When Financial Conduct Authority director David Lawton testifies to MPs tomorrow, he must explain how the regulator allowed a company facing serious corruption allegations to list in London and then depart while it was under criminal investigation.
Today ENRC will cease trading on the London Stock Exchange, following a buy-out by its founders. Despite calls by Global Witness to block the transaction, the FCA and its predecessor, the Financial Services Authority, failed to act. The Business, Innovation and Skills select committee should demand an explanation.
The UK's Serious Fraud Office is investigating Eurasian Natural Resources Corporation on suspicion of corruption in Kazakhstan and Africa. Its mining deals deprived the Democratic Republic of Congo, the world's least developed nation, of $725 million according to the Africa Progress Panel, headed by former UN secretary general Kofi Annan.
With the purchase of ENRC by a company newly incorporated in Luxembourg, a highly secretive financial jurisdiction rated "non-compliant" by the OECD in a 22 November transparency report, there is a grave risk that this will hamper the investigation into one of the City's biggest scandals.
ENRC listed in December 2007, immediately joining the FTSE 100. Just three months earlier, auditors Herbert Smith compiled a report on the company detailing what appears to have been systematic fraud. The committee should ask Mr Lawton if regulators saw the document. If they did, what concerns did they raise? A letter earlier this year from the law firm Dechert to ENRC's General Counsel alleges "cash payments to African presidents" and said that the "payment(s) had been sanctioned by a senior executive".[i]
Global Witness has sent detailed questions to ENRC on all of the allegations but has received replies to none of them, although the company said that it "has a zero-tolerance policy to bribery and corruption". Investigations into ENRC continue and it has not been found guilty of any wrongdoing.
The FCA said in earlier written evidence to the select committee that it isn't its job to check if a company is corrupt:
"Our review of an application for listing focuses on ensuring the applicant meets the admission criteria and is therefore eligible for listing. We do not consider whether it is suitable for listing," it said in its 22 October submission.
"We take no view on... whether it might be the sort of company that we would like investors to have the opportunity to invest in."
The FCA doesn't appear to know what its job is. Its stated aim is to protect shareholders from companies that use "corrupt or unethical methods". How does it square that with its failure to take action over ENRC, whose share price plummeted following allegations of corruption?
Earlier this month the FCA announced new listing rules aimed at protecting minority investors - an apparent response to the ENRC debacle. However, in Global Witness's opinion these changes will do little to prevent a repetition of the kind of corruption scandal seen with ENRC.
ENRC disclosed last year that the UK Listing Authority, which comes under Mr Lawton's authority, was investigating some of the company's transactions in Congo and Kazakhstan, including whether they had breached rules on related-party transactions. ENRC also said the UKLA was investigating its compliance with stock exchange listing rules more widely. MPs on the select committee should ask what the status of these inquiries is and whether they will be brought to a conclusion, despite ENRC's delisting.
The 2007 Herbert Smith audit offers evidence that the trio of oligarchs who control ENRC used the company as a private cashpoint, defrauding shareholders by skimming off most of the profits for themselves.
The Serious Fraud Office is also examining ENRC's later role in one of Africa's most controversial mining deals.
In 2009 and 2010, ENRC bought mines from a close friend of the Congolese president after the government sold them off at fire-sale prices. Most of these assets had been confiscated from another company. The dispute sparked uproar and prompted investors including Standard Life to sell ENRC holdings in protest, contributing to a massive drop in the company's share price. ENRC is still paying off $1.25 billion to settle it.
MPs should ask Mr Lawton if the FCA is doing enough to prevent the City aiding and abetting the pillage of African resources by corrupt firms.