With haste rare in officialdom, the South African Reserve Bank confronted Chinese rail conglomerate CRRC a week after amaBhungane and our #GuptaLeaks partners revealed that CRRC was paying kickbacks to the Gupta crime family.

It was June 2017, and the Bank cut a lonely institution holding out against state capture. It must have taken some resolve for its officials to target an industrial group controlled by a friendly state and alleged to be in a corrupt relationship with friends of the South African head of state.

In later correspondence with CRRC, the Bank referred to a 7 June 2017 meeting with its representatives, called “to, inter alia, discuss the allegation that ‘kickbacks’ were paid to Tequesta”. The Bank complained that its officials were “not furnished with any plausible explanation of the rationale for the transaction”.

In our first #GuptaLeaks story seven days before, we had revealed that CRRC predecessor China South Rail, which won contracts to supply Transnet with hundreds of locomotives, agreed to divert billions to Gupta offshore fronts, including Tequesta Group in Hong Kong.

We had posted online a copy of a kickback agreement in which China South Rail promised to pay Tequesta 21 cents in each rand it received from Transnet for an order of 359 electric locomotives.

CRRC then, as it seems to have maintained since, “stated that it was not aware of any [kickback] agreements” – though the Bank went to the effort, according to its correspondence, of commissioning a forensic handwriting analysis. This appeared to verify the signatures of Gupta lieutenant Salim Essa and China South Rail official Guo Bingquang on the Tequesta agreement.

CRRC, the Guptas and Essa have consistently failed to respond to amaBhungane’s requests for comment.

The big freeze

Before the year was out, on 12 December 2017, the Bank froze R1.26-billion it found in the accounts of CRRC E-Loco Supply, the local CRRC subsidiary that was contracted to supply Transnet.

The Bank did so under exchange control regulations permitting freezing orders and eventual forfeiture using a simple logic: If CRRC offshore was paying 21% of the proceeds of the 359 locomotive contract to Tequesta, CRRC E-Loco had not told the Bank the full truth when it applied to send forex to CRRC offshore for the importation of locomotives and parts.

The forex transfers, the Bank held, must have been inflated by 21% to pay kickbacks – a purpose the Bank had not approved.

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The amount the Bank froze constituted 21% of the almost R6-billion that CRRC E-Loco had sent abroad by then. According to the Bank’s correspondence, “CRRC E-Loco … applied for and caused foreign currency in the amount of R1 255 058 117.48 (21 per cent of R 5 976 467 226.08) to be transferred … out of the Republic, which foreign currency was to be used for, or applied to a purpose other than stated in the relevant application.”

In its annual report a year later, CRRC Corporation, the group parent company listed in Hong Kong and Shanghai, declared a contingent liability related, so it said, to the establishment of the Zondo commission into state capture and South African media reports referring to “violation of laws related to multiple procurements for the supply of locomotives by South African train operator, Transnet”.

It declared that “bank balances totalling approximately RMB600-million [about R1.26-billion then] held in two bank accounts of the Group in South Africa are the subject of freezing orders issued by the South African Reserve Bank”.

In subsequent regulatory filings, the frozen amount CRRC declared grew: RMB1.27-billion (about R2.6-billion) in June 2019, RMB2.2-billion (about R4.4-billion) in December 2019, and RMB1.88-billion (about R4.6-billion) in June this year.

Which is to say that as Transnet paid CRRC E-Loco for more locomotives, the Bank kept freezing more. The Bank ignored amaBhungane queries earlier this year despite CRRC putting the freezing orders in the public domain.

A steaming deadline

But the clock was ticking. The Currency and Exchanges Act and exchange control regulations provide that money frozen on suspicion of a forex contravention must be released after 36 months, unless the Bank confirms its suspicion and makes an order forfeiting the money to the national fiscus.

Here, the Bank had the opportunity to recover the largest pot yet of state capture loot for the public.

But with Saturday 12 December, the deadline to release the first R1.26-billion, bearing down on it, the Bank appears to have blinked. The Government Gazette, where forfeiture orders must be published to take effect, has remained silent week after week.

A forfeiture order is reviewable in court. Whether the Bank was concerned about the strength of its case, was happy for another organ of state to take the lead or has a last-minute trick up its sleeve is not known.

Whatever the Bank’s plans, the South African Revenue Service (Sars) has stepped in with a last-minute attempt to preserve the pot.

Sars last month filed an application which it wants the Pretoria high court to hear on an urgent basis on Tuesday 8 December, four days before the deadline.

The application is for an interim order preserving all of CRRC E-Loco’s assets and appointing a curator to take control of them. The curator will be specifically authorised to transfer any funds unfrozen by the Bank to his trust account.

Sars’ application motivates the intervention on the basis that it is preparing a R3-billion-plus claim in taxes, penalties and interest against CRRC E-Loco and that “a preservation order is required … to secure CRRC E-Loco'[s] realisable assets to be available for the collection of the said tax that may be due”.

If the court grants the interim order, CRRC E-Loco will be entitled to argue against it being made final at a full hearing in February.

Not tax-deductible

Sars’ claim is largely founded, like the Bank’s before, on the cover-up that accompanied the kickbacks.

Whereas the Bank effectively said CRRC E-Loco broke forex rules by failing to disclose that part of the money it took out of the country was meant for kickbacks, Sars is saying that the company broke tax rules by including kickbacks in its cost of sales. Put differently: Corrupt payments are not tax-deductible.

And like the Bank, Sars relies heavily on information amaBhungane put in the public domain.

In his affidavit motivating the application, Deon Boshoff, an investigator with Sars’ illicit economy unit, says Sars was investigating Essa, the Gupta lieutenant, but that the focus started shifting to CRRC E-Loco after Sars obtained a report on the Bank’s freezing orders in May this year.

Sars governance structures approved an investigation by the unit into CRRC E-Loco in August.

Boshoff states that he studied information in Sars’ possession and in the public domain. “I specifically considered an article appearing on the amaBhungane website on 1 June 2020 titled ‘How the Guptas’ R9-billion loco heist went down‘… The amaBhungane article contains several electronic links to documents that are relevant to the discussion below.”

Our article revealed that CRRC group companies had entered contracts to pay Gupta offshore fronts a staggering R9-billion in kickbacks on Transnet locomotive deals worth about R42-billion.

Based on our analysis of evidence including eight kickback contracts and flows into offshore accounts, all of which we posted online, we concluded that by October 2016 the CRRC companies had already paid R3.7-billion to the Gupta fronts. After that the offshore data went dark but the payments likely continued.

Sars’ view

Boshoff’s 96-page affidavit examines each of the three contracts for electric locomotives – 95, 100 and 359 – that CRRC E-Loco won from Transnet, returning repeatedly to amaBhungane’s information.

Commenting on the kickback contracts, he says: “Sars is of the view that these agreements were concluded to extract funds from Transnet, the largest procurement vendor in South Africa together with Eskom, to line the pockets of Mr Essa, the Guptas and other high profile individuals, to the detriment of the South African taxpayer and the South African economy in general.”

In the end, he identifies R2.65-billion in kickbacks that CRRC E-Loco irregularly deducted in its 2014, 2015 and 2016 tax returns. It is less than the R3.7-billion identified by amaBhungane, among other reasons as the Sars dragnet did not include a CRRC E-Loco sister company which won a separate contract for 232 diesel locomotives from Transnet and where kickbacks were also paid.

It is not known if Sars is separately investigating the sister company, CRRC SA Rolling Stock.

Boshoff proceeds to recalculate CRRC E-Loco’s tax returns, disallowing the kickback deductions and some other items. With penalties and interest, the “total probable tax debt” comes to R3.17-billion. But the tax audit, he says, is not complete and the figure may change.

Others circling

Boshoff says that the funds frozen by the Bank last month amounted to R4.19-billion – it had come down from the about R4.6-billion frozen at its height after the Bank acceded to a CRRC E-Loco request to release some of the funds “to pay its debts, as it is entitled to”.

Boshoff draws the court’s attention to the fact that the currently envisaged SARS claim is about R1-billion less than what the Bank has frozen.

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He adds, “However, SARS is not fully informed regarding exactly what the position is regarding all of these funds or whether there may be other persons or entities who have a claim against these funds. Under the circumstances, SARS asks for the entire amount, together with the other assets of CRRC E- Loco to be preserved.”

Indeed, amaBhungane understands that Transnet, the Asset Forfeiture Unit and possibly other state organs are preparing applications of their own. The recovery race is on.