94 Red flags were missed in the “tuna bonds" $825 million claim

Overview

1. On July 29, 2024, the High Court in London ruled in favour of Mozambique, awarding it over $825 million from the shipping group Privinvest and its late owner, Iskandar Safa.
2. The decision in the "tuna bonds" claim brought by the Republic of Mozambique ("Mozambique") against Privinvest, a shipbuilding company, and several banks providing the funding for the project serves as a helpful reminder for banks and other institutions looking to capitalise on opportunities in emerging markets of critical issues that may be indicative of 'RED FLAGS' when engaging with states and public officials in such markets.
3. The court found that bribes had been paid to Mozambican officials between 2013 and 2014, constituting civil liability under English and Mozambican law.
4. This case revolved around three infrastructure projects in Mozambique, financed by sovereign-guaranteed loans amounting to over $2 billion.
5. The judgment also entitles Mozambique to an indemnity linked to the $1.5 billion it is liable to pay lenders and bondholders.
6. The judgment can be found here.
• https://www.judiciary.uk/judgments/the-republic-of-mozambique-acting-through-its-attorney-general-v-credit-suisse-international-and-others/
• https://www.judiciary.uk/wp-content/uploads/2024/07/Mozambique-Judgment-12-Trial-290724-Final-as-Handed-Down.pdf

Reminder about red flags and due diligence

1. This case highlights that Emerging markets offer a wealth of opportunities across a wide range of sectors, yet there can be a catch, even for sophisticated parties, especially financial institutions:
   • A greater number of risk indicators, or 'red flags,' could require investigation when negotiating a potential transaction.
2. In the context of its claim in corruption and bribery, Mozambique accused many of the lenders involved of having "actual or constructive" knowledge of 94 'red flags' grouped into 20 categories
3. For examples [complete list at the end of this post]
4. Importantly, rather than being indications that the lenders had done something wrong, the judge seemed to accept Privinvest's submissions that they might instead indicate that a lender is required to do something, for example,
   • Undertake additional due diligence or
   • Take responsibility for ensuring that certain disclosures are made to the relevant organisations or individuals.
5. Due to the settlements between Mozambique and the banks, the Hon., Mr Justice Knowles, did not make any liability findings against them, but he did state that.
   • "The regulatory, professional and reputational position for these banks may be severely exposed, with economic and operational consequences".
6. The judge's summary of the red flags and critical takeaways provides a clear guide for future transactions, helping to avoid potential pitfalls.
7. It is imperative to carry out due diligence on:
   • Any contracting state, particularly regarding corruption, governance and transparency.
   • Key players in the transactions, noting any reputation relating to bribes or corrupt practices.
   • Any surprising project leaders, e.g. public servants with no experience in the area.
8. It is essential to obtain:
   • Reasons for lack of public procurement or a competitive tender process.
   • Valuation of any assets and services to be supplied.
   • Reasoning for structuring lending as a loan to an SPV coupled with a State guarantee, primarily when this avoids Public Procurement Regulations.
   • Confirmation that any guarantees and guarantee confirmations do not exceed the guarantee limit in the relevant State Budget Laws.
   • If banks receive an unusually high return, it is crucial to question why.

Conclusion

1. Parties looking to take advantage of opportunities in emerging markets, particularly where jurisdictions have a reputation for corruption, must ensure that their checks and due diligence are thorough and careful in the event a deal collapses and becomes the subject of a dispute.
2. The potentially higher returns from investing in emerging markets can come with higher risk.
3. Therefore, sophisticated parties, particularly regulated institutions with robust compliance functions and responsibilities, have a greater obligation to ensure that they identify red flags and take the necessary additional steps.
4. This judgment is a helpful guide on some key issues that could raise red flags when engaging with states and public officials in emerging markets.

The overall total of 94 ‘red flags’ can be grouped and summarised as follows:

(1) Mozambique is, by reputation and report, a country with a wide and deep corruption problem caused by weak institutions, poor governance, and low transparency.

(2) Mr Safa had a reputation and was reported as being involved in corrupt practices, including alleged past and continued involvement in offering and receiving bribes and kickbacks.

(3) External due diligence had yet to be done on Mr Safa, the Privinvest Group, or Palomar.

(4) There had been no public procurement or competitive tender process; an explanation for this had not been sought or provided, and how the relevant contracts had been obtained had yet to be investigated.

(5) The terms of the Supply Contracts were one-sided and unusual. All of the assets and services to be supplied had yet to be carried out.  

 (6) Lending had been structured as a loan to an SPV coupled with a State guarantee rather than direct lending, a structure known to avoid Public Procurement Regulations. An explanation for this had not been asked for or provided.

(7) The guaranteed lending was in huge sums, with substantial increases and expansion in a very short time, for which no explanation was provided or sought. With one Project following the next, the financing was paid upfront and directly to the Privinvest Group.

(8) The intermediation of Mr Boustani and the Privinvest Group and Palomar and the absence of representatives of the SPVs or Mozambique in the negotiations or in providing due diligence or KYC information.

(9) Proindicus and MAM were led by a civil servant (Mr do Rosário) with no background or experience in business. No explanation had been received for this.

(10)Although the projects were presented as self-financing, the business plans needed to be more realistic, commercially realistic, and unviable, including revenue projections, and the relevant SPVs would not be able to service or repay the loan.

(11)The SPVs had not generated any revenues or profits.

(12)The Proindicus and MAM transactions were shrouded in secrecy. Neither had been referred to in any public, government or IMF document that the banks had seen, and the banks did not seek or obtain an explanation.

(13) The IMF, international donor community, and the press had raised concerns about EMATUM, and it was abnormal to use privately placed LPNs. These were not investigated.

(14)The Proindicus Guarantee and the proposed MAM Guarantee had not been disclosed to the IMF and were entered into in breach of the IMF’s NCBL, as can be seen from the IMF’s published reports.

(15)The Guarantees and the Guarantee Confirmations substantially exceeded the guarantee limit in the relevant State Budget Laws and were without Parliamentary approval. The banks had not explained why and were not assured that the State Budget would be rectified to accommodate them.

(16)The Guarantees and the Guarantee Confirmations would require prior authorisation by “visto” from the Administrative Court unless duly authorised by the General Director of SISE. No authorisation was sought, and no explanation was sought or provided.

(17)The Privinvest Group paid substantial contractor fees. No explanation was sought or provided for this.

(18)The substantial fees paid or to be paid to Palomar and their circumstances.

(19)The payment of subvention fees and their circumstances.

(20)The high return ultimately offered to the banks

Sourced

1. https://www.mayerbrown.com/en/insights/publications/2024/09/red-flags-for-lenders-investing-in-emerging-markets-recent-high-court-guidance
2. Mozambique victorious in UK lawsuit tied to 'tuna bond' scandal - City A.M.. https://www.cityam.com/mozambique-victorious-in-uk-lawsuit-tied-to-tuna-bond-scandal/.
3. Republic of Mozambique secures judgment for over US$2 billion in ‘tuna .... https://3vb.com/republic-of-mozambique-secures-judgment-for-over-us2-billion-in-tuna-bonds-litigation/.
4. Commercial Court hands down judgment in ‘Tuna Bonds’ case. https://www.fountaincourt.co.uk/2024/07/commercial-court-hands-down-judgment-in-tuna-bonds-case/.
5. Credit Suisse, Mozambique, secure out-of-court 'tuna bond' settlement. https://finance.yahoo.com/news/credit-suisse-mozambique-reach-court-091714995.html.
6. Mozambique Secures Significant Legal Victory in $3.1 Billion Tuna Bond .... https://www.devdiscourse.com/article/law-order/3033789-mozambique-secures-significant-legal-victory-in-31-billion-tuna-bond-scandal.