Samancor: Looking in the throat of a “Crocodile”
by Amandla correspondent | Amandla! Issue No. 66 | October 2019
On 2nd October, the Association of Mineworkers and Construction Union Amcu) filed court papers at the Johannesburg High Court against the second largest chrome mining company in the world – Samancor. The company is accused of systematic profit shifting since 2006. A group of Samancor directors are accused of diverting over 2 billion US Dollars to their bank accounts and to companies in tax havens under their control.
The case is brought to the court under Section 163 of the Companies Act. This is a law aimed to protect minority shareholders from detrimental conduct by majority shareholders. Amcu acts on behalf of the Samancor Workers’ Ndizani Trust. It owns only 5.6% of the Samancor shares according to the BEE agreement. Still, Amcu claims that the trust has lost “well over” US$100 million from 2005 up to today.
Demand on Samancor to “open the books”
In a first legal step, Amcu is asking the court to order Samancor to make public a record of all transactions that have been taking place over the years, as well as all business contracts and all its financial reports. Amcu is simply asking the Court to order Samancor to “open the books”. Since 2005, Samancor has not been a public company. Its shares are not traded on the JSE. Even its annual financial reports are not public.
The purpose of the Ndizani Trust is to regularly distribute the trust’s share of the company’s profits to all employees. It is also to hand out all kinds of benefits to the workers, like bursaries for further studies. But it is also obvious that if this outflow of money hadn’t take place, there would have been billions of rand more put on the wage bargaining table since 2005. The alleged schemes have also profoundly affected wage levels at the company.
The Alternative Information Development Centre (AIDC) has been supporting Amcu in preparing this case. In a supporting affidavit to the court, AIDC called this behaviour “wage evasion”.
At least one of the schemes that Amcu challenges is still in place. This is a so called “sales commission” of 9% on all Samancor’s sales. From 2005-2009 this stream of money was sent to a firm in Malta. Documents given to the court indicate that it had no employees and no telephone costs. The documentation includes a financial report from Malta in 2007. The firm, or outfit, reports a profit of US$72 million after tax for that year alone. This is over half a billion rand at the 2007 exchange rate to the dollar.
In excess of the 9% commission that should never have been paid, Amcu says in the court papers that another US$29 million claim on the Malta firm was simply written off from the books of Samancor for no evident reason. From 2009, the sales commission payment was shifted to a firm of Dubai. The reason seems to be that the tax on profits in Malta is 4%, but in Dubai there is no such tax; it is zero. In SA, the same tax is 28%. This is the tax you avoid if you shift your profits to a so called “tax haven”.
At today’s exchange rate of 15 rand to the dollar, over US$100 million in profits shifted from South Africa means that between five and six thousand Samancor workers over 14 years have lost over R1.5-Billion!
But there is more than sales commissions paid to tax havens every year, and we will come to that. This case of profit shifting could be the biggest ever in South African history. Indeed, it is the first case ever launched by a trade union against a transnational corporation, demanding that the company pay back R1.5 billion to a workers’ trust.
First whistle blower of its kind in SA
The chain of events that led to a court case started nearly a decade ago. Mr Miodrag Kon, a former director of Samancor, was dismissed in January 2009 for raising issues about suspicious transactions and business contracts that Samancor should never have entered into. Those contracts only existed because some directors had been paid under the table. This is what he claims in his supporting affidavit. He had felt uncomfortable with what was going on since 2006.
He became a crucial “whistle blower”; blowing it all out in the open, as it were. By this action he has become the first of his kind in South Africa. At the press conference on 9th October, Amcu’s President, Joseph Mathunjwa, committed Amcu to pay R100,000 to anyone else in the corporate community who blows the whistle about profit shifting.
A four year process
After trying with other lawyers, Mr Kon finally contacted Richard Spoor’s law firm in 2015. They in their turn contacted AIDC to investigate the claims he made and to make sense of documentation of more than 1,000 files. The research and the discussions with the whistle-blower, about the case that AIDC called “Crocodile” in confident discussions, took three years. More and more papers and even email conversations between some directors and with Nedbank in SA and in London were disclosed by Mr Kon.
In March 2018, Amcu’s Joseph Mathunjwa and the lawyers met members of the Samancor board and put the issue on their table. Samancor’s CEO Juergen Schalamon and the Chair of the Samancor board, Mr Amre Youness, promised to start their own internal investigation, saying that they were shocked. Amcu went to court 18 months later when it appeared obvious that nothing would be done.
The Kazakhstan connection
It appears that this affair started in 2005 when Samancor was sold to Kermas Ltd by Anglo American and BHP Billiton. Kermas is a company registered in the tax haven British Virgin Islands (BVI). It is controlled by Dr Danko Koncar. Two other directors of Samancor also have had a stake as minority shareholders; Juergen Schalamon who was the CEO of Samancor until last year, and Branislav Lazovic, who left in 2010.
It was Kermas which owned the firm in Malta to which the 9% sales commission was paid.
Behind Kermas was venture capital from a chrome mining conglomerate in Kazakhstan, one of the former republics of the old Soviet Union. To finance the take-over, Kermas got a loan of US$165 million from a group of companies that all have the letters “IMR” in their name. Some of them are owned from Luxembourg and some from Switzerland, but all of them controlled by three individuals who are of Kazakh nationality.
There is a whole menagerie of IMR companies, all owned by another company – European Natural Resources Cooperation (ERNC). These three “oligarchs” own ERNC. This company was delisted from the London stock exchange in 2013 after accusations of rule breaking and a collapse in the share price
Just as all other Soviet republics, Kazakhstan became independent when the planned economy collapsed in the 1990s. Many top bureaucrats of the communist party transformed into capitalists and took over all major state companies, and the mining industry. The politicians became rich by becoming private shareholders, comprising, as it were, a brand new capitalist class.
Secret strings attached
According to the documentation to the Court, the loan to Kermas from IMR in Switzerland was not given for free. In the confidential loan agreement and in a “management contract”, Kermas promised to treat the creditor IMR just as if it held 45% of the ownership of Samancor. This was obviously not known to the SA Competition Commission when it approved Kermas to buy Samancor.
In 2009, another of the IMR companies, this one registered in the Netherlands, bought 70% of Samancor. In 2013, Samancor was sold again, by “IMR Chrome on Mauritius” this time, to a group of companies named “Terris” this and “Terris” that.
Chains of ownership
In Mr Kon’s affidavit, two redacted decisions by the SA Competition Commission have been put together to describe who the owner of Samancor is today. It is not easy to know. Neither is it easy to accept why the South African authorities are playing by deleting information about ownership on each row in the documents.
A company called “Terris Mining” in Mauritius owns Samancor Holdings. But that company is owned by “Terris Steel” in Mauritius, which is owned by another “Terris” in Cayman Island, which is owned by “Terris SPV” in Cayman Island, which in its turn “is controlled by a financial investor in London”.
Mr Kon asserts that these arrangements of ownership in chains by companies in tax havens are there to confuse the authorities. He also alleges that it is likely that the Kazakh IMR group is still in secret control of the second largest chrome company in the world.
In a similar way, the Samancor board in 2008 took a decision to pay for “management services” provided by “RCS Ltd”. There are “RCSs” in Malta, Panama, the Bahamas and the British Virgin Islands. In 2008, US$4 million was paid to RCS Ltd for management services. This should be to the one in Malta, which Kon says has no employees, but he thinks that it in the end it was paid to “RCS” in the Bahamas, which has a bank account in the UBS bank in the island of Jersey, which is a UK tax haven.
Needless to say, all these RCSs are owned by Kermas Ltd.
US$125-million paid on the side
One of the most staggering disclosures in the court papers is the apparently corrupt sale of a 50% stake in the Tubatse chrome mine to the Chinese company Sinosteel in 2007. It is indeed strange but also instructive how this could take place.
The sale of a share in Tubatse came with lots of reports in the media, with the price set at US$230-million. This price was also announced in January 2007 by the then Deputy Minister of International Relations and Cooperation, Mr Aziz Pahad.
However the 2008 annual report of Samancor only reflects US$100-million in the books. The rest evidently went to Kermas Ltd on the British Virgin Islands, Samancor’s majority owner. The SA Revenue Services did not see or react to what had happened, and neither did Samancor’s auditor KPMG.
This incredible affair is corroborated in email exchanges cited in Mr Kon’s affidavit. Nedbank Capital says that they “received $25 million and $75 million, by order of Sinosteel”. In a later email the say that they “can also confirm that Nedbank London has received $125 million on the account for Kermas”.
Other emails between Mr Lazovic and others annexed in the court papers discuss how the directors should go pulling this off without Sinosteel speaking in public about the amounts.
“Getting platinum metals for free”
Based on the documentation and the testimony of the whistle blower, Amcu also argues to the Court that a long standing business deal between Samancor and Sylvania Metals has been flawed from the very start in 2006. This deal is about the extraction of chrome and platinum group metals from Samancor’s tailings dams. It has made Sylvania into a very profitable company. Too profitable, Amcu implies.
Using public documents, email discussions and accounts from stock brokers provided by Mr Kon and discussed in his affidavit, the court papers appear to show that this deal was secured by a bribe. 14.1 million shares in Sylvania were given, in a roundabout transaction, through nominee companies, to two Samancor directors, Mr Lazovic and Mr Koncar.
Sylvania’s annual reports speak about 14 million shares being paid for “facilitation” of the deal to a company “Portpatrick Ltd” or Portpatrick Inc, on British Virgin Island. Mr Kon’s affidavit and supporting documents make it credible, however, that the “nominees” were two companies registered in Luxembourg, owned by the said two gentlemen.
Mr Kon states that he never understood the Sylvania deal and never heard of any “facilitation”. He testifies that he attended every board meeting and that the deal was never discussed and that the agreement isn’t mentioned in any Board minutes. Amcu holds that this deal has been to the detriment of Samancor as a company and to Samancor’s minority shareholders, like the Ndizani Trust.
A game changing case
As the Samancor case proceeds it can show that profit shifting in general is about harvesting greater profits through reduced wages and then shifting those profits to low-tax jurisdictions. It is not only to avoid paying the 28% tax on profits in SA, but also, plain and simple, to enrich small cabals of conspirators in the corporations.
If the shifted profits were repatriated and retained in the companies, 28% would go to SARS. But before that, the profits would lie on the wage bargaining table. It would also be harder for mining companies to avoid social labour plan obligations in mining affected communities. Profit shifting is not just about tax avoidance or evasion. It is also about wage avoidance, and it maintains the gulf of income inequality in the country.
This case is truly one of a kind, but trade unions can play a key role in demanding corporate transparency, simply by demanding the financial statements of corporations’ subsidiary companies during wage negotiations and asking questions about cross border transfers.
Indeed, what will wage bargaining at Samancor look like after this? At least if Amcu finally becomes a recognised union.