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How Export Development Canada overlooked red flags about the Gupta family
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As South Africa's biggest banks decided the wealthy brothers were too toxic to touch, the Canadian Crown corporation was still doing business with them. Leaked e-mails and documents tell the story of how the EDC's vetting process broke down
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By GEOFFREY YORK, MATTHEW MCCLEARN
  
  

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Tuesday, June 11, 2019 – Page A10

JOHANNESBURG TORONTO -- It was one of the pivotal moments of South Africa's biggest post-apartheid corruption scandal. In late 2015, South African mining minister Mosebenzi Zwane flew to Switzerland with key members of the Gupta business family to persuade the mining giant Glencore to sell a potentially lucrative coal mine to the Guptas.

After the meeting, according to leaked e-mails, the cabinet minister flew from Zurich to India on the family's private luxury jet, which the Guptas had acquired from Bombardier Inc. for US$52-million just a few months earlier - with 80 per cent of the cost financed by Export Development Canada, the federal government's export credit agency.

The mine would later become central to a scheme that allegedly allowed the Guptas to profit from inflated prices in coal contracts with South Africa's power utility. The jet itself would become equally notorious. In the South African media, its movements were avidly tracked. It became a vivid symbol of the Guptas, their political power and the vast wealth that they amassed from their links to South Africa's state-owned companies.

How did a Canadian Crown corporation become the financier for such a high-profile emblem of South African corruption? And why did it double down on the Guptas and approve another US$450-million loan for a locomotive contract with South Africa's state-owned freight rail company, which was effectively controlled by Gupta proxies who - according to several subsequent inquiries - extracted hefty "consulting fees" from many of its contracts?

An investigation by The Globe and Mail has found that the Gupta saga was the nadir of the EDC's due-diligence failures: a decision to provide financing to a family that had long been exposed in the South African media for its dubious dealings and its shadowy business partnership with the son of Jacob Zuma, the president of South Africa at the time.

Only in late 2017 - nearly three years after approving the Gupta jet loan - did the EDC finally decide to back out of the deal. By then, all four of South Africa's biggest banks had already severed their relationships with the Guptas, in part because of the risks associated with handling tainted funds.

This fiasco wasn't supposed to happen. Like other financial institutions, the EDC screens its transactions to weed out prospective clients engaged in alleged corruption or other criminal activity. The goal is to protect the agency, and the federal government, from projects that could bring it into disrepute.

In South Africa, however, the EDC had somehow overlooked clanging alarm bells. Years before the EDC finalized the aircraft loan to the family in early 2015, the close relationship between the Guptas and the Zuma family was an open secret in the country.

There had already been scandals before 2014, documented in colourful detail in media reports and internal government inquiries, revealing how the Guptas were linked to questionable government contracts, deals that benefited the Zuma family and even a bizarre incident in 2013 in which Gupta wedding guests were flown to a military base and allowed to bypass normal immigration procedures.

That year, the Guptas also reportedly offered a bribe of 500,000 rand (about US$57,000 at the time) to the chairman of South African Airways. According to testimony at an inquiry into state corruption this year, senior members of the ruling African National Congress had complained as early as 2011 that the Guptas had advance knowledge of Mr. Zuma's cabinet appointments and were summoning ministers to their luxurious villa to inform them.

Under a federal directive in 2008, the EDC was required to "give due consideration to the personal integrity of those they lend to or provide benefits to."

After all the reports and scandals about the Guptas, it is unclear how the EDC decided that they had sufficient integrity to warrant a loan.

Thanks to leaked e-mails and other documents, the EDC's loan to the Guptas affords a rare window into its approach to vetting clients. In retrospect, the EDC's failure to recognize the family as dangerous business partners is a sign that its process failed spectacularly. Although the EDC insists it continually monitors transactions, its slowness in disentangling itself from the Guptas calls this assertion into question.

And in the aftermath of it all, there are few indications that the EDC has learned the lessons or changed its practices as a result.

There are three Gupta brothers: Ajay, Atul and Rajesh. In the 1990s, after the end of apartheid, they were ambitious young immigrants from India, looking to cultivate wealth and political influence. Their ascent in South Africa was rapid. By 2016, under the freewheeling Zuma presidency, they were ranked among the richest families in the country, with an empire ranging from mining companies to computers, most of it dependent on government connections.

Two years later, it all collapsed: Their political patron resigned from the presidency under pressure from his own party, criminal cases were under way and the Guptas fled South Africa to a secret location, believed to be in Dubai. They have denied all of the allegations against them.

The EDC's involvement with the Guptas began in early 2014, at a time when its biggest client, Bombardier, was zeroing in on two important South African deals. Bombardier needed an EDC loan to support an aircraft sale to the family, and it needed a much larger loan for a separate deal to sell locomotives to Transnet, the state-owned freight company.

Transnet was about to make a massive purchase worth up to US$5-billion. Bombardier was one of the front-runners for the contract.

Transnet was so wealthy and powerful that its name was emblazoned on the tallest office building in Africa, the Carlton Centre in Johannesburg, its corporate headquarters. By 2014, the Guptas had allies installed in all of the key positions at Transnet, including the board of directors and management team.

Five years later, after the Gupta proxies had finally been sacked, Transnet chairman Popo Molefe said the company had been a "horror movie" of corruption. During the Gupta years, it had been transformed into a "piggy bank" for looters, he said.

Investigations in 2018 showed that the Guptas had received hundreds of millions of dollars in "consulting fees" from a Chinese company that had shared the locomotive contract with Bombardier and others.

As their wealth and power mounted, the Guptas wanted a luxury airplane. By February.

2014, a month before the locomotive deal was finalized, Bombardier was searching for funding to help the Guptas buy their jet.

For the EDC, Bombardier is the agency's largest customer by far.

Since 2001, the EDC has provided between $20-billion and $46-billion in loans for Bombardier deals (the agency only reports ranges of transaction values).

Even EDC insiders sometimes call it "the bank of Bombardier."

But to get their jet, the Guptas would need to pass through the EDC's due-diligence process, which should have quickly spotted their many years of exploiting their Zuma connections.

Leaked Gupta e-mails obtained by The Globe and other media outlets, and later placed into evidence at South Africa's commission of inquiry into state corruption, show that the aircraft deal was surrounded by red flags.

One of the first warning signs was on Feb. 10, 2014, when, in an e-mail from Bombardier to a senior Gupta employee, Bombardier quoted a U.S. aircraft financier who referred to the "politically connected nature of the Guptas." The financier also asked skeptical questions about the Guptas and their murky finances.

It is unclear whether Bombardier shared those concerns with the EDC.

The Guptas were shopping for one of Bombardier's most expensive private jets: a Global 6000, capable of carrying 17 passengers and crew on intercontinental flights. Bombardier executives flew to Johannesburg to meet the Guptas to discuss the deal.

In e-mails to Ajay Gupta on Feb. 18, 2014, a vice-president of Bombardier's business aircraft division promised to provide "the best priced Global on the market." He offered the airplane for a discounted price of US$52million, along with various "credit memos" (further discounts of US$1.35-million) and free pilot training. Most significantly, he said Bombardier had found a willing financier to help the Guptas: the EDC, which could cover 80 per cent of the cost.

The Bombardier vice-president also told Mr. Gupta: "We hope that a successful conclusion will lead to further opportunities for our organizations to explore working together, whether on infrastructure or aviation-related business" The e-mails were written just a few weeks before the announcement that Bombardier won a US$1.2-billion slice of the massive contract to sell locomotives to Transnet. Bombardier has denied that there was any connection between the two deals.

Over the next several months, the EDC negotiated with the Guptas to finalize the jet loan.

But it quickly discovered that the Gupta finances were opaque.

In May, 2014, in questions relayed by Bombardier to a senior Gupta official, the EDC noted that the 2014 financial information provided by the main Gupta company, Westdawn Investments, was difficult to interpret and "seems unaligned with 2013 performance." Westdawn also apparently did not have "sufficient cash-flow to repay such debt obligations."

In response, Gupta lieutenant Ronica Ragavan insisted that the Guptas could juggle money among their various businesses to repay the loan.

By June, the e-mails show, the Guptas still hadn't answered the EDC's financial questions, but a Bombardier official reassured them that the EDC was ready to "finalize the offer" as soon as the answers were given.

A few weeks later, the EDC asked for a "wiring diagram" of the Guptas' murky business empire. The agency also decided to send two specialists to South Africa for final due-diligence checks - a cost that the Guptas would be required to pay. Even on this point, the Guptas felt confident enough to haggle, with Ms. Ragavan offering just US$5,000 - barely a third of the actual cost.

Throughout this period, the EDC should also have been searching for public information about the Gupta brothers - and there were literally hundreds of media reports about dodgy deals.

The EDC should also have noticed that corruption was widespread in South Africa, but the country had an independent media and civil-society sector that often exposed scandals.

Despite the mounds of evidence about the Guptas, the EDC signed a deal in December to provide US$41-million to cover 80 per cent of the jet's cost. In February, 2015, Bombardier emailed photos of "your stunning new Global 6000" to the Guptas, and the luxury jet was delivered shortly afterward.

For the next 21/2 years, as investigations produced a flood of new evidence about the Guptas, the EDC stood loyally with them.

In fact, according to an e-mail from a Bombardier official in June, 2015, Bombardier and the EDC were already discussing a loan to help the Guptas purchase another jet "to meet their growing travel needs." (In the end, the deal never came to pass.)

Meanwhile, less than three months after approving the first Gupta loan, the EDC went ahead with the US$450-million loan to Transnet to allow it to buy locomotives from Bombardier.

According to a database of EDC transactions, it was the biggest loan that the EDC had ever provided to any South African company. "This is a massive thumbs-up for our country," said the announcement by Transnet chief executive Brian Molefe.

Mr. Molefe was just one of many Gupta allies within Transnet at the time. A year later, an investigation by South Africa's Public Protector - an anti-corruption watchdog with constitutional powers - reported evidence of a long-standing "cozy relationship" between Mr. Molefe and the Guptas, including dozens of phone calls and text messages.

The influence of the Guptas over the Zuma government became even more obvious over the next two years, and the Guptas continued to fly their EDC-financed airplane around the world. In October, 2015, the federal agency opened a formal office in Johannesburg, its first in Africa, giving it a front-row seat to witness the Guptas in action.

In December, 2015, lobbying by the Guptas was widely reported to be a key reason for Mr. Zuma's dismissal of his finance minister, Nhlanhla Nene, who was resisting a nuclear-energy deal that the Guptas wanted.

Around the same time, one of South Africa's biggest banks, Absa, began quietly closing the bank accounts of Gupta businesses. In testimony to the state corruption inquiry later, an Absa executive said the bank had been concerned about "evidence of large, unexplained transfers of funds" as early as November, 2014.

By early 2016, the other major South African banks had also closed their Gupta accounts, worried about regulatory and reputational risks if they received funds from money laundering or other crimes. But the EDC maintained its Gupta loan, despite the risk (later acknowledged by the EDC) that the Guptas might be using the proceeds of crime to repay it.

And then, that March, deputy finance minister Mcebisi Jonas disclosed that the Guptas had met him in late 2015 and "offered" him the post of finance minister. Two weeks later, auditing firm KPMG announced it was ending its relationship with Gupta companies, saying that the "association risk" was "too great."

Later in the year, the Public Protector issued a 355-page report documenting allegedly corrupt connections between the Guptas and the Zuma government. Among her revelations was a devastating allegation by Mr. Jonas, who said the Guptas had offered him the equivalent of US$42,000 in cash, and US$42million in the future, if he accepted the finance minister's job and sacked bureaucrats who were resisting the family's schemes.

By then, the EDC was worried - but it still continued the loan.

"Since the fall of 2016 we sought external counsel advice to confirm that we were not, and would not be, acting contrary to applicable proceeds of crime laws," the agency told The Globe.

South Africa's banks faced stricter regulations than the EDC.

They had to abide by legislation on suspicious transactions, money laundering and the proceeds of crime and corruption. Canada's equivalent law applies to banks and other financial institutions - but the EDC is exempt.

Until mid-2017, there had been no media coverage of the EDC loan to the Guptas, which hadn't been publicly announced. But in July, 2017, when The Globe first contacted the EDC to inquire about its Gupta loan, the agency immediately briefed its board of directors on the Gupta issue and the corruption allegations.

According to EDC spokesperson Jessica Draker, this report, on July 26, 2017, was the first time the agency communicated to its board about the loan. Before then, she said, the agency had only been monitoring the risks.

In October, 2017, Westdawn failed to make a payment on its jet loan. This was followed by other alleged breaches in the loan agreement, and within weeks, the EDC told the Guptas that it was cancelling the loan.

According to the EDC, this was "the first legally appropriate opportunity" to do so.

The Guptas ignored the cancellation and denied any breaches. They continued flying around the world in their Bombardier jet, but turned off its public tracking device.

In a court application in South Africa, the EDC said there was a "very real concern" that the Guptas might use the aircraft to "escape justice" or for some other "unlawful means." It alleged that the Guptas might be using "the proceeds of crime" to pay for the airplane.

In court documents in February, 2018, an EDC official insisted that the agency was "until very recently, unaware of any concrete evidence of serious wrongdoing" by the Guptas. But detailed evidence of Gupta wrongdoing had appeared in South African media and public inquiries for years.

Even the EDC itself, in briefing documents for a visit by senior EDC officials to South Africa in 2017, had described how the corruption allegations had "reached the highest level of government" and how Mr. Zuma had been "implicated in numerous investigations for corruption and fraud."

Many of those allegations had directly involved the Guptas.

(The documents were obtained by researcher Ken Rubin under the Access to Information Act.)

In the court case, a Gupta representative said it was "inconceivable" that EDC officials "can legitimately claim to have been unaware of the regular media coverage of the allegations of unlawful conduct" against the family.

By 2018, the Gupta problem was repeatedly on the agenda of high-level government meetings in Ottawa. Briefing papers, obtained by The Globe, showed that senior federal officials were worried that the Gupta loan had caused significant "reputational risk" to the EDC.

By now, opposition MPs were raising questions. In March, 2018, Charlie Angus and two other New Democrat MPs sent a letter to François-Philippe Champagne, the international trade minister at the time. They questioned why the EDC was lending money to "corporate outliers" such as the Guptas.

There should be a "more thorough ethics screening" so that the EDC would "avoid bad bets like the Guptas," the MPs said.

"Even the most cursory scan of the internet would have revealed that the Gupta brothers had a troubling history of corruption and shady links to President Jacob Zuma."

In response, Mr. Champagne rejected the ethics screening idea, suggesting it might not be legal - and could affect the "confidentiality" of Canadian companies.

Mr. Angus said he later met EDC officials, but was dissatisfied with their responses. "The Gupta jet scandal, to me, is something they still haven't really explained. Heads should have rolled," he told The Globe.

The EDC argues that the Gupta deal was an isolated incident. In 20,000 transactions over the past 80 years, "this is the first time where we've gone to court because of the risk of corruption," the agency said in a March, 2018, statement.

Two months later, however, the EDC disclosed to The Globe that it was launching an internal investigation of its US$450-million locomotive loan to Transnet.

But the EDC has refused to provide any details about the investigation.

Bombardier says it subjects its aircraft transactions to a "robust due diligence and compliance procedure" and decided to sell the jet to the Guptas "based on the information available at the time." The sale was concluded "at fair market price," the company says.

"It would be erroneous and misleading to analyze a transaction that occurred years ago with the insights and information that are available today," Bombardier vice-president Olivier Marcil told The Globe in a statement.

On the Transnet locomotive contract, "our detailed review of the allegations so far has confirmed that we have always acted in full compliance with the applicable laws and our contractual obligations," Mr. Marcil said.

By 2019, however, the Gupta name had become toxic. The family's corporate vehicle, Oakbay, was delisted from the Johannesburg stock exchange, and the Guptas were under criminal investigation.

International firms such as KPMG, McKinsey and Bell Pottinger have apologized for their dealings with Gupta companies.

But the EDC and its supervising cabinet ministers have never provided a full explanation or apology for the EDC's dealings with the Guptas.

As for the notorious airplane: It is now gathering dust in a Johannesburg airport hangar, while the EDC's local agents search for a buyer.

Associated Graphic

Far left: Ajay, left, and Atul Gupta sit with Duduzane Zuma, son of South Africa's then-president Jacob Zuma, in 2011.

Left: Former CEO of Transnet Brian Molefe is seen in 2008. Mr. Molefe was one of many Gupta allies within Transnet, the South African-owned freight company.

Below: In order to purchase their jet, the Guptas needed to go through the EDC's due-diligence process.

FAR LEFT: GALLO IMAGES; LEFT: GIANLUIGI GUERCIA


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