The World Bank, Red Flags And the Looting of Nigeria’s Oil Revenues - The Seven Energy Web

Thursday, October 25, 2018 19:08PM /Written by Nicholas Hildyard

The IFC’s investment in Seven Energy: What would have been your call?

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Introduction

Here’s a question: if you were entrusted with $355 millionof money that didn’t belong to you, would you invest it in a company whoseflagship contract involved operating a scheme that was allegedly lootingbillions of dollars from the state’s oil revenues? Would it make a differenceto your decision if the allegations had been made by the country’s head banker,Governor of its Central Bank?

And here’s another question: If youdecided to invest, would you withdraw your investment if 10% of your company’sshares were later listed in an application1 for a worldwide freezing order2(subsequently granted by a court) as assets that had been obtained through theillegal diversion of oil revenues for the benefit of the country’s then oilminister and her cronies?

If your answers are “Yes” and “No”, thenyour prospects for getting a job at the World Bank’s International FinanceCorporation (IFC) or the World Bank’s Multilateral Investment Guarantee Agency(MIGA) are looking good.

In fact, more than good. Because this isa not a hypothetical example: between 2014 and 2016, both the IFC and MIGA madeinvestment calls that chimed exactly with yours.

Proshare Nigeria Pvt. Ltd.

To be more specific:

On1st May 2014, the IFC committed $75 million to an equity investment in SevenEnergy International Limited (SEIL). The company refers to itself as “SevenEnergy”8 and, to avoid confusing acronyms, we will do likewise, occasionallyabbreviating to “Seven” for ease of reading. Registered in Mauritius, SevenEnergy operates in Nigeria through subsidiaries, one of which is “Septa EnergyNigeria Limited” or “Septa”. Clock the name – it will feature prominently inwhat follows – and also note that the IFC was fully aware of the existence ofSepta at the time of its investment; indeed, its project summary for theproject specifically states that “within Nigeria, [Seven Energy] operates andtrades as ‘Septa Energy’.” Septa has since been renamed Seven Exploration andProduction Limited.
Afurther investment of $30 million was made in Seven Energy at the same timethrough the IFC African, Latin American and Caribbean Fund, which is managed bythe IFC’s Asset Management Company; and,
Afew months later, in October 2014, the IFC provided yet more funds through ananchor investment of up to $50 million in Seven Energy’s inaugural bond issue.

Atthe time, the IFC’s investments constituted the “IFC’s largest equity financingin the oil and gas sector in Africa”. MIGA later provided a $200 millionguarantee for an investment in Accugas Limited, a wholly-owned subsidiary ofSeven Energy, in September 2015.

The Governor’s Memo

And here’s the rub.

Seven months before theIFC made its first investment in Seven Energy, Mr Lamido Sanusi, the Governorof the Central Bank of Nigeria (that’s right: Nigeria is the 31st largesteconomy in the world) presented a damning 6-page memo to the then President ofNigeria Goodluck Jonathan. Governor Sanusi reported that, in the 19 monthsbetween January 2012 and July 2013, 76 percent of the value of the oil liftedby the Nigerian National Petroleum Corporation (NNPC) had not been remitted tothe government’s central bank account, known as the Federation Account, “ingross violation of the law”.

In an exhaustive statement tothe Nigerian Senate,submitted a full three months before the IFC’s firstinvestment in Seven Energy, Sanusi detailed a number of mechanisms that he heldpotentially responsible for this wholesale looting of the public purse. Amongthem were so-called Strategic Alliance Agreements (of which more later) thatthe NNPC’s wholly-owned subsidiary the Nigerian Petroleum Development Company(NPDC) had entered into with a number of Nigerian companies.

Sanusi initially put the lostoil revenue from Strategic Alliance Agreements and other schemes at $49.8billion,20 which is the equivalent of more than 40 times Nigeria’s annualhealth budget, a loss he blamed on transactions “taking place under legal coverwith huge revenue leakages embedded therein”.

Later, after taking accountof new information, he calculated that the amount that had been “illegally andunconstitutionally withheld, diverted or spent by NNPC” 22 was closer to $20billion23 – well below his original estimate but still a gob-smacking $1.5billion a month.

Of this grand total, Sanusiestimated that Strategic Alliance Agreements (known as SAAs) accounted for some$7 billion of the lost revenues4 And he went on to name two companies which hadbenefited from SAA contracts, both founded by oil traders Kola Aluko and JideOmokore. One company was Atlantic Energy.

The other – and, at thispoint, those at the IFC doing due diligence on Seven Energy should have prickedup their ears – was Seven’s wholly owned25 Nigerian subsidiary, Septa, whichhad been granted an SAA covering three oil fields, known as OMLs 4, 38 and 41,in November 2010.

The Strategic AllianceAgreements and Seven Energy

What then were these Strategic Alliance Agreements?
Why was Sanusi so exercised about them? and
Why did Sanusi single out Seven and Atlantic by name?

Introduced in 2010 by oilMinister Diezani Alison-Madueke, SAAs were overtly a means of bringing Nigerianprivate sector capital into the Nigerian oil industry. Prior to 2010, the NNPC(that’s the Nigerian National Petroleum Corporation for those who find theacronyms hard to remember) operated individual oil fields in joint partnershipwith a subsidiary of a major international oil company, with the NNPC owning55% and the oil company 45%. Both the NNPC and the company injected funds andboth took their share of the oil revenues. The NNPC’s share was remitteddirectly to the Nigeria’s Federation Account, a central bank account.

Under Alison-Madueke’s SAAprogramme, the NNPC retained its 55% ownership of the oil licenses but assignedits financing and operating role to its subsidiary, the National PetroleumDeveloping Corporation (NPDC). However the NPDC lacked the in-house financialresources and technical expertise to fulfil this role. It therefore enteredinto SAAs with third parties who (in theory) were able to provide the requisitefinance and operating experience.28 In return, the SAA partners were entitledto recoup their costs by selling a portion of the oil or gas they lifted. Theremaining profits – after costs had been recouped – were then split between theSAA contractor and the NPDC. The SAAs were signed exclusively for fields inwhich the international oil companies (notably Shell) had divested their 45%interest to Nigerian oil companies; and the programme was justified on thebasis of indigenising oil production.

What was striking about thearrangement, Sanusi argued, was the lack of any financial or operational rolefor the NPDC. What then was its function? Sanusi’s answer was clear: the NPDCwas being used “for the purpose of acquiring assets belonging to the [FederalRepublic of Nigeria] and transferring the income to private hands.”30 And hewas explicit as to who these “private hands” were: namely, business partners ofNPDC “like Seven Energy and Atlantic”.

Sanusi did not accuse Sevenor Atlantic of any illegalities;32 but he argued that the use of SAAs was“illegal and unconstitutional”33 – and he produced three legal opinions fromeminent Nigerian lawyers to support that view.34 He also questioned why theNPDC had chosen Seven and Atlantic as SAA contractors, when the neither companyhad experience in crude oil production and both lacked the financial resourcesto bring any capital of their own to the table. Sanusi’s testimony caused afurore in Nigeria. It was not the first time that SAAs had been criticized. butSanusi’s position as the top banker, and the documentation he made public,raised the criticisms to a new level.

In response, Seven Energy hasconsistently denied the criticisms, arguing they are without foundation. In apress release, the company insisted that its subsidiary Septa, contrary tosuggestions otherwise, had funded all of its cash call obligations under itsSAA for OMLs 4, 38 and 41. The company also strenuously defended the legalityof the deals, stating: “We have undertaken legal reviews of the StrategicAlliance Agreement and we are confident of its legal status and robustness.”

In a later statement, it alsonoted that the 2014 Senate Finance Committee had found certain of Mr. Sanusi’sallegations to “‘misleading’ and ‘incorrect’” and that both the AttorneyGeneral of Nigeria, Mohamed Adoke, and Mr Andrew Yakubu, the General Manager ofthe NNPC, had defended the legality of the SAA arrangements.

Arresting developments

Shortly after Sanusi’s Senateappearance, President Jonathan dismissed the Governor from his post for alleged“financial recklessness and misconduct.” But the issues that Sanusi raised havenot gone away

Fast forward (spoiler alert here!) toOctober 2018. The IFC and MIGA are still invested in Seven Energy and not aword has been posted on the World Bank website that might remotely suggest anycontroversy over the company’s past. Nada. Zip. Zilch.

Meanwhile, Nigeria has a new governmentunder President Mohamed Buhari, who assumed office in May 2015, having beenelected on a ticket that was firmly committed to combatting corruption. SinceBuhari’s election, the Nigerian anti-graft agency, the Economic and FinancialCrimes Commission, has been working with authorities in the US, Switzerland andUK to investigate the oil revenue theft allegations made by Sanusi. And the nethas widened to include former oil Minister, Diezani Alison-Madueke, who is saidby the US Department of Justice to have been a major beneficiary of the allegedcorruption.

Although no charges have been broughtagainst Seven Energy, other companies and individuals involved in thecontroversy over the SAAs and the missing oil revenues (many of whom were namedby Sanusi as having an association with Seven) are now feeling judicial heat:

InOctober 2015, Diezani Alison-Madueke was arrested in London on suspicion ofbribery and corruption, although she has yet to be charged.. The National CrimeAgency reportedly confiscated her passport and £27,000 in cash found in herapartment. She has since been indicted, in absentia, in Nigeria formoney laundering. Alison-Madueke denies any wrong doing.
KolaAluko, Seven’s Deputy CEO at the time that Seven’s SAA was negotiated andsigned, though as yet facing no criminal charges, is also reportedly underinvestigation in the UK for bribery. Mr Aluko denies any impropriety.
InJune 2016, the Federal Republic of Nigeria sought53 (and obtained) 54 aworldwide freezing order, directing 19 Nigerian banks, eight foreign banks andeight local and international firms to freeze the funds and assets they hold onbehalf of the Mr. Omokore, Mr. Aluko and two Atlantic Energy group companies.Among the assets listed in the Federal Republic’s application are 10% of theshares in Seven Energy, said to have been obtained by the defendants with theillegally diverted proceeds of crude oil lifted under Atlantic’s SAAs andinvested in Aluko’s name.
On2nd June 2016, Jide Omokore was charged in Nigeria with money laundering inrelation to Atlantic’s SAA contracts. Three former NNPC executives, includingthe former Group Managing Director of the Nigerian National PetroleumCorporation (NNPC), Mr Andrew Yakubu (yes, the same Mr Yakubu that exoneratedthe SAA deals), were also charged with abetting Omokore. The defendantsdeny the charges.
InSeptember 2016, the UK’s National Crime Agency obtained a court order freezingtwo London properties belonging to Diezani Alison-Madueke under the Proceeds ofCrime Act. · In January 2017, a Lagos Federal Court ordered the forfeiture ofN34 billion (about $107 million) of assets linked to Alison-Madueke.
InFebruary 2017, the NPDC (the subsidiary of the Nigerian National PetroleumCorporation that entered into the SAA agreements) notified Seven Energy that itintended to terminate the company’s SAA, alleging that Seven Energy owes moneyunder the agreements. Seven disputes that there are grounds under which the SAAcan be terminated and has announced that it “will take necessary steps,including legal actions, to defend and enforce its position and to preserve itscontractual rights under and in respect of the SAA”. In 2015, the SAA providedSeven Energy with 10% of its income: its permanent termination would thus posea major financial risk to the IFC’s investment.
InMarch 2017, Andrew Yakubu (yes, Mr Yakubu again), was charged with six countsof money laundering and false declaration of assets, after some $10 million incash was found in a safe in a house belonging to him. The charges reportedlyarose as a result of an investigation into the suspicious movement of fundsfrom the Nigerian account of Atlantic Energy Drilling Concept to its sistercompany in Switzerland called Atlantic Energy Holdings. Yakubu was Groupmanaging Director of NNPC at the time that its subsidiary, the NigerianPetroleum Development Company, entered into a Strategic Alliance Agreement withAtlantic. Yakubu denies the charges. Although he admits to being the owner ofthe monies found in his safe, he has reportedly claimed it was “gifts given tohim by friends and well-wishers and also savings accumulated over a period ofyears”.
InJuly 2017, the US Department of Justice (DoJ) sought to seize $144 million inassets (including Aluko’s yacht, the Galactica Star, and several of his houses)said to have been bought with monies due to the Federal Government of Nigeriabut diverted for the benefit of Aluko, Omokore and Alison-Madueke. Arrest warrantsagainst various properties were subsequently obtained.72 According to DoJ,“from 2011 to 2015, Nigerian businessmen Kolawole Akanni Aluko and OlajideOmokore conspired with others to pay bribes to Nigeria’s former Minister forPetroleum Resources, Diezani Alison-Madueke, who oversaw Nigeria’s state-ownedoil company. In return for these improper benefits, Alison-Madueke used herinfluence to steer lucrative oil contracts to companies owned by Aluko andOmokore”. The court papers include transcripts of a wiretapped conversationbetween Alison-Madueke and Aluko, in which she is reported to have said: “westuck our necks out regarding the SAA and we supported it”. Alison-Madueke thenberates Aluko for his acquisitive spending, which had “ruined it” by drawingthe attention of the authorities. Later in the conversation, Alison-Madueke isalso recorded as acknowledging the receipt of furniture worth $4 million fromAluko and stating that she was “happy to escort all of you to jail along withmyself” if he attempted to blackmail her.
InMay 2017, Seven defaulted on its IFC underwritten bond issued in 2014. InOctober 2017, it announced that it was undergoing “capital restructuring” andthat, again, it would not be making the interest payment due on the IFC-underwrittenbond. In April 2018, there was a further default. According to SavannahPetroleum plc, a UK company that is now seeking to acquire some of Seven’sassets, Seven’s total unserviced debt as of December 2017 amounted to“approximately US$900m in aggregate”.
InNovember 2017, Savannah Petroleum entered into a Lock-Up Agreement with anumber of Seven’s companies and unnamed creditors of the Seven Group to acquiretwo of Seven’s Nigerian assets, the Uquo and Stubb Creek oil and gas fields,together with a 20% interest in Accugas, described as “the Seven Group’smidstream business”.
TheLock-up Agreement envisaged the holders of the IFC-backed Seven bondsexchanging them in return for US$87.5 million in cash and US$52.5 million innewly issued Savannah shares. Given that the aggregate total principal of thebond issue was $318,228,000, that would seem quite a “haircut” for the bondinvestors.
Savannahhas emphasised that it will not be acquiring Seven Exploration & ProductionLimited (previously Septa) as part of the agreed transaction. Moreover,Seven Exploration’s SAA was not included in the deal. In an email clarifyingits potential interest in the SAA, Savannah has said: “Savannah will takeadvantage of future commercial opportunities, which may include the SAAdepending upon the outcome of the ongoing settlement discussions. In suchcircumstances, the assumption or acquisition of the SAA would be the subject ofa separate transaction independent from the Transaction”.
Thecompanyemphasises that: “If there were subsequently to be any separate transactionrelating to the SAA or the underlying assets then this would also be subject tothe satisfaction of detailed legal due diligence, including a compliance andanti-bribery review.”
On7 February 2018, Savannah Petroleum announced that it had reached agreement with bond holders to exchange 96% of the IFC-backed bondissue for shares in Savannah. As of July 2018, according to Savannah, thecompany was still “in the process of acquiring the Seven Assets” but expectedthe transaction to be completed “in the third quarter of 2018”. At thetime of going to press, in mid-September 2018, the transaction had not beencompleted.

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Due Diligence?

Quite a series ofdevelopments.

The IFC insists that “priorto investing in Seven Energy, IFC conducted comprehensive due diligence as isstandard for our investments” (see Box: Right of Reply Responses). However, itdid not respond to specific questions about its post-investment duediligence.

So, if you were working atthe IFC and tasked with undertaking due diligence on the IFC’s investment inSeven, how would you have assessed the risks? You might take the view thatnatural justice precludes you from taking any of the listed prosecutions andcriminal investigations into account: after all, no-one has yet been convictedof anything and Seven itself has not been charged with any offense. But thiswould be to misunderstand the purpose of due diligence. No-one is asking you toact as judge and jury: it is for the courts to decide whether or not anycriminality has occurred.

But due diligence does requirean assessment of the risks that related prosecutions and investigations pose toan investment and to the institutions that make the investment.

And, in this case, one hopesthat IFC and MIGA were following the developments closely. Because, as thingscurrently stand, the IFC is a major shareholder in (and MIGA a guarantor of) acompany that has defaulted on its debts and is claimed by the Federal Republicof Nigeria in court pleadings to be partly owned by two suspected criminals whoare alleged to have used Seven Energy as a vehicle for laundering stolen oilfunds.

Quite where that latter development places the World

Bank is one for the lawyers. But, from alay perspective, it is surely not unreasonable to conclude that, should theallegations against Aluko, Omokore and their associates be proven, both the IFCand MIGA might find themselves accused having profited from money launderingand, thus, of unlawful enrichment.

To repeat, it is for the courts to decidewhether or not those who have been charged are wrong’uns; and it is importantto reiterate that all those charged deny wrong-doing or malpractice. So westress that we ourselves make no allegations against Seven Energy and wereadily record that the company has consistently denied wrong doing.

Our concern is solely with the World Bankgroup’s decision to invest in Seven Energy – and the adequacy of the IFC’s andMIGA’s due diligence procedures.

Our focus is therefore on the IFC’shandling of the investment.

We do not know how the IFC assessed thefinancial and reputational risks of its investment in Seven Energy. Despite itsprofessed commitment to transparency, which it describes as “fundamental tofulfilling its development mandate and strengthening public trust”, the IFCdoes not release its due diligence reports.

But we do know that the IFC’s rulesrequire it to assess “integrity risk issues” (related to “the institutions andpersons” involved in a given investment) and that these risks are supposed tobe monitored “throughout the life of the project or engagement”.

We also know what information wasavailable to anyone with a computer and access to the internet at the time thatthe IFC made its investment in Seven Energy and MIGA issued its guarantee (seeAnnexe 1: Timeline). So we are in a good position to make our ownassessment of the reputational and financial risks and to judge, on the basisof common sense, whether or not the Bank’s investments were reasonable andjustifiable.

And because the IFC’s rules require it totake account of money laundering risks,95 we are also in a position to take aview on whether or not the Bank has adequate anti-money laundering controls andprocedures in place. A benchmark (albeit a low-bar benchmark) might be that setby UK law: namely, the requirement to have controls and procedures that aresufficiently robust to prevent money-laundering. To ensure prevention,the trigger for action on the part of a bank or other financial institution isnot proof of criminality but “reasonable grounds for knowing or suspecting”that a person is engaged in money laundering. This would seem to be anappropriate test for whether or not the IFC should have blocked or withdrawnfrom the investment.

So let us run through some of the risks(or red flags to use the jargon of due diligence) that the IFC shouldreasonably have been expected to assess at the time of their decisions toinvest; and, given the requirement for ongoing assessment, how those risksmight be viewed today.

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Red Flags

Hindsight, as the poet William Blakeobserved, is a wonderful thing. Foresight, he went on to comment, is better,“especially when it comes to saving life or some pain”. And that, of course, isthe point of conducting due diligence. In the IFC’s case, the pain that itseeks to avoid, as expressly set out in its annual financial statements, is thepain of “adverse reputational and/or financial impact on IFC”.

The IFC was therefore dutybound (under its own rules) to assess the financial underpinnings of theinvestment it proposed to make. And that, at the very least, required anassessment of the robustness, integrity and legality of the SAA contracts thatSeven Energy had entered into with the NPDC. Indeed, by the company’s ownaccount, the SAA agreements were fundamental to the financial health of thecompany.

In its Memorandum foroffering its IFC-backed bonds to investors in 2014, Seven stated that therevenue generated by the three oil fields that it operated under the SAAs“represented all of our revenue” in 2013 and “the significant majority of ourrevenue” for the six months up to June 30, 2014.” Seven Energy alsostated that the SAAs would continue “to have a significant impact on ourresults of operations, even as our other assets are scheduled to come online...”

And, critically, it confirmedthat the “primary credit support” for the bond issued was “derived from ourrights in these assets”. In effect, if the SAAs were unsound – orsubsequently ruled illegal – then the IFC’s investment would – pardon thetechnical term – be up shit creek without a paddle.

The allegations made bySanusi therefore raised not just one red flag but several, each bigger thananything (cry your eyes out, Jo Stalin) that has ever flown over the Kremlin.The question is: how did the IFC deal with them? And how would you have doneso?

Let’s look at the red flags in detail.

RED FLAG 1:

ALUKO’S ROLE IN NEGOTIATINGTHE SAA’s

Seven Energy dates the startof the “negative media coverage” about its Strategic Alliance Agreement to2011, thus well before the IFC invested. Seven Energy summarises the coverageas consisting of allegations that “the Nigerian Minister of Petroleum Resources,Mrs. Diezani Alison-Madueke, secretly and illegally transferred productionrights of three oil blocks to Septa Energy”; and that “illicit payments weremade to Nigerian government officials or associates of such officials in orderto secure the entry into of the Strategic Alliance Agreement”.

By 2013, press reports on thecontroversy over the SAAs were widely available online, prompting Seven toissue its first public response in May of that year.

The reports would thereforehave been available to IFC at the time that it made its investment. The pressreports are important because they go beyond what was alleged by Sanusi,although he did reproduce some of them in the annexes to his February 2014Memorandum to the Senate.

For example, a 2013 articlein Sahara Reporters, headlined “Petroleum Minister, DiezaniAllison-Madueke, Accused Of Blowing N2 Billion On Private Jets”, reportedspecific allegations linking Allison-Madueke with Kola Aluko and Seven Energy.We reproduce the quotes below solely for the purpose of recording whatallegations were in the public domain at the time of the IFC’s investment –allegations that it should have assessed under its due diligence rules onintegrity risks. We also record that Seven Energy has dismissed the allegationsmade in the press as “inaccurate and misleading”.

The Sahara Reporter articlequotes a source at the Nigerian National Petroleum Corporation as saying: “[Kola]Aluko and Mrs. Diezani Allison-Madueke are neck deep in the oil business . . .She helped him [Mr. Aluko] to land a choice allocation of pricey oil blocks through a companycalled Seven Energy.”

It continues: “Our NNPC sourcedisclosed that some of the financial details of Ms. Alison-Madueke’s usage ofprivate jets may be hidden. According to him, the minister ‘often uses severalcompanies, Septa Energy, Atlantic, Seven Energy International, to absorb thecost of her rentals.’

The source added that she hassignificant, if not ownership, stakes in the three oil companies as well asfirms engaged in oil-related activities”.

These are significant allegations, which,on the face of it, should have triggered enhanced due diligence by the IFC. Weasked IFC: “Did the IFC’s due diligence on the Seven investment include anassessment of Aluko’s role as co-CEO of Septa Energy in negotiating the SAAs?”We received no specific response (see Box: Right of Reply Responses).

We do however have access to SevenEnergy’s response to the allegations raised over Aluko’s role in the SAAs.Although no public statement was made until after the IFC had invested, thecompany’s public offering for its inaugural bond issue on November 2014includes an extensive passage on the controversy over the SAAs and Aluko’s rolein Seven Energy.

Seven Energy states that Mr. Aluko served“as our deputy chief executive officer and as a director on our board ofdirectors from 2007 to 2011, during which time his primary role with us wasbusiness development;” that “he was involved in discussions related to ourentry into the Strategic Alliance Agreement”; and that, post 2011, “he remainedin a transitional consulting role until November 2012”.

Later, in October 2015, afterAllison-Madueke had been arrested in London and an international arrest warranthad reportedly been issued for Kola Aluko, Seven Energy issued a pressstatement, further distancing itself from both Aluko and Jide Omokore.

The press statement repeated that Aluko“has had no involvement in the running of, management of, or Board of theCompany since 30th November 2011”.

But, if the IFC relied upon the company’sstatements in assessing the integrity risks of investing in Seven Energy, thereare grounds for concern.

One reason is that Mr Aluko’s role in theSAAs would appear to have been more significant than merely being a party toSeven Energy’s discussions on the SAAs. At the time, he was co-CEO of SeptaEnergy, the company that was actually contracted under the SAA.

And it was in this latter role that Aluko(yes Aluko, not his co-chair) signed the SAA document itself.

It may therefore be unrealistic to assumethat Aluko did not play a significant role in Septa Energy’s negotiation of theSAA. And, if, as alleged by Sanusi and others, the intention was to divertfunds for the personal gain of public officials, that would have posed a majorintegrity risk to IFC. The fact that Aluko had left Seven by the time of theinvestment should be discounted: the integrity risk potentially arises fromAluko’s historic involvement.

We put five questions for the IFC:

When did the IFC first learn of the allegations made byGovernor Sanusi relating to Seven/Septa?
What assessment was made by IFC of the Sanusi allegationsprior to its investment in Seven?
Did the IFC’s due diligence on the Seven investment includean assessment of Aluko’s role as co-CEO of Septa Energy in negotiating theSAAs?
What conclusions were reached?
And on what grounds?

The IFC replied: “Prior to investingin Seven Energy, IFC conducted comprehensive due diligence as is standard forour investments. We do however take note of your interest in the matters raisedand will ensure in our continued engagement with the company that they considerthe questions you are raising”.

No specific response was given to thespecific questions (see Box: Right of Reply Responses).

We also put the questions to Seven Energyand gave three opportunities to respond over a period of two months. Althoughthe company twice undertook to send a reply, no response had been received byour final press deadline.

Savannah Petroleum was also sent a Rightof Reply. It responded:

“We are not acquiring all of SevenEnergy’s assets. For example, neither the shares in Seven Exploration &Production Limited (Formerly Septa Energy Nigeria Limited) (‘SEPL’) nor anyinterest in the Strategic Alliance Agreement (the ‘SAA’) is included within thescope of Savannah’s acquisition. We are therefore not in a position to respondto any of the questions raised by you in relation to the SAA or SEPL. Inpreparation for this transaction, we undertook appropriate ‘know you customer’(or in this case ‘know your counter-party’) due diligence on SEIL in order tounderstand the ownership structure of SEIL in compliance with the UK BriberyAct and money laundering regulations and conducted due diligence on thebusiness and assets to be acquired. However, as is normal in an acquisition ofthis type, the information we obtained from SEIL [Seven Energy InternationalLimited] as part of our due diligence is subject to a confidentialityundertaking which remains in force. As a result, we are unable to respond toyou on the [points raised in the Right of Reply Letter] . . .We would welcome achance to engage with you and others in the future concerning our involvementin Nigeria, but regret that we are unable to do so with respect to the periodbefore our arrival.”

Savannah Petroleum also stressed that“Savannah had no involvement with SEIL [Seven Energy International Limited],its subsidiaries or activities” prior to Savannah’s current negotiations toacquire Seven’s Uquo and Stubb Creek oil and gas fields and its 20% interest inthe Accugas midstream business. (See Box: Right of Reply Responses forSavannah Petroleum’s full response).

RED FLAG 2:

ALUKO’s CONSULTANCY PAYMENTS

Seven Energy’s statements onAluko’s involvement also raise other concerns. Their careful wording is to beapplauded; but it is wording that could leave the impression that Aluko had nobusiness relationship (other than as a consultant) with Seven Energy post 2011.If, so, that could be misleading.

Seven Energy’s accounts for2012 record a $1.1 million payment to Tracon Investments Limited, a BritishVirgin Islands based company “in which Kola Aluko... has an interest”.

The payments were describedas “consultancy fees... in connection with business development and acquisitionopportunities”. In 2011, during which time Aluko was only a consultant for onemonth (he left Seven Energy at the end of November 2011), the fee paid was$97,000.121 Seven Energy’s consultancy agreement with Tracon was not renewedbeyond November 2012122 and no fees were paid in 2013.

An investigation by AfricaConfidential has found Bills of lading showing that “in 2013 TraconInvestments later exported the 12-metre speedboat, Star Chaser, which is thepartner to Aluko’s 60-metre Galactica Star, from northern Italy to Florida”.

Africa Confidential comments:

“It is not known whetherthe ‘business development’ cited by Seven Energy successfully generated anybusiness for Seven, or whether Aluko was the sole shareholder in TraconInvestments. When contacted, Seven said it had not been charged by eitherNigerian or British law enforcement.”

Seven’s reply is noted but itshould not have been given much weight by the IFC: recall that the anti-moneylaundering due diligence test is not whether charges have been bought against aperson or a company, it is whether there are reasonable grounds for suspectingmoney-laundering activities, in this case by Aluko.

Still less reassuring in thatregard are the recent developments in the USA. Charges laid before the US courts by the US government, as partof its 2017 asset freezing application against properties said to be owned byKola Aluko, record that, beginning in August 2011 and continuing throughJanuary 2014, “Aluko and a company beneficially owned by him, Tracon InvestmentLtd, made a total of at least £537,922 in rental payments for two centralLondon residence both located at 22 St Edmunds Terrace, London NW8 7QQ.”

The court documents allege that thepayments were “made corruptly by, on behalf of, or at the direction of Alukofor the purpose of benefiting Alison-Madueke and her mother”.

The court documents assert that thepayments for St Edmunds Terrace were “in return for Alison-Madueke havingimproperly influenced the award of the Forcados SAAs to [Atlantic] and inanticipation of or in return for her improperly influencing the award of theBrass SAA [also to Atlantic]”

Mr. Aluko is reported to have admittedpaying rent for St. Edmund’s Terrace, describing it as “simply gifts to afriend.”

The IFC could not have known this at thetime it made its investment in Seven Energy: but it now does.

And the question that arises is: wereconsultancy payments made by Seven Energy to Aluko used to pay Alison-Madueke’srent? In which case, why? Were the consultancy payments legitimate? Or werethey part of a scheme through which Alison-Madueke benefited from the unlawfuldiversion of oil revenues through the SAA scheme? If so, this would surely posea major reputational risk for the IFC.

So, here are some further questions weput to the IFC:

Has the IFC’s ongoing due diligence on its Seven investmentsincluded a probe of the consultancy payments made to Tracon?
Is the IFC satisfied that the payments were for Aluko’sconsultancy work?
Is the IFC satisfied that the fee was commensurate with thework undertaken?
What evidence did the IFC find that the payments hadresulted in business for Seven?
How has the IFC satisfied itself that the payments were notused to cover Allison-Madueke’s rent for the two properties at 22 St EdmundsTerrace, London?
Did the IFC probe the shareholdings of Tracon?
Was Aluko the sole shareholder?
If not, who else held shares?

Again the IFC did not given specificanswers to the specific questions. And again, we received no response fromSeven. Savannah, as previously noted, stated that it was unable to comment.(For further details, See Box: Right of Reply Responses).

RED FLAG 3:

BENEFICIAL OWNERSHIP AT TIMEOF INVESTMENT

Sanusi raised questions aboutthe beneficial ownership of Seven Energy: and, as previously noted, an NNPCinsider has alleged that Allison-Madueke had “significant, if not ownership,stakes” in Seven Energy and Septa Energy. The insider was not specific as towhat such “stakes” might consist of, but, for the purposes of the IFC’s duediligence, it would have been important (in our view) to rule out beneficialconsultancy agreements (for example with Seven Energy or Septa directors thatwere then used to pay Allison-Madueke’s rents) or warrants, share options andconvertible bond options that might have been held on her behalf.

Seven Energy has not made anypublic statements (to our knowledge) refuting the allegations ofAllison-Madueke’s beneficial interests in the company or its subsidiaries. Thissilence should have been probed by the IFC.

However, Seven Energy hassought to clarify Aluko’s interests. In November 2014, thus after theIFC investment, it stated “according to our share register and to the best ofour knowledge, Mr. Aluko is a direct and beneficial owner of approximately onepercent of our equity interests on a fully diluted basis”. The company alsostated that he owed Seven $2.2 million for a loan taken out in 2007 to purchaseshares.

Aluko’s 1% holding is said toderive “primarily from his management equity stake in Exoro Energy”.

Aluko was CEO of Exoro EnergyInternational Limited (EEIL) until 2007, when it merged with a division ofWetherfords International to become Seven Energy.

Aluko’s holdings post theIFC investment are of course of interest (although we should note that SevenEnergy’s account would appear to be at odds with that made in the 2017 assetrecovery claim by the Federal Republic of Nigeria – of which more later). But,from the point of view of the IFC’s due diligence obligation, the critical timeperiod was prior to its investment.

To satisfy itself that thefinancial and reputational risks arising from its investment in Seven Energywere acceptable, the question that the IFC needed to answer was whether or notAluko (and Alison Madueke)had beneficial interests at the time that the SAAs were negotiated andsigned. The reason is clear: any taint of corruption might result in theSAAs – on Seven Energy’s own admission, the cash cow that would repay theIFC-backed 2014 bond issue – being voided.

Seven Energy’s own financial accounts putAluko’s holding at December 2013 at 4.5%.136 This stake would appear to excludeinterests held through warrants, share options and convertible bond options.

We know (from Seven Energy’s 2014 bondprospectus) that Aluko’s holdings came through primarily from his equity stakein Exoro Energy. But who else held Exoro Energy shares at the time of the IFC’sinvestment in Seven Energy? And what became of them post IFC’s investment?

As of December 2013, Exoro EnergyHoldings Limited, the Mauritius-based holding company for EEIL, held 49.8% ofSeven Energy’s issued share capital, in effect controlling the company. BecauseMauritius is a secrecy jurisdiction, the names of the shareholders in EEIL arenot in the public domain. Was the IFC able to obtain the shareholderinformation on EEIL from Seven Energy? If not, that in itself should have beena further Red Flag – arguably egregious enough to close down furtherconsideration of any potential investment.

In any event, following the issue ofadditional equity to the IFC and other new investors in 2014, Exoro EnergyHoldings Limited shareholding ceases to feature in the list of Seven Energy’sshareholders.

There are a number of possibleexplanations for this. One is that its shareholding had been diluted by the newshare issue to below 3% of the new total (approximately 3,176,841 shares). Butthis does not square with the published figures, since Exoro’s shareholding in2013 (251,966 shares)141 would represent 7% of the diluted 2014 share capital.It would therefore have been declarable.

A second possibility is that Exoro’sshares were bought by one of the new investors in Seven Energy. If so, the IFCshould have satisfied itself that the shares that were sold did not belong toAlison-Madueke or any other public official or anyone holding those shares ontheir behalf.

For the avoidance of doubt, we are notmaking an allegation that this was the case. We are simply asserting that theIFC’s integrity risk due diligence should have satisfied itself that it wasn’t.

So another batch of questions for theIFC:

Did the IFC seek and obtain credible assurances that noNigerian public official had a beneficial interests in Seven Energy throughExoro Energy Holdings Limited?
Were Exoro Energy Holdings Limited’s shares in Seven Energy,as recorded in the 2013 accounts, sold to an investor, either in whole or inpart?

RED FLAG 4:

ALUKO’S CURRENT HOLDINGS INSEVEN ENERGY

The claims made by theFederal Republic of Nigeria (FRN) in its 2016 application to the High Court inLagos for a worldwide freezing order on Aluko’s assets raise further questionsabout Seven’s current beneficial ownership.

As previously noted, SevenEnergy claims that Aluko now holds 1% of the company’s share capital on a fullydiluted basis. But the FRN asserts that Aluko currently holds 10% on behalf ofhis co-defendents.

And, to recall, it is theFRN’s case that these shares were obtained by Aluko with the illegally divertedproceeds of crude oil lifted under Atlantic’s SAAs. The FRN’s assertion thatSeven Energy was, in effect, being used as a money laundering vehicle for fundsillegally obtained by Aluko (and his co-defendants) should have triggered animmediate reassessment by the IFC of its investment. Having been alerted to theallegations, it would need to satisfy itself that it was not a party toassisting money laundering or profiting from it.

We put the followingquestions to the IFC:

When did IFC become aware of the FRN’s claimthat Aluko currently owns 10% of Seven Energy?
What steps did it take – and when – to satisfyitself that Aluko had not used Seven Energy as a money laundering vehicle forillegally-obtained funds?
How does the IFC reconcile the discrepancybetween Seven’s assertion that Aluko owns 1% of Seven Energy and the FRN’sassertion that he owns 10%.

Again the IFC did not givenspecific answers to the specific questions. And again, we received no responsefrom Seven. Savannah, as previously noted, stated that it was unable tocomment. (For further details, see Box: Right of Reply Responses).

RED FLAG 5:

LEGALITYOF SAA’s

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Published by

CornerHouse Research, United Kingdom

CornerHouse Research [“Corner House”] is a UK-registered non-governmentalorganisation. It began investigating alleged corruption surrounding the sale ofthe OPL 245 oil license in Nigeria in 2012. It was a signatory to the criminalcomplaint that triggered the current prosecutions of Shell and others in Italyand Nigeria.

web:http://www.thecornerhouse.org.uk/

GlobalWitness, United Kingdom

GlobalWitness is a non-governmental organisation based in London and Washington, thatinvestigates and campaigns to prevent natural resource related conflict andcorruption, and associated environmental and human rights abuses. It has beeninvestigating OPL 245 since 2008 and was also a signatory to the complaint thatled to the Italian and Nigerian prosecutions of Shell and others.

web:https://www.globalwitness.org/en/

HEDA,Nigeria

Humanand Environmental Development Agenda (HEDA Resource Centre) (HEDA) is aNigerian based non-governmental organisation. HEDA’s involvement in the OPL 245began in 2013, when it submitted a petition to Nigeria’s Economic and FinancialCrimes

Commission(EFCC), demanding investigation of the transaction. Following the petition, aninvestigation was opened by the commission, culminating in recent prosecutionof parties to the deal.

web:http://hedang.org/

Re:Common,Italy

Re:Common is an independent and not-for-profit “association of social promotion”under the Italian law. It has been investigating OPL 245 since 2013 and is alsoa signatory to the criminal complaint that triggered the current prosecutionsof Shell and others in Italy and Nigeria.

web:https://www.recommon.org/eng/