Nedbank and Transnet at war

Nedbank and Transnet have been locked in a battle over a deal made during the state capture era for almost a decade – and the bank now faces a R2.8 billion lawsuit.

The matter centres around the financing for Transnet’s 1064 project, which started in March 2012. The company wanted to buy 1,064 locomotives for freight trains, with 465 of them diesel and 599 electric locomotives.

By April 2013, the project was expected to cost R38.6 billion. The business case calculations included the effects of forex hedging, forex escalation and other price escalations, but the board was told that the cost excluded these.

Contracts were signed in March 2014, and Transnet immediately made an upfront payment of R7.37 billion. In May 2014, weeks after signing, the costs were revised, increasing to R54.5 billion.

Transnet’s 2018/19 annual report said that by March 2019, “the cumulative expenditure incurred on the 1,064 locomotive contract amounted to R33.6 billion, with R3.9 billion invested in the current year”. 

The Organisation Against Tax Abuse (OUTA) believes that as much as R9 billion was looted through backhanders paid on these contracts and that the price was increased to accommodate this.

“The contracts involved kickbacks paid by Transnet through the Chinese locomotive manufacturers and then laundered by Gupta-lieutenant Salim Essa through his Hong Kong-based businesses Tequesta and Regiments Asia,” OUTA said. 

The battle between Nedbank and Transnet came about because Nedbank lent money to Transnet for its 1064 project.

Initially, the parties agreed to a variable interest rate, meaning the rate would fluctuate with the market.

However, shortly after, a Gupta-linked company intervened and negotiated a shift to a significantly higher fixed interest rate.

Some claim that if the rate were kept variable, Transnet would have saved R2.8 billion in interest by now, as the contract was for a 15-year period.

Nedbank was part of a “loan club” comprising various banks and financial services companies that raised an estimated R12 billion for the project.

According to former Trillian CEO Mosilo Mothepu, this club was overseen by Trillian Financial Advisory and Regiments Capital, which is Gupta-linked.

Mothepu told Newzroom Afrika that Regiments and Trillian often chose a floating rate and then quickly swapped it to a fixed rate. 

“This makes sense if interest rates are rising, but it’s problematic when they fall,” she explained.

Transnet now alleges that Nedbank and Moss Brickman – one of the bank’s dealers at the time – unduly profited R2.8 billion from these transactions.

“What’s controversial is that Nedbank paid Regiments and Trillian directly, bypassing Transnet’s balance sheet. This happened before the R12 billion club loan,” Mothepu explained. 

During this inquiry in 2019, City Press ran an article claiming that Nedbank had “pocketed” R780 million from Transnet.

“This week, Transnet’s acting chief executive, Mohammed Mahomedy, will appear before the state capture inquiry where he will detail how Nedbank made R780 million after changing the interest rate terms of a multibillion-rand loan three days after making the loan,” the publication said.

However, Nedbank vehemently denied these claims, saying in a 2019 press release that it did not “pocket” R780 million, as suggested by City Press.

“The inference that may arise from Transnet’s testimony at the Zondo Commission that Nedbank made R780 million after fixing the interest rate subsequent to granting the loan is simply incorrect,” the bank said.

“It is important to note that the figure did not accrue to Nedbank.”

It said that participating in the financing arrangements and subsequent hedging is “hardly unusual” and is “standard industry practice.” 

“No adverse conclusion can thus be drawn from Nedbank’s participation in both the lending and interest rate swap arrangements,” it said.

“It is now becoming increasingly clear from Transnet’s evidence at the Zondo Commission that some of its key officials and decision-makers were compromised by state capture, resulting in the breakdown of internal Transnet processes.”

Ultimately, the Zondo Commission of Inquiry into State Capture did not explicitly implicate Nedbank in wrongdoing. However, it raised serious concerns about the bank’s role in certain deals and encouraged further investigation.

Nedbank was also featured in an amaBhungane report in February 2021.

The article alleged that the bank had formed an agreement with Regiments in which the Gupta-linked company brokered loans with state-owned enterprises like Transnet in exchange for tens of millions of rand in fees. 

However, Nedbank also denied these claims, saying in a 2021 press release that it has noted the article published by amaBhungane, Daily Maverick and News24 on 8 February titled, “State Capture: The case against Nedbank”.

The bank said that while it values the importance of objective investigative journalism, the selective allegations and narrative in the article are based on assumptions that fail to properly consider the legal framework involved.

“Our internal and external reviews confirmed that Nedbank has at no time acted unlawfully in its dealings with Regiments and the affected counterparties; or Regiments’ clients,” the bank said. 

“Nedbank strongly refutes the inference made in the article that it was complicit in any alleged scheme by Regiments to defraud its clients or to extract undue benefit from them.”

The bank said there was nothing unlawful or unusual about the agreement Nedbank had entered into, on the understanding that Regiments would adhere to its terms, coupled with its obligations as a registered Financial Services Provider. 

“Regiments was obliged to comply with the Financial Advisory and Intermediary Services Act and General Code of Conduct for FSPs. These required Regiments to disclose its fees to its clients and to avoid conflicts of interest,” it said.

“If Regiments failed to do so, and/or otherwise engaged in improper or unlawful conduct, Nedbank cannot be held accountable.”

Earlier this year, Nedbank provided another update when it announced that it had participated in a mediation process with Transnet.

The bank said it had entered into this process “in good faith to resolve a long-standing and widely reported dispute between the parties regarding swap transactions, which Transnet regards as tainted by corruption”.

However, the bank said it could not agree to any settlement on terms that would allow it to be “portrayed as a participant in any corruption that it was not and could not have been aware of at the time”.

“Nedbank will not be held liable for any governance failures at Transnet, and Nedbank will strongly defend any litigation against it,” it said.

The bank may now have to back up this claim as Transnet and the Special Investigating Unit (SIU) announced last week that they have jointly instituted proceedings against Nedbank.

In a media statement released on Friday, 26 July, Transnet and the SIU announced that it had approached the Johannesburg High Court to set aside the interest rate swap transactions.

It said these transactions took place in 2015 and 2016 between Transnet and Nedbank, under which Nedbank profited in excess of R2.74 billion.

Transnet and the SIU also seek to recover the amounts that Transnet unduly paid to Nedbank under the transactions.

“Transnet and the SIU are of the view that the interest rate swaps are void and unenforceable under the Public Finance Management Act, alternatively contravene section 217 of the Constitution and are contrary to public policy,” the statement said.

“There is sufficient basis for the sought relief, and Nedbank must account for its involvement and conduct in the swap transactions.”

“Transnet and the SIU collaborated closely in preparation of the court proceedings, and this included SIU’s uncovering of evidence critical to the case.”

In response, Nedbank confirmed that Transnet and the SIU had served it with review proceedings regarding the swaps. 

“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,” the bank said. 

“The joint media statement by Transnet and the SIU of 26 July 2024, which states that Nedbank profited in excess of R2,736,094,704.82 in respect of the swaps, is incorrect.” 

The bank said the sales margin it earned 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.”

“Nedbank will strongly defend the litigation against it and will pursue its counterclaims against Transnet and others.”