KPMG green-lighted three Gupta deals that bore multiple hallmarks of money laundering. In these, suspicious foreign entities paid millions for shares in dormant local shell companies.

Our investigations suggest that at least two of the transactions were a cover to bring dirty money home.

KPMG audited the Guptas’ Oakbay Investments when it received the money – around half a billion rand. The deals were specifically described in Oakbay’s audited financials.

KPMG had enough evidence to see that something was wrong – the deals appeared to be fake, as we will explain – yet it did not qualify its audit opinions.

The money was mostly sourced from Transnet kickbacks and provincial government funds.

There is no evidence that KPMG knowingly participated in corrupt schemes. It audited about 30 Gupta companies in South Africa, but not their offshore vehicles, meaning it would have struggled to discover the ultimate source of the money.

But the new evidence will underscore public concern that KPMG may have looked away while illicit funds flowed under its nose.

KPMG denied that it “facilitated” corruption. It said it was taking responsibility and “will comply with all our reporting obligations”. It declined to comment on the specific transactions.

The Guptas did not comment for this article. They have consistently declined to comment on #GuptaLeaks allegations but said the leaked data was fake and that they did no wrong.

Professional scepticism?

KPMG South Africa is in a precarious position, thanks in part to its work for the Guptas.

In June, we reported how KPMG audited a South African Gupta company when it received Free State government money, diverted to pay for a lavish Gupta wedding.

KPMG South Africa’s then chief executive and its audit partner on the Gupta account attended the wedding. They later sent ingratiating emails to the Guptas that suggested an all-too-cosy relationship.

We then reported how a senior KPMG partner helped the Guptas to establish Dubai companies that would avoid South African taxes by pretending not to be associated with the Guptas.

KPMG said this tax structure was “within the parameters of the law”.

But the allegations sparked an ongoing public backlash, and KPMG South Africa has lost numerous prominent clients.

In September, KPMG International announced the results of an investigation. It found that the firm had not shown enough “professional scepticism” and its work “fell considerably short of KPMG’s standards”.

KPMG’s country chairman, top six South African executives and the Gupta account audit partner resigned.

Red flags

An external auditor’s job is to “provide assurance” that there is no “material misstatement” in a company’s financial statements. This is so that the users of those statements – lenders, shareholders, investors, business partners, etc – can make decisions about how to interact with the company. They trust auditors like KPMG to assure them that the company is not a booby trap camouflaged by misleading numbers.

High risks of misstated financials and financial fraud go together. After a number of big fraud scandals, international accounting rules were reinforced to require auditors to try to detect fraud diligently.

So the sceptical auditor is on the lookout for red flags.

Among these red flags is political exposure. It was well known from 2010 that the Guptas courted, employed and financially assisted President Jacob Zuma’s family. Since that year, the family has been linked to numerous credible corruption allegations.

And it is well known to accountants that a common form of fraud is to create fictitious transactions to “explain” illicit money flows. A diligent auditor would specifically look out for this.

Another red flag would be contradictory evidence behind transactions.

Money for nothing #1

The earliest deal now in question involved Worlds Window, a 25-year-old Indian scrap metal and logistics group.

In 2010, Worlds Window paid Oakbay $4.43-million (R31.6-million then).

Oakbay booked this cash in its audited financial statements as an “advance for subscription of shares” in Oakbay subsidiaries.

It was booked as a current liability, meaning that Oakbay did not transfer the shares to Worlds Window, but intended to do so later.

Every year from 2011 to at least 2014, Oakbay booked the same entry in its financials.

Among our unanswered questions to KPMG, we asked: “Did KPMG question why any company would ‘advance’ funds to Oakbay Investments, for years, yet never receive shares?”

KPMG might also have asked itself: What did Worlds Window believe it was getting in return, and how did this come to be valued at R31.6-million?

A KPMG spokesman said: “We do not believe it is appropriate to comment on specific transactions”.

Worthless

We have seen the purported share sale agreements between Oakbay and Worlds Window, signed in July and August 2010. We have not been able to verify them independently.

They describe that Worlds Window was buying minority stakes in the dormant Oakbay subsidiaries Micawber 480 and Micawber 492, which had access to two KwaZulu-Natal coal-prospecting rights.

So, Worlds Window had paid R31.6-million for minority stakes in dormant shells with purported access to two pieces of paper that may or may not have been good for profitable coal in future.

KPMG was apparently satisfied that the price was not inflated.

The #GuptaLeaks show that during Oakbay’s 2014 financial year, a Gupta employee sent two letters to the department of mineral resources in respect of the coal prospecting licences. The letters said:

“With reference to the following applications we hereby withdraw the applications and will not pursue the applications further.”

No coal, in other words.

Oakbay’s 2014 audited financials did not reflect this.

Worlds Window

Worlds Window did not respond to our requests for comment, but a senior company insider insisted this was a legitimate deal in which Worlds Window expected “a profitable mine” in return for its money.

Of Oakbay, he said: “They issued the share to us, but they might have done a fraud and shown it as advance.” He said Worlds Window planned to sue.

Had KPMG heeded the signs, it might have studied the source of the money more closely.

It would have found an Indian scrap metal dealer that, in 2010, had no visible interest in mining or South Africa.

During its 2014 audit, KPMG might have noticed that, in 2013, Indian authorities arrested Worlds Window’s founder and chairman Piyoosh Goyal on charges that he bribed Indian bank officials to inflate a company loan account.

We understand the case has not been resolved, although Indian authorities did not respond to us.

A 2009 “money laundering awareness handbook”, published by the Organisation for Economic Co-operation and Development (OECD), warns auditors to be on the lookout for “transactions with suspected criminals”.

The OECD also describes other signs of potential money laundering:

“There is no economical or logical explanation for the transaction”, “the transaction does not fit the person’s background or legal income”, “interest rate differs significantly from the market rate” and “interest payments and repayments do not occur”.

Money for nothing #2

Oakbay’s 2014 KPMG-audited financial statement described a second “advance for share subscriptions”.

This was a deal between it and one Fidelity Enterprises Limited. Fidelity had agreed to buy 49% of another Gupta company, Micawber 495, for $32.7-million (about R350-million then).

Micawber 495 was also dormant, and “the advance does not bear interest”, the financials reported.

This Micawber had also “entered into an agreement” with a Gupta subsidiary for “the mining of their coal right regarding portion 3 of the Farm De Roodepoort”.

Accounting records in the #GuptaLeaks show Fidelity paid Oakbay “advances” of $24-million (about R256-million then) by February 2015, the last year that KPMG audited Oakbay.

Correspondingly, Micawber 495 records show no evidence of shares transferred to Fidelity.

KPMG might have asked:

• Again, are these commercial terms?
• Who are Fidelity?
• Where is this money coming from?

Offshore Gupta

Had KPMG probed, it would have discovered that Fidelity was registered offshore, in Dubai’s Jebel Ali Free Zone. Otherwise, Fidelity had no public profile to explain its line of business or its ownership.

The OECD money laundering handbook flags anonymous companies in offshore jurisdictions:

“Such companies play an important role in the concealment, shifting and investment of criminal proceeds as well as in the concealment of the true beneficial owners.”

And it warns auditors to beware of “non-transparent/non-identifiable customers, creditors or lenders”.

Another of our questions that KPMG declined to answer was:

“In light of the apparent commercial implausibility of these deals, did KPMG question whether these were bona fide arms-length transactions?”

They were not. The #GuptaLeaks now show that Fidelity is a Gupta-controlled company. Oakbay’s audited financials failed to disclose this.

In short, under KPMG’s nose, the Guptas offshore sent money to the Guptas in South Africa for value that was not provided.

Dairy money

The transaction appeared to hide money laundering.

Fidelity’s payments for Micawber 495 were sourced from two polluted streams. The first sprung from the Free State provincial government.

We previously reported how the Guptas misappropriated R30-million in government money that was supposed to fund a community dairy, washed it through the UAE and brought it to South Africa to pay for their Sun City wedding.

Sparking much of the present criticism against the audit firm, KPMG audited the local Gupta company, which then booked the wedding as a business expense, meaning the Guptas paid no income taxes on the Free State money.

A junior KPMG auditor raised serious questions about this, the #GuptaLeaks show, but these were ignored.

Accounting records in the #GuptaLeaks also show that in September 2013, another $3.1-million (R30.5-million then) found its way from the dairy to Gateway Limited, a Gupta-controlled shell company in the UAE, and on to a Fidelity account in Dubai.

Two days later, Fidelity paid the amount in rand to an Oakbay account in South Africa as part of its Micawber 495 “advance”.

Transnet kickbacks

The second polluted stream that funded Fidelity’s “advance” rose from Transnet.

We previously reported how Transnet contractors paid kickbacks to a Dubai-registered company, JJ Trading (JJT), which passed 85% of these on to Gupta companies.

Of the first $4-million Fidelity paid Oakbay for Micawber 495, $755,000 came from JJT, which paid another Gupta UAE shell company, which transferred $800,000 to Fidelity.

The next day, Fidelity transferred $900,000 (R8.9-million) to Oakbay in South Africa.

Using the Guptas’ banking and accounting records, we also traced the source of most of the remaining Fidelity-Oakbay payments back to JJT.

Money for nothing #3

In 2013, 26-year-old US-based Ashish Gupta agreed to buy 35% of Keriscan from Oakbay for $17.5-million. Oakbay’s accounting records show that only weeks before, Oakbay had purchased Keriscan off the shelf for R100.

According to Oakbay’s 2014 KPMG-audited financials, Ashish “advanced” $10-million (R107-million then) to Oakbay. The deal was again purportedly linked to a Gupta coal licence.

Again, the financials explain: “The advance does not bear interest,” and Keriscan “is currently dormant” – it remained dormant years later.

Ashish’s online biography suggests he had recently finished his medical internship – the first year of training out of medical school. Interns in the United States make on average $50,000 annually.

Yet, young Ashish had $10-million burning a hole in his pocket and, apparently, no better way to spend it than lending that cash to Oakbay, with no interest rate return.

Just like the Worlds Window and Fidelity deals, this looked like a fake transaction.

Had KPMG asked, it might have discovered that Ashish was in fact a South African Gupta relative.

Oakbay’s financials did not disclose this.

More laundry

There is scant evidence of Ashish’s money being used for coal mining. In fact, as we previously reported, Oakbay used some of it to pay for President Jacob Zuma’s fourth wife’s house.

We don’t know where the young Ashish got the cash – and he did not answer emailed questions – but Ashish was later “replaced” as the buyer in the deal, according to the audited Oakbay financials.

The new buyer was a Gupta shell company in the UAE, Accurate Investments. Reimbursing Ashish, it wired $10-million to an account in New York, the #GuptaLeaks show.

The FBI is investigating this, the Financial Times has reported.

Accurate was the same company that “reimbursed” the Sun City wedding expenses, KPMG might have noticed.

We asked KPMG:

“Did KPMG question why Accurate Investments – a shell company KPMG purportedly was told was owned by the father of the Sun City bride – also appeared in a transaction involving Oakbay Investments?”

KPMG declined to answer.

Tracing the cash Accurate used to reimburse Ashish reveals that most of it came from JJT, and more of it ultimately came from another Transnet crane contractor, the Swiss-based Liebherr.

Liebherr investigated and recently concluded that the Guptas’ Accurate acted as its legitimate “sales agent … to provide interface services to the end user during the tender, procurement and supply process”.

These were not kickbacks, Liebherr insisted.

Among our unanswered questions, we asked KPMG about Fidelity and Accurate:

“Did KPMG question why two UAE-incorporated shell companies – let alone seemingly in a matter of weeks – would agree to purchase shares in dormant companies (Micawber 495 and Keriscan) for a total of $50.2m?”

And:

“What documentation was KPMG given that supported a fair market valuation of two dormant companies, Keriscan and Micawber 495, in excess of $50m (respectively, $17.5m and $32.7m)?”

Asleep at the wheel

The OECD’s anti-money laundering handbook explained:

“Deviation from normal or expected behaviour may indicate risk. The greater the deviation in behaviour and the more frequent the occurrence of unusual situations, the greater the risk for money laundering. Subsequent assessment is required.”

The OECD remarked that the role of auditors “puts them in a unique position to identify not only tax crimes, but also money laundering and other financial crimes”.

But, in its 2014 Oakbay audit, KPMG stated:

“We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion… In our opinion, these financial statements present fairly, in all material respects, the consolidated and separate financial position of Oakbay Investments Proprietary Limited at 28 February 2014.”

It offered no qualification.

‘We take responsibility’

A KPMG spokesman said:

“Whilst the KPMG International investigation established that the management of certain Gupta entities responded misleadingly and inadequately to our audit teams’ enquiries, we have made it clear, publicly, that in certain instances the audit teams failed to apply sufficient professional scepticism and to comply fully with auditing standards.

“We have taken full responsibility for the issues identified by the investigation, and those responsible have left the firm.”

We had also asked it:

“If Oakbay Investments’ management misrepresented these as arms-length transactions or misrepresented the source of funds (which, again, appear to be largely, if not exclusively, misappropriated from government contracts), would this breach Oakbay Investments’ management representation letter to KPMG?”

And:

“If such misrepresentations were made, is KPMG obligated to withdraw its audit opinions?

It ducked:

“We have, and will, comply with all our reporting obligations as required by applicable law, regulation and professional standards. If new information is brought to our attention, we will act decisively.”

But, KPMG said:

“We strongly reject your assertion that a failure to detect ‘a number of clues’ is evidence that KPMG South Africa facilitated illicit financial flows. Such a conclusion would be an unfair and unfounded allegation against both KPMG South Africa and our employees.” DM

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