Earlier this week on Tuesday July 3, producer and trading company Glencore said it had received a subpoena from the US Department of Justice to produce documents and other records related to a money laundering probe.
Sanctions were not mentioned, but each of the countries named
has a link to ongoing restrictions by the US government.
The commodities trader-producer said it was reviewing the request, which relates to its business in Nigeria, the Democratic Republic of Congo (DRC) and Venezuela from 2007 to present.
It’s just a request for documents, and Glencore certainly isn’t the first natural resources company to be quizzed over its international activities. But, as the immediate dive its share price took highlights, it was not well-received by investors.
(Their nerves were likely soothed afterwards by Glencore's announcement two days later that it planned to buy back as much as $1 billion worth of shares in a program lasting till the end of the year, which perhaps indicates that the company's executive shareholders view the initial share move as extreme.)
It shouldn’t be a total shock that the DRC is one of the jurisdictions in which the US Department of Justice is probing.
Glencore recently settled a spat there with Dan Gertler, an Israeli businessman with sanctions against him and his businesses since December. According to the US government, between 2010 and 2012 alone, the DRC reportedly lost over $1.36 billion in revenues from the underpricing of mining assets that were sold to offshore companies linked to Gertler.
Glencore had stopped making royalty payments to Gertler when the sanctions were imposed but resumed making them in euros in an effort to get around breaching them
as well as to prevent possible disruptions to the company’s lucrative copper and cobalt operations in the country, namely Mutanda Mining Sarl and Kamoto Copper Co SA (KCC).
Payment of any kind to a US-sanctioned individual and his businesses probably that didn’t go down too well with the US government. However, Glencore did consult with the appropriate US and Swiss government agencies regarding the Gertler payments.
KCC, a subsidiary of Glencore’s Katanga Mining unit and a joint venture with the DRC’s state-run mining company Gécamines, had also been the focus of another dispute for the Switzerland-based company.
Glencore recently settled that fight with Gécamines
. It ended up costing Glencore $5.6 billion but led the company to be positively singled out by Gécamines as demonstrating the kind of “constructive spirit” it expected to see from other international mining companies with which the DRC miner has similar gripes.
But the path to this comradery had led the non-executive directors of Katanga to initiate an independent review into the accounting practices of Katanga covering the financial years ended December 2014, 2015 and 2016.
That review concluded that as a result of inappropriate accounting practices and significant weaknesses in Katanga’s internal control environment around financial reporting and inventory valuation and recording, including management override of internal controls, various financial line items were mis-stated during those years.
The Glencore board held its own internal review, which led to three of the Katanga executive directors resigning from the Katanga board and three new directors replacing them. Glencore also implemented various structural and internal control changes across the copper department to enhance and strengthen its financial processes and procedures.
Katanga isn’t out of the woods yet: enforcement staff of the Ontario Securities Commission (OSC) are investigating, among other things, whether Katanga’s previously filed periodic public disclosures contain statements that are misleading in a material respect and the adequacy of Katanga’s corporate governance practices and the related conduct of certain directors and officers
Katanga has also been advised that OSC enforcement staff are reviewing Katanga’s risk disclosure in connection with applicable requirements under certain international bribery, government payment and anticorruption laws, Glencore said in its 2017 annual report.
If the DRC is a US sanctions hotspot, then so too is Venezuela.
In May, the US designated Venezuelan politician Diosdado Cabello Rondón for sanctions related to a corruption network in the country.
Those sanctions alleged that Venezuelan officials including Cabello used Venalum as well as state-owned Aluminos Nacionales SA (Alunasa) to launder money to Costa Rica and Russia
At times during the 10-year period of the subpoena, Glencore has had an offtake agreement
for the Venalum smelter’s aluminium.
Glencore was previously part of a consortium - including Pechiney, acquired by Alcan and then in turn acquired by Rio Tinto - to add a fifth potline to the CVG Alcasa smelter.
A number of international firms, including Glencore, Trafigura and Vitol, were recently named in a Miami, Florida-filed lawsuit by state-owned Petróleos de Venezuela, alleging payments were made as bribes to get the inside track on oil deals.
Glencore is not the only international mining firm to be active in Venezuela; a number of its peers have been and remain actively involved in the country.
Nigeria sanctions link
Nigeria is perhaps more of an opaque situation.
There is currently one Nigerian individual sanctioned by the US government in relation to global terrorism. The country’s oil sector, in which so many international firms are significant players, has escaped direct US sanctions; so too its smaller metals sector.
Like its natural resources peers, Glencore has been active in Nigeria during the 10-year subpoena period.
In 2012, it signed a memorandum of understand with the country’s government
to discuss prospects in the mining industry inside the country that could amount to up to $1 billion of investment.
Aside from any marketing and trading it may have been involved in, Glencore has worked, for example, with Folawiyo Energy at the country’s key port of Lagos. It has also supplied alumina in barges along the Niger Delta to the Alscon smelter in a deal that dated back to company employees’ former Marc Rich days.
Alscon could perhaps be a key reason why Nigeria is mentioned in the subpoena list.
The smelter, which has been shut since 2012, is owned by UC Rusal and has been the subject of a now-resolved but extremely protracted battle with the government over its sale to the Russian firm.
The owner of that firm, Oleg Deripaska, is at the top of the sanctions hit list
for the US Department of Justice, being the subject of individual sanctions on himself as well as his businesses.
The mega firm that exists as Rusal today was formed in 2007 following the merger of its assets with smaller domestic rival Sual and the alumina operations of Glencore.
There’s no indication that Glencore has done anything wrong in any of the subpoena jurisdictions, nor any suggestion that the subpoena will turn into a formal investigation.
The subpoena's links with the sanctions may be coincidence and entirely unrelated; that is not something the US Department of Justice will publicly reveal right now, but could perhaps become clearer in time.