Opinionista Dick Forslund 19 September 2014

Without a trace: Lonmin’s Bermuda connection

The story to emerge from cross examination during the Marikana Commission hearings shows Social Labour Plans for Lonmin’s mines are affordable if producers aren’t involved in profit shifting. It’s time to lift the veil of secrecy from the financial statements of multinational companies’ South African subsidiaries say and bring these unaffordable practices into the open.

A structure like this is normally set up to be optimal from a tax perspective,” said director Mahomed Seedat, Lonmin’s second respondent during the Marikana Commission hearings on 16 September. Seedat was appointed as executive director (chairman and president) of Western Platinum Ltd (WPL), one of Lonmin’s key subsidiaries in South Africa, in September 2007. Despite this, Seedat didn’t know much about WPL’s payment of sales commission to a Bermuda subsidiary, Western Metal Sales Ltd (WMS). He hadn’t been directly involved in the matter, he said. When asked during cross examination why Western Metal Sales was (supposedly) closed in 2007, he said costs could start to outweigh benefits. “I suspect that’s the logic that was applied at the time but I can’t give you the exact reasons,” he said. Seedat could only provide general information about how these things are usually done in the mining industry.

It would get worse during the cross examination.

The story told by Lonmin to the Marikana Commission is that the marketing services of the Bermuda outfit were phased out from 1 April 2007, from which date only half of the sales commissions were paid to WMS in Bermuda. No commissions were paid to WMS from the start of the 2009 financial year, Lonmin says in a document titled ‘Lonmin Agreed Facts’ that was made public during the cross examination. The sales commission was instead paid to the Lonmin Plc’s head office via its external South African company, LMS.

All Western Platinum’s audited financial statements delivered to SARS between 2007 and 2010, as well as the 2012 financial statement, report “Sales Commissions paid to Western Metal Sales” as a separate item. The only statement that “redirects” the flow to Bermuda of R1.228-billion during these years is the 2011 statement. It was signed on 4 October 2012. According to Seedat, five out of six financial statements audited by KPMG contained an error. As financial statements also account for the preceding year, the 2011 statement is contradicted by the 2010 and the 2012 statements.

It would seem that in 2012 both the managers and the auditor forgot what was supposed to have been a change in 2011 – or was there ever a change?

Then there is an extra twist. The alleged change in 2007 actually happened in 2012, but retroactively, as it were. After Seedat suggested there was an “error” in almost all financial statements, Lonmin’s lawyer Schalk Burger intervened by pointing to the Lonmin Agreed Facts document. In this version, Western Platinum’s financial statements were indeed correct (well, save for the 2012 statement that is entirely inexplicable). The “dormant” company on Bermuda hadn’t been dormant at all when those payments were made! No, Western Metal Sales was declared dormant in 2012. In June and July 2012 an agreement was signed that redirected the Bermuda flows to Lonmin’s South African company, LMS.

At this point, we must assume the marketing team on Bermuda had to pay back over R1-billion to LMS and dissolve, because from now on, the marketing and sales of Lonmin’s PGMs was to be done by LMS. And this “from now on” was to be implemented much earlier in Lonmin’s business history, financially speaking and for some reason.

Evidence leader Matthew Chaskalson impolitely suggested that the reason for this late decision, reflected only in the 2011 statement (again, the 2012 statement doesn’t acknowledge any change), was that Lonmin was then exploring the possibility of a bond issue in US, an exploration that compelled the company to show investors more than required in its public financial statements. No, Burger replied. He was told it was Incwala Resources, Western Platinum’s BEE partner, that had objected to the change for all these years. Incwala’s resistance was finally broken in June 2012. Now Seedat agreed this might well be true because a structural change of this magnitude needed to be approved by the BEE partner that holds 18% of the voting shares in Western Platinum.

If this is so, one might wonder why the change itself doesn’t merit any comment in the 2011 statement, audited by KPMG like all the other statements and allegedly the only statement in six years that got it right.

Aside from this mess, was any marketing of Lonmin platinum ever done from an office on Bermuda? It is notoriously difficult to find any trace of Western Metal Sales on the web. The Bermuda address, Canon’s Court on 22 Victoria Street, is the same as the address of Appleby Services, a big law firm specialising in off shore business with branches in tax havens all over the world.

On 1 October 2003, the above address was lodged at the Company Registry of Bermuda as the “registered office” of Western Metal Sales. A 25 March 1999 verdict (T-102/96) in the European Commission refers to “the fact that LPD’s [short for Lonmin’s Western Platinum and Eastern Platinum Ltd in SA] worldwide sales are carried out through Western Metal Sales, a Belgian subsidiary of Lonrho [Lonmin’s name at this time] based in Brussels”.

All this matters because it is Western Platinum that has committed to a Social Labour Plan for the surrounding mining community, not the parent company Lonmin Plc, and excessive invoicing of a South African subsidiary, legal or not, reduces this subsidiary’s ability to pay for this, and for wages. Impala Platinum chose to engage with AIDC’s questions in June on what appeared to be excessive sales rebates. At a meeting they also said their platinum group metals are sold by an insourced team of four to five people. The cost for this is hardly R200 million to R300 million per year, the size of the sales commissions paid to the Bermuda outfit.

Western Platinum also pays annual management fees of almost the same size to LMS, the branch of Lonmin Plc in South Africa. Lonmin Plc’s 2013 annual report adds to the question of fees and commissions charged internally by Lonmin and what is supposedly affordable. In the section ‘A Deeper Look’ 2009-2013 appears an item ‘Management and Marketing Service’. The group accounts should reflect what is paid to service providers outside the Lonmin Group. Internally we take for granted that Bermudian Western Metals is a part of the group accounts – Western Platinum Ltd paid R1.742-billion for the two services, marketing and management 2009-2012, to Bermuda and to LMS. In addition, the public 2013 ‘Deeper Look’ reveals R1.029-billion was paid by the Lonmin Group to external providers of the same two services!

Both August 2012 and the platinum strike 2014 showed that transfer pricing and the depletion of the funds of South African subsidiaries is unaffordable in the deepest sense of the word. Decent wages for workers and the fulfilment of SLP plans are affordable if the producing companies, the subsidiaries that pay wages and taxes, are not involved in chains of profit shifting. Lifting the veil of secrecy from the financial statements of multinational companies’ subsidiaries in South Africa is vital. So called “independent auditing” is not doing the job. Bring these unaffordable practices out into the open. They are truly unaffordable, to the mine workers, to the mining communities and to South Africa at large. DM

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