Glencore's growing legal troubles with Katanga Mining

New report by British NGO

Glencore's  growing legal troubles with Katanga Mining

Press statement by Rights and Accountability in Development (RAID)

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 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.