OPEN SECRETS: UNACCOUNTABLE

Estina’s Banks

By Open Secrets 19 March 2020

The infamous Estina Vrede Dairy Project was supposed to direct public funds to ‘empower’ indigent Free State farmers and develop local agriculture. Instead, almost all of the money was looted to benefit the Gupta enterprise. This week Open Secrets focuses on two of the banks that facilitated this injustice. As shown in The Enablers Investigative Report, it takes more than a few corrupt politicians to capture the state. It requires banks to facilitate suspicious payments and the extraction of money from the country. In the case of Estina, Standard Bank and FNB have questions to answer.

See here: The Enablers Investigave report 

In February 2013 Ace Magashule, then Free State Premier and now ANC Secretary-General, used his State of the Province address to make a major announcement: the Free State government would be setting up a “state-of-the-art” dairy farm in the town of Vrede.

Two months later, Gupta family and friends, along with South Africa’s political, economic and media elite, gathered at Sun City to celebrate the wedding of Vega Gupta and Aakash Jahajgarhia. The lavish event prompted one of the first big Gupta-linked scandals when it emerged that guests had been allowed to land at Waterkloof airport, a military installation. 

But the wedding involved an even bigger scandal: funds from Magashule’s vaunted dairy project, instead of benefiting local farmers, were laundered into the pockets of Gupta companies to meet the costs of the Sun City wedding. The Enablers explains how audit firm KPMG was centrally involved in assisting the Gupta enterprise to launder stolen Estina funds via the books of the Gupta company Linkway, using the costs of the Sun City wedding to do so.

Subsequent investigations of the project by the Public Protector and National Treasury, together with analysis of the #GuptaLeaks, reveal that the Estina/Vrede Dairy Project was, from start to finish, a Gupta-driven project, established to benefit the Gupta enterprise and loot Free State government funds. An analysis of banking records and other documentation by Shadow World Investigations has revealed that the vast majority of the R280.2-million paid to Estina by the Free State government was transferred into accounts owned or controlled by the Gupta enterprise.

As with most State Capture schemes, the Gupta network needed to launder the money they extracted. To summarise this process; once deposits from the Free State Department of Agriculture were received in Estina’s accounts with Standard Bank and FNB, they were extensively ‘washed’ through local accounts by means of ‘round-tripping’ or ‘loan-backs’. Once reintegrated in Estina’s Standard Bank or FNB accounts, the money would be transferred to Gateway Limited in Dubai, and then further moved between offshore accounts. Finally, the funds were either sent to pay Gupta bills abroad, deposited into Gupta-controlled hawala accounts, or, more notably, transferred into the accounts of South African Gupta companies such as Linkway Trading and Oakbay.

This laundering served two purposes. The first was to make it incredibly difficult for authorities to follow the money, potentially confounding a criminal investigation. This worked: the Asset Forfeiture Unit’s failed attempt to seize funds related to the Estina project in 2018 was partly a result of its failure to understand fully the sophisticated banking methods used. The second reason was even more cynical – to create the appearance that Estina was securing other sources of investment for the project. The circular laundering systems recycled Estina money multiple times through multiple accounts, allowing for the fabrication of a fraud. It appeared that money additional to the Free State funds was being paid into the account when this was not the case.

The evidence that follows shows that the banks that held these accounts either did not do enough to identify the conspicuous red flags related to these transactions, or if they did, they and their regulators failed to act. We focus on Standard Bank and FNB in this article. Another central player in this case was the Bank of Baroda – and you can read more about their role in The Enablers.

Standard Bank

As noted in The Enablers, Estina was a small private company with no agricultural experience, headed by Kamal Vasram, the sole director of this enterprise. Vasram had no farming experience: the #Guptaleaks show that he worked as an IT salesperson; then, for much of the life of the Estina Project, he worked full-time as a salesperson at Toshiba. The only thing that appears to have counted in Vasram’s favour was his connection to the Gupta enterprise. Standard Bank provided banking facilities to both Estina and Vasram.

Between 11 June 2012 and 25 July 2014, Estina received R174-million from the Free State Department of Agriculture in six payments to its Standard Bank account. After this, the funds were subject to the extensive laundering process outlined previously. The evidence suggests that Standard Bank might have missed at least three red flags of possible money laundering that should have been identified.

The first was that often the deposits made into Standard Bank accounts by the Free State government were almost immediately transferred onto external beneficiaries. This is usually a major red flag, as legitimate operating businesses tend to keep funds in their accounts in order to transact day-to-day business. Bank records show that, of the six payments that were made into Estina’s Standard Bank account by the Free State government, only two deposits were left untouched for more than a week. In one case, the immediate transfer of funds was combined with inexplicable ‘smurfing’ activity: on 26 April 2013, when Estina was paid R30-million by the Free State government, this full amount was immediately transferred to Estina’s Baroda account in six transfers each equalling R5-million. 

The second red flag was that Estina made a number of large and unexplained payments to a single offshore company registered in Dubai – Gateway Limited. Transacting with offshore entities in this way is often a major concern in money laundering. Documents from the #GuptaLeaks, when read against Estina’s bank statements, show that Estina transferred US$8,348,000 into Gateway’s Standard Chartered account. If Standard Bank was proactively monitoring the Estina account, it surely must have wondered why Estina, an agricultural firm reliant on government grants, was transferred large amounts of operating capital, in round amounts, to an offshore company that had no online or public profile.

The final red flag was that for a substantial period of time during which Estina operated its Standard Bank account, it was already widely reported in the media that there were concerns with the project. By June 2013, amaBhungane had dug deep into the project, detailing compelling evidence of suspicious activity. Early the following year, it emerged that National Treasury had initiated an investigation into the project, and that a Free State official had testified that the project was linked to Mosebenzi Zwane. Estina’s Standard Bank account was, during this entire time, receiving payments from the Free State Department of Agriculture and making a range of suspicious outbound payments. It is hard to see how, if Estina’s accounts were being proactively monitored, Standard Bank could not have picked up these warning signs.

Red flags should also have been raised concerning the personal account of Vasram which was used to facilitate various loan-backs that laundered Estina funds. Documents from court proceedings involving the Gupta enterprise have shown that Vasram received multiple payments from either Oakbay or Aerohaven and immediately transferred these on to Estina’s Standard Bank account. Through this method, Vasram’s Standard Bank account received and immediately paid out R33.592-million between October 2012 and December 2013. Aerohaven and Oakbay were both publicly and undeniably part of the Gupta’s stable of companies. Surely a proactive Standard Bank must have wondered why an IT salesperson, who was working full-time as a sales consultant, was handling large sums of money paid by Gupta companies, which were then immediately transferred to a dairy farm in the Free State.

We use the term ‘proactive’ because this is how Standard Bank has described its due diligence process to the Zondo Commission. On 12 March 2019, Ian Sinton, a member of Standard Bank’s legal department, appeared at the Zondo Commission in terms of a subpoena issued to Standard Bank. In that testimony, Sinton acknowledged that legal provisions in anti-money laundering laws placed a legal duty on the bank not only to ensure they were not knowingly aiding corrupt activity, but also created a positive duty to investigate suspicions of wrong-doing. Sinton assured the Commission that:

We monitor all of our clients activities on an ongoing basis and where we have reason to believe quite apart from what is reported on the Financial Intelligence Centre where conduct appears to us to be suspicious we will investigate and if we think that conduct is such as it will expose us to contravention of any of these acts we typically prefer to terminate the relationship, rather than face the risk of prosecution ourselves.

The evidence above illustrates that Estina’s bank accounts at Standard Bank should have been subject to rigorous scrutiny by the bank. At a bare minimum, this would have required filing suspicious transaction reports (STRs) with the Financial Intelligence Centre (FIC). Section 29 of the FIC Act requires South African banks to report any transaction to the FIC when it has or is about to receive the proceeds of a crime, which have no apparent lawful or legitimate purpose, and which have facilitated the transfer of unlawful proceeds.

It is not known whether Standard Bank made any suspicious activity reports in relation to money-laundering activities linked to Estina and the Vrede Dairy Project. We asked the bank whether it conducted due diligence on these clients, if it enquired into the source and rationale of the deposits into Estina’s accounts, and whether it reported any suspicious activity reports to the FIC related to these accounts. Standard Bank responded:

Standard Bank has complied with its regulatory responsibilities and has engaged where applicable and appropriate with the relevant authorities and/or Commission of Inquiry within the ambit of the law. The Code of Banking Practice prohibits Standard Bank from divulging any confidential information relating to its clients to third parties.

When Sinton appeared before the Commission, he made no disclosure of any suspicious activity reports, also citing confidentiality. Regardless, Sinton assured the public in his testimony that beyond basic reporting requirements, Standard Bank was proactive and as such monitored all clients “on an ongoing basis” in order to ensure it was not assisting any unlawful activity.

Yet this assurance of proactive monitoring and action sits at odds with the evidence regarding the red flags linked to Estina’s accounts with Standard Bank. It is crucial that the Commission re-summon the bank’s executives to fully explain this apparent discrepancy.

First National Bank (FNB)

First National Bank (FNB) also held Estina accounts that received two significant deposits from the Free State Department of Agriculture. These payments included a deposit of R60-million on 8 May 2015, as well as a deposit of just over R46-million on 5 May 2016. Estina also utilised an FNB call account that was used as a stopping-off point for Estina funds. Bank statements for Estina’s FNB business account indicate that this account remained active until at least April 2017, although the last major transaction (R215,000 paid to a little known South African company called Pwe Trading), which also constituted the last of the distribution of funds from the Department of Agriculture, took place on 31 October 2016.

Like all the big four banks, FNB appeared before the commission in September 2018 to testify about why they had closed Gupta-linked accounts in 2016. These discussions were limited to the banks’ allegations that there had been an attempt by certain political factions to put pressure on them regarding the closure of these accounts. The bank also stressed the right of the bank to end relationships with clients on the basis of “perceived illegality”, which creates a negative association, regardless of whether actual criminal activity took place.

Yet just like Standard Bank, there were a number of obvious red flags that FNB should have identified in relation to its provision of banking services to Estina.

The first was that by the time Estina started making regular use of its FNB facility, it was publicly confirmed in April 2015 in the Free State legislature that Estina’s role in the Vrede Dairy Project had been cancelled in August of the year before. Later that same year, in August 2015, it was publicly confirmed that this cancellation was due to irregularities in the awarding of the Estina contract discovered by National Treasury. The cancellation of Estina’s part of the deal in 2015, due to irregularities, should have raised an alarm at the bank about their possible complicity in any criminal activity by continuing to permit these transactions. 

The second red flag related to how funds were dissipated from the FNB account. Estina’s FNB bank records indicate that deposits by the Free State government were paid out to secondary accounts almost immediately after the initial deposits. The first payment received from the Free State Department of Agriculture was on 8 May 2015 (valued at R60-million). On 13 May 2015, five days later, Estina transferred R59.75-million into an FNB account whose ownership remains unclear. From there, the funds were transferred into an FNB Money Market account, which started paying money into and out of Estina’s FNB account on 28 May 2015. FNB, as the supplier of these accounts, had sight of how these transactions flowed.

The final red flag related to the recipients of money paid out by FNB. In total, of the R106-million that was paid into Estina’s FNB account by the Free State government in 2015 and 2016, over R85-million was paid out to Gateway Limited. The payments to Gateway Limited in 2016, drawn from the final tranche of money paid to Estina by the Free State government, were not even subject to any proper laundering. After the Free State government paid R46-million into Estina’s FNB account on 5 May 2016, Estina transferred R40,737,452 directly to Gateway Limited. This amount was made up of four payments made between 9 and 18 May 2016. The dispersal of the 5 May 2016 payment was additionally remarkable in that it took place five months after Absa had terminated its Gupta-linked accounts in December 2015.

Shadow World Investigations put these issues to FNB in September 2019, asking whether FNB had conducted due diligence on Estina, the source and rationale of the payments into Estina’s accounts, and whether FNB had filed any suspicious activity reports with the FIC. FNB responded:

Due to client confidentiality, FNB cannot comment on specific bank accounts. In instances where the bank is required to comply with external legal or judicial processes, the bank will adhere to such requests.

Like Standard Bank, FNB’s response is disappointing. It certainly does not answer any of the queries raised, or put to bed doubts about whether the bank met its legal obligations.

Time for banks to account

As the Zondo Commission continues trying to unpick webs of state capture, the fact remains that those who stole hundreds of millions of rand from poor farmers in the Free State did not only need to capture a minister and corrupt a provincial government department. They needed South African and global banks to move their money.

In this case, the conduct of Standard Bank and FNB along with their answers to our questions, leaves many questions about whether the banks met their obligations under FICA. This is why we have called for the Commission to summon both banks to testify and explain why they provided banking facilities to Estina despite obvious red flags. They should also confirm whether they submitted suspicious activity reports, and if so, further inquiries into how these were handled by the FIC are essential.

They should not be alone. Open Secrets has called on the State Capture Inquiry to summon each bank, accounting firm, consultancy and legal professional implicated in State Capture to publicly answer, at minimum, the following questions:

  1. Were they knowing participants in the illicit and illegal activities in question?
  2. If not, did they satisfy the duties required by the law and their professions to stop becoming unwitting accomplices to criminal activity?
  3. Why did they not identify the obviously suspicious nature of many of the transactions sooner, and if they did, why did they not act to stop them sooner?
  4. Do they acknowledge that a reasonable and responsible professional in their position should have done more to identify the criminal intentions behind many of the transactions and deals that they facilitated?
  5. How much have they profited from these transactions, and how much of this illicit gain has been repaid, if any?
  6. What punitive actions have they taken against individual executives and employees identified as being complicit in illegal or unethical activity? Further, what structural reforms have they enacted at their firms to prevent similar conduct in the future? DM

Open Secrets is a non-profit organisation which exposes and builds accountability for private-sector economic crimes through investigative research, advocacy and the law. Tip-offs for Open Secrets may be submitted here.

Previous articles in the Unaccountable series are: 

Unaccountable 00001: Dame Margaret Hodge MP – a very British apartheid profiteer

Unaccountable 00002: Liberty – Profit over Pensioners

Unaccountable 00003: Dube Tshidi & The FSCA: Captured Regulator?

Unaccountable 00004: Rheinmetall Denel Munition: Murder and mayhem in Yemen

Unaccountable 00005: National Conventional Arms Control Committee: handmaiden to human rights abuse?

Unaccountable 00006: Nedbank and the Bank of Baroda: Banking on State Capture. 

Unaccountable 00007: HSBC – The World’s Oldest Cartel

Gallery

DA Federal Congress

South Africa’s slickest political show goes virtual in impressive style

By Rebecca Davis