- November 20, 2018

(20 November 2018) – A year ago, Katanga Mining Limited (TSX: KAT), a subsidiary of Glencore plc (GLEN: LN), was forced to publish an embarrassing internal audit after its activities were probed by Canada’s Ontario Securities Commission (OSC), which oversees the Toronto Stock Exchange. The audit found "material weaknesses" in financial reporting relating to the company’s activities in the Democratic Republic of the Congo, where Katanga Mining operates one of the richest copper and cobalt mines in the world. 

Since then the legal and regulatory troubles of Glencore and its subsidiary have deepened. Three of Katanga Mining’s directors resigned, including Aristotelis Mistakidis, a senior executive at Glencore. The OSC probe into Katanga Mining continues and new investor lawsuits have been filed against both companies and senior managers. In December 2017, United States authorities sanctioned one of Glencore’s key business partners, notorious Israeli billionaire Dan Gertler, and in July 2018 the U.S. Department of Justice (DOJ) issued Glencore with a subpoena for information as part of a corruption investigation. Glencore also faces the prospect of a UK Serious Fraud Office (SFO) investigation. All this raises important questions about how one of the world’s largest mining companies is conducting business.

The launch of the OSC investigation was the first time Canadian authorities responded to bribery and corruption concerns related to Katanga Mining repeatedly raised by civil society groups, corporate watchdogs and investigative journalists. It followed a detailed letter from RAID in June 2017, to both the OSC and the Toronto Stock Exchange expressing concern that the TSX was being used to launder assets and enable corrupt transactions that violated the U.S. Foreign and Corrupt Practices Act (FCPA).

RAID’s letters highlighted links between companies listed on the TSX and a corrupt scheme implemented by Gertler, Gertler-held companies, and the US hedge fund Och-Ziff Capital Management Group LLC (Och-Ziff). The scheme involved the capture and resale of highly valued Congolese mining assets and was investigated and exposed by US law enforcement authorities. In September 2016, Och-Ziff admitted to conspiring to violate the anti-bribery provisions of the FCPA and was fined USD $412 million in combined civil and criminal penalties, one of the largest fines ever levied against a Wall Street firm. The release of the investigations' findings should have alerted Canadian authorities, RAID said, because a number of the transactions identified as corrupt by US authorities concerned mining companies listed on the TSX.

The RAID letters called on the TSX and the OSC to investigate and clarify how Katanga Mining and another mining company, Africo Resources Ltd, were able to retain their TSX listings throughout, given the degree of Gertler’s participation and control.

On 15 August 2017, the OSC issued a Cease Trade Order (CTO), prohibiting Katanga Mining’s directors and executive officers from trading in or purchasing securities of the company, subject to certain limited circumstances. The limited order did not affect the ability of third parties to trade in the company’s shares. It is still in effect.

OSC investigators are looking into whether Katanga Mining filed misleading financial and other statements; its governance and the adequacy of historical corporate practices and compliance; and compliance with disclosure obligations under bribery and anti-corruption laws.

Katanga Mining suspended its trading in accordance with the CTO and commenced an internal audit. Shortly thereafter, on 20 November 2017, it published the results of that audit which found that the company had overstated its production numbers, overvalued its inventories and improperly transferred shortfalls in the valuation of its stockpiles. It concluded that certain of these “accounting adjustments” were made due to “senior management and executive directors…overriding the Company’s control processes.”

There is no indication the OSC probe has been completed.  The regulatory authority has not yet issued a statement of allegations, the first step towards holding a company to account for breaches of securities law. If found in violation of the Ontario Securities Act, Katanga Mining could face penalties, including a fine and/or imprisonment of those responsible.

The legal pressure is mounting. In December 2017, under the Global Magnitsky Human Rights Accountability Act, the U.S. imposed financial sanctions on Gertler and his affiliated companies, whose partnership with Glencore dates back to 2007 and who previously controlled Katanga Mining. The US Treasury stated that Gertler “amassed his fortune through hundreds of millions of dollars’ worth of opaque and corrupt mining and oil deals in the Congo.” On 15 June 2018, Glencore and Katanga Mining announced that they would, through subsidiaries, continue paying royalties to Gertler-associated companies, despite U.S. sanctions designed to prevent such payments. The same day, the US Treasury Department added a further 14 entities affiliated with Gertler to the sanctions list.

The publication of Katanga Mining’s internal review has also prompted lawsuits, filed on behalf of investors whose shares lost value, including one class action in November 2017 in the U.S. District Court of New Jersey against the company and its senior management that alleges that the company “employed devices, schemes and artifices to defraud.” Glencore, its CEO Ivan Glasenberg and CFO Steven Kalmin have also been hit with investor lawsuits. One of these, filed in July 2018, also in the New Jersey court, claims that Glencore, Glasenberg and Kalmin “engaged in acts, practices and a course of business that operated as a fraud or deceit” in Congo.  

In July 2018, further legal troubles followed. Glencore was subpoenaed by the DOJ for compliance with the FCPA and money-laundering statutes in Congo and elsewhere. Insiders involved with the DOJ investigation report U.S. authorities are seeking documents concerning Gertler and other “intermediaries.” Casting a further shadow over Glencore is a possible corruption investigation by Britain’s SFO. Glencore is listed on the London Stock Exchange, which may give UK law enforcement authorities jurisdiction to investigate the company. Glencore says that it will “cooperate with the DOJ” and that it “takes ethics and compliance seriously”.

Not only are the growing number of probes into Glencore and Katanga Mining important to determine if corruption and bribery laws have been violated, they are also important for the people of Congo who have to date gained little from the country’s vast natural resources. Congo remains one of the poorest countries in the world with little public spending on health and education. Almost 80% of its 69 million people live on less than $2 a day. Stepping-up legal action and scrutiny of companies who facilitate bribery and corruption is a crucial step in helping the people of Congo pull themselves out of poverty.

For further information

Click here for RAID’s letter to the Toronto Stock Exchange and here for the letter to the Ontario Securities Commission.

DR Congo: Greed and Corruption Block Democratic Progress. Blog piece.

‘Bribery in its purest form’: Och-Ziff, asset laundering and the London connection, Full Report

‘Bribery in its purest form’: Och-Ziff, asset laundering and the London connection, Executive Summary

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