Out-of-Court Settlement Cancels Most of MAM Debt

The Mozambican Ministry of Economy and Finance and the Attorney-General's Office (PGR) announced on Monday that the government has obtained an out-of-court settlement with the banks which lent 535 million US dollars to the fraudulent company Mozambique Asset Management (MAM) in 2014.

MAM was one of three companies set up as part of the fraudulent scheme known nowadays as the "hidden debts'.

The term "hidden debts' refers to the enormous loans, totaling over two billion US dollars, which the three companies, namely MAM, Proindicus and Ematum (Mozambique Tuna Company), all of which were run by the security service SISE, obtained from the banks Credit Suisse and VTB of Russia.

The loans were only possible because the government of the day, under the then President Armando Guebuza provided state guarantees for the full amount of the loans. The guarantees, signed by Guebuza's finance minister, Manuel Chang, were illegal since they smashed through the ceiling on loan guarantees set by the 2013 and 2014 budget laws.

Predictably, the three companies could not repay the loans and soon went bankrupt, leaving the Mozambican state liable for the full amount. Thus hidden loans became hidden debts.

The Constitutional Council, the country's highest body in matters of constitutional law, declared the loans illegal and unconstitutional.

Based on the Council's ruling, the government could simply have stopped any further payments to the creditors. Instead, it negotiated with them, to reduce the size of the debt.

Under the agreement announced on Monday, the MAM debt has been reduced to 220 million dollars, a cut of 84 per cent. This agreement was reached with the Russian bank VTB, and the Portuguese Commercial Bank (BCP), which is the main shareholder in one of the largest of the Mozambican commercial banks, the Millennium-BIM.

The agreement was approved by the Council of Ministers (Cabinet) on 18 June, and published in the official gazette, the "Boletim da Republica', dated 20 June. But at the time no publicity was given to the deal, and the "Boletim da Republica' usually appears later than the date on its masthead.

So the public did not know about the agreement until a joint press conference given on Monday by the Minister of Economy and Finance, Max Tonela, and the Assistant Attorney-General, Angelo Matusse.

Under the terms of the agreement, the Mozambican state must pay 50 million dollars to the BCP as soon as possible, and by no later than 28 June (last Friday).

It must also pay immediately 55 million dollars (in pounds sterling) to VTB, a second instalment, of 50 million dollars, by 31 August, and a third instalment, of 45 million dollars, by 24 September.

These instalments all go to VTB Capital Plc, while a second arm of the Russian bank, VTB Bank Europe SE, will immediately receive 20 million dollars (in euros).

Explaining why the government had negotiated with the banks, rather than refusing to pay illegitimate debts, Tonela said "the agreement is a solution which responds to the needs of mitigating the risks and costs associated with litigation, and it strengthens the path to restoring the trust of international investors in the Mozambican financial system'.

As for the ruling from the Constitutional Council, Matusse praised it - but told reporters that the Mozambican government could not enforce it in foreign courts.

Without the out-of-court settlement, Mozambique would have faced demands for payment, in capital and interest, of around 1.4 billion dollars (equivalent to eight per cent of the country's GDP). If the government insisted on pursuing the case through the courts, then the interest and legal costs would continue to climb, in the event that it lost.

But the out-of-court agreement had reduced Mozambique's exposure by 84 per cent.

"The out-of-court settlement offers the Mozambican State clear advantages in comparison with an uncertain judicial outcome, and with possibly unsustainable consequences for the country in the short and medium term', said the note from the Ministry and the PGR. "It also avoids endless appeals and extremely high costs'.

This agreement does not affect the criminal cases under way against those individuals and companies whose illicit behavior led to contracting the debts in the first place, and the issuing of illegal state guarantees.

Among those individuals is former Finance Minister Manuel Chang, who will face criminal charges on his return to Mozambique. Currently he is in detention in New York, awaiting trial on fraud and money laundering charges.

The government is also suing the Abu Dhabi-based group, Privinvest, for 3.1 billion dollars. The fraudulent scheme was largely the brain child of Privinvest which spent hundreds of millions of dollars in bribing Mozambican officials, including Chang, and Credit Suisse bankers.

Privinvest became the sole contractor for Proindicus, Ematum and MAM, and grossly over-invoiced the three companies for the fishing boats, patrol vessels and other assets it sold them. An independent audit of the companies in 2016/17 calculated the amount of over-invoicing at more than 700 million dollars.

The case against Privinvest is being heard in London, and a verdict is expected on 17 July.