Dear Clients and Friends,
The latest enforcement action in the “Tuna Bonds” scandal was announced in May when the FCA banned Detelina Subeva from the financial services industry. The scandal and resulting enforcement actions contain several takeaways for regulated firms to consider.
Case Background:
Between 2012 and 2016, Credit Suisse arranged approximately $1.3 billion in loans and bond issuances for three Mozambican state-owned enterprises. The financing was purportedly for tuna fishing and maritime security, but much of the money was misappropriated. Critically, the loans were backed by undisclosed state guarantees, which were never approved by Mozambique’s parliament, rendering them illegal.
Following a multi-jurisdictional investigation enforcement action was taken against Credit Suisse and several former executives, highlighting deep failures in financial crime controls, due diligence, and executive accountability.
Key Lessons and Takeaways:
1. Due Diligence outcomes can’t be outsourced
Due Diligence is the responsibility of the manager, and you can’t rely solely on local approvals or counterparty representations.
What Now?
Firms are accountable for what its fund vehicles finance, even indirectly. Where deals are taking place – even where a portfolio company is adding a bolt on – ensuring that the appropriate due diligence has taken place and fits your firm’s risk tolerance and assessment is essential.
2. Watch for Red Flags- Then Act
The investigations found that Credit Suisse ignored internal concerns and suspicious structures. These failings resulted in extensive regulatory investigations and ultimately in a fine and public censorship for the firm as well as individuals being banned from the financial services industry.
Risk frameworks should be enterprise wide and as such, subject to the appropriate level of reporting throughout the governance structure. In this case the consequences of not reviewing and heeding escalations included regulatory fines, asset write-downs, reputational harm and bans for individuals.
What Now?
Financial crime is a material investment risk. It pays to have the team responsible for financial crime checks involved at an early stage. It is also appropriate to be monitoring the risk ratings of deals in their lifecycle.
- Ignoring red flags can result in personal and institutional liability. Is the appropriate escalation happening?
- What kind of reporting is being provided to the relevant committees and boards?
- When risks are identified are they being investigated and an appropriate decision being taken?
3. Know the Counterparties
Deals can involve multiple layers of tax structuring and holding companies for efficiency however complicated structures can facilitate illicit payments.
What Now?
Whilst the time pressures to sign a deal can be short, it is vital to understand the full deal chain, not just the borrower or seller. As such, those involved in financial crime diligence need to be engaged early in a deal process to ensure the appropriate documentation and assessments can be conducted ahead of signing.
Final Thoughts
This case is a stark reminder that financial crime is not a peripheral compliance issue, it is a central risk to investment, reputation, and personal accountability. Firms must embed robust controls and ethical leadership at every level and maintain appropriate oversight of the risks to the business.