8. Oil-backed loans to Angola: doing business with an opaque national oil company
Deutsche Bank was hiding behind the shield that it was dealing solely with ‘central bank accounts’ in order to do business with Niyazov’s horrifying regime in Turkmenistan. Meanwhile, a host of banks have been hiding behind the shield of providing trade finance for an oil company in order to do business with Angola, a country which earns billions from its oil yet the majority of whose population continues to live in conditions of appalling poverty.
By providing oil-backed loans to Sonangol, the Angolan state oil company, large consortia of banks have allowed Angola to mortgage its future oil wealth in return for instant cash with no transparency about how the money is being used.
Resource-backed loans are not an unusual way of raising finance, and Angola is not the only country doing this. So why does this matter? It is because Angola is a key example of resource revenues being misused and put to the service of a shadow state where the only real outcome for the majority of people is poverty and, once again, banks are part of the structure that has allowed it to happen.
As with Deutsche Bank and Turkmenistan, the issue here is not a regulatory one. There is no suggestion that the banks involved have breached any of their regulatory obligations. The questions this story raises are: could the banks have exercised a higher level of responsibility? Should they be required to exercise a higher level of responsibility?
Government in Angola broke down completely during its long civil war, then once the conflict ended with MPLA victory in 2002, remained highly secretive. For a few years, the subject of corruption was top of the agenda, with vocal criticism from the IMF and donors, and billions of dollars going missing from the budget, as publicised by Global Witness and others.298 Now the criticism is more muted. The corrupt environment has not changed significantly, nor have the living conditions of the majority of the population, as this chapter will show. A democratic election has recently taken place, won by the existing government by a huge majority which, observers have noted, is not unrelated to the oil funds at its disposal. Independent media operates under restrictions and civil society organisations are being threatened with closure.299 What has changed is demand for Angola’s oil. Everyone wants some of it, and the government is now trying to convert itself, in terms of perceptions, into a respectable business partner.
Angola’s economy revolves around oil, which accounts for over 80% of government income.300 In April 2008 it overtook Nigeria as Africa’s largest producer of oil.301 The IMF said that Angola’s GDP grew 21% in 2007, and based on an oil price of $90 a barrel it estimated in October 2007 that Angola was due to earn tax revenues from oil of $22.8 billion in 2008.302
But a continuing lack of transparency and proper budgetary oversight means that much of this vast influx of wealth is being squandered with no improvements to the lives of its population. According to recent research by Save the Children UK, Angola has the highest rate of child mortality relative to national wealth in the world. 303 The average Angolan can expect to live only to 41.7, one of the lowest rates in the world; 31% of all Angolan under-fives are malnourished and almost half of Angolans do not have access to safe water and sanitation.304 Seventy per cent of Angolans still live on less than $2 a day.305 So despite now being the largest oil producer in Africa, Angola still ranks at only 162 out of 177 on the UN’s Human Development Index; barely moved from its position at 160 out of 174 a decade and billions of dollars of oil revenue ago.306 Even as the oil flowed throughout the 1990s, income inequality rose, making Angola one of the most unequal countries in the world.307
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Yet for the last ten years, the amounts lent by commercial banks – mostly European but increasingly also Chinese – in oil-backed deals to Sonangol have steadily increased and now involve regular new loans of billions of dollars each. The trade press is full of praise for Sonangol as a reliable borrower – a borrower which has in recent years been rewarded for its reliable repayments with increasingly large loans, diminishing interest rates, and longer ‘tenors’ (length of loan).
In the last couple of years, oil-backed loans are no longer the sole source of external funding for Angola, as China has opened extensive credit lines, followed by a couple of European banks. But the oil-backed loans have continued. Global Witness and Angolan civil society are concerned that by forward-selling future output, these loans have allowed the Angolan government to convert future oil revenues into cash today, with no clarity or accountability about how those revenues are being used. By making such loans, banks may be making themselves complicit in the activities of a government that continues to resist full transparency over its resource revenues.
This chapter shows how accepting deposits is not the only way that banks can help to fuel the engine of the corrupt shadow state; they can also do it by providing untransparent loans. But whether accepting money or loaning it, the need for due diligence is the same. If the bank doesn’t check where the money is from, it might be the proceeds of corruption; if it doesn’t check how the money will be used, there is a risk that it may contribute to corruption.
What is an oil-backed loan?
Businesses need finance from banks. Resource extraction businesses, particularly oil, have significant financing needs, because of the high initial cost of extracting the commodity from the ground before it can be sold. One way of doing this is to borrow money using the oil as security. Another – which can be more secure for the banks in uncertain environments – is pre-export financing. The loan is not just secured against oil revenues, but is repaid directly in specific future oil cargoes, whose proceeds can be paid straight into an offshore account or ‘special purpose vehicle’, with specific provisions in the loan contract for how the future oil cargoes will be ‘lifted’ and sold, to whom, and how often, in order to replenish the offshore account or special purpose vehicle from which the bank takes its repayment. This was, until recently, the structure used for many of the commercial oil-backed loans to Sonangol.
The interest rates on such loans are not always the cheapest way of raising finance for the borrower, but because the lender has a very secure way of getting its money back, it is an attractive option for the bank. Effectively, from the bank’s point of view, none of the money with which the bank is repaid goes anywhere near the company or indeed even the country with which they are making the deal. An international oil company might lift the oil in Angola, a western oil trader then buys it, and the money that the trader pays for the oil goes straight into an offshore account from which the bank is paid back.
A 2001 report by UNCTAD (the UN body dealing with trade and development) about the potential uses of structured commodity financing – of which pre-export finance is one technique – notes that, unlike more traditional forms of financing, it is all based on a specific transaction, or set of transactions, allowing the circumvention of risks associated with a company’s balance sheet or a country’s risk profile. ‘In many parts of the world, accounting standards are not truly satisfactory from a financier’s point of view. With structured finance the role of the balance sheet is fairly minor; what matters more are the transactions for which finance is sought – if the profitability of these transactions can be reliably ascertained, they could be financed, even if the company has a poor balance sheet.’308
It is this set-up that has allowed banks to manage the risk of making loans to a state-owned company in a country that was for decades at war, and which since the end of the conflict has continued to maintain a significant reputation for corruption. However, while the banks may 69
be able to separate themselves from the financial risks, by making these loans they are actually contributing to the very situation that makes Angola a risky investment in the first place.
The extraordinary series of huge oil backed loans to Sonangol has made it the poster-child of pre-export finance to the developing world, and the number of banks joining each syndicated deal has grown as more banks become comfortable with doing business there. But as Angola’s oil production increases, promising ever more lucrative deals for the banks making loans, Global Witness believes it is important to take a clear look at how oil-backed loans came about in Angola, and how much has really changed since the end of the war.
Box 6: Oil backed loans - a dirty history
Oil-backed loans to Angola come with a disturbing history, with origins that are mired in arms dealing and corruption on a massive scale. When the Elf scandal – the story of how the Elf Aquitaine oil company systematically paid kickbacks, peddled influence and encouraged government indebtedness in order to maintain its control over the oil of several African countries – reached the French courts in 2003, the provision of oil-backed loans was revealed to be a key component of the ‘Elf system’. Future oil revenues in Congo-Brazzaville, Angola and Gabon were mortgaged for ready cash, with handsome kickbacks for African leaders and Elf’s secret accounts. The trial ended in November 2003 with the conviction of 30 former senior Elf executives.309
Jack Sigolet, who was not charged with any offences, was the Elf executive in charge of arranging oil-backed financing for African leaders. He testified that the loan system was conceived ‘in such a way that the Africans were only aware of the official lending bank and were ignorant of the whole system which Elf rendered particularly and deliberately opaque.’ His testimony said that he arranged several oil-backed loans of between $50 million and $200 million for the Angolan government in the first half of the 1990s, during the civil war.310
Global Witness raised the issue of oil-backed loans to Angola’s opaque and corrupt wartime government in its 1999 report A Crude Awakening, which first sounded the call for transparency over oil revenues.311 Its 2002 follow-up, All the Presidents’ Men: The devastating story of oil and banking in Angola’s privatised war, showed how the civil war provided a cover for the full-scale looting of the country’s oil money by national and international business and political elites, typified by the Angolagate ‘arms-to-Angola’ scandal that broke in France in 2000.
During the civil war against UNITA in the 1990s, the Angolan president, dos Santos, had turned for help to sympathisers in the French establishment. Introductions were made via Jean Bernard Curial, who ran a humanitarian aid company that worked on behalf of French government ministries, and Jean-Christophe Mitterrand, son of the then French president. As a consequence, two businessmen, Pierre Falcone (an advisor to Sofremi, a security export company run by the French interior ministry under Charles Pasqua) and Arkadi Gaydamak, a Russian émigré, were provided with Angolan diplomatic passports and went to work on behalf of dos Santos.312
As Gaydamak told Global Witness in 2000, they were ‘made signatories on the accounts’ that they had set up with Banque Paribas (now BNP Paribas) for generating oil-backed loans. He at first stressed that the purpose of his and Falcone’s role was the provision of oil-backed loans only, and only later admitted that arms had also been supplied. 313 The Angolan government did not have the money to pay for weapons directly, so a system of high-interest loans against future oil production was devised. Those arranging the arms deal would be paid a sum up front, then an oil-backed loan was raised from French banks and disbursed out of Paris to cover the other costs and fees.315
In testimony to the Angolagate investigators,
Jean Bernard Curial said that he distanced
himself from these deals after beginning to
see them as ‘une gigantesque escroquerie’ –
a gigantic fraud. He alleged that this offshore
procurement process outside the national budget
became a ‘huge money making machine’ for
Falcone, Gaydamak and Angolan leaders.
He also testified that kickbacks were so common
from these deals that Jack Sigolet, the Elf
finance executive, had begun to refer to Angolan
officials by the percentage of their cut: there was
Mr Thirty Percent, and Mr Twenty Percent.316
Falcone is currently standing trial in France
in criminal proceedings arising from
‘Angolagate’.317 The trial is expected to be deeply
embarrassing, exposing the dirty laundry of
the French political establishment. Falcone has
already been given a four-year prison sentence
for tax fraud and sentenced to a further year
by French courts for receiving commissions in a
case involving misappropriation of public funds
via Sofremi.318 According to the Angolagate
indictment, seen by Global Witness, between
1993 and 2000 Falcone ordered bank transfers
totaling a minimum of $54,569,520 in favour
of Angolan officials.319
Meanwhile, more oil-backed loans were raised,
supposedly to pay off $1.5 billion of Angola’s
debt to Russia. The funds were moved through
the bank account at UBS in Geneva of a
company set up by Falcone and Gaydamak
called Abalone Investment Limited. Between
1997 and 2000, out of a total of $773.9 million
paid into Abalone’s account by Sonangol, only
$161.9 million was passed into an account
marked Russian Ministry of Finance.
Around $600 million was transferred to
accounts belonging to Falcone, Gaydamak and
a series of obscure companies, with millions
ending up in the private accounts of highranking
Angolan officials, including President
Dos Santos, according to a memo reproduced
in the French newspaper Le Canard Enchaîné
and documents seen by Global Witness. Falcone
was investigated for ‘money laundering, support
for a criminal organisation’ and ‘corruption
of foreign public officials’ in a Swiss criminal
inquiry into these suspicious transactions.
Gaydamak was never formally charged. Both
men deny any misappropriation of funds.320
The investigation was suspended at the end of
2004 by the Public Prosecutor of Geneva, Daniel
Zappelli. In 2006, a group of Angolan citizens
called for the case to be reopened, but despite
renewed pressure from Global Witness and
Swiss civil society organisations, there has been
no further action from the Swiss authorities.321
This system of oil backed loans was in
operation from 1993-4 onwards. So when
banks consider the long history of Sonangol
as a reliable loan customer that pays back
on time, they are also including the many
years in which oil-backed loans were being
used to line pockets and purchase weapons.
The Global Witness report All the Presidents’
Men highlighted a series of newer oilbacked
loans from a variety of commercial
banks to Sonangol during 2000 and 2001
which provided a minimum of $1.1 billion
beyond the IMF-imposed limit of $269
million in new credit to the conflict-stricken
government,322 thus undermining the international community’s efforts to bring some
accountability to Angola’s use of its oil revenues.
In 2004’s Time for Transparency, published
two years after the end of the war, Global
Witness showed how Angola was continuing
to borrow against future oil revenues while
the country’s oil income remained completely
opaque; revealed the diversion of oil revenues
to offshore bank accounts, and raised the
‘major concern that the mechanisms of
embezzlement entrenched during the war
will simply be redirected towards profiteering
from the country’s reconstruction.’323
What had begun as an emergency measure
under the fog of war, a structure to get around
the restraints of the civil war when nobody else
would lend to Angola, had became a cash cow
for government officials. When peace came in
2002, there was no sign of it being given up.
An opaque present
The Angolan conflict may now have ended,
but the loans have continued. However, the
fundamental problem remains the same: the
murky management of oil revenues which
flourished under the cover of war has not yet
been satisfactorily cleaned up, and it is still
not clear how these loans are being used.
Mismanagement and corruption in Angola’s
public finances, and particularly in the oil
sector, are well documented. Transparency
International currently ranks Angola
158th out of 180 countries on its Corruption
Perceptions Index324 and the OECD, in a
2007 economic outlook, referred to a business
climate characterised by ‘major bottlenecks
due to endemic corruption, outdated
regulations and rent-seeking behaviour’.325
Historically, analysis by Global Witness of
IMF reports showed that an annual average
of about $1.7 billion (or 23 per cent of GDP)
went unaccounted for from the Angolan
Treasury between 1997 and 2001.326
According to the UNDP in 2005, about 17%
of the country’s budget was still earmarked
for ‘special use’, with no clarity over where
it goes.327 In 2007 the OECD said that
‘much remains to be done to align fiscal
policy actions with the priorities of poverty
eradication.’328 A few improvements have
now been made; in May 2008 the OECD
remarked that ‘recent years have seen
progress regarding the transparency of
oil revenue management’ then continued,
‘although much remains to be done.’329
Such progress has included the fact that the
Ministry of Finance now publishes some oil
export figures on its website. But these figures
serve scant purpose when set against the
ongoing bigger picture of lack of transparency,
because they cannot be put in sufficient context
to tell the full story. There is still too much
muddiness about what happens between
Sonangol and the Ministry of Finance, as the
World Bank and IMF continue to point out.
The fundamental problem with transparency
over Angolan oil revenues centres around
the multiple roles of Sonangol, the state
oil company. Its roles as both a tax-paying
oil company and a concessionaire for the
government, handling oil revenues accruing
for the government, constitute a significant
and much-commented on conflict of interest.330
As a fiscal agent for the government, it collects
revenues and makes expenditures on the
state’s behalf, but as of 2007, the World Bank
noted that the government still did not have
effective control and monitoring over these
quasi-fiscal operations.331 The 2007 IMF
Article IV report commented that several
of the actions required to effectively ringfence
Sonangol’s activities had still not been
initiated; and that Sonangol’s quasi-fiscal
activities were not being executed through the
central budgeting system, SIGFE.332 Sonangol’s
activities are only recorded in the budget with
a 3-month delay.333 Crucially, while Sonangol
has now apparently been audited, it still does
not publish any audited accounts and thus
remains without effective public oversight.334
In reality, Angola’s public finance system
still maintains two spending tracks. One is
the official budget managed by the Treasury;
the other is the ‘non-conventional’ system
via Sonangol, which is not subject to public
scrutiny.335 In 2007, the World Bank noted
that Sonangol has in the past reduced ‘the
tax and profit oil payments it owes to the
Government by the amount of the costs it has
incurred on Government’s behalf. Disputes
arise because in the past there has not been
clarity on which activities qualify for offset
treatment, and because expenditures under
qualifying categories have not been audited.’336
A recent article by Ricardo Soares de Oliveira
at the University of Oxford described Sonangol
as ‘the centerpiece in the management of
Angola’s ‘successful failed state’, highlighting
the extent to which a nominal failed state can
go on surviving and indeed thriving amidst
widespread human destitution.’ Instead of leading to development, Sonangol’s success
had ‘primarily been at the service of the
presidency and its rentier ambitions.’337
What this all means is that a bank
lending to Sonangol is lending into a
financial system that has never explained
its black holes, and in which it is still
unclear exactly where the line is drawn
between Sonangol and the state budget.
Yet the oil-backed loans have continued,
including the following loans which have been
reported in the trade press. It should be noted
that this may not be complete information on
each loan, and that there may be other loans
not listed here. Banks release only selected
information about loans into the public domain.
• June 2003: $1.15 billion, arranged by
BNP Paribas, Belgolaise, Natexis, SG
CIB. Other banks included Commerzbank,
Crédit Lyonnais, KBC, Standard
Chartered, RBS and West LB. The loan
was made and repaid via a special purpose
vehicle called Nova Vida. The rate was
2.25 per cent over LIBOR for four years
and then 2.5 per cent thereafter.338
• August 2004: $2.35 billion, coordinated
by Standard Chartered. Other banks out
of a total of 35 in the syndication included
Banco Espirito Santo, Barclays, Calyon,
Commerzbank, Deutsche Bank, KBC,
Natexis, RBS. The loan was structured
through a special purpose vehicle called
Esperanca Finance. The rate was 3.125
to 3.37 per cent over LIBOR.339
• November 2005: $3 billion, coordinated
by Calyon. Other banks in the syndication
included Banco BPI, BNP Paribas,
Commerzbank, Deutsche Bank, DZ
Bank, Fortis, HSH Nordbank, KBC
Bank, Natexis, Nedbank, RBS, SG,
Standard Bank, SMBC, UFJ, West LB.
This loan was described as a ‘structured
commodity export finance facility.’ The
rate was 2.5 per cent over LIBOR.340
• March 2007: $1.4 billion loan to Sonangol
Sinopec International, a joint venture
of Sonangol and Sinopec, the Chinese
oil company. This was a new structure:
a borrowing base facility (ie a revolving
credit line) secured against oil reserves.
Coordinated by Agricultural Bank of China,
Bank of China, Bayern LB, BNP Paribas,
Calyon, China Construction Bank, China
Development Bank, China Exim, ING, KBC
Finance, Natixis, SG CIB, and Standard
Chartered. The rate was 1.4 per cent over
LIBOR for the first three years and then
1.5 per cent.341 Some bankers reportedly
expressed concerns about the status of the
joint venture to which they were lending,
suspecting ‘it might belong in part to local
interests too close to the ruling elite.’342
• April 2007: $500 million from
Standard Chartered, at a low interest
rate (only 1% over LIBOR) and for
a long term of ten years.343
• August 2007: $3 billion arranged by
Standard Chartered, with Commerzbank,
Natixis, and Banco Espirito Santo, at
the same low interest rate, for seven or
eight years. It was reported that this
would be used to repay the November
2005 loan and provide funds for capital
and operating expenditure. The loan
was reportedly unsecured.344
• November 2008: $2.5 billion arranged
by Standard Chartered, Absa/Barclays,
Sumitomo Trust & Banking Company
and Millennium bcp, with a similar
structure to the previous year’s loan
and paying 1.6% over LIBOR, up
slightly on the previous year’s rate. The
trade press article commented, ‘Debate
rumbles on over how hard the global
financial turmoil will hit Africa, but some
things apparently never change.’345
That’s at least $13.9 billion in slightly over five
years. It is unclear whether each of these loans
represents entirely new money, or whether they
are being used to refinance earlier borrowing.
It is also unclear how they are being used:
spent on developing oil infrastructure?
Passed to the government? Repaying other
loans? Because Sonangol does not publish
independently audited accounts, it is not
known how much it needs to spend on capital
expenditure, and whether that is really what
these massive and repeated loans are being
used for. This matters because of the continued
opacity of the relationship between Sonangol
and the Ministry of Finance, as documented
by the World Bank and IMF; because of the
history of missing oil revenues; because of
the current lack of evidence that Angola’s
oil revenues are benefiting its population.
Certainly there are now other sources of
finance available in Angola. The major oil companies which are exploiting Angola’s
offshore oil will already be ploughing large
amounts into the country’s oil infrastructure
themselves, and the Angolan government also
has a revolving credit facility from China,
reported to be anything between $2 billion
and $7 billion, to use for rebuilding the
Angolan economy.346 This was reported in
July 2008 to have been extended, to finance
construction of a new airport as well as roads
and railways.347 Concerns have been raised
by civil society and donors about the opacity
of arrangements for disbursement of the
Chinese loans, which have raised the spectre
of potential diversion of funds.348
In addition, a consortium of Angolan banks
is reported to have opened a line of credit
worth $3.5 billion to the government for
reconstruction;349 in 2003 Deutsche Bank
signed a framework agreement with the
Ministry of Finance for infrastructure loans
which have so far totaled more than €800
million ($1.1 billion);350 in June 2008 Société
Générale signed a framework credit agreement
for infrastructure development.351 So with all
this other funding available, the question of
how the upfront cash borrowed against Angola’s
future oil sales is being used remains open.
The IMF and World Bank, at various stages
of their troubled relationships with Angola,
have put pressure on the government to quit
its commercial oil-backed loans habit, and have
repeatedly criticised the loans being made.352
The IMF offers far better terms for long-term
loans than commercial banks, yet for years
Angola chose to opt for short-term, highinterest
loans from private lenders in order
to avoid the scrutiny of public finances that
comes with IMF engagement. Promises to stop
the loans were repeatedly broken, as Global
Witness documented in its reports All the
Presidents’ Men and Time for Transparency.
However, Angola’s increasing confidence as its
oil output increases (and, until recently, as the
price of oil continued to rise) means that it no
longer has to listen. In late 2006 the Angolan
government paid off $2.3 billion in debt to
Paris Club creditors, instead of negotiating a
rescheduling or partial write off, which would
have required an IMF-approved programme.353
The problem with oilbacked
loans
There is nothing wrong with using assets
as security to access finance in itself. The
problem is if state assets are used without
public or parliamentary debate and oversight,
and if there is no transparency about the
loans themselves or the fees associated with
them; the problem is if it is done in order to
run a parallel financial system that may be
fuelling corruption, as the Angolagate and
Abalone cases (see: Oil backed loans – a
dirty history, on page 93) have suggested.
Global Witness research in Angola has
shown that, as in other corrupt countries,
state-owned enterprises are used to provide
hidden off-budget financing, and therefore
can constitute a significant corruption risk
for those banks that do business with them.
As far as the banks are concerned they are
making commercial loans, from their trade
finance departments, to an oil company.
In Angola, the oil-backed loans have
been made to Sonangol, not the Angolan
government, and that has been the basis
on which the banks are prepared to make
them. For years, Sonangol has successfully
presented itself to the international oil
majors and big banks with which it does
business as separate from the chaos of the
rest of Angola’s finances. Ricardo Soares de
Oliveira’s article shows how Sonangol was
deliberately protected from Angola’s chaotic
political economy from the outset, becoming
‘a paradoxical case of business success in
one of the world’s worst governed states.’354
But, as shown above, the Angolan authorities
are having their cake and eating it, because
Sonangol has been used by the authorities as
an off-budget system, one which has in the
past allowed billions of dollars of national oil
wealth to simply disappear from the state’s
opaque finances. Loans to Sonangol have also
been used to pay off some of the bilateral debt
run up by an opaque state. For example, $800
million of the $2.35 billion 2004 oil-backed loan
arranged by Standard Chartered was used to
pay off Portuguese creditors.355
This is a loan that was made to an oil company
by the commercial trade finance departments
of banks, yet it was used to pay off sovereign
debt. If it had been a sovereign loan, the banks
would have had to do proper due diligence
on Angola’s fiscal systems, and it is unclear,
given the concerns which have been raised
by the international financial institutions
about these systems, how the banks could
have mitigated their risks. The oil backed
loan to Sonangol, however, allows the Angolan
government to circumvent this problem.
This means that the banks are also having
their cake and eating it. They do business
with Sonangol as if it were a commercial outfit
like any other. But in fact it is a state owned
company whose functions overlap with its
opaque parent government. If the banks are
not prepared to do business with the state as
a sovereign entity – and in Angola, until very
recently, they were not (despite some effort,
Angola has not been able to achieve a sovereign
credit rating which would allow it to access
cheaper finance on world markets) – then
they should not be comfortable doing business
with a state oil company which operates as
a shadow off-budget financing system.
Commercial oil-backed loans to Sonangol have
therefore allowed the Angolan government to
continue to:
• bypass its own treasury’s central
financing system;
• run parallel black-box financial systems
which are not open to public scrutiny, and
are potential vehicles for corrupt activities;
• use its state oil company to access trade
loans from commercial banks, yet use the
money to pay off sovereign debt with no
transparency or parliamentary oversight;
• resist the emerging global consensus
among civil society, donors and investors
that where natural resource revenues are
the main source of government income,
managing those revenues more transparently
and equitably is the key to sustainable
development and poverty reduction.356
Although it is no longer the case that
commercial oil backed loans are undermining
the international community’s efforts to
pressure Angola into more transparency,
given that alternative sources of funding
such as the Chinese credit lines are available,
there is still the huge problem of lack of
transparency and oversight over the loans,
their fees, and what they are used for.
There is also a striking gap between, on the one
hand, the accolades heaped on the shoulders
of the banks and bankers in the structured
commodity finance business who have set up
the loans for Sonangol (such as Trade Finance’s
Deal of the Year for the Standard Chartered
$2.35 billion loan in 2004357 and The Banker’s
country Deal of the Year for the $1.4bn loan in
2007358), and the praise from these bankers for
Sonangol as a good loan bet, and on the other
hand, the despairing reports from the IMF and
World Bank about Angola’s failure to account
fully and publicly for government revenue.
Then, beyond the purely ethical concern is
the due diligence aspect of the issue. What
due diligence did these banks do before
making the loans? Global Witness asked
each of the banks which had been involved in
arranging these oil-backed loans since 2003:
• to confirm if the press reports of
their involvement were correct
• to provide details of all the loans to
Sonangol or the Angolan Government
in which they had participated,
including the purpose of the loan
• what information it sought about its client
and the use to which the loans would be put
• how it reconciled its relationship with
Sonangol with the repeated concerns
expressed by international financial
institutions about conflicts of interest and off-budget financing relating
to the role of Sonangol in public
finance management in Angola
how it evaluates • country, credit and
reputational risk in Angola, given that
Angola earns the vast majority of its
revenue from oil, and given these well
documented concerns regarding the
utilisation of oil revenues in Angola
• what safeguards are built into the loan
documentation regarding the use of loans
• what monitoring is performed of
the use of loan funds disbursed to
Sonangol or the Angolan Government
in order to police these safeguards.
Nineteen of them did not respond. Of the 12
that did reply, Royal Bank of Scotland, Bayern
LB, Deutsche Bank, Barclays, BNP Paribas and
ABSA were not able to provide any information
about whether they had participated, saying
that they could not comment on individual
deals or relationships. All except BNP Paribas
added that all deals were subject to risk and
compliance procedures.374
Calyon said it is subject to AML rules and
also complies with its group policies, and said:
‘We acknowledge that the wider economic
and political issues raised in your letter
may be in the public interest, however the
specific information you are seeking on the
provision of financing to our client and the
structure of such financing is information
which Calyon may not disclose due to its legal
obligations of confidentiality to the client.’375
Others, such as Standard Bank and Fortis
were able to briefly confirm that they had
participated in loans to Sonangol in the
past and, as with the others, said the loans
had been subject to their compliance and
know-your customer standards. Standard
Bank, for example, said: ‘as both a policy and
a principle’ it ‘will not knowingly provide
funding for any unlawful or socially deleterious
purpose and will require repayment of
any loan that is found to have been used
for anything other than a stated, lawful
purpose.’376 Bayern LB, WestLB and Fortis
pointed out that, the loans in which they
were involved having been repaid, they no
longer have any exposure to Sonangol.377
Standard Chartered, which has arranged
a number of the loans, wrote to say ‘while
it is not appropriate for us to comment on
the specifics of client deals as we owe a legal
duty of confidentiality to our clients, it is in
the public domain that we have a business
relationship with Sonangol. Standard
Chartered is committed to working with
each of its clients to promote international
standards of disclosure and governance
… The purposes of loans are outlined as a
condition of the relevant loan agreements.
We do not lend in circumstances where
the Bank believes the borrower will
breach that contractual obligation.’378
Securing supplies of oil has always
been a factor but is now more
important than ever, and it is now
happening in ever-sexier countries.
So it boils down to country risk
appetite of the bank for these sexier
environments. Those that have this
appetite are going to be the winners.
Andy Bartlett, global oil and gas director, corporate finance
at Standard Chartered, quoted in Trade Finance, May 2007380
Standard Chartered invited Global Witness
to a meeting to discuss the decision-making
process for its loans. None of the dealmakers
were present, although an executive who
sits on one of the committees that assesses
potentially controversial loans was. They
were not able to talk about any specific
deals, but said they could talk about how
decisions were made. They confirmed that
Standard Chartered has had a relationship
with Sonangol since 1975, and described
how the wholesale banking reputational risk
committee assesses loan decisions that get
referred to it. Each of the Sonangol loans
has been discussed by the committee, and
has also been referred up to the group risk
committee. ‘There’s a process to make sure
these things aren’t glossed over by guys whose
primary interest is to sell the deal; there are
many others concerned,’ they said. There
is also training for all staff, to ensure that
they know when to refer deals to the risk
committees, and ‘to overcome the mentality of
the traders’ “if it’s legal, I will do it” attitude.’
They emphasised that there were very clear
terms attached to the loans, but could not
say specifically what these were, except that
‘the loan structure had elements in it that
encouraged transparency.’ The wholesale
banking reputational risk committee reviews the use of loans annually. They added that
the bank’s guiding principle was to be able
to make a positive difference, and that they
did so in this case by putting their weight
behind the reformers within Sonangol
who wanted to make it more transparent.
They did not provide any specific details
on how use of loan funds is monitored.379
Fortis, while not commenting beyond
acknowledging its involvement in the 2005
$3 billion loan, pointed out that its procedures
for client due diligence have ‘evolved rapidly’,
that it is strengthening its sustainability
risk assessment framework, and ‘in this
context, the eligibility of new clients and deals
outside high-income OECD countries will be
subject to enhanced ESG [environmental,
social and governance] due-diligence.’381
ING noted that it is ‘currently not involved
in providing financing to Sonangol Sinopec
International,’ the loan which it is reported
to have participated in during 2007. It
elaborated on the policies which it uses
to guide its loan decisions, and added: ‘In
addition to the sensitivities that we generally
acknowledge for the oil and gas sector…
we acknowledge that financing oil and gas
transactions involving Angola is – for a number
of financial and non-financial reasons – prone
to higher risks than in a number of other
countries. In that respect we have designated
Angola as a high risk country. Transactions
involving activities in a high risk country
such as Angola are treated with great care;
as described above we will only consider such
financings if sufficient mitigants are in place.
The proper application of funds and control
mechanisms is part of our considerations.’
ING went on to say that ‘Sonangol has made
progress in achieving better transparency
and improving its standards, and progress
seems to be made with developing Angola’s
economy to the benefit of the population.’
As evidence for this, it pointed to factors
including the audits of Sonangol’s financial
statements by an international firm, the
improvement of the macro-economic situation
in Angola, and the implementation by Angolan
authorities of an economic programme to
address the consequences of the war.382
Global Witness remains concerned, however,
as stated previously, that these audits have
not been published, that the international
institutions have continued to raise concerns
relating to Sonangol, and that development
indicators for Angola are still dire.
KBC and Natixis were among those
who did not reply. However, they had
responded to Global Witness’s public
criticism of the 2005 $3 billion loan.
KBC said it ‘has adopted and implements
stringent ethical rules for the approval of
loan transactions.’ Natexis said that ‘our
formal approval process for all facilities is
extensive, involving several committees and
transaction reviews, including compliance,
legal and credit risk due diligence.’383
The German bank WestLB provided perhaps
the most specific information about the loans
in which it participated, confirming that it first
took part in an oil-backed loan to Sonangol in 1997, and participated in further loans in 2003
and 2005. It provided an insight into the 2003
Nova Vida facility, arranged by BNP Paribas,
in which it participated along with other banks.
WestLB said: ‘In this pre-export financing,
the funds were used to finance a prepayment
to Sonangol, which was subsequently repaid
by proceeds from the delivery of crude oil.
It is common in such financings, that the
facility documentation states a specific
utilisation of the disbursed funds and even
explicitly prevents the Borrower(s) from
using the funds for any military purposes.
We also requested and obtained confirmation
by respective official institutions that the
application of the funds would not contravene
any obligations of Angola towards the
International Monetary Fund, World Bank
or any other supranational organisation.
If misappropriation of funds had become
evident, this would have triggered a default
under the facility, which did not happen.’384
It should no longer be acceptable
to hide behind the secrecy of
commercial confidentiality to
make untransparent resourcebacked
loans to governments
or state-owned companies
It is interesting to see that the funds cannot
be used for military purposes, which was
the reason for some of the original oil backed
loans during the war. It is also interesting
to see that misappropriation of funds would
have triggered a default as part of the loan
contract. The question then, of course, is how
much monitoring is performed of the use of
the loan funds in order to identify any such
misappropriation? While WestLB’s letter did
talk about its ‘comprehensive due diligence
process before entering into a business
relationship with a client,’ and noted that
‘our due diligence did not provide evidence
of incidents preventing us from sustaining
a business relationship in the past,’ it did
not answer the specific question posed by
Global Witness: ‘what monitoring did WestLB
perform of the use of loan funds disbursed to
Sonangol?’ None of the other banks that replied
to us answered this specific question either.
So it is difficult to know how much effort was
put into searching for evidence of misuse
of funds. The regulatory requirement, as
WestLB points out, emphasises knowing
your customer and their business at the
opening of the relationship, not after the
funds have been disbursed. It would not
appear to be in any bank’s interests to
enquire too deeply, if it was not required to
do so by regulations, into the use of funds
loaned in case it endangered its own profits.
So it is unclear how much practical effect all
this due diligence is having with oil backed
loans to Angola. What effect did due diligence
have on the oil-backed loan that was supposed
to pay off $1.5 billion of Angola’s debt to
Russia, but of which only $162 million was
passed to the Russian finance ministry amid
huge backhanders to Angolan officials? (see
Oil backed loans – a dirty history, on page 93)
What exactly do the ‘rigorous risk and
compliance procedures’ to which so many
banks refer actually entail? None of the banks
explicitly answered the crucial questions:
exactly what information they sought about
their client and the use to which the loans
would be put; how they reconciled their
relationship with Sonangol with the repeated
concerns expressed by international financial
institutions about the conflicts of interest
and off-budget financing relating to the role
of Sonangol in public finance management
in Angola; how they evaluate country,
credit and reputational risk in Angola,
given that Angola earns the vast majority
of its revenue from oil, and given the well
documented concerns regarding the opacity
over utilisation of oil revenues in Angola.
Instead those who responded to our letters,
and Standard Chartered whom we met, told us
about how their own policies are sufficient to
control the risks presented by doing business
in Angola. The subtext to this is ‘trust us,
we have systems in place.’ But the global
banking crisis, in which banks have been
shown to have insufficient systems in place to
control the extent of their own liabilities, has
demonstrated the hollowness of such claims.
There is no information in the public domain
about the specific assurances that banks
require from trade finance clients that are
state-owned companies. If there isn’t a
sufficiently clear distinction between Sonangol
and central government, as the World Bank
and IMF continue to point out, then how can a
bank claim to know precisely who it is lending
to, and how the use of funds will be firewalled?
Of course a bank’s primary motivation is
commercial, to get its money back, along with interest and fees. On this basis alone,
then Sonangol, with its access to the second
largest oil reserves in Africa, positioned
safely offshore away from any potential
political instability, can be perceived as
an excellent customer. With an agreed
mechanism through which the oil is sold and,
up until 2007, a ring-fenced structure such
as a trust fund or offshore special purpose
vehicle to collect the oil revenues and pay
them back to the lenders, it looks like a
great deal for the banks making the loans.
But banks have recently begun to admit
that, in their position of global influence,
profit cannot be their sole concern when
making loans. The 65 major and secondtier
banks that have adopted the Equator
Principles since 2002 have agreed to
consider the social and environmental
issues of new developments before making
project finance loans, and not to provide
loans for the worst offending projects.385
Some of the banks who responded to Global
Witness’s letters – WestLB, ING, Fortis,
Standard Bank – cited their adherence
or, in the case of Standard Bank, planned
adherence, to the Equator Principles.386
Other banks cited their own sustainability
policies or their adherence to the UN
Global Compact, including Deutsche Bank,
Barclays, Bayern LB, WestLB, RBS and
Fortis.387 Standard Bank pointed out its
membership of the Johannesburg Stock
Exchange Socially Responsible Investment
Index. Barclays pointed Global Witness
towards its sustainability report, which
mentions its work with the UN Environment
Programme Finance Initiative, an alliance
of 160 financial institutions, to develop an
online resource for banks on the human
rights issues associated with lending.388
However, neither the Equator Principles, the
UN Global Compact, nor the UNEP Finance
Initiative explicitly apply to resource-backed
loans such as these. The Wolfsberg Group,
meanwhile, mentions ‘project finance/export
credits’ among the services that present a
money laundering risk, and briefly addresses
due diligence for syndicated loans in its FAQs
on anti-money laundering issues for investment
and commercial banking. But it too does not
explicitly tackle resource-backed loans.389
And while these voluntary initiatives present
useful emerging standards, they are not
underpinned by rigorous monitoring and there
is no real sanction for non-compliance (see Box 7: Regulation rather than voluntary initiatives,
on page 114). By signing up to them, though,
banks are rightly acknowledging the potential
consequences of their loans on the ground and
the resulting reputational risk for themselves.
Fortis explicitly said that it applies the
Equator Principles ‘beyond project finance’,
for example ‘corporate/hybrid transactions
that are related to a single asset as far as
this is possible.’ However, it added that ‘For
trade finance, including structured commodity
finance, we consistently find that the extensive
information required to assess compliance
with the Equator Principles is not available.
In these types of transactions, where we
have concerns about environmental, social
or governance issues, we instead assess the
client based on its capacity, commitment
and track record on these issues.’390 So what
Fortis seems to be saying here is that when
it comes to transactions of the category
that includes oil backed loans, it cannot
perform the due diligence it would apply
under the voluntary Equator Principles,
but instead assesses the record of the client
on these issues. This chapter has outlined
the many governance issues associated
with doing business with Sonangol.
Finally, as with each of the cases in this
report, there is the regulatory issue. As with
the Deutsche Bank and Turkmenistan case,
the regulators are not required to look at
the issue of resource-backed lending. Once
again this is despite the fact that public
lending institutions were not prepared to
keep lending into such a corrupt situation.
All the noise on the issue has been created
by NGOs and subsequently the media.
Just as it is no longer acceptable for a bank
that takes its responsibilities seriously to
finance a project that harms human rights
or pollutes, it should no longer be acceptable
to hide behind the secrecy of commercial
confidentiality to make untransparent
resource-backed loans to governments or
state-owned companies that fail to provide full,
independently audited disclosure of their receipt
and disbursement of oil revenues. The money
that is released to Sonangol (and thus, due
to fungibility of funds between the two, also
potentially to the Angolan government) from
these loans is repaid from future oil revenues,
and thus consists of the patrimony of the
Angolan people, which according to the Angolan
constitution should be exploited and used ‘for
the benefit of the community as a whole.’391 Yet the Angolan parliament has no
opportunity to scrutinise these loans. As a
result of the culture of secrecy surrounding
these deals, with select details released to
the trade press only when banks feel like
doing so, it is impossible for the Angolan
people to see where the country’s wealth is
going. In fact, ironically, it appears that banks
have been publicising even fewer details of
their oil-backed loans to Angola since Global
Witness criticised 2005’s loan.392
It is very difficult under the current regime for
Angolan citizens to hold their government to
account. Parliament is weak, and civil society
is put under pressure. There is thus a greater
responsibility on the part of the international
community to ensure transparency
over the provision and use of funds.
It is time for banks to be required to verify
the use of loans they make, and this should
involve transparency over the verification of
use of loans. Lending into such environments
should also be an issue of concern for banks’
shareholders. Where a state-owned company
does not have independently audited and
published accounts available to ensure that
proper risk assessment is carried out, banks
should be required to report publicly to
their shareholders on what basis their risk
assessments have been made. Crucially,
banks should also be required to publish details of loans made to any governments or
state owned companies. Otherwise, claiming
that they are lending to a state oil company
and that this is good business, banks will
continue to be able to support a regime
that suppresses dissent, still does not fully
and publicly account for its oil money, and
allows children to die in unconscionable
numbers despite its growing wealth Action needed:
Banks should be • required to publish
details of loans to governments
or state-owned companies,
including fees and charges.
• Banks should be required to
transparently verify use of the
loans they make to governments
and state-owned companies.
• Where a state-owned enterprise receiving
a loan does not have independently
audited and published accounts available
to ensure proper risk assessment is
carried out, or some other independent
oversight mechanism, banks should
be required to report publicly to their
shareholders on what basis their
risk assessments have been made.
http://www.globalwitness.org/media_libra...th_corrupt
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