This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 6, 2017).
The U.S. Justice Department and Federal Bureau of Investigation are investigating three international banks for their roles in selling about $2 billion of debt for Mozambique, opening a new phase in the global inquiry into the bond deals, people familiar with the matter said.
Swiss lender Credit Suisse Group AG, Russian bank VTB Group and French bank BNP Paribas SA are focuses of the U.S. probes, the people said. The FBI is looking into whether the banks facilitated corruption by enabling Mozambican officials to take money raised in the debt sales, the people said.
Financial regulators in the U.S., the U.K. and Switzerland began probes into potential securities-law violations by the banks last year, after The Wall Street Journal reported the existence of irregularities in the Mozambican transactions. The newer U.S. inquiries widen the scope of the probes to include potential corruption and raise the possibility of criminal prosecution.
Credit Suisse has been trying to rehabilitate its international image for more than a year and recently restructured the investment banking unit that handled the Mozambican deals.
Credit Suisse's CEO Tidjane Thiam has been pushing to change the bank's culture of risk taking for several years with some success -- the bank settled a longstanding lawsuit from the financial crisis in 2016 and reported a sharp rise in third quarter profits this year as it focused more on wealth management.
When informed of the investigations by the Journal, Alex Vines, head of U.K. international-policy think tank Chatham House's Africa division, said they were "an important step toward greater transparency on how these undisclosed loans were negotiated. It is important for Mozambique's leadership to learn from past mistakes and will have international implications."
Spokeswomen for Credit Suisse, VTB and BNP declined to comment. Two Mozambican government spokesmen didn't reply to requests for comment.
The FBI began looking into the soured bonds around June 2016, when a small team of agents visited Maputo, the capital of Mozambique, according to people familiar with the situation. The securities-fraud unit of the FBI's New York field office has been investigating whether the banks facilitated improper payments to senior Mozambican officials, a person familiar with the matter said.
Attorneys from the Justice Department's Washington, D.C., division specializing in money laundering and asset recovery met this summer with investors who had been sold the Mozambican bonds and requested they provide all documents and communications from the banks, according to the people familiar with the matter.
Justice officials also have met with Credit Suisse and VTB bankers and lawyers based in London, where the deals were originated, to discuss the transactions and follow-up dealings with investors and Mozambique, the people familiar with the matter said.
Credit Suisse became involved in the deals in 2012, when the lender began discussions with defense contractor Iskandar Safa, who negotiated a deal to supply Mozambique with military and surveillance equipment through his company Privinvest Group. Mr. Safa asked Credit Suisse to help Mozambique borrow money to pay for the contracts.
From 2013 to 2014, the Swiss bank, VTB and BNP raised $2 billion in bonds and loans for companies owned by Mozambique's Defense Ministry, which contracted to buy equipment and services from Privinvest. About $1.2 billion of the debt wasn't publicly disclosed and, in an unusual twist, proceeds from the deals went straight from the banks to Privinvest rather than going first to the state-owned companies that borrowed the money, people involved in the transactions said.
After the Journal reported on the deals in 2016, donors including the International Monetary Fund suspended hundreds of millions of dollars in direct aid to the impoverished country, citing concerns about how the money had been spent. The aid freeze triggered a currency crisis and worsened food shortages in Mozambique, which ranks 181st out of 188 countries on the United Nations' Human Development Index, a composite statistic including life expectancy, education and income.
The IMF commissioned investigations firm Kroll to audit the deals, and Kroll found that the prices of equipment to be provided by Privinvest exceeded what they should have cost by about $700 million, while an additional $500 million of the loan proceeds was unaccounted for.
"It is our view that, had Kroll assessed the pricing of the projects properly, using the correct assumptions and methodology, they would have found no discrepancy between the contract prices and value delivered," a Privinvest spokesman said. He also said the goods and services provided weren't military in nature and declined to comment on the Justice Department and FBI inquiries.
Revelations of the debts and the allegedly missing cash have sparked anger in Mozambique at the government and at the banks it hired.
"Clearly there was nothing to do with borrowing money -- at least the traditional way of borrowing money -- for development," said Adriano Nuvunga, program director for Mozambique's Center for Public Integrity, a watchdog group, speaking at a conference at Johns Hopkins University in March. "This, for us, is clearly an international corruption scandal."
The Justice Department is also examining whether the banks helped Mozambican officials borrow more debt than the country's economy could reasonably repay, said one of the people familiar with the matter. The deals increased Mozambique's national debt by 25% in 2013, and the country defaulted on its loans and bonds last year.
Mozambique's ruling Frelimo party has close ties to the military and former veterans and Defense Ministry officials, including current President Filipe Nyusi and former President Armando Guebuza, who hold or have held many top government posts, analysts say. The Mozambican government has denied any wrongdoing or corruption in the raising and spending of the funds through the disputed bonds.
The government's intelligence service and Defense Ministry created the companies that borrowed the debt, while the finance ministry provided government guarantees for the deal without obtaining the parliamentary approval required by law, according to public findings by Mozambique's parliament.
--Matina Stevis-Gridneff and Aruna Viswanatha contributed to this article.
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(END) Dow Jones Newswires
November 06, 2017 02:48 ET (07:48 GMT)