East Africa

Standard Chartered accused over $100m African ‘dirty debt’


Standard Chartered bought a $100m “dirty debt” and used it to demand compensation from an African government despite knowing that the loan had been part of a multimillion-pound embezzlement scheme, according to claims in a legal battle.

The Tanzanian High Court is due on Monday to begin hearing in earnest a claim brought by a local company called VIP Engineering and Marketing, the erstwhile minority investor in a scandal-prone power plant project. VIP is seeking $491m in damages from StanChart, Mechmar, the Malaysian majority investor in the plant, and Wärtsilä, the Finnish engineering group that built it. They deny VIP’s claims that they were complicit in siphoning money out of the project.

For the London-based emerging markets bank, which has incurred nearly $1bn in fines over the past nine years for breaching sanctions and failing to guard against money laundering, the Tanzanian case marks another instance of alleged involvement in illicit financial dealings. StanChart denies wrongdoing and calls VIP’s allegations “baseless”.

The case is the latest in 18 years of international courtroom tussles stemming from a formerly socialist government’s efforts to harness the private sector to bring electricity to some of the two-thirds of Tanzanians who lack power.

Almost from its inception in the mid-1990s, the Independent Power Tanzania Limited (IPTL) project has been marred by acrimony between its two private investors — VIP and Mechmar — and the government, which funded the plant through a tariff.

When StanChart bought IPTL’s $101m debt for $76m in 2005, the company was already in default and its investors locked in dispute. Banks and other investors — including so-called vulture funds — often buy distressed debt in emerging markets in the hope of enforcing it.

Expert reports commissioned by VIP and submitted to the Tanzanian court last week raise questions about the circumstances in which StanChart acquired the loan from a Malaysian lender. They point to a stipulation in the sale agreement under which StanChart agreed not to hold the Malaysian bank responsible for the “legality, validity [or] enforceability” of the loan. This, one of VIP’s experts writes, indicated that StanChart knew the debt it was buying was “highly suspicious”.

VIP’s experts, including a British barrister and a Dutch legal scholar, also cite a 2001 arbitration ruling in New York that the costs claimed by IPTL and Wärtsilä were $30m too high. And they highlight changes to the terms of the loan made by the Malaysian lender that allegedly helped Wärtsilä and Mechmar siphon money fraudulently from the project. StanChart, one of the experts concludes, was “at a minimum . . . wilfully blind” to alleged past misconduct related to the loan when it bought it.

In the years since, StanChart has lobbied Tanzania to nationalise IPTL. It argues its debt is legitimate and has launched three international arbitration proceedings, including one demanding compensation from Tanzania. Last year it brought a suit in London against VIP and others after the company agreed to sell its shares in the project to another Tanzanian group.

That sale involved the improper use of government funds and the payments of bribes to officials, according to a 2014 parliamentary report that triggered a high-level political scandal in Tanzania. VIP, majority owned by local businessman James Rugemalira, contests the report’s findings.

Neither Mechmar nor the liquidators that a Malaysian court appointed in 2012 responded to requests for comment. Wärtsilä said VIP’s claims were “fanciful”. The Finnish group added that its “role in the project was limited” but that it stood by its work. It declined to comment further while the case was before the court.

StanChart, which reports annual results on Tuesday, said it “denies the allegations made against the bank and is committed to defending this position in court”.

Financial Times

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