arranged. The fixed rate (11.15 percent) was 2 percent higher than the floating rate (9.1 percent), and the consulting fees specified in Ramosebudi’s memo added still more, yielding a final interest rate of 11.83 percent, a margin of 2.6 percent.

Thanks to the extra fees, Regiments earned 161.8 million rand ($11.29 million). Nedbank earned another 28.2 million rand ($1.96 million dollars), presumably its cut of the fees.

In early March, the operation was repeated again, earning Regiments 335 million rand ($21.9 million) and Nedbank 46.15 million rand ($3.02 million).

A few weeks later, according to internal documents obtained by OCCRP, Transnet’s Treasury unit held a meeting with Pillay and Ramosebudi. The dealers complained that they had been excluded from the process and that the costs of executing the swap were miles from the market -- the second higher than the first. At the meeting, Pillay explained that his role had been limited to making a phone call to a Nedbank trader. He said that he had done this on instruction by Wood as a favor to him.

By that month, Trillian acquired Regiments’ financial advisory division, affording Wood greater control.

Rather than continuing to use Nedbank, Wood then apparently decided to use Transnet’s pension fund -- a separate legal entity known as TSDBF -- as the counterparty. This meant, in practice, that Trillian wouldn’t have to pay a cut of their fees to a counterparty (previously Nedbank).

Fortunately for Wood and Trillian, a key ally was in place.

About a year earlier, South Africa’s Minister of Public Enterprises, Lynne Brown, who had appointed many of the Gupta family’s friends to key roles and who was associated with them via her partner -- brought Stanley Shane, himself a Gupta ally and Trillian principal, into the Transnet board. Shane would also take on the role of chairman of the TSDBF board of trustees.

This put him in a position to lobby heavily for Regiments to win a TSDBF tender for asset manager. Affidavits and other documents in OCCRP’s possession show that, though a range of highly rated asset managers applied for the role, Shane ensured that Regiments would have insider information and get the contract. At the same time, he acted on behalf of Trillian in examining Transnet deals.

"Stanley Shane ... helped establish Trillian, which he then helped get work for while being a board member of Transnet," said Mosilo Mothepu, a former CEO of Trillian Financial Advisory, the unit that acquired Regiments Advisory, where she previously worked.

Speaking to the Parliamentary Portfolio Committee on Public Enterprises on October 31, she described how uncomfortable Trillian's own directors were that Shane, Essa and Wood made decisions which directors, like herself, would be accountable for.

Over the next few months, two interest swap operations using the TSDBF fund were carried out, earning Regiments 284.6 million rand ($19.1 million) on the first swap and 148.4 million rand ($9.9 million) on the second. These speculative swaps cost Transnet’s pension fund consulting fees. There is no defensible reason for a pension fund to take part in large interest rate swaps – and, in fact, the volume of derivatives TSDBF came to hold because of its participation violated laws meant to protect the pensioners from excessive risk.

TSDBF had contracted with Regiments, not Trillian, to manage its assets – so when the fund discovered that Regiments had transferred its consulting fees to Trillian (even though Trillian had arranged the deals), it sued Trillian and others involved, demanding repayment of 230 million rand ($16.3 million)

Notably, this money had been deposited into Trillian’s account at the Bank of Baroda, which government reports show is a linchpin of the Guptas’ financial empire.

According to the Sunday Times, citing the TSDBF court filing, the same account was also used by Albatime, a shell company the Public Protector report says was part of the Guptas’ massive money laundering machine. The company is run by Kuben Moodley, then an adviser to Minister of Mineral Resources Mosebenzi Zwane.

The use of this bank account by both Albatime and Trillian underscores Trillian’s close connection to the Gupta family. From December 2015 - the date of the first interest rate swap - until April 14, 2016, shortly after the last swap, Albatime received 42 million rand (nearly $3 million) from Regiments via this account. The Public Protector report confirmed that Albatime contributed to the purchase of a coal mine for the Guptas.

Regiments’ transfers to Trillian soon became the subject of a dispute among the alleged conspirators of the fleecing of Transnet.


State Capture Attempt

Even as the interest rate swaps were playing out from December 2015 through April 2016, the Trillian principals’ influence over South Africa’s state-owned companies continued to grow.

According to whistleblower affidavits seen by OCCRP, by October 2015, Wood (then still with Regiments), had received advance knowledge of President Zuma’s plans to fire Finance Minister Nhlanhla Nene. (Meanwhile, the deputy finance minister, Mcebisi Jonas had publicly revealed that the Guptas had offered him 600 million rand (then around $ 44 million) to take over Nene’s position.)

“[Wood] emailed me a document that essentially outlined initiatives that the new finance minister was going to approve - about 12 of them- and the potential fees that Regiments - at the time, was going to earn,” said Mothepu, the former CEO of Trillian Advisory, to parliament of the day that Wood told her Nene would be fired.

“Six weeks later in December 2015, I confirmed to Eric that he was right,” he continued. “He then mentioned a colleague at Regiments, Mohammed Bobat, an advisor to the new Minister, and his role was to essentially channel all the work from state-owned companies or national treasury to [the company that would become] Trillian.”

On Dec. 9, 2015, several days after the first interest rate swap, the president announced he would fire Nene and hire Des Van Rooyen as his replacement -- with Mohammed Bobat, a Regiments principal -- as advisor. Their alleged role, according to leaked emails, would be to channel government tenders from the national treasury and various state-owned entities like Transnet to the newly-formed Trillian.

But the appointment of Van Rooyen, an ANC parliamentary backbencher, caused a financial panic. Days later, he was replaced by Pravin Gordhan, known to be a corruption fighter. But affidavits obtained by OCCRP indicate that in March 2016, when Trillian was established, Trillian’s CFO confirmed that “they” (meaning the Guptas) would soon have Gordhan replaced.

By March 2017, the following year, he was.

No Honor Among Thieves

In the meantime, the architects of the Transnet scheme began to fall out with each other. Even as Regiments was pocketing millions from Transnet, it began to squabble with Trillian over who would get the lion’s share of the money and the deals.

According to Mothepu, Regiments gave 50 cents of every rand earned from its public sector contracts to Salim Essa and Kuben Moodley -- showing that the Gupta associate and the Albatime head were both benefitting from Regiments’ success.

But by late April 2016, Transnet’s board voted to transfer its Regiments contracts to Trillian officially. As Trillian absorbed Regiments’ business under Wood’s direction, Regiments principals Pillay and Nyhonyha fired back, filing a court case that accused Wood of diverting their business opportunities.

Meanwhile, Wood is quoted in a prominent report on state capture as saying that nothing improper had happened, as Trillian had been subcontracted by Regiments to carry out the Transnet work.

This was backed by Brown, the Minister of Public Enterprises, who stated Trillian Asset Management was introduced to Transnet as a subcontractor to Regiments and as part of the latter’s supplier development obligations to Transnet.”

Nyhonyha has denied these claims, according to his High Court filing, in which he argued that Trillian had not been subcontracted by Regiments.

WhatsApp messages seen by OCCRP show that Pillay at least was well aware that, without the knowledge of Ramesbudi, Wood was engaging in interest rate swaps during this period.

During the October 31 parliamentary cross-examination of Mothepu, questions were posed, asking how Regiments was able to obtain the type of consultancy contracts that only state-owned companies like Transnet would know about and which Trillian later hijacked.

Mothepu responded that work was channeled through the business development partners, Salim Essa and Kubentheran Moodley. When asked how the staff of these state-owned entities felt when internal capacity and expertise was put aside in favor of external consultants, she said that internal staff felt resistant but such decisions were taken by the executive - men like Anoj Singh, Brian Molefe, Garry Pita and Phetolo Ramosebudi.


The Audit

As a state firm, Transnet is subject to annual audits to ensure that it is using taxpayer funds wisely and legally.

However, the firm’s long-time auditor, SizweNtsalubaGobodo (SNG), which conducted the audit for the financial year in question, failed to uncover any irregularities related to the interest rate swaps -- such as the 612 million rand in additional consultancy fees costs earned by Regiments.

Though Transnet’s 2016 annual financial statements show 511 million rand in losses on interest rate swaps, as compared to none in the previous year, SNG’s audit did not address the issue.

SNG said it was not within the normal audit scope to look at mandates between counterparties and suppliers. However, the first two swaps (with Nedbank) violated section 8.3 of Transnet’s public procurement manual, which declares that external consultants, like Regiments, may not be approached for specialist services that fall into the competency of the treasury unit.

SNG appears to have had its own conflict of interest. It is the auditor not only of Transnet, but also of Regiments, and, from April 2016 until September 2017, of Oakbay, the most prominent firm within the Guptas’ business empire.

In the summer of 2017, Stanley Shane resigned from the board of Transnet. Shortly thereafter, in July, the fixed interest rate charged to Transnet dropped by a significant margin.

Shane was too ill to answer questions posed by OCCRP.

After submitting interview questions to SNG via email, OCCRP was informed that the head of audit was also too sick to answer questions.

SNG did send a response, but immediately recalled the message several times.

In a subsequent response, SNG said that “The interest rates swaps due to their nature and the risk associated with were part of the audit scope for the 2015/ 16 audit.”

Trillian and Regiments did not respond to emailed questions.

Nedbank did not respond to questions, citing client confidentiality.

Transnet did not respond to specific questions, saying it had never dealt with a news agency of this nature before.

State-owned companies - the low hanging fruits - were Regiments and later Trillian’s main clients. "We were essentially being given stuff on a silver platter that other companies did not have," Mothepu told parliament.


This story is part of the Global Anti-Corruption Consortium, a partnership between OCCRP and Transparency International. For more information, click here.

 This article was supported by Trust Africa, a non-profit organisaton supporting investigative journalism and advocacy.