Business Maverick


Ernst & Young and the scam that cost Mozambique $2.2bn

Ernst & Young and the scam that cost Mozambique $2.2bn

The people of Mozambique have been battered by devastating cyclones and an increasingly virulent armed insurgency in the north of the country. The backdrop is a country battling State Capture. This involves a coterie of corrupt politicians, multinational corporations and international banks.

In previous instalments of the Unaccountable series, we wrote about the role of Credit Suisse and VTB Capital in megalooting in Mozambique. This week we turn our attention to the complicity of one of the Big Four auditors, Ernst & Young. 

EY: Crisis on crisis

Ernst & Young (EY) is no stranger to corporate scandal or audit failure. Open Secrets covered some of this in Unaccountable 00019: EY- Incompetent, Negligent or Criminal. Hot on the heels of their dubious role as auditors and consultants at the now defunct Lehman Brothers, EY is again facing another credibility crisis. The firm is embroiled in one of Germany’s biggest financial frauds since the end of World War II – Wirecard. 

Last year, fintech company Wirecard collapsed when it was unable to confirm the existence of €1.9-billion in cash. Yet for 10 years up until this moment, EY consistently approved Wirecard’s financial statements/accounts. This was despite many reports from short-sellers and journalists questioning the company’s third-party acquiring (TPA) businesses in Asia. These TPAs were at the heart of the missing (non-existent) €1.9-billion.  

In a scathing report following an investigation by the German Parliament, EY is said to have missed serious errors in Wirecard’s accounts, raising questions about its due diligence and its ability to apply the auditing principle of professional scepticism. According to the report, EY failed to spot fraud risks, did not implement professional guidelines, and in an outrageous departure from basic auditing practice, EY relied on verbal assurances from executives rather than original documentation.

Given the numerous lawsuits against EY in connection with its auditing of Wirecard, including a class action by investors, and the questions about EY’s unquestioning audits – it is perhaps prudent to ask questions of the mysterious role of EY’s auditing and consulting arms in Mozambique’s own massive fraud – the tuna bond scandal. 

Tuna bonds

In two previous Open Secrets’ Unaccountable profiles, we explained the role that Credit Suisse and VTB Capital played in the financing of loans to two of the three state-owned companies created by Mozambique’s government in 2013 to fund a tuna fishing fleet and maritime infrastructure. The loans for $2.2-billion were used to divert funds to the state’s intelligence agency, the Serviço de Informação e Segurança do Estado (Sise), and to the inner circle of former president Armando Guebuza. The Mozambican people saw no benefits.

Credit Suisse financed the $622-million loan for ProIndicus, the supposed maritime security company. VTB Capital financed the $535-million for Mozambique Asset Management (MAM) which was for maritime repair and maintenance services. The $850-million loan to the state-run tuna fishing company Ematum was financed jointly by VTB Capital and Credit Suisse. Of these three loans, only the Ematum loan was disclosed to the Mozambican public and the government’s other creditors, though it amounted to 6% of Mozambiques’ GDP at the time.  Aided by the banks, Ematum securitised the loans and sliced them up into bonds and sold them to international investors, earning them the nickname “tuna bonds”. The further two loans for MAM and ProIndicus were kept secret, making them illegal. 

All three loans were state-guaranteed; if the companies defaulted, the state, and by extension the Mozambican people, were on the hook to repay them. When the companies did default in 2016, the full scale of the loans was revealed and Mozambique was plunged into an economic crisis. Fourteen donors and the International Monetary Fund (IMF) stopped all lending to Mozambique; the country’s currency, the metical, plummeted in value by 70%, and its GDP growth rate fell from 6.7% to 3.8%. The economic catastrophe was not just due to the secretive nature of the loans, but also because the maritime security equipment and tuna fleets had failed to materialise. 

Though the Ematum loan was the only loan disclosed, Ematum proved to be full of financial irregularities and lies at the centre of questions about a missing $500-million. Investigators and prosecutors in Mozambique allege that this money was embezzled by shipping company Privinvest, former president Armando Guebuza and his inner circle, including his son Ndambi Guebuza; the head of Sise, António Carlos do Rosário, and the minister of finance, Manuel Chang. Chang is currently imprisoned in South Africa, where he is awaiting the National Prosecuting Authority’s decision to extradite him either to the US or Mozambique where he is wanted on criminal charges related to the tuna bond loans.

In 2019, the Ematum loan was declared illegal by the Constitutional Court of Mozambique. The court voided the agreements Mozambique had made with its creditors, but both Credit Suisse and VTB Capital have insisted on loan repayment, resulting in lawsuits between the Mozambican government and both banks in UK courts.

In 2017 lawyers from the UK branch of the firm Kroll were hired by the Swedish embassy in Mozambique on the request of the Mozambican Public Prosecutor’s Office to undertake an independent, forensic audit into the financial state of Ematum, ProIndicus and MAM. The investigation concluded that VTB Capital and Credit Suisse had failed to perform their due diligence requirements and should not have financed the loans because Mozambique’s loans are required by law to be approved by Parliament, the Council of Ministers, the Central Bank or the Attorney-General. Moreover, feasibility studies of the projects found the Ematum and ProIndicus projects to be worthless, while it is unclear whether one was conducted for MAM at all.

The dubious nature of these loans to three state-owned companies does not only implicate the banks. It also demands questions of other professionals who were involved in these deals. The first question is: Where were the auditors? 

Auditors and consultants

EY was contracted by the Mozambican state to conduct a statutory audit of Ematum’s financial statements for the years 2013 and 2014. However, it was not their only role. In 2016, when it was clear the government was about to default on the loan repayments, EY and Mozambique’s state-owned development bank Banco Nacional de Investimento (BNI) were paid $17.3-million to advise on the tuna bonds debt structuring.

EY’s dual role as both auditor of Ematum and as an adviser on the bond restructuring raises serious questions over its role in the scandal and how conflicts of interest in the audit profession undermine audit quality and may facilitate corruption. EY’s role as Ematum’s independent auditor meant it had the legal responsibility to take a balanced and fair view of the financial health of Ematum, and if warranted, raise the alarm over any potential corruption risks. Yet despite Ematum’s financial statements exhibiting several major corruption red flags and being littered with irregularities, EY did not flag them. Arguably, EY had a strong incentive to keep quiet because it was at the same time jostling to offer lucrative consultancy services to the same client, in this case, the Mozambican government. 

This conflict of interest gets to the heart of the problem in the audit firms’ business model and provides another case study of why all jurisdictions should prohibit audit firms from offering consultancy services to the same client.

EY’s 2013 and 2014 Ematum audits

In the absence of reliable financial information from Ematum’s management, Kroll’s forensic audit was based on information provided to it by EY. Kroll’s report uncovered highly irregular and suspicious business practices, undisclosed bank accounts and several other corruption red flags that auditors such as EY are required to inspect further during their audits.

For example, in February and August 2014 Credit Suisse sent two interest payment request notices to Ematum for a total of $51.8-million. During the course of its audit, Kroll identified a previously undisclosed Ematum bank account at Mozambican bank Moza Banco that, in fact, received the funds from a bank account connected to Sise (Mozambique’s intelligence services) which were then used to pay Credit Suisse directly.

Then in March 2015, while EY was undertaking its 2014 Ematum audit, Ematum’s directors sent an audit representation letter to EY claiming that the shipbuilder Privinvest had in fact paid $51.7-million to Credit Suisse (as well as $1.2-million to “another entity”) on Ematum’s behalf to cover the interest payments. Two days later, EY finalised Ematum’s 2014 statements and recorded a liability of $53-million. Kroll’s audit, however, found that these figures did not match the banking records for the corresponding transactions and concluded that the representations on the letter sent to EY were “incorrect”.  Neither Ematum nor Privinvest have been available to provide any evidence for an agreement in relation to this amount.

In his testimony before a New York court, former Credit Suisse banker Andrew Pearse confirmed that this audit representation letter was designed to deceive EY auditors and convince them that the source of interest payments on loans came from Privinvest instead of Ematum. This was because the Mozambique Ministry of Finance was hiding the existence of these interest payments from the Mozambican Parliament, despite this being unlawful. 

Although there may have been an intention to deceive EY, serious questions remain as to whether EY adequately checked banking records during its audit and whether it acted with the appropriate levels of professional scepticism that may have identified the source of the illegal interest payments. After all, checking bank statements is auditing 101, though it was also the failure of EY at Wirecard that allowed that company to hide a €1.9-billion fraud.  

There were other inconsistencies picked up by Kroll’s forensic audit. Ematum’s income in 2013 was recorded as $3,049,084 but only $14,268 of this came from fishing revenues with $3-million coming from an unexplained loan from Ematum’s supplier, Logistics International, in September 2013. A further $1.2-million from the same supplier was sent to Ematum in December 2014. Yet Kroll noted that the corresponding supply contracts made no mention of such amounts for operational expenses.  However, the audited statements signed off by EY refer to the payments as being “…provided by the supplier of the vessels to support the company’s current expenses during the initial stage of its business”.

Despite the almost non-existent revenue, Ematum’s audited statements for 2013 and 2014 identify significant “foreign exchange losses”, as a major contributing factor to Ematum recording overall losses for those years. In 2013 foreign exchange losses of $13.5-million were reported that contributed to an overall accounting loss of $10.7-million. The following year, Ematum recorded a foreign exchange loss of $13.9-million which contributed to an overall loss of $25.5-million. Overall, in the years EY audited the accounts, Ematum recorded $27.4-million in total foreign exchange losses.

Shoddy record-keeping by Ematum 

It is important that EY clarifies to the Mozambican public the reason why it did not sign off on Ematum’s later accounts, given the questions surrounding the records kept by Ematum. Kroll’s report directly queries the validity of invoices passed to EY’s audit partners, which it concludes do not correspond to the supply contracts and contain only limited information on the value of the vessels purchased. The Ematum supply contract examined by Kroll (worth $635,582,800) ran to just one page, and other invoices supplied to Kroll amounted to just $538,248,000. With the support of an independent expert, Kroll estimates that the price discrepancy between the prices of the assets as stated in the invoices provided to Ematum by the contractor, and the prices estimated by Kroll’s independent expert amount to $647,478,000. Kroll concluded that without the proper documentation the differences remain unexplained.

The lack of detail on the invoices and general standard of bookkeeping with relation to the transactions is, according to Kroll, a potential breach of Article 42 of Mozambican law as well as Article 150 for failing to have care with regard to their due diligence obligations to keep accurate documentation “in the interests of the company, taking into account the interests of the partners and its employees”. In addition, the fact that EY was not able to finish its 2015 and 2016 audits due to a lack of documentation means that Ematum directors were in breach of their obligations (Article 415) to engage an independent auditor.

EY’s Ematum consultancy 

Kroll’s report confirms that the Mozambican Ministry of Finance paid a total $31.4-million to 12 parties in fees in relation to the April 2016 Ematum debt restructuring. The largest amount, $17.3-million, was paid to a consortium of Banco Nacional de Investimento Mozambique (BNI Mozambique) and EY as the “local adviser to the government”.

Kroll obtained an undated copy of the mandate letter naming the consortium as an adviser to the Ministry of Finance for the restructuring of the Ematum loan. The document states that the consortium’s fee was performance-based and depended on the amount of debt raised, the number of notes exchanged, and the amount of equity raised.

Andrew Pearse from Credit Suisse claims that a Mr Matola was the representative of the BNI Mozambique along with a Mr Come from EY. According to his LinkedIn page, Tomás Matola is the president of BNI and was at the time of this contract. Local analysts claim that in practice BNI demonstrates its worth as Mozambique’s main development bank by “hunting commissions” by providing assistance to government institutions searching for loans on the international financial markets.

According to the Mozambican government in proceedings launched at the UK High Court, EY prepared a five-year business plan for Ematum in September 2015, claiming that with appropriate support from the Mozambican government and with changes to its revenue and debt obligation, Ematum’s business was “viable”. 

It is unclear how EY could consider Ematum – which was just months from a default on its loans and had no tuna fleet or revenues – could have possibly been a viable business. How did EY’s consultants come to this conclusion? Were they placing profit over their professional duties, securing the business of advising the government at the expense of their professional duties? 

These are some of the many questions that remain about EY’s role in Mozambique, though the firm has remained silent on its role in the tuna bonds scheme. This is symptomatic of the consulting industry more broadly. Researcher on McKinsey, Duff McDonald, pointed out in his book The Firm, that at the heart of the success of management consultancies is that they “expect no credit and accept no blame”. As the consulting sides of the Big Four’s business grows ever more lucrative and extensive, there is the risk that their cultures are increasingly skewed towards this exact ethos.

Holding the audit firms to account

While Mozambique and US prosecutors drag the politicians, bankers and shipping magnates throughout the legal systems of the US, UK, and Mozambique, EY has largely avoided scrutiny, remains silent and is to date unaccountable for its role in this scandal.

This is one of the reasons that Spotlight on Corruption is pushing for some accountability for EY’s repeated misconduct. In late 2020, Spotlight wrote to the UK’s Crown Commercial Service asking it to review whether EY should be banned from bidding on public contracts for three years. In its response, the UK government claims that despite a UK High Court judge finding that EY had engaged in “professional misconduct” in the UK, and despite a litany of egregious misconduct in other jurisdictions, it still does not meet the threshold to be debarred.

As a result, the search for accountability for audit failure continues. Firms like EY have a strong monopoly on public contracts and face little consequence for poor behaviour and misconduct. Until governments take a tougher line with the audit firms, we will continue to see them signing off on the accounts of companies involved in corruption and other forms of misconduct. DM

Unaccountable. We have not forgotten. 

Open Secrets is a non-profit organisation which exposes and builds accountability for private-sector economic crimes through investigative research, advocacy and the law. To support our work including the investigations that go into the Unaccountable series visit

Read more profiles from the Unaccountable series here


Comments - Please in order to comment.

  • Andy Miles says:

    Another fascinating expose of the deep cracks in morality in big business, its supposed guardians, and Government. Whilst the losers in this are the people of Mozambique, the real damage is to the credibility of the free market system. Love it or hate it, the free market has had more success in improving livelihoods, and expanding, however hobbled it may appear democracy, than any other. Immorality, corruption and greed are promoted with the agglomeration of power be it in business or Government. Big is the common denominator. Governments respond to public demand for protection from such events by passing more legislation. Large corporates have responded by employing technocrat lawyers to lobby and influence this legislation, shaping it to their narrow self interest – take a look at the number and costs of lobbyists in Washington, USA, and compare it to 50 years ago. It is an epidemic, more dangerous than covid. We need to turn things upside down and go back to basics, where individuals take responsibility for their lives, and communities drive decisions that affect them. Shrink Government where possible, certainly decentralise, and incentivise local involvement. Return money to being a means in our society, that is where it started, not the purpose of life, the end game. Many of South Africa’s difficulties have at their root cause this driving force of big central Government knows best, people encouraged to abdicate responsibility. Replace legislation with involvement.

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