As highlighted here and here, in July 2018 Credit Suisse resolved a $77 million Foreign Corrupt Practices Act enforcement action focused on alleged improper hiring practices in China and the Asia Pacific region.

As highlighted here, in January 2019 the DOJ unsealed criminal charges against former Credit Suisse bankers Andrew Pearse, Surjan Singh, and Detelina Subeva charging them with conspiracy to violate the FCPA’s anti-bribery and internal controls provisions in connection with financing various Mozambican maritime projects.

This follow-up post wondered what the 2019 enforcement action would mean for Credit Suisse.

While the DOJ clearly made respondeat superior allegations in the matter (i.e., “Pearse, Singh and Subeva were agents acting within the scope of their employment on behalf of [Credit Suisse], with intent, at least in part, to benefit [Credit Suisse],” the DOJ’s own allegations also acknowledged that Pearse, Singh and Subeva knowingly and willfully circumvented Credit Suisse’s internal controls and took various steps to conceal their conduct from others at Credit Suisse including the compliance department. Indeed, in connection with the 2019 individual enforcement action, Credit Suisse stated: “The indictment alleges that the former employees worked to defeat the bank’s internal controls, acted out of a motive of personal profit, and sought to hide these activities from the bank.”

Pearse, Singh and Subeva all subsequently plead guilty, but interestingly not to FCPA charges, but rather conspiracy to commit wire fraud or conspiracy to commit money laundering.

Yesterday, the DOJ and SEC announced (here and here) enforcement actions against Credit Suisse based on the same core conduct alleged in the 2019 enforcement action concerning financing of various Mozambican maritime projects.

The SEC enforcement action found that Credit Suisse violated the antifraud provisions of the securities laws as well the FCPA’s books and records and internal controls provisions. To resolve the matter, Credit Suisse agreed to pay $99 million ($34 million in disgorgement and prejudgment interest and a civil penalty of $65 million).

The DOJ enforcement action (which will be highlighted in a subsequent post) was also based on the same core conduct and charged Credit Suisse and a U.K. subsidiary with conspiracy to commit money laundering. After crediting amounts paid to the United Kingdom’s Financial Conduct Authority, Credit Suisse agreed to pay $175 million to resolve the DOJ matter while also agreeing to pay $200 million to the U.K. FCA. Because the DOJ’s enforcement action against Credit Suisse was not an FCPA enforcement action, it will not be captured in FCPA statistics published on this site. (After all, if FCPA enforcement statistics are to mean anything – they should only capture actual FCPA enforcement actions).

In summary fashion, this SEC administrative order finds:

“This matter concerns an offering fraud and violations of the internal accounting controls and books and records provisions of the Foreign Corrupt Practices Act by Credit Suisse, from 2013 to 2016, in connection with three interconnected transactions involving, among others, United Kingdom-based Credit Suisse entities and Mozambican state-owned entities. The transactions include a syndicated loan and two securities offerings by Mozambican state-owned entities, the first of which Credit Suisse underwrote, structured, marketed and distributed, and the second of which Credit Suisse underwrote, structured, marketed and distributed as a joint lead manager with another international investment bank, VTB Capital plc (“VTB”). Specifically, the transactions—the latter two of which are securities offerings—include: (1) a 2013 $622 million syndicated loan to a Mozambican state-owned entity known as ProIndicus S.A. (“Proindicus”), for which Credit Suisse provided $504 million in financing—and an extension of payment terms in a later, related transaction; (2) a 2013 $850 million offering of interest-bearing loan participation notes (“LPNs”) marketed and sold to the international bond market to finance debt offered to a second Mozambican state-owned entity known as Empresa Mocambicana de Atum S.A. (“EMATUM”), to which Credit Suisse also provided $500 million in financing; and (3) a 2016 bond offering by the Republic of Mozambique, commenced after Credit Suisse discovered several irregularities and risks associated with the EMATUM offering, that allowed investors to exchange their LPNs for new sovereign bonds issued directly by the government of Mozambique (the “Exchange Offer”). The-then Minister of Finance signed a guarantee on behalf of Mozambique for the ProIndicus and EMATUM LPN transactions. Mozambique has since disputed the validity of the guarantees.

Credit Suisse, through the actions of three former bankers, Banker 1, Banker 2, and Banker 3 (collectively, the “CS Bankers”) as further described herein, knew that ProIndicus and EMATUM were newly formed state-owned entities with no prior business operations. The ProIndicus and EMATUM projects were vehicles through which the CS Bankers and intermediaries received kickbacks and corrupt Mozambique government officials obtained bribes, which were paid by the intermediaries. The CS Bankers, who hid the corruption scheme and their kickbacks from other members of management, received kickbacks totaling at least $50 million. Together with Mozambican government officials, the improper payments and kickbacks totaled at least $200 million.

The CS Bankers were able to carry out the long-running scheme as a result of Credit Suisse’s deficient internal accounting controls environment, in which the bank acted unreasonably in addressing bribery risks associated with the transactions. By the time of the EMATUM LPN offering, Credit Suisse, through the actions of the CS Bankers, hid the underlying corruption scheme and drafted offering materials on behalf of Mozambique that falsely represented to investors that the proceeds would be used exclusively to develop the country’s tuna fishing industry and generate revenues to make principal and interest payments to investors. The offering materials drafted by Credit Suisse also failed to sufficiently disclose to investors its conflict of interest—that the bank was a major creditor under the ProIndicus transaction with interests, in certain respects, adverse to noteholders. Further, Credit Suisse knew or should have known that the debt disclosures provided by Mozambique were false and misleading because they failed to disclose Mozambique’s true level of indebtedness and, relatedly, its risk of default on the notes and ability to pay back investors. These disclosure failures rendered the offering materials false and misleading.

By 2016, after Credit Suisse learned that EMATUM would not be able to meet repayment obligations under the schedule provided for in the LPNs and of other red flags surrounding the transaction, Credit Suisse and VTB structured the Exchange Offer to allow investors to exchange the LPNs they already held for new sovereign bonds issued directly by the government of Mozambique. By the time of the closing, Credit Suisse knew the full scope of Mozambique’s debt from financing extended by VTB, including a $535 million 2014 loan to a third government-owned entity known as Mozambique Asset Management (“MAM”) provided by VTB, as well as an additional $118 million to ProIndicus and $350 million to EMATUM funded by VTB. The-then Minister of Finance, again, signed a guarantee on behalf of Mozambique for the MAM transaction, though Mozambique has since disputed the validity of the guarantee.

In connection with the Exchange Offer, the offering materials prepared by Credit Suisse on behalf of Mozambique did not disclose to investors the true nature of Mozambique’s indebtedness and the magnitude of missing funds from the prior offering. Specifically, the offering materials failed to accurately and fully disclose Mozambique’s indebtedness, including over $622 million in financing that it and VTB had provided to Mozambique through the ProIndicus transaction and $535 million in financing that VTB had provided to MAM. The offering materials also failed to disclose to investors the existence of the ProIndicus and MAM transactions and the banks’ conflicts of interests relating to these transactions. While the offering documents for the EMATUM and Exchange Offer included disclosures that Credit Suisse was a party to other financing agreements, the conflict of interest—that the bank was a major creditor under the ProIndicus transaction with interests, in certain respects, adverse to noteholders—was not specifically disclosed. As a result, investors in EMATUM LPNs and the Exchange Offer were not provided with a complete and accurate picture of the true nature and magnitude of the country’s debt, the high risk of default on the LPNs and that Credit Suisse had placed its own interests as a creditor above bondholders.

In April 2016, shortly after investors approved the Exchange Offer and after news reports on “secret” debt, Mozambique disclosed the ProIndicus and MAM transactions and the true nature of its guaranteed debt. Simultaneously, it emerged that since, at least 2013, Mozambique had misrepresented its public and publicly-guaranteed indebtedness to the International Monetary Fund (“IMF”). The IMF and other international donors halted financial support to Mozambique and, in turn, the country defaulted on the bonds.

The EMATUM LPN transaction is the basis for the violations of Exchange Act Section 10(b) and Rule 10b-5 and Securities Act Section 17(a)(1). The EMATUM and Exchange Offer transactions are the bases for violations of Securities Act Sections 17(a)(2) and 17(a)(3). From 2013 to 2016, Credit Suisse engaged in violations of the books and records and internal accounting controls provisions of the Exchange Act, including violations of the Foreign Corrupt Practices Act.”

Regarding the ProIndicus Transaction, the order finds in pertinent part:

“ProIndicus was officially established to supply vessels and training to protect Mozambique’s coastline and maritime interests.”

[…]

In reality, ProIndicus was set up by Mozambican government officials acting in collusion with an agent of the Intermediary (“Intermediary Agent”) in order to carry out an extensive scheme involving improper payments to government officials and others. As part of the scheme that began in 2012, only a portion of the loan proceeds were applied towards maritime projects while the rest were diverted for kickbacks to the CS Bankers and the Intermediary Agent, and bribes to Mozambican government officials. The deal was also structured to hide the level of Mozambique’s indebtedness from the IMF. Subsequently, near the time of the closing of the ProIndicus transaction in 2013, the CS Bankers agreed to accept improper kickbacks, which, alongside the improper payments to government officials were hidden from other members of Credit Suisse management. From 2013 through 2016, the CS Bankers, Mozambican officials and others received improper payments, in total, of approximately $200 million in connection with securing the ProIndicus and EMATUM financings.

Several contemporaneous communications reflect that improper payments were intended to be paid to Mozambican government officials by the Intermediary, and the deals were structured to build into the financing the amounts that would be paid. For example, in a 2012 email from the Intermediary Agent to Banker 3 and two other Bank employees, he stated that “[a] ‘premium’ is well expected by the Mozambicans.” Around the same time, the Intermediary Agent also advised Banker 3 in a phone discussion that a high ranking Mozambican official understands that he will be paid a premium from the financing deal.

In connection with the ProIndicus transaction, Credit Suisse’s books and records did not record the fact that a substantial portion of the ProIndicus financing proceeds would be paid as improper payments to numerous senior-level government officials in Mozambique or as kickbacks to the CS Bankers. Following the closing of the ProIndicus transaction, on March 21, 2013, Credit Suisse transferred $327.9 million in loan proceeds to an Intermediary account in Abu Dhabi, and in June and August 2013, Credit Suisse made two additional transfers of loan proceeds into the same account, all through U.S. correspondent banks. In total, Credit Suisse transferred $547,463,200, including $446,950,800 that it arranged and $100,512,400 that was arranged by VTB, to the Intermediary, from which bank records of the Intermediary reflect that improper payments were made to Mozambican officials and the Intermediary Agent and others, and kickbacks to the CS Bankers.

Shortly after the first transfer to the Intermediary in March 2013, Intermediary bank records indicate transfers of over $80 million to accounts controlled by Mozambican government officials and others relating to the transaction. The transfers included a transfer of $50 million from which a relative of a high-level government official shared part of the payment with key government officials, who approved the transaction and authorized the-then Minister of Finance to sign the guarantee. Intermediary bank records reflect additional improper payments, including, for example, $13 million paid to government officials holding senior positions at ProIndicus and a $5 million payment to a senior official who reported to the-then President of Mozambique.

The CS Bankers were able to carry out the scheme as a result of deficiencies in Credit Suisse’s internal accounting controls, unreasonable reliance on the CS Bankers to structure the deal, and inadequate appreciation of bribery risks that came to the attention of the bank’s reputational risk, credit risk and compliance groups. The CS Bankers, for example, structured the financings to transfer all proceeds directly to accounts controlled by the Intermediary in Abu Dhabi rather than to the borrower in Mozambique. Credit Suisse also transferred the funds directly to the Intermediary despite being aware of allegations of corrupt practices concerning the Intermediary.

The Bank’s financial crime compliance group commissioned and received a third-party diligence report that quoted an anonymous source describing the Intermediary’s principal (“Intermediary Principal”) as a “master of kickbacks” and included other information, including:

a. “All sources we spoke to about [Intermediary Principal] were confident of his past and continued involvement in offering and receiving bribes and kickbacks” and “raised concerns about the integrity of [Intermediary Principal’s] business practices,” and that “[Intermediary Principal] was heavily involved in corrupt practices.”

b. “Another banking source close to a Lebanese commercial bank that previously dealt with [Intermediary Principal and his brother] and the [Intermediary] group of companies stated: ‘[Intermediary Principal] is a first-class deal maker and an expert in kickbacks, bribery and corruption.’”

The information provided to the compliance team in their diligence efforts also included that the Intermediary Principal’s business was being conducted “in a more classical way, more in compliance with the rules of ethics.” A source also reported that UAE authorities were not aware of information tying the Intermediary to corrupt practices, and that the Intermediary Principal had been removed from a screening service due to the age of some of the allegations against him. Credit Suisse, nonetheless, acted unreasonably in failing to properly consider the totality of bribery risks surrounding the transaction that came to its attention.

In March 2013, a Director in the Bank’s Europe, Middle East and Asia (“EMEA”) group warned that Intermediary Principal was an “undesirable client” for the bank and he and his entities had been, in the past, “obviously involved in corrupt practices.” EMEA advised against providing the financing “given that we are not comfortable with Intermediary Principal and his entities” and recommended rejecting any financing that involved the Intermediary Principal and his entities because of corruption risks. In November 2012, an email among Banker 1 and Banker 2 and an EMEA Managing Director and Director stated “[the EMEA CEO] said no to the combination of Moz[ambique] and your friend [Intermediary Principal], so we need to structure him out of the picture.”

Regarding the EMATUM LPN Offering, the order finds in pertinent part:

“The Offering Circulars for EMATUM’s issuance of LPNs were created and drafted by Credit Suisse and provided by Credit Suisse to investors. The Offering Circulars disclosed that the proceeds would be used “towards the financing of the purchase of fishing infrastructure, comprising of 27 vessels, an operation center and related training and for the general corporate purposes of the Borrower […]” and falsely disclosed that EMATUM would not “use the proceeds of any Loan, or make available to any person, for the purpose of financing or facilitating any activity that would violate Anti-Corruption Laws, or in any way which constitute a Corrupt Act.”

As with ProIndicus, EMATUM, through the acts of the CS Bankers, was used as a vehicle to divert proceeds to themselves as kickbacks and make improper payments to government officials through the Intermediary. The CS Bankers also hid the underlying corruption and kickback scheme from other members of Credit Suisse management. For example, in a July 26, 2013 email using non-Credit Suisse email accounts, the Intermediary Agent informed Banker 1 and Banker 2: “Bro for fish: [Intermediary Affiliate] contract 750 and 50 between [Intermediary Related Entity] and MoF [Minister of Finance]?” In a subsequent July 2013 email, the Intermediary Agent advised the CS Bankers that the EMATUM financing would need to be increased from $750 million to $825 million in order to include a cushion for payments to government officials, stating: “825 please. 25 on top of the 50 to the borrower.” Further, a spreadsheet maintained by Intermediary reflects over $600 million as payable to an account controlled by Intermediary Principal, with over $100 million being paid to government officials and others involved in the approval process.

Following instructions out of Mozambique that the structuring should be designed to “prevent any defaulting situation in the repayment obligations,” the Intermediary Agent, Banker 1 and Banker 2 also discussed $51 million as part of the $850 million EMATUM financing in order to cover interest payments that ProIndicus and EMATUM were obligated to pay in March and September 2014. In an email dated July 21, 2013, the Intermediary Agent discussed with Banker 1 and Banker 2 on their personal emails, “[w]e will go for $800 million so we can keep a cushion for ProIndicus interest payment next year.” They also discussed “we should keep a cushion for ProIndicus of $17m so that we don’t need to go back to MoF [Minister of Finance] and they are on our side” and “we need to keep an interest cushion of 18 months for the bond interest payments so that everyone is comfortable the bond doesn’t default until the fleet is up and running.” ProIndicus lacked the ability to meet its interest obligations and the cushion allowed the corruption scheme to continue undetected, as a default on ProIndicus interest payments would have caused investors to question the legitimacy of EMATUM.

In two separate transfers on September 11 and October 11, 2013, Credit Suisse sent $759.8 million from LPNs the bank purchased directly to an Intermediary controlled account in Abu Dhabi, through a U.S. correspondent bank. Until mid-October, when Credit Suisse finished selling the entire note offering, the unsold portion of the securitized debt from the firm commitment offering remained on its books.

The CS Bankers were able to carry out the scheme as a result of deficiencies in the bank’s internal accounting controls, unreasonable reliance on the CS Bankers to structure the deal and inadequate response to bribery risks that came to the attention of the bank’s reputational risk, credit risk and compliance groups. Despite identified risks, Credit Suisse structured the financings to transfer all proceeds directly to accounts controlled by the Intermediary in Abu Dhabi rather than to the borrower in Mozambique.

From the Proindicus and EMATUM loan proceeds, the Intermediary made improper payments to the Intermediary Agent and Mozambican government officials and paid kickbacks to the CS Bankers. The Intermediary paid $45 million to Banker 1, who in turn paid $2 million to Banker 3 and $2.2 million to Banker 2. In addition, the Intermediary paid $3.7 million to Banker 3 directly. Mozambique officials received payments from Intermediary totaling approximately $150 million, including, but not limited to, $5 million paid to an official involved in approving the transaction, $8.8 million to a relative of a senior government official, and $11.9 million to a government official who was also an officer of EMATUM.”

In the SEC’s release, Gurbir Grewal (Director of the SEC’s Division of Enforcement) stated:

“When it comes to cross-border securities law violations, the SEC will continue to work collaboratively with overseas law enforcement and regulatory agencies to fulfill its Enforcement mission. Our action against Credit Suisse … is yet another example of our close and successful coordination with counterparts in Europe and Asia.”

Anita Bandy (Associate Director of the SEC’s Division of Enforcement) stated:

“Credit Suisse provided investors with incomplete and misleading disclosures despite being uniquely positioned to understand the full extent of Mozambique’s mounting debt and serious risk of default based on its prior lending arrangements. The massive offering fraud was also a consequence of the bank’s significant lapses in internal accounting controls and repeated failure to respond to corruption risks.”

In a separate administrative order, the SEC found VTB Capital, a London-based investment bank which acted as joint-leader manager with Credit Suisse, misled investors in connection with a 2016 bond offering in Mozambique. VTB agreed to pay approximately $6.4 million to resolve the matter.

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