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South Sudanese letter of credit system exploited in billion-dollar scam, report claims

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South Sudanese letter of credit system exploited in billion-dollar scam, report claims

South Sudanese leaders allegedly abused a US$993mn letter of credit (LC) scheme that deprived the country of food, fuel and medicine, a new report has claimed.

Following a three-year investigation, corruption-tracking organisation The Sentry says that LCs intended to be used to purchase vital imports – necessary due to an oil production shutdown in 2012 that triggered a financial crisis and depleted foreign currency reserves – were awarded to companies that did not deliver the goods.

From 2012 to 2014, the Bank of South Sudan signed credit facility arrangements enabling it to borrow lines of credit amounting to US$793mn from Qatar National Bank (QNB) and US$200mn from CfC Stanbic Bank in Kenya, a subsidiary of South Africa’s Standard Bank Group. The last LC-supported contracts were awarded in 2015.

“The credit lines were supposed to be repaid through the oil production that the country was hoping to resume shortly,” The Sentry’s report notes.

Traders could apply to the government and, if selected, deposit South Sudanese pounds (SSP) with QNB and CfC Stanbic, receiving US dollar-denominated LCs in return. The LCs would then provide a guarantee for banks to pay the exporter once the local importer had presented proof of delivery documents, such as invoices or customs papers.

Yet after interviewing former officials and reviewing corporate and government records, The Sentry claims that “hundreds of millions of dollars were transferred into accounts in Kenya and Uganda linked to the same individuals who were allocated the LCs, or to their close associates, often with no proof of delivery”.

Contracts were given to companies that only existed on paper and unqualified businesses, including those with connections to President Salva Kiir and Kornelio Koriom, then governor of the Central Bank of South Sudan, as well as military officials. Allocation criteria were often either ignored or manipulated, the report asserts.

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For instance, “the requirement of a signed sales contract between the applicant (importer) and the beneficiary (exporter) was often ignored, and the consignee and consignor were the same person or entity”, the report says. Companies that received US dollars could then sell them on the black market for more than the official exchange rate of 3.16 SSP per dollar.

“One of the biggest problems with the letters of credit program is that the banks didn’t require physical verification that the promised goods were delivered,” comments Denisse Rudich, senior advisor at The Sentry.

“The letters of credit were often paid out based on false or misleading documents presented by companies selected by the government of South Sudan,” she says.

The report concludes that “South Sudanese government officials and regional networks of traders” obtained “more than US$500mn of the US$922mn allocated LCs” without any proof the goods were delivered.

The South Sudanese government did not repay the loans and entered arbitration proceedings initiated by QNB at the International Center for Settlement of Investment Disputes in 2020. A debt-restructuring agreement between the government and QNB was agreed in July 2020, but the arbitration is still ongoing.

Technical bankruptcy looms

Shortages in food, medicine and fuel continue to affect the country, which gained its independence in 2011. Civil war broke out in 2013 and ended when a peace agreement was signed in 2018. However, the current unity government recently announced a two-year extension of the post-civil war transitional period, meaning that provisions of the peace deal not yet implemented could be further postponed.

According to the Famine Early Warning Systems Network, “levels of acute food insecurity are expected to further deteriorate in most areas [of South Sudan] between October and January”, with widespread emergency (Integrated Phase Classification [IPC] phase 4) outcomes likely. Phase 4 is one stage before famine on the IPC scale.

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South Sudan’s economy relies on oil and humanitarian relief, with the US providing an annual US$1.5bn in aid. Both sources of funding are under threat, however. A lack of foreign investment has limited oil production, while many humanitarian donors require the country to make progress in the peace deal before committing funds.

A report published by specialist intelligence company Pangea-Risk in August 2022 warns that “public debt is fast shrinking as fewer commercial banks and commodity traders wish to lend to the country”, and is projected “to fall from 50% of GDP this year to just over 20% by end of 2023”.

If funding from commercial banks like QNB is no longer forthcoming, the report notes that “South Sudan will undoubtedly head towards technical bankruptcy in coming months”.

Speaking to GTR, Pangea-Risk founder Robert Besseling says: “South Sudan is not a country very popular with most banks. There are rising non-payment risks, and these are making commercial lenders hesitant to disburse loans, while large donors such as the US, for example, are planning to cut humanitarian funding. If the US continues to scale down humanitarian funding, the government will very soon run out of cash.”

“The currency keeps depreciating against the dollar and these credit lines from previous banks, like QNB, are set to expire. QNB is one of the few banks which seems to have been active in South Sudan over the past few years, providing these credit facilities to the South Sudanese government, very often based on pre-export finance facilities,” he says.

“The problem is that many of these are suffering from delayed payments, or from what you can call technical non-payment, or defaults, on a number of these lenders, so there is actually less and less interest in the country.”

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Besseling notes that while the International Monetary Fund (IMF) would be able to offer some food security emergency facilities that are not subject to any prerequisites like structural reforms, more significant financing would come with requirements.

“Any longer term and more substantial financial assistance from the IMF would become conditional on reforms, particularly in terms of transparency, but also to cut the bloated public sector and public payroll, and to implement growth-enhancing reforms in the economy,” Besseling says, adding that such reforms would be “very politically unpalatable for the South Sudanese government”.

“Cutting the public payroll would undermine that state patronage system, which is fuelled by oil money and humanitarian cash, and would essentially destabilise the government,” he explains.

According to Besseling, the South Sudanese government has longer-term plans to reinvigorate the oil sector, including building a new pipeline and refinery, as well as bringing in new foreign investors from South Africa, Malaysia and China, but, he says, these plans “have been stuck since pre-Covid times”.

In a statement provided to GTR, Standard Bank Group says it “is aware of the matter relating to the letters of credit programme in South Sudan between 2012 and 2015”.

“Stanbic transacted with its already existing clients who had undergone the normal know-your-customer processes and due diligence. These processes returned satisfactory outcomes,” it continues.

“The requirement under the letters of credit was to examine the transactional documents requested to ensure that they were compliant with the terms and conditions of the letters of credit. The documents were sufficient and compliant, hence the payments were released.”

QNB and the Bank of South Sudan did not respond to requests for comment.




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