Nedbank took R191m to be a ‘cardboard cutout’, and paid eye-watering commissions – report
- Nedbank took a R191 million fee to act as a "cardboard cutout" in back-to-back interest-swap deals at Transnet, the amaBhungane investigative journalism centre says.
- The bank on Monday told staff it had acted within the law, and had never found any corruption while looking into transactions with state and city entities.
- But the report paints an unflattering picture of a bank that took huge profits on suspect deals, legal or not.
- For more stories go to www.BusinessInsider.co.za.
On Monday Nedbank told staff and customers it had “noted” an article by the amaBhungane Centre for Investigative Journalism that links it to the extraction of hundreds of millions of rands from state-owned entities during the period of state capture.
"Our board and management commissioned detailed internal and independent external reviews of the transactions and these reviews found no evidence of any collusion or corruption by Nedbank," the bank said in an internal email and in a statement to clients.
Nedbank said, as it has insisted before, that it had acted within the law, and that the "sophisticated entities" its corporate banking business deals with can manage their own internal affairs.
But the article it was responding to provides a detailed breakdown of how Nedbank secured vast payments for itself – as well as for advisory firm Regiments – while, in some cases, taking little to no risk.
Read the full article via Fin24 | State capture: The case against Nedbank
Drawing on internal emails, and subsequent investigations by some of the entities involved, amaBhungane provides a rare glimpse into a world of high finance, but one twisted out of true, where clients accept interest rates that make no commercial sense, reward is unconnected with risk, and disclosure is a haphazard affair.
Here is what we learnt about Nedbank's corporate dealings with state entities from the latest instalment of amaBhungane's investigation into state capture.
Some R215 million went from state entities companies to Nedbank, then on to an advisory firm – in some cases without the state knowing
The transactions described in the article were initiatives by Regiments, a now-disgraced advisory company with close links to associates of the Gupta family and a history of costing state entities a lot of money.
In total, amaBhungane calculates, Nedbank agreed to pay Regiments at least R95 million in commissions. Of that, some R62 million was in introduction fees, at times paid without the knowledge of the Nedbank clients the money ultimately came from, and around R33 million was invoiced as services rendered by Regiments, which recovered fees from Nedbank instead of directly from state-owned entities.
Around R45 million in the Regiments fees came from the Airports Company of SA (Acsa), around R35 million from the City of Tshwane, and just about R16 million from the City of Johannesburg.
In the case of another R120 million of fees that went from Transnet to Regiments, Nedbank says it had no knowledge of the money.
Nedbank says its approach is standard in banking – but Absa refused to play the same way, and Standard did more
Regiments literally cut-and-pasted a commission agreement it received from Nedbank onto its own letterhead, and presented it to Absa, amaBhungane reported. That would have allowed Regiments to offer city governments and state-owned companies interest-rate swaps from Absa too – while claiming the same kind of rich rewards it was paid by Nedbank. (An interest-rate swap deal allows a company to exchange a floating interest rate on a loan for a fixed cost, which is more expensive - but provides protection against an increase in interest rates.)
Regiments made some changes, including deleting a clause that made it responsible for disclosing its commissions and fees to its clients.
Absa not only insisted on inserting a disclosure clause, but said that it – not Regiments – would take the responsibility for disclosing fees to Regiment customers, in writing, leaving no room for mistakes.
"It appears that this did not suit Regiments, and as far as both we and Absa can tell, Absa did not receive any derivatives business from Regiments after their agreement was signed," said amaBhungane.
Standard Bank did more to back up Nedbank's position on fees. Standard was the counter-party for an interest rate swap with Acsa, facilitated by Regiments, for which Standard paid Regiments handsomely, and from its own fees.
“[I]t is not uncommon for a counter-party in the position of Acsa to avoid or reduce up-front transaction costs by allowing the bank concerned to remunerate its chosen adviser as an intermediary," Standard Bank told amaBhungane.
But where Nedbank simply told Regiments it was responsible for disclosing fees, Standard went one step further: after Acsa agreed to the swap transaction terms, it email Regiments "reminding it of its obligation to produce written proof of it disclosure of its fee agreement with Standard Bank to Acsa."
Regiments did so by sending an email to the Acsa treasurer, and copying in Standard Bank officials.
By law there only needs to be disclosure of fees, not agreement to them, Standard said, so it "considered the content of the e-mail to be sufficient compliance and did not deem it necessary to itself separately make a disclosure in its agreement with Acsa."
Nedbank took 23% in fees and profit from an interest rate swap – and paid another 33% as commissions – in a deal with the City of Johannesburg
In 2009 the City of Johannesburg, on instruction of the auditor general, needed to get rid of "naked" interest rate swaps.
The cost of achieving that, a later review suggested, should have totalled about R5 million. Regiments put together a deal at a price of R12 million. That was supposed to include R1 million worth of fees for Nedbank.
In reality, says amaBhungane based on internal emails between Regiments and Nedbank, Regiments secured a fee of more than R4 million for itself, an effective 33% finder's fee, while Nedbank took R750,000 to cover its costs and a further R2 million as profit.
Nedbank allowed Regiments to set the interest rate it would charge
In one email cited by amaBhungane, a (still current) Nedbank employee told Regiments: "We leave it up to you to negotiate a margin for us to share on the usual 50/50 agreement."
The effect of that approach was that Regiments would convince clients such as the City of Johannesburg and Acsa that they would need to pay higher than the going rate for loans, then split the fat with Nedbank, which would sign the loans on that higher rate.
Nedbank arranged for a R191 million fee to act as a 'cardboard cutout' between Transnet and a Transnet pension fund
In late 2015, Regiments set up a deal that would see Transnet do an interest rate swap on a portion of a huge club loan with its own pension fund – just with Nedbank in the middle. Transnet would swap a floating interest rate for a fixed rate, of 11.83%, while the Transnet Second Defined Benefit Fund would get a floating rate in exchange for a fixed rate of 11.65%.
The 18 basis point difference would go to Nedbank.
As far as we can tell, this unusual structure was designed to get around the problems created by Transnet entering into interest rate swaps with a related party, i.e. its own pension fund," says amaBhungane.
It estimates the value of the structure to Nedbank at R74.2 million.
In 2016, a similar deal was struck on another part of the big club loan, this time with a 17 basis point fee for acting as a "cardboard cutout", with no real risk. By the time that swap terminates in 2030, Nedbank will have profited by more than R117 million, amaBhungane calculates.
In total, Nedbank's fees, taken though an interest rate differential, will amount to R191.3 million, the investigative centre calculates.
Nedbank considers the fees "fair, reasonable and appropriate for the risks involved".
(Compiled by Phillip de Wet)
Read the full article via Fin24 | State capture: The case against Nedbank
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