- December 9, 2018

“What can you do?” asks the United Nations as part of International Anti-Corruption Day on 9th December. Just recently, the London Stock Exchange asked itself the same question when the rulebook for the Alternative Investment Market (AIM), its lightly-regulated junior market, came up for review. The answer was disappointing. It seems the Exchange is willing to do very little to prevent corrupt transactions on AIM.

AIM has a disturbing back-catalogue of scandals in which investors have lost plenty, but it’s not just investors who are affected. The use of AIM companies for corrupt transactions and to launder assets impacts people across the globe, including those struggling to make a living in marginal economies. As the UN campaign warns, corruption “contributes to instability, poverty and is a dominant factor driving fragile countries towards state failure.”

When a notorious dealer in conflict diamonds, Dan Gertler, launched or took control of AIM companies from 2006 - 2009, no one, least of all the Exchange, paid much attention. US authorities were less lax. In 2016, they exposed a corruption scheme involving Och-Ziff (a major US hedge fund), Gertler, the president of the Democratic Republic of Congo and billions of dollars worth of mining assets. Fines totalling $412 million were levied against Och-Ziff. The connection to London, and its markets, was clear, as reported by RAID. AIM companies featured prominently as vehicles for the corruptly acquired concessions, with Main Market companies the ultimate buyers. The latter included ENRC (now Eurasian Resources Group), since delisted and under investigation by the Serious Fraud Office, and Glencore plc, recently subpoenaed in the US under the Foreign Corrupt Practices Act. Indeed, Glencore’s legal and regulatory troubles are mounting.

Confronted by this trail of corruption and laundered assets, the Exchange hides behind its rulebook, claiming its remit does not cover such illegality. Fraud, corruption, and market abuse are the concern of the Serious Fraud Office and the Financial Conduct Authority, it says. It repeats the mantra of ‘working closely’ with the relevant statutory authority, but that’s all.

Although not wanting to get involved in exposing corruption on AIM, the Exchange is all too aware that the use of the junior market to launder assets is neither good for its reputation nor for the peace of mind of investors. Its answer to this dilemma is, firstly, to rely on commercial companies as nominated advisers (‘nomads’) to act as gatekeepers when it comes to regulating AIM companies. Secondly, the Exchange puts its unadulterated faith in AIM rules ‘focused on disclosure to ensure investors have the relevant information to make informed investment decisions’. Thirdly, when things go wrong, the Exchange oversees disciplinary action against companies and their nomads.

The reforms to the AIM rulebooks adopted during 2018 were supposed to have strengthened all three areas, but were quite minor and peripheral. RAID, among others who responded to the review, is not alone in being unconvinced.

A clear example of the problem is highlighted by RAID’s research on a corrupt scheme involving the Central African Mining and Exploration Company (CAMEC) Limited which was admitted to AIM in October 2002. Once set up on AIM, CAMEC brought Congolese and Zimbabwean mining assets of dubious provenance to the London market. Gertler did likewise, launching Nikanor plc. A due diligence report, bought to light by the US investigation, revealed how a number of advisors and fund managers did not want to assist in bringing a Gertler company to market, but Nikanor was still able to engage a nomad and join AIM. Gertler went on to acquire a large holding in CAMEC, paving the way for the injection of funds from Och-Ziff. According to the US authorities, when Och-Ziff subscribed to the CAMEC share offer, a pot of money was immediately made over to cover the payment of bribes.

The Exchange’s three safeguards did not work to halt the use of AIM to launder these assets. Firstly, the nomads failed to spot non-compliance. In CAMEC’s case, RAID sent the Exchange a 162 page submission covering some 78 issues of non-compliance with AIM rules, all of which appear to have escaped the nomad’s attention. The breaches related to failures to ensure timely and accurate notifications, to apply the class tests on significant shareholders, to flag the absence or incompleteness of accounts, and to scrutinise the conduct and reputation of key managers and business associates.

Secondly, it is patently absurd to rely upon transparency of the market when it comes to corrupt deals. On 5 September 2007,  CAMEC informed the market its mining licences had been withdrawn by the DRC government, strongly hinting that illegal and dirty tactics by “commercial forces” had been used to stop CAMEC buying lucrative assets. Yet, six months later, CAMEC merged with a Gertler-controlled company, using its news release to tell investors that working closely with former rival Gertler in Congo created significant value. To ensure “investors have the relevant information to make informed investment decisions” would have meant stating that Gertler had engineered the stripping of CAMEC’s licences. It would also have meant revealing, as the US authorities did eight years later, that CAMEC was earmarked for the corrupt acquisition of further lucrative mining concessions using Och-Ziff funds.

Thirdly, no action was ever taken against CAMEC or Nikanor. The former’s nomad faced rare sanction, but the disciplinary action was ‘illustrative’ and related to other rule breaches and ostensibly had little or nothing to do with the failure of the nomad to scrutinise CAMEC's conduct. As a result, the whole sorry saga of CAMEC’s dubious Congolese and Zimbabwean transactions was buried by the Exchange, until the US authorities dug them up in 2016.

By its very nature, International Anti-Corruption Day and the question “What can you do?” is a call to action. It has not been heeded by the Exchange. The minimal nature of the revisions to AIM’s rules broadly boil down to: guidance whereby nomads should notify the Exchange early on about the “appropriateness” of a company seeking to list and; a new rule requiring a company to “comply or explain” against a recognised corporate governance code (of their choosing). Most of the dubious transactions exposed by RAID and others occurred after admission, not before, and took advantage of a lack of ongoing scrutiny. The nomad system also persists, whereby commercial companies have vested self-interest in bringing clients to market and retaining them afterwards, yet are also meant to police non-comliance.

When it comes to reform of the disciplinary rule book, RAID’s view is that the key changes help to clarify procedures, but they do not result in increased public acknowledgement of wrong-doing, or holding companies and their advisers to account.

The Exchange noted in its response to the consultation that ‘[p]ublicising outcomes of material disciplinary cases was also supported’. However, while the Exchange will now name those who break the rules in contested cases, the new Handbook also provides for fixed and attractive discounts on any fines for those who settle early, while retaining the option for private censure (as well as a whole host of other  discrete interventions behind closed doors).

Once again, the Exchange has described the AIM rulebooks as ‘providing comprehensive standards of disclosure’, stating that it is this very disclosure that ‘enables investors to fully understand the businesses in which they are investing and the relevant risks attached to such investments’. Yet, when it comes to disclosure of the most vital information to investors, concerning breaches of the rules and misconduct and the serious risk this represents, the Exchange has codified and written into the Handbook the means to withhold such information.

This secretive approach is out of step with the stance adopted by other regulators, such as the Financial Conduct Authority which has moved to curtail private censure. It also ultimately allows companies to use AIM to attract investment while engaging in fraud or laundering illicitly acquired assets (including those secured through bribery), with little risk of exposure under AIM’s opaque regulatory regime.

The Exchange may argue that combatting bribery, corruption and fraud does not fall within its remit, but it is ignoring the obvious. Companies engaged in such crimes are also flouting AIM rules under a lax regime. Strong and effective regulation would discourage all such activity and send a clear message that companies intent on illegality are not welcome on AIM. Working to achieve that outcome is what the Exchange should do to mark International Anti-Corruption Day.