Analysis on Mozambique’s hidden debts – Don’t Call Bribes ‘Chickens’

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Analysis on Mozambique’s hidden debts – Don’t Call Bribes ‘Chickens’

12:26 CAT | 07 Jan 2019

Bloomberg

If you are bribing government officials to give your firm lucrative construction contracts, an important question is: When do you pay the bribes? I am not an expert on bribes, but I had vaguely thought that the answer would be “before you are awarded the contracts.” It just seems like the government officials have more leverage than you do: They can award very large contracts, while you can only pay them somewhat smaller bribes; lots of people are competing to bribe them for the contracts, while there are relatively few corruptible governments that will give out lucrative contracts in exchange for bribes.

Also of course this is, in different form, the normal approach in the gift economy of investment banking and big business generally: If you are a service provider trying to get a lucrative mandate from a company, you curry favor with the company by doing free work, taking executives out to dinner, etc., before they give you the mandate. Companies don’t hire investment bankers to do big deals in the hopes that the bankers will buy them steak dinners afterwards; the bankers buy the steak dinners in the hopes that the companies will hire them to do big deals.

But the problem with bribes is that, if you pay a corrupt government official a large bribe before he awards you a lucrative contract, he can always not award you the contract. (Or he can hold out for more bribes.) It is hard to rely on his honesty and integrity, you know? And if he stiffs you it is not like you can sue. Plus, you might not have the money: You might need to get the contract payment first, so you can use some of it to pay the bribes. So here is an email that Jean Boustani, a salesman for Abu Dhabi-based shipbuilding company Privinvest Group, allegedly sent to an unnamed official of the government of Mozambique about the timing of alleged bribes (uh, “success fees”) connected to a contract that Mozambique awarded Privinvest to help build a “coastal monitoring system” to fight pirates:

A very important issue which needs to be clear: we had various negative experiences in Africa. Especially related to the ‘success fees’ payments. Therefore, we have a strict policy in the Group consisting of not disbursing any ‘success fee’ before the signature of the Project Contract.

Very fair! But look at it from the government official’s perspective. If he awards you the contract first, and then he doesn’t get his bribe, he still has leverage: He can cancel the contract or seize your assets in the country or whatever. But after the contract award he might be more constrained by institutions or publicity. Plus, in this particular case, the contract fee was paid at signing, so you’ve already got the money. Also, what if he loses an election? Here is how the Mozambican official allegedly responded to Boustani’s email:

Fabulous, I agree with you in principle. Let us agree and look at project in two distinct moments. One moment is to massage the system and get the political will to go ahead with the project. The second moment is the project implementation/execution. I agree with you that any monies can only be paid after the project signing. This has to be treated separately from the project implementation … Because for the project implementation there will be other players whose interest will have to be looked after e.g. ministry of defense, ministry of interior, air force, etc. … in democratic governments like ours people come and go, and everyone involved will want to have his/her share of the deal while in office, because once out of the office it will be difficult. So, it is important that the contract signing success fee be agreed and paid in once-off, upon the signing of the contract.

So the equilibrium is apparently that you pay the bribe at the same time the contract is signed. (Actually Privinvest allegedly wired its co-conspirators $10.2 million of bribes five days after signing, which is also when Mozambique wired Privinvest its $317 million fee under the contract.) Makes sense. Why would either party trust the other?

Those emails are from this indictment that U.S. federal prosecutors in Brooklyn brought yesterday against Boustani, as well as Mozambique’s former Minister of Finance and three former Credit Suisse Group AG bankers who helped arrange the financing for the projects that Mozambique awarded to Privinvest. The indictment is full of instructive bribe-negotiation emails. For instance Boustani allegedly emailed the Mozambican official “requesting a bribe and kickback figure,” and the official replied:

Fine brother. I have consulted and please put 50 million chickens. Whatever numbers you have on your poultry I will add 50 million of my breed.

Look, again, I am not an expert on bribes, and nothing in this column is ever legal advice. But it does seem to me that, if you are looking for a code word for “bribes,” “success fees” is almost infinitely superior to “chickens.” Like if someone finds these emails and asks you “isn’t ‘success fee’ just a euphemism for ‘bribe,’” you can just tough it out and be like “oh no those are success fees, very standard, in every contract, you gotta pay a fee for success. Consulting! Local expertise!” But if someone finds these emails and asks you “isn’t ‘50 million chickens’ just a euphemism for ‘$50 million of bribes,’” what, are you going to be like “no no no we had a legitimate need for 50 million chickens for this coastal monitoring project, the chickens will be stationed on the seashore to look out for pirates”? Come on. If you are using “chickens” as a euphemism for “bribes,” you are not doing it to be sneaky; you are doing it to show off how ridiculously brazen you are.

The charges against the three Credit Suisse bankers are in some ways stranger. A big part of them is: Credit Suisse originally demanded some stringent conditions for the loan, and in the course of negotiations the deal team replaced some of those conditions with less stringent but still perfectly reasonable conditions. For instance, Mozambique was receiving financing from the International Monetary Fund, which imposed limits on Mozambique’s borrowing from private sources, and Credit Suisse originally required Mozambique to inform the International Monetary Fund of the loan. This condition was replaced “with the less stringent requirement that Mozambique represent to investors ‘that they [were] in compliance with their IMF and World Bank obligations.’” That strikes me as a reasonable compromise: If the IMF required notice, then the compliance rep means that Mozambique would give the IMF notice; if the IMF didn’t require notice, then there’s no reason for Credit Suisse to. (Either way, the representation wasn’t true, but that’s a separate issue.)

It is an unsettling read. Business deals are complicated, and there is a give and take in negotiating legal protections; a bank wants the strongest possible guarantee that its client is not doing anything legally risky, while the client wants as much flexibility as possible to run its affairs. The bank will generally start out by asking for a lot — copious representations and certifications and sign-offs and legal opinions and control rights for the bank — and the client will push back, and they will agree on a compromise. If it turns out that the client was doing enormously illegal stuff, then in hindsight that compromise will look suspicious: Why didn’t the bankers insist on ironclad guarantees? But that is just not generally how it works, even when there’s no bribery going on.

Or there were some people involved in the deal — proposed deal partners and proposed directors of the entity formed by Privinvest and Mozambique — who were flagged by Credit Suisse executives or by an outside due diligence firm as bad actors. “A master of kickbacks,” is the phrase that a due diligence report used about one of them. The deal team “failed to relay” these concerns to Credit Suisse’s compliance department, alleges the indictment. But what they did instead was get rid of those people! “We need to structure him out of the picture,” the lead banker said about the kickback-master guy, and as far as I can tell they did. After seeing red flags about the proposed directors, the bankers got a different group of directors appointed, and then got compliance approval based on those directors “without revealing that two separate groups of directors had been researched.” I don’t know! That seems okay, no? Like, they considered doing a non-compliant transaction, and they researched it and decided that it would be non-compliant, so they decided to do a compliant one instead, and they took that one to the compliance department.

In my former life as an investment banker, I tried to only go to compliance for approval of transactions that I thought were legal. Asking compliance to approve illegal transactions would have wasted their time and mine, and damaged my credibility. Occasionally people came to me — innocently enough, usually; the law is complicated — asking me to do transactions that were illegal, and I would say “no, that’s illegal, why don’t we do a legal transaction instead?” If they agreed, then I’d go get compliance approval for the legal one, not the other one. 1 The job of the deal banker is to structure a deal that works, that will get through compliance and committee approvals. Most deals start by not working, and the banker has to massage them to get them to work; you take the final one to compliance for approvals, not the bad rough draft.

So I was sympathetic to the bankers up until I got to the part of the indictment alleging that “throughout 2013 and 2014, using loan proceeds, Privinvest made numerous kickback payments” to the Credit Suisse bankers! Specifically the lead banker allegedly got $45 million wired to a bank account that he set up in Abu Dhabi, characterised as “partial payment on consultancy agreement” or “dividends payment,” some of which he allegedly shared with the other two bankers. These are much better euphemisms than “chickens,” but still, if you work at a bank you can’t have your banking client pay you millions of dollars personally for “consultancy”! Come on.

Auto lending

A stylised story that you could tell about banking since, like, “It’s a Wonderful Life” is:

1 – In the olden days, each town had a local bank, and the local banker had a thick set of relationships with the people in the town that allowed him to make nuanced judgements of creditworthiness. If he saw you at church and knew your parents and was impressed by your firm handshake, he’d take a chance on giving you a loan; if he saw you at the pool hall and your parents were deadbeats and you had shifty eyes, he wouldn’t give you a loan no matter how good your collateral.The key determinant of creditworthiness was character, and the banker’s job was to evaluate character.

2 – Then banks became vast multinational entities and could no longer rely on those deep relationships to make credit judgements, and they were selling the loans anyway, so lending became a matter of crude judgements like FICO scores and debt-to-income ratios.

This story is often told with an implication that the old methods were more accurate — that deep local knowledge and conservative banking led to better credit decisions than the crude numeric indicators — though I am not sure how true that is; I have never seen an empirical study on the relationship between firm handshakes and creditworthiness. And the old methods were susceptible to obvious biases; here is a recent study finding that (human-administered) auto loans tend to discriminate against minority borrowers more than (purely statistical) credit card origination. But in any case, the main point is that the new methods are faster, cheaper and much more scalable: If you are everywhere, it is hard to rely on local knowledge, and so you will rely on algorithms instead.

But while not too long ago “algorithms” meant, like, “divide the loan amount by the customer’s income,” now the word “algorithms” carries the promise of infinite subtlety. Here’s a story about auto lenders who are using machine learning to evaluate borrowers, and the language can sound a little “It’s a Wonderful Life”-y:

“What artificial intelligence and machine learning allow us to do is to get much broader perspective on consumers, and we’re going to be able to lend more to people who were invisible” thanks to additional data shedding light on their creditworthiness, she said.

The computer doesn’t just look at crude signals, but probes deeply into the real story behind them, sort of:

Instead of looking simply at whether a potential borrower has ever filed for bankruptcy, for example, the machine-learning system helped Prestige consider such factors as when the bankruptcy happened, and analyse that data with other variables, including previous car-payment records and time spent living in his or her current residence.

(Amusingly, recent bankruptcies are better, for legal-risk rather than character-evaluation reasons.)

If you are nostalgic for the old methods of individualised human evaluation, this is … good-ish? Lenders are making nuanced holistic evaluations of a person’s life and character rather than just relying on crude scores. I tend to be an optimist about this sort of stuff, and I can easily believe that a machine-learning algorithm can end up making better lending decisions than both (1) local humans relying on their gut instinct for handshake quality and (2) simplistic numerical scoring mechanisms.

And yet: creepy? The old-timely banker’s evaluation of your character was opaque and unpredictable and prone to bias, but at least there he was, sitting across the desk from you, shaking your hand. The algorithm’s evaluation of your character is opaque and unpredictable (at least to you), and perhaps prone to bias, and you have no human context to fit it into, no way to say “well I always thought that algorithm was a jerk.”

It’s a story about lending but really it’s a story about postmodern life generally. In the olden days, people lived on a small human scale where they had deep connections to each other and all knew each other’s business. Then modernity occurred and people became more autonomous and anonymous, with weakening ties to their communities but, at the same time, with more freedom. Then, like, Facebook occurred, and now we somehow have the worst of everything; everyone knows everyone else’s business but in an inhuman, alienating, super-scale way.

Insider blah blah blah

If you’re buddies with New York Governor Andrew Cuomo, and he told you on Wednesday that he wasn’t going to shut down the L train, and you went and bought a bunch of real estate in Williamsburg before the official announcement on Thursday, and Williamsburg real estate prices shot up as soon as he made the announcement, would that be insider trading? Ugh I don’t know, who cares, though I will mention that a New York legislator is working on making it illegal. (Which maybe means that it isn’t now?) But what about if you’re friends with one of the engineers who worked on the alternative not-shutting-the-L proposal? Also seems like insider whatevering. But what if you’re friends with a tunnel engineer who didn’t work on the proposal, and has no connections to anything, but who nonetheless told you “you know there’s a way to repair the tunnel without shutting down the L and I bet they’ll figure that out”? That’s clearly legitimate research, right? It’s important for that engineering knowledge to be incorporated into the price of Williamsburg real estate, for market efficiency. I don’t know.

Elsewhere, Sujeet Indap points to a “Social Q’s” column in the New York Times about material nonpublic information:

My father is a big shot in finance. When I saw him recently, he asked about a friend and former roommate. I mentioned where he works. My father grimaced and said that my friend’s company will soon be sold. According to my dad, this will be terrible for my friend. Should I tell him to find a new job?

If you did, and if he instead bought some stock in his company to profit from the sale, would that be insider trading? Ugh, I don’t know, who cares. My rough answer is: No, based on a theory of tipping from the big shot, but maybe yes, based on a theory of “come on, you work at the company, if you trade its stock knowing it’s going to be sold you will get in trouble.” But my real answer is that if a “big shot in finance” tells his son’s roommate that his company is going to be sold, he is half-remembering something he read in the newspaper about a different company, and the roommate should ignore him. This is not legal advice but, you know, the banker actually running the deal is not gossiping like that.

Market orders

We talked a bit yesterday about flash crashes. “If humans just tried not to use market orders,” I said, a lot of trouble could be avoided: The problem is often that an exchange will only have so many orders lying around to buy a stock, so if someone comes in looking to sell a lot of that stock all at once, at whatever price she can get, the stock might briefly trade at a very low price before the buy orders are replenished. This prompted a reader, who is currently a leveraged loan trader at a bank, to email me this (lightly edited) reminiscence from his days at Wharton:

Aug. ’03, MBA orientation: The bowels of Huntsman Hall housed a large ‘trading room’: ersatz Bloombergs, high ceilings, smug professor. Around 60-80 new students herded in to partake in a trading simulation with a bunch of stocks and commodities to trade off a fake news feed. After messing around for a few minutes I placed massively wide $0.01-$9,999 limits in a bunch of securities just to see what would happen. Started getting hit and lifted in size as people were putting in market orders against a really thin market. I could barely keep up with all the screens but knew every time it happened because I’d hear a “HEYYYYY… WHAT?!?” from somewhere in the room. Hardest part was replacing executed orders fast enough so I wouldn’t miss the next one. Wound up +several $mm vs the field and decided “this trading thing is for me.”

The bad news is that a lot of his classmates who got filled at $9,999 probably decided the same thing!

Things happen

Three Theories on the FX Flash Crash: Robots, Apple, Yen Shorts. Chinese Consumers Tighten Their Belts and the World Feels the Squeeze. Leveraged Loan Investors Worry Good Times Will Soon Haunt Them. Delta Cuts Revenue Forecast, Sparking Airline Selloff. Lehman spin out profits from buying into buyout groups. Democrats Take a Big Step Toward Protecting the Markets from Trump. “The rising value of high-skilled workers’ time is an important driving force behind the gentrification of American central cities.” Armoured Car Employee and Two Others Indicted for Theft of Over $500,000 from Armoured Car on Long Island. “The sea takes. The sea gives.” Lines for salads out of control after ‘eat healthy’ resolutions. Why Gout Is Making a Comeback.

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I suppose I might sometimes have had a casual conversation with a compliance person where I’d be like “you’ll never believe how they originally wanted to do this transaction!” and she’d be like “hahaha oh clients.” Again, when people asked me to do stuff that didn’t work, it was generally out of innocent naivety, because the stuff I did was complicated and legally counter intuitive. I didn’t get any requests to just, like, pay huge bribes to government officials; that I probably would have mentioned to compliance.

Later transactions were even weirder. Another transaction, for financing for a Mozambican tuna fishing fleet supposedly to be provided by Privinvest, occurred after the lead banker had given notice that he was quitting Credit Suisse, but before he officially left. He was not involved in the deal on Credit Suisse’s side, but he did allegedly advise Privinvest and Mozambique, and took personal payments from them, while also allegedly concealing his involvement from Credit Suisse.

By Matt Levine

Source: Bloomberg