SIU joins Transnet in lawsuit against Nedbank over State Capture-era deals

The Special Investigating Unit (SIU) is now supporting Transnet in its legal case against Nedbank. The case concerns the commercial bank’s role in conducting financial transactions that were allegedly corrupt during the period of State Capture.

On Friday 26 July, the SIU and Transnet jointly announced that they had filed a lawsuit against Nedbank in the Gauteng Division of the High Court in Johannesburg. The lawsuit relates to Nedbank’s role in conducting interest rate swap transactions for Transnet — transactions that were allegedly corrupt and cost the state-owned transmission entity billions of rands.

Transnet had already taken legal action against Nedbank after months of mediation talks between the two parties failed. The talks were aimed at settling the dispute amicably and avoiding messy litigation. The SIU has now jumped into the fray, saying Nedbank has a case to answer.

The SIU is a body that investigates allegations of corruption in state bodies and entities and has the power to initiate legal proceedings to recover losses.

Nedbank has responded to Transnet and the SIU’s announcement, denying any wrongdoing. Nedbank said it “will vigorously defend the legal proceedings against it and will pursue its counterclaims against Transnet and others”.

“To date, no evidence has been found, or presented to Nedbank, of any dishonesty, corruption or collusion by Nedbank staff,” the bank said in a statement.

Read more: Nedbank faces more lawsuits over Transnet and its relationship with Gupta-linked Regiments Capital

In the interest rate swap transactions, Nedbank was essentially involved in restructuring the interest on the debt that Transnet used to finance its rail freight and port operations, while at the same time receiving fees for this.

Transnet and the SIU said the interest rate swap transactions, which took place in 2015 and 2016, resulted in profits for Nedbank of “in excess of R2,736,094,704.82” or more than R2.736 billion. Transnet and the SIU want the High Court to set aside the interest rate swap transactions and claw back the alleged profits generated by Nedbank on the grounds that they were “unlawfully paid” by the state-owned enterprise (SOE).

Transnet and the SIU are of the opinion that the interest rate swaps are void and unenforceable under the Public Finance Management Act, are in breach of section 217 of the Constitution and are contrary to public policy. “There is sufficient basis for the relief sought and Nedbank must account for its involvement and conduct in the swap transactions,” a statement from the SIU and Transnet said.

Nedbank is facing another complaint from the Airports Company South Africa (Acsa) regarding the bank carrying out interest rate swap transactions on behalf of the state-owned airport operator. Acsa has referred Nedbank to the SIU. Like Transnet, Acsa believes it was wronged by Nedbank when it restructured interest rates and wants any losses it incurred to be recovered from the bank.

Nedbank has previously denied any wrongdoing in connection with its activities at Acsa.

Regiments Capital

Nedbank’s role in the interest rate swap transactions at Transnet and Acsa is detailed in the first and second parts of the State Capture Commission reports. These reports also examined the bank’s relationship with Regiments Capital, a financial services provider with ties to the Gupta family.

In the State Capture Commission reports, Judge Raymond Zondo made no definitive ruling on misconduct against Nedbank. He merely questioned the bank’s work with Transnet and Acsa and recommended further investigation of interest rate transactions.

Nedbank’s relationship with Regiments is probably the most destructive at Transnet.

In his second State Capture report, which takes an in-depth look at Transnet’s affairs, Zondo found that Nedbank’s work at the SOE had caused the company “significant harm” and financial losses.

Nedbank and Regiments’ involvement with Transnet began after the SOE embarked on a massive capital investment programme in 2011 to modernise its locomotive fleet. Transnet ultimately purchased 1,064 locomotives from Chinese manufacturers, primarily China South Rail and China North Rail.

Read more: How the Guptas’ R9 billion locomotive heist unfolded

Transnet was not financially strong enough to finance the purchase of the locomotives and had to mobilise funding from lenders. It approached a consortium of lenders for a loan of approximately R12 billion.

Around August 2014, Anoj Singh, then Transnet Group CFO, insisted that SOE appoint Regiments as an advisor to manage the R12 billion loan and the associated interest rates. Singh bypassed Transnet’s internal treasury team, which would normally be responsible for managing the company’s cash, debt and financial risks.

Read more: Here it is: Transnet’s sweetheart deal with Regiments Capital

Nedbank’s relationship with Regiments

Regiments also needed external assistance to restructure the interest on its R12 billion loan, and so on 4 December 2015 it approached Nedbank for assistance.

Involving Nedbank would arguably create a conflict of interest for the bank, as it partly financed the R12 billion loan while simultaneously assisting in the restructuring of Transnet’s interest on the loan. In other words, Nedbank would effectively be a player and arbiter.

To restructure the interest rate on the loan, Regiments executed an interest rate swap agreement between Transnet and Nedbank. At a basic level, an interest rate swap occurs when two parties agree to swap the type of interest they pay on loans, which would mean swapping a floating/variable rate for a fixed one. Swaps are essentially a bet on what interest rates will be in the future. During a rising interest rate cycle, locking in an interest rate can make a loan and interest payments cheaper. But in the long run, locking in interest rates (especially below-market rates) costs you more down the road.

These are the costs that Transnet and the SIU want to recover from Nedbank.

Nedbank has accused Regiments and Transnet of misconduct.

Nedbank said: “To the extent that there was corruption, it was on the part of Regiments Group and Transnet employees and not on the part of Nedbank. Nedbank will not be held liable for any governance failures at Transnet.

“Given the internal and independent external reviews they have conducted, the board and management of Nedbank remain satisfied that Nedbank’s internal governance procedures have been followed in relation to these swaps and that there is no evidence of dishonesty, corruption or collusion by Nedbank’s personnel.”

Nedbank also denied Transnet and the SIU’s claim that the bank had made a profit of more than R2.7 billion. “The sales margin earned by Nedbank in respect of the swaps was market-related and amounted to less than R43 million. The swaps were commercially sound and the return on equity earned by Nedbank was fair, reasonable and appropriate at 15.5% over the life of the transactions,” the bank said. DM