SIU joins Transnet in legal proceedings against Nedbank for State Capture-era financial transactions

28 Jul 2024

The Special Investigating Unit and Transnet believe that interest rate swap transactions, which took place in 2015 and 2016, resulted in Nedbank generating profits in ‘excess’ of R2.7bn. Transnet and the SIU want these alleged profits to be recovered.

The Special Investigating Unit (SIU) has now supported Transnet in its legal proceedings against Nedbank related to the commercial bank’s role in executing financial transactions allegedly tainted by corruption during the State Capture era.

On Friday, 26 July, the SIU and Transnet jointly announced that they had instituted legal proceedings against Nedbank at the Gauteng Division of the High Court in Johannesburg. The proceedings relate to Nedbank’s role in carrying out interest rate swap transactions for Transnet — transactions that were allegedly corrupt and cost the state-owned transport entity billions of rands.

Transnet had already pursued legal action against Nedbank after months of mediation talks between both parties broke down. The talks had been aimed at settling the dispute amicably and avoiding messy litigation. The SIU has now entered the fray, saying Nedbank has a case to answer.

The SIU is a body that investigates allegations of corruption at state organs and entities and has the power to institute legal proceedings to recover losses.

Nedbank has responded to the announcement by Transnet and the SIU, denying any wrongdoing. Nedbank said it will “strongly defend the litigation against it and will pursue its counterclaims against Transnet and others”.

“To date, no evidence has been found, or presented to Nedbank, of any Nedbank staff dishonesty, corruption or collusion,” a statement from the bank said.

Read more: Nedbank faces more litigation woe over Transnet and relationship with Gupta-linked Regiments Capital

In the interest rate swap transactions, Nedbank was essentially involved in restructuring the interest on the debt that Transnet used to fund its freight rail and port operations. At the same time, the bank would receive fees for doing so.

Transnet and the SIU said the interest rate swap transactions, which took place in 2015 and 2016, resulted in Nedbank generating profits in “excess of R2,736,094,704.82” or more than R2.736-billion. Transnet and the SIU want the high court to set aside the interest rate swap transactions and for the alleged profits generated by Nedbank to be recovered because they were “unduly paid” by the state-owned enterprise (SOE).

Transnet and the SIU believe that interest rate swaps are void and unenforceable under the Public Finance Management Act, contravene section 217 of the Constitution, and are contrary to public policy. “There is sufficient basis for the sought relief, and Nedbank must account for its involvement and conduct in the swap transactions,” an SIU and Transnet statement said.

Nedbank faces another complaint from the Airports Company South Africa (Acsa) relating to the bank carrying out interest rate swap transactions on behalf of the state-owned airport operator. Acsa has referred Nedbank to the SIU. Like Transnet, Acsa believes that it was prejudiced by Nedbank when it restructured interest rates and wants any losses it incurred to be recovered from the bank.

Nedbank has previously denied any wrongdoing over its work at Acsa.

Regiments Capital

Nedbank’s role in the interest rate swap deals at Transnet and Acsa is detailed in the first and second parts of the State Capture commission reports, which have also examined the bank’s relationship with Regiments Capital, a financial services firm that was linked to the Gupta family.

In the State Capture Commission reports, Justice Raymond Zondo did not make a definitive finding of wrongdoing against Nedbank, but merely questioned its work at Transnet and Acsa and recommended that the interest rate swap transactions should be further investigated.

Nedbank’s relationship with Regiments has arguably been the most destructive at Transnet.

Zondo, in his second State Capture report, which dives deep into the affairs of Transnet, has found that Nedbank’s work at the SOE has caused it “significant prejudice” and financial losses.

The involvement of Nedbank and Regiments at Transnet started after the SOE embarked on a massive capital investment programme in 2011 to modernise its fleet of locomotives. Transnet ended up procuring 1,064 locomotives from Chinese manufacturers, mainly China South Rail and China North Rail.

Read more: How the Guptas’ R9bn locomotive heist went down

Transnet wasn’t in a strong financial position to fund the purchase of the locomotives and needed to mobilise funding from lenders. It approached a consortium of lenders for a loan facility of about R12-billion.

Around August 2014, Anoj Singh, the Transnet group CFO at the time, pushed for the SOE to appoint Regiments as an adviser to manage the R12-billion loan and the interest rates associated with it. Singh sidestepped Transnet’s internal treasury team, which would normally be responsible for managing the company’s money, debt and financial risks.

Read more: Here it is: Transnet’s sweetheart deal with Regiments Capital

Nedbank’s relationship with Regiments

Regiments also needed outside help to restructure the interest on the R12-billion loan. So, it approached Nedbank for help on 4 December 2015.

Involving Nedbank would arguably create a conflict of interest for the bank, as it partly funded the R12-billion loan while also helping to restructure Transnet’s interest rate on the loan. Put differently, Nedbank would effectively be a player and referee.

To restructure the interest rate on the loan, Regiments executed an interest-rate swap arrangement between Transnet and Nedbank. At a basic level, an interest-rate swap happens when two parties agree to swap the kind of interest rate they pay on loans, which would include swapping a floating/variable interest rate for a fixed one. Swaps are essentially a gamble on what interest rates will be in the future. During a rising interest-rate cycle, fixing an interest rate could make a loan and interest payments cheaper. But down the line, fixing interest rates (especially below-market interest rates) costs more later.

This is the cost that Transnet and the SIU want to recover from Nedbank.

Nedbank has laid wrongdoing at the doors of Regiments and Transnet.

Nedbank said: “To the extent that there was corruption, this was on the part of the Regiments Group and Transnet’s staff members and not Nedbank. Nedbank will not be held liable for any governance failures at Transnet.

“Considering internal and independent external reviews commissioned by them, the Nedbank Board and management remain satisfied that Nedbank internal governance procedures were followed in respect of these swaps and that there is no evidence of any Nedbank staff dishonesty, corruption or collusion.”

Nedbank also denied the claim by Transnet and the SIU that the bank made a profit of more than R2.7-billion. “The sales margin earned by Nedbank in respect of the swaps was market related and amounted to less than R43-million. The swaps were commercially sound and the return on equity earned by Nedbank was fair, reasonable and appropriate at 15.5% over the life of the transactions,” the bank said. DM

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Nedbank’s relationship with Regiments