Mozambique took out the first of its so-called tuna bond loans in March of 2013, to fund a newly created enterprise called ProIndicus. The venture was to provide coastal security and thereby protect commercial tuna fishing interests.

As part of its due diligence in arranging the loan, Credit Suisse commissioned several external investigations, which revealed that the shipbuilding vendor to ProIndicus was widely regarded to be engaged in corrupt practices. UK and US regulators pounced on once source’s comment that the contractor was a “master of kickbacks.” Other known risks included the lack of clarity on how the vendor was selected, and the absence of due diligence on politically exposed persons that would be on the board of ProIndicus.

Credit Suisse moved forward with the loan, apparently based on [DL1] the age of the corruption allegations, and on the due diligence report also stating that the vendor’s business was being conducted “in a more classical way, more in compliance with the rules of ethics.”

The enforcement documents do not discuss what, if any, other factors Credit Suisse’s compliance and risk management functions considered or were aware of regarding this particular transaction. The UK Financial Conduct Authority concluded, regarding the collective set of loans that Credit Suisse arranged, that “[a]lthough Credit Suisse did consider relevant risk factors, it consistently gave insufficient weight to them individually and failed adequately to consider them holistically.”

To be sure, Mozambique had started to see a surge in foreign investment on the back of new natural gas discoveries; and business judgments shouldn’t be equated with compliance decisions. Nevertheless, considering other risk factors at this stage may have led to a better conclusion, sooner.

In particular, it is not clear just how urgently Mozambique needed to borrow money for this purpose. If a transaction is unnecessary, or based on unrealistic assumptions, it may signify that other – potentially improper – motivations are at play.

Some factors relating to necessity include:

• The absence of any discussion on coastline security in the Fleet Development Plan that Mozambique submitted to the Indian Ocean Tuna Commission in March of 2013;
• Whether existing naval resources could not be allocated more efficiently;
• Whether it was proportionate to provide security for commercial fishing vessels given Mozambique’s friendly relations with its neighbors and limited number of domestic commercial vessels;
• Why a partner country could not be brought in – even on a paid basis – to provide patrols; or
• Why the patrol vessels needed to be purpose-built, instead of purchased from another country’s navy.

Factors around feasibility include:

• The loans were to be repaid in just six years;
• While Mozambique’s economy was growing rapidly at the time, it still relied on foreign grants to cover about 11 percent of its $5.87 billion enacted 2013 budget, and foreign loans to cover about 21 percent;
• Overseas aid was expected to “remain relevant in Mozambique over the medium term”; and
• The first tranche of the loan, at $372 million, would represent more than 6 percent of the national budget.

The details of the Ematum venture, which would be financed a few months later, would be amongst the most important of the commercial considerations here. This foray is discussed in Part 3: Hook, Line and Sinker: Ematum.

This post is part of our "Hook, Line and Sinker" series, examining the major red flags of one of the world's biggest corruption scandals, "Mozambique’s Tuna Bonds Scandal".