On Monday, amaBhungane published an in-depth investigation into Nedbank’s relationship with tainted financial services firm Regiments Capital, the company that served as a key enabler of state capture.
The revelations that Nedbank had paid or promised to pay roughly R95-million to Regiments – most a reward for introducing Nedbank to government business – were the fruit of months of painstaking research. We trawled though leaked emails, memos and budgets, and engaged extensively with the bank.
In response to growing public outrage, Nedbank released a carefully-worded statement denying any wrongdoing but has otherwise kept silent.
The case in brief
The case we make in our investigation – summarised here but published in full at here – is that Nedbank incentivised Regiments to push financial products to its public sector clients – including the City of Johannesburg, the City of Tshwane, Airports Company South Africa (Acsa) and Transnet – and rewarded the controversial firm with massive fees.
This was initially set out in a “highly confidential” commission agreement – entitled Introduction of Derivative Transaction – which saw Nedbank pay millions in “introduction fees” for each new deal Regiments brought to the bank.
Later, Nedbank agreed to act as postman for fees Regiments charged its clients, delivering millions of rands of public money to the controversial firm, with the blessing of Regiments’ public sector clients.
In each case, the fees were funded by adding a margin to the interest rate on loans and interest rate swaps, meaning that municipalities and state-owned entities ultimately paid these fees, but not always with their knowledge.
Although Nedbank was not the only bank that signed one of these introduction fee agreements with Regiments, it was by far the most prolific – and others appear to have insisted on more rigorous checks that these fees were disclosed to Regiments’ clients.
By our calculation, Regiments was able to generate at least R95-million in fees from Nedbank via these two methods, plus another R120-million from a set of Transnet transactions where the fees once again flowed via Nedbank but without, the bank claims, its knowledge.
The bank is scheduled to continue making payments to Regiments on some of these transactions until 2023.
Nedbank does not deny that it entered into the Introduction of Derivative Transactions agreement, nor does it deny that it paid millions to Regiments.
“There was nothing unlawful or unusual about the agreement which Nedbank had entered into,” Nedbank said in a statement published after our article was released.
Nedbank argued that it was Regiments’ responsibility, as the advisor, “to disclose its fees to its clients and to avoid conflicts of interest”.
“If Regiments failed to do so, and/or otherwise engaged in improper or unlawful conduct, Nedbank cannot be held accountable,” the bank said.
Another leg of Nedbank’s argument is that it could not be expected to know about Regiments’ role in state capture and its allegedly corrupt relationships with government officials, such as Acsa and later Transnet treasurer Phetolo Ramosebudi.
“At the time of the transactions Nedbank had no information indicating that the internal governance process of certain companies, or certain key role players had been compromised to the extent that has subsequently become apparent through investigative journalism and processes like the Zondo Commission.
“Had Nedbank been aware of the compromises in these companies, with the benefit of hindsight, we would likely have taken different actions,” the bank said.
The argument we make in our in-depth investigation, backed by an extensive docket of evidence, is that Nedbank did not need to know about Regiments’ role in state capture to know that its commission deal tempted Regiments to take its clients for a ride.
Regiments’ modus operandi was to get appointed as advisor, then stretch its mandate to sell its clients loans and interest rate swaps without a competitive bidding process, claiming an additional fee from the client, a commission from the bank, or both.
For example, on a series of loans in 2009 and 2010, Regiments took R7.9-million in capital raising fees from the City of Johannesburg and City of Tshwane, then turned around and quietly billed Nedbank another R12.9-million under the Introduction of Derivative Transactions agreement.
On each invoice to Nedbank, Regiments wrote: “Regiments Capital (Pty) Ltd has informed its client that it is earning a fee for the facilitation of the above transaction.”
Yet a City of Johannesburg spokesperson again told amaBhungane: “The City was at no point made aware by Regiments and/or Nedbank that Regiments received a fee from Nedbank.”
Financial weapons of mass destruction
Some of the transactions Regiments pushed its public sector clients to enter into were high-risk, and some proved to be catastrophic.
In 2010, Regiments persuaded Acsa to enter into two interest rate swaps – with Nedbank and another bank.
In basic terms, an interest rate swap is where two parties agree to swap the kind of interest rate they pay on loans, for instance, swapping a floating interest rate for a fixed one.
But swaps are essentially a gamble on what interest rates will do in future; get it wrong and a few basis points can become what Warren Buffett called “financial weapons of mass destruction”.
With each swap, Regiments negotiated an additional fee under the Introduction of Derivative Transactions agreement, generating R19.5-million from Nedbank.
But the swaps ultimately proved disastrous for Acsa which disclosed in its 2012 annual report that it had paid R919-million to unwind the swaps.
Taking Transnet for a ride
A similar situation is currently playing out at Transnet. In December 2015 and March 2016, Regiments persuaded Transnet to enter into a series of interest rate swaps on its newly-acquired R12-billion “club loan”, which it took from a consortium of banks to finance new locomotives.
Nedbank would once again act as counterparty, but would also enter into a mirror trade with a Transnet pension fund, effectively passing the impact of the interest rate swap on to the pension fund.
For acting as “credit intermediary”, a role with very little risk, Nedbank will receive, by our calculation, R191.3-million between 2015 and 2030.
Regiments could have walked away with even more: For acting as advisor, Regiments was promised R220.2-million in fees, but opted to take a smaller upfront payment of R120.6-million.
Counting the cost
Currently these interest rate swaps are deep in the red, and over the past year have cost Transnet almost R200-million.
If interest rates remain unchanged, Transnet will by our calculation have lost R4.5-billion by the time the swaps expire in 2030.
In a 2019 report, Transnet’s attorneys advised: “The decision to conclude the swaps was irrational and irregular. Transnet should approach a court to have the interest rate swaps reviewed and set aside; and/or refuse to perform and to resist attempts to enforce the interest rate swaps.”
So far Transnet has not done this, choosing instead to negotiate with Nedbank.
Regiments has already returned its portion of the fees earned from the interest rate swaps to the pension fund which successfully sued the firm.
In a letter to clients responding to the article, Nedbank insisted that it had “at no time acted unlawfully in any manner whatsoever”.
*For the full investigation and Nedbank’s full response read State capture: The case against Nedbank.