How South Sudan’s elite looted its foreign reserves
EXCLUSIVE: Leaked audit report shows how family and friends of top government officials benefited from letters of credit scam.
We all know, intuitively, that there is a powerful link between war and money. When the bullets fly, someone dies; meanwhile, someone else is getting rich.
In South Sudan, we know who is dying. At least 50 000 people, mostly civilians, in nearly four years of fighting. That figure is probably a gross underestimate. Another four million - a third of the population - have been forcibly displaced from their homes, fleeing to squalid refugee camps in neighbouring countries or trying to make a new life in dangerous, unfamiliar conditions somewhere else in the country. Families have been torn asunder, livelihoods abandoned, future generations sacrificed in the near-complete absence of education and basic healthcare.
Now we also know who is getting rich. Simona Foltyn’s painstaking investigation into how South Sudan’s ruling elite have stolen and squandered the country’s reserves of foreign currency is an extraordinary insight into the mechanics of looting on a grand, almost unimaginable scale. Nearly a billion dollars cannot be adequately accounted for, according to a report produced by the state’s own auditor-general - a report which, for obvious reasons, the state has been reluctant to make public.
Implicated in the scam are close friends and family of South Sudan’s most senior officials, including figures aligned to both the government and the rebels. It’s clear there are no good guys leading this war - only the rich and powerful trying to get richer and more powerful, casually risking the lives and futures of South Sudan’s people to do so. - Simon Allison
On a hot, dusty day in April 2015, generals, ministers, senior ruling party officials and members of parliament descended on the offices of the ministry complex in South Sudan’s capital Juba. Some army men came in their uniforms, accompanied by a flock of AK-47 toting soldiers. Others, perhaps less willing to be seen, sent letters with requests, bearing the seal of whatever government institution they worked for. Some would simply pick up the phone to give instructions.
At first sight, the gathering may have looked like an emergency meeting of the country’s leadership. In fact, South Sudan’s elites were scrambling to cash in on dwindling foreign reserves - the advanced stage of a systematic effort to loot the resources of the world’s youngest nation.
At that time, South Sudan was well into the second year of a bloody civil war — a war that is yet to be resolved. Oil revenues had declined by a third, and the country’s dwindling foreign reserves had become its most sought-after commodity — especially for those in power.
In order to address the country’s acute shortage of hard currency, the Bank of South Sudan earmarked $993-million in oil revenues between 2012 and 2015 to import vital goods like medicine and food. Ministries allocated the hard currency to selected traders at a preferential exchange rate through letters of credit (LCs), a documentary credit facility commonly used to facilitate international trade.
But instead of helping South Sudan’s impoverished population, the LCs became one of the biggest corruption scandals in South Sudan’s short but troubled history, a Mail & Guardian investigation has found. Rather than using the lifeline to import badly needed goods like grains and medicine, many of those involved exploited it as a means to buy scarce oil dollars at a highly discounted exchange rate and resell them on the black market, potentially generating hundreds of millions of dollars in profit.
“Some few officials and fake traders, apparently with the assistance and collaboration from officials in authority, turned the LCs to a mere mean for personal benefit [sic],” concluded a confidential report of the national audit chamber obtained by the Mail & Guardian.
“Many beneficiaries of the letters of credit seem to have managed to get their payments without delivering the intended goods or services to the country,” said the audit report, which was presented to President Salva Kiir in December 2015. The LCs “have caused the country huge financial losses [...] at the expense of the majority of the populace in the country,” it concluded.
Initially launched when South Sudan shut down its oil production in 2012, the scheme took off just as conflict engulfed the young nation. Almost 90% ($875-million) of the funds were allocated in four rounds between May 2014 and April 2015. The practice flourished until the country finally ran out of foreign reserves, eventually forcing the Bank of South Sudan to abandon the fixed exchange rate in December 2015.
The dollar allocations were disbursed through the Qatar National Bank and CFC Stanbic [a subsidiary of South Africa’s Standard Bank] in South Sudan and transferred mostly to banks in Uganda and Kenya, including Kenya Commercial Bank, Barclays Bank, Equity Bank and Stanbic Uganda. Since the transactions occurred in USD, and were cleared through US correspondent banks, US law enforcement agencies could assert jurisdiction to prosecute any transactions found to violate US anti-money laundering laws.
The LCs are only the latest in a series of corruption scandals in a country whose birth in 2011 was greeted with international adulation and generous financial support. Although South Sudan ranks second from bottom in Transparency International’s corruption index, it remains one of the top recipients of foreign aid. In 2014, at a time when the scheme was at its height, donors spent $1.8-billion as part of the second largest humanitarian appeal in the world, trumped only by Syria. This year, the UN has asked donors for $1.6-billion to respond to a worsening humanitarian crisis, including localised famine in the first half of the year, caused by the cumulative effect of years of war and the worsening economic crisis.
The audit report investigating the scheme, which was completed in 2015 but was never presented in parliament, contains a list of over 1 900 LCs awarded to almost 1 200 companies. It stops short, however, of identifying their owners. Pro-transparency organisations believe the findings are intentionally kept under wraps.
The president’s office denied widespread abuse of the LCs and allegations that it was stalling further investigation. “The abuse comes as an exception and I’m not aware of particular details,” said Ateny Wek, President Salva Kiir’s spokesman. The auditor-general declined to comment on a report that has yet to be made public.
Over several months, the Mail & Guardian analysed data in the audit report and investigated the background of companies that received the largest allocations. An examination of the shareholders for a sample of companies suggested they were often linked to people in government and the armed forces. Moreover, evidence corroborated through dozens of interviews and official records suggests that only a small share of the funds were actually used to import the intended items.
In economies with mature financial markets, LCs form an integral part of international trade, with little room for manipulation. The idea is to minimise the risk for two parties trading across borders: upon request of the customer, a bank issues a written guarantee of payment to the bank of a supplier in another country. The customer deposits the value of the LC with his bank in local currency, the hard currency equivalent of which is released to the supplier’s bank as soon as the conditions stipulated in the letter are met. Usually, the release of funds requires documentary proof of delivery of goods.
In South Sudan, a country with weak institutions where an artificially-maintained dual exchange rate regime incentivised corruption, the LCs became a portal to self-enrichment. The decision to place the power to allocate LCs into the hands of ministries, instead of commercial banks as is the practice around the world, laid the ground for lobbying and abuse by office holders.
Every three to four months, when the time came to divide the hard currency available through the LCs, high-ranking members of the ruling party used their political clout to channel funds to companies owned by their associates or relatives.
“There was nobody who didn’t come,” one source close to the selection process said. “Ministers, members of parliament, generals – everybody came,” said the source, who - like most people interviewed for this story - requested anonymity in fear of reprisals.
“There were so many generals, you would think the ministry was the army headquarters,” said another source close to the process. “People could not even put their uniform away and come in civilian clothes. [They came] with their guns and with their boys behind them, intimidating everybody.”
Government officials rarely owned the companies that received the LCs, which would violate a constitutional provision prohibiting office holders from transacting commercial business. But according to several sources, letters of recommendations from government and army officials supported the vast majority of companies that passed the selection process, allegedly in return for a share of the profits generated through black market currency trading.
The Mail & Guardian obtained a few of these recommendation letters, signed by ministers, generals and governors (the details of the letters are withheld to protect the identity of sources that provided them). Several sources close to the process further reported that letters of recommendation came from the office of the president, the office of the chief of general staff of the army, and the office of the first lady, and were usually signed by administrators.
The members of the Joint Technical Committee, a body composed mostly of mid-level technocrats and charged with verifying the authenticity of companies recommended for allocations, felt powerless to intervene.
“We are just sitting there, like tools,” one of them said.
Several members described the vetting process as a facade, based on a set of easily manipulated criteria. The companies that regularly received allocations were often unknown to the business community and were alleged to be briefcase companies created for the purpose of embezzling funds.
One particular case stood out. In April 2015, $10-million was earmarked to import cooking oil. It was an eyebrow-raising amount, equivalent to two thirds of the country’s annual consumption, according to trade data. Although the $10-million was split between five companies in an apparent effort to feign competition, they all belonged to the same businessman of Eritrean origin, Gebremeskel Tesfemariam. Moreover, all five companies were incorporated between September and October 2014, just a few months before securing the LCs, with their designated suppliers in Uganda incorporated around the same time.
Several members of the Joint Technical Committee protested what they considered an obvious attempt to defraud. But the decision had already been made. The request, several witnesses recalled, was said to be “coming from above” and was backed by Daniel Awet Akot, a US-trained general and senior member of the ruling party who currently serves as a top advisor to President Kiir. Akot did not respond to repeated attempts to obtain comment.
It wasn’t unusual that large allocations fell to Eritrean businessmen, who are said to have close business connections to senior army and government officials. The relationships were forged during the Sudanese civil war, when Eritrea backed the South Sudanese rebels in their fight against Khartoum. When South Sudan opened up for business after a peace deal was signed in 2005, the Eritreans leveraged their ties to the rebels-turned-ruling party and obtained access to land and financing, as well as enjoying protection from their South Sudanese patrons.
“The Eritreans became the business partners of our generals,” said one senior member of the ruling party.
This mutually beneficial relationship was evident in the LCs scheme. According to information from the audit report and data obtained from official records, 22 of the top 30 beneficiaries of hard currency allocated for the importation of food were of Eritrean origin.
The Mail & Guardian’s examination of official records obtained from the business registry at the Ministry of Justice suggests that other companies may have been linked to those in power:
- Walda Pharmaceuticals, owned by children of the recently removed governor of the Bank of South Sudan, the very institution responsible for overseeing the LCs, received a total of $6.4-million to import drugs, the highest allocation given to any company by the Ministry of Health.
- Golden Star Holdings, a trading company owned by Ajok Wol Atak, then a sitting member of parliament and a wife of Paul Malong, then chief of the army, was allocated a total of $1.4-million by various ministries.
- Quality Pharmaceuticals, a company that received $1-million in 2012 and $300 000 in October 2014, appeared to be registered in the names of close relatives of Oyay Deng, former SPLA Chief of Staff and Minister of National Security. Deng confirmed that his family owned the business, but denied that the company benefited from the LCs.
- Greenland Trading and Investment, which received a total of $5.7-million through various ministries, appeared to be registered in the names of the wives of Cleto Akot Kuel, reportedly a member of the Dinka Council of elders, a body that is said to wield vast influence over the president
- Well Done International received a total of $6-million to deliver essential goods to two states. The company is allegedly owned by a close business associate of Malong, according to two independent sources close to the former army chief. The company was specifically mentioned in the audit report for securing unusually large amounts of hard currency, sometimes by dubiously replacing competitors late in the allocation process
The Mail & Guardian repeatedly attempted to obtain comment from Walda, Golden Star, Greenland Trading and Well Done, using both telephone numbers provided on the business registry as well as externally-sourced contacts. However, telephone calls and emails went unanswered.
The abuse wasn’t limited to a handful of officials and traders. Ministry officials, commercial banks, customs authorities, national security – officials along the entire value chain of the allocation process reportedly took bribes, be it to secure allocations, to provide fraudulent customs documents proving delivery, or to expedite transfers.
The scam seemed to have allowed elites and their loyalists to further concentrate their control over power and resources at a time of conflict when there were few checks and balances: political opponents had defected or fled the country; donors were distracted with humanitarian assistance; and ordinary South Sudanese were simply trying to survive.
Even as suspicions of abuse grew, the government did little to verify whether the beneficiaries of the scheme were honouring their obligations to import affordable goods.
“You go to the bank, the money was transferred. But the question is, did the money bring in goods or not? That is what we are asking until today,” said Simon Akuei, Secretary General of the South Sudan Chamber of Commerce, who occasionally represented the chamber on the Joint Technical Committee.
Facing outrage from the business community over perceived irregularities in the use of the LCs, Akuei tried to dispatch a monitoring team to Nimule, the main border crossing with Uganda, where the bulk of goods entered the country. But the proposal received no support from government officials.
“It didn’t work,” said Akuei. “Because [of] the fact that the ministries were the ones allocating the LCs, it became difficult to be part of the committee that could evaluate themselves.”
The banks, too, were accused by the auditor-general of turning a blind eye. The Qatar National Bank and CfC Stanbic, the two banks issuing the LCs in South Sudan, offered lax terms and executed transfers without verifying the authenticity of documents, the auditor general concluded in his report.
In email correspondence, a spokesperson for QNB insisted that the bank “exercised full due diligence applicable or required for such dealings - including customary checking of documents”. CfC Stanbic confirmed that it had issued a $100 million LC facility to importers approved by the government and the Bank of South Sudan, and that LC payments were made only “upon fulfilment of the relevant conditions of the LC and presentation of the requisite delivery documentation as confirmed by [the Government of South Sudan] who were the recipients of the goods.”
To date, it remains unknown how much of the billion dollars disbursed through the LC scheme was embezzled. South Sudan is a country where archiving systems are practically non-existent, and a visit to the customs headquarters quickly reveals the futility of trying to gather reliable data: at the time of reporting, the office had no electricity on most days, let alone a proper database of imports.
Yet a peek into the better-kept records of South Sudan’s neighbours, who were party to the cross border transactions under the LCs, offers some insights. Data obtained from the Ugandan Bureau of Statistics, corroborated with the United Nation’s Comtrade database, suggests that the bulk of LCs weren’t used to import goods.
What, for example, happened to the $10-million allocated to the five Eritrean companies for the importation of $10-million in cooking oil from Ugandan suppliers? According to trade data, at best one third was delivered.
In the period April - July 2015, during which the goods were due, only $3.4-million worth of cooking oil was imported from Uganda to South Sudan. (This amount also reflects any cooking oil imported by traders who obtained hard currency on the parallel market, as well as imports by humanitarian agencies. So, the actual value of goods delivered by the five Eritrean companies could be much less than $3.4-million).
Other things, too, raised questions about whether the Eritrean businesses delivered. Their owner, Gebremeskel Tesfemariam, received a total of $38-million between April 2014 and April 2015 through nine different companies, including the five that were supposed to import cooking oil. But when the Mail & Guardian visited the premises of one of his companies in mid-2016 and met with Tesfemariam, he claimed he had obtained only “a few hundred thousand here and there” through the LCs, and had largely ceased operations since 2014 due to the shortage of hard currency.
Tesfemariam was presented with the findings of this report by email. During a subsequent phone conversation, he insisted that his companies fully delivered on their obligations, but provided no additional documentation to support his claims.
It’s unclear what might have happened to the funds, but foreign companies are believed to have used the LCs to repatriate profits in an attempt to circumvent legal procedures for capital transfers, according to the auditor-general’s report.
A second probe into imports of pharmaceuticals is equally damning. Between May 2014 and August 2015, the total value of drugs imported to South Sudan via Uganda was $1.7-million - only six per cent of the $29-million wired to Ugandan suppliers through the LCs and due within that period.
During the same period, Walda Pharmaceuticals alone should have imported $4.8-million in drugs from Uganda. When the Mail & Guardian visited Walda in early 2016, the wholesaler’s stores were almost empty. Only a few boxes of infant formula stood on the concrete floor. A staff member said Walda had largely stopped importing drugs since the conflict began in late 2013. Achok Koriom, one of Walda’s owners and the daughter of the former governor of the Bank of South Sudan, didn’t respond to repeated requests for comment.
One billion dollars could have gone a long way for South Sudan’s population of around 10-million, a third whom faced severe food insecurity at the height of the scandal. But while government officials and their business associates used the country’s dwindling foreign reserves to enrich themselves, ordinary South Sudanese literally paid the price.
“The pharmaceuticals situation is in a mess,” said John Charles Ladu, the owner of St. Joseph’s pharmacy. “We don’t have a source where you can get the medicine.”
Located just across the Juba Teaching Hospital, South Sudan’s main secondary health care facility, St. Joseph’s is one of the oldest and busiest drug retailers in the capital Juba.
With a turnover not exceeding $500 000 annually, St. Joseph’s should have been inundated with affordable drugs from wholesalers who benefited from the $38-million in LCs allocated to the nascent pharmaceutical sector, the size of which industry insiders estimate at only $5-10-million annually.
“The LC allocations would have been more than enough to cover the needs of the country for one to three years,” said Emmanuel Tongun, who runs Dr Philip’s Pharmaceuticals, located just down the road from St. Joseph’s. “If the companies had used the money properly, there would be no shortage of drugs now,” said Tongun. Even though Dr. Philip’s is often described as a large and well-established wholesaler with a reputation of supplying high quality drugs, the company received only $300 000 through the LCs.
Instead, genuine traders like St. Joseph’s or Dr. Philip’s mostly relied on the black market, where the very dollars obtained through LCs at the official exchange rate of 3 South Sudanese Pounds (SSP) were resold for multiples of that. In 2015 alone, the cost of the dollar on the parallel market shot up by 300%. In December that year, just before the Bank of South Sudan finally abandoned the peg, the dollar traded for 18.5 SSP – over six times the official rate.
It was a mind-bogglingly profitable business for those who were able to swap their LC dollars on the black market, but it cost the South Sudanese dearly. As prices shot up, most of Ladu’s customers could no longer afford life saving medicine like antibiotics or antimalarials.
The misuse of funds intended for vital food and medicines further increased the burden on donors to fill the gaps.
The Emergency Medicines Fund (EMF), financed by the US and the UK, supplied around $25-million in drugs in 2014 and 2015. Donors say it was barely enough to cover basic needs. The $38-million in LCs allocated for importing affordable drugs could have filled the gaps, one aid worker familiar with the EMF told the Mail and Guardian.
Some donors say the government has taken advantage of their readiness to provide aid for emergencies, without making steps to spend its own funds more responsibly. Donors fund 80% of South Sudan’s health care while World Bank data shows the government spends only 1.1% of its own funds on health – one of the lowest rates in the world.
“It’s a kind of blackmail,” said one Western diplomat. “If you draw your red line, and you say we will only spend this much, [the government] will just say, okay, don’t fund it then. If we don’t do it, people will die.”
Donors were also forced to pick up the slack when malnutrition rates began to rise in urban centres. In a sign that the LCs failed in their objective to stabilize food prices, the cost of a food basket went up five fold between 2014 and 2016, forcing many urban dwellers to drastically cut their food intake. The spread of hunger to Juba was a worrying development for aid agencies, already stretched trying to avert famine in remote, conflict-ridden areas.
“Most of our assistance has been going to rural areas...but with increased food insecurity, it will require scaling up the activities in the urban areas,” said Joyce Luma, country director for the World Food Programme (WFP) in South Sudan. Together with other agencies, WFP in 2016 launched a new $21-million program to feed the capital’s increasingly impoverished population.
“The citizens are really suffering,” said Aduli Zeitun, a trader in Juba’s Konyo Konyo market. She too never saw the benefit of the LCs. The cost of her janjara beans, brought from Uganda using black market dollars, was beyond the reach of many South Sudanese. Even though the staple beans normally sell like hot cakes, Zeitun’s colourful, neatly stacked buckets of janjara remained full that morning. She worried that her dwindling income might soon not be enough to feed her own family.
“Let the government think about the citizens,” she appealed. “Even the children can’t get enough to eat.”
But with South Sudan’s bloody civil war of over three years showing no signs of abating, there’s little hope that the government will take meaningful steps to stabilize the economy or bring those who embezzled public funds to account.
On a blistering day in April 2016, Filiberto Mayout sat outside his office at the Ministry of Justice, trying to escape the afternoon heat inside. “We have no power,” the prosecutor general said, closing the legal file filled with notes. With no money for fuel, the justice ministry’s generators had been standing idle, and the prosecutor general had resorted to pen and paper.
Mayout was appointed in 2013 to chair an investigative committee that scrutinises companies suspected of having embezzled the bulk of $1.44-billion awarded in 2008 for the importation of grain in a corruption scheme that became known as the Dura grain saga. Three years into the investigation and eight years after the events in question, his team was losing the race against time. Data had been deleted, companies had vanished, valuable information had been lost.
“Of course the passage of time has some impact on the investigation,” said the Khartoum-educated lawyer, dabbing the pearls of sweat that perpetually formed on his forehead. “The findings might not be conclusive but at least some of the cases will be considered as fraudulent.”
Mayout has handled several corruption cases during his tenure, but there’s little to show for it. There was the corrupt under-secretary of education who was acquitted and left the country before the prosecutor could appeal. There was the finance minister who was arrested over corruption allegations but then escaped from jail with the help of a friendly militia.
Over the years, South Sudan’s legal system has proven ill-equipped to bring corrupt officials to account. The prosecutor general’s office, the audit chamber and the anti-corruption commission - the three institutions mandated with investigating corruption - all report to the president, who has the final say over who is prosecuted.
President Kiir has repeatedly pledged to crack down on corruption. But apart from occasional convictions of mid-level bureaucrats, cases that risk implicating high-level officials are hardly ever pursued.
In 2014, President Salva Kiir reportedly requested the auditor-general to stop investigating corruption allegations related to the Crisis Management Committee, a body charged in 2014 with coordinating the emergency response to South Sudan’s conflict, but suspected to be a loophole to siphon money into the pockets of the ruling elite. The President is also said to have halted the investigation of senior government officials implicated in the Dura saga, according to two sources, including a senior government official who served as cabinet member at the time. The president’s office denied the allegations.
Now, the investigation into the abuse of the LCs risks facing a similar fate. The auditor general’s report – the first step on a long road towards a formal investigation – was presented to the president and submitted to the parliament in December 2015. Asked why President Salva Kiir hasn’t followed up on the findings of the report, his spokesperson, Ateny Wek, said that “the office of president is dealing with a lot of other things that have more priority.”
But pro-transparency activists accuse the presidency of obstruction of justice. “The reason why this report is not being discussed in parliament is because it involves or implicates top officials in the government,” said Edmund Yakani, who leads a civil society and activist group called CEPO and who personally lobbied parliament to request an audit of the LCs.
With the re-escalation of fighting since 2016, along with a crackdown on opposition, the press and activists, chances that officials and businessmen who have abused the LCs for their personal benefit will be brought to account have all but vanished.
Yakani’s only hope is that the international community, which has invested billions in practically unconditional aid to midwife and nurture the world’s youngest nation, starts demanding genuine reforms and accountability.
“Donors need to give their foreign support with benchmarks, among them the commitment to really fight corruption,” said Yakani. “Everything else is a waste of time.”