London–U.K. lawmakers criticized the Financial Conduct Authority for allowing Kazakh mining company ENRC Corp. to sell shares on the London Stock Exchange in 2007, when there was alleged evidence of corruption, and for permitting the company to delist its shares on Monday amid a fraud investigation.
David Lawton, director of markets at the FCA, which authorizes share sales in London, should have known about a report that raised questions about alleged corruption before ENRC sold shares, Conservative lawmaker Brian Binley said during a hearing in Parliament on Tuesday. Lawton also should have had knowledge about which banks prepared ENRC’s share sale and about alleged corruption at mining assets in the Democratic Republic of Congo, Labour lawmaker Ann McKechin said.
The timing of ENRC’s delisting “does seem suspicious,” McKechin said, “because if you were sure of your probity then you would want to actually establish that in a major international listed company setting.” In an interview after the Business, Innovation and Skills Committee hearing, held in a wood-paneled room overlooking the River Thames, McKechin said, “I would expect the due diligence to be at a much higher level.”
Lawton rejected the criticism, saying it was not the authority’s mission to oversee corporate conduct.
The hearing was part of a larger investigation by British politicians, who are examining the City of London’s role in the global oil, gas and mining industries. U.K. domestic production of mineral resources is limited, yet London remains the world’s primary market for natural resource companies raising money to explore across all continents.
Representatives from oil producer Royal Dutch Shell Plc and mining companies Glencore Xstrata Plc and Rio Tinto Plc also testified, saying that a well-regulated financial market in London gave investors confidence. The three companies are among the largest on the London Stock Exchange.
Tara Hopkins, Rio Tinto’s chief adviser for external affairs in Europe, said the cost of complying with regulation was worthwhile because it helped the company to access new sources of capital.
“We’re proud to be here,” said Charles Watenphul, director of corporate affairs at Glencore, one of the world’s biggest publicly traded commodities supplier, with 190,000 employees.
Glencore is based in Switzerland and was founded by Marc Rich, a former fugitive who was pardoned by U.S. President Bill Clinton on the last day of his presidency. In 2011, the European Investment Bank said it would decline financing requests from Glencore “due to serious concerns about Glencore’s governance.”
ENRC’s share sale and subsequent delisting raise questions about whether regulators in London are adequately protecting investors, lawmakers said. In the coming weeks, the committee will consider calling ENRC’s bankers to testify, Labour’s McKechin said. Deutsche Bank AG led the share sale, according to a copy of the prospectus on the mining company’s website . Credit Suisse, Morgan Stanley and ABN Amro Rothschild also assisted.
ENRC first sold shares for 540 pence each. In April, the U.K.’s Serious Fraud Office said that it was investigating ENRC for allegations of fraud, bribery and corruption relating to activities in Kazakhstan and Africa. In July, the U.S. Justice Department joined the investigation. The company’s closing share price was 217.5 pence a share. The purchasers of the company include Alexander Machkevitch, Patokh Chodiev and Alijan Ibragimov, who founded ENRC in the 1990s.
Global Witness, the non-profit organization that campaigns against corruption, particularly in the natural resource sector, published a statement on Monday urging lawmakers on the committee to ask Lawton about the FCA’s oversight of ENRC. The delisting of ENRC may “hamper the investigation into one of the City’s biggest scandals,” Global Witness said.
ENRC said in an emailed statement that there is “zero substance or evidence” to the “false claims, innuendo and persecutory propaganda” of Global Witness. “ENRC has fully engaged with all authorities on resolving questions and has exercised a zero tolerance policy on corruption,” the company said.
ENRC has previously said in a written statement to the committee of lawmakers that regulators in London should “consider introducing a quarantine period” for foreign companies that seek to list their shares to allow them time to become accustomed to more stringent scrutiny.
“Although fast, its evolution from a private, Kazakh-based company to the scrutiny appropriate for a FTSE 100 company was not fast or flexible enough to prevent the natural adjustment being played out in an unsympathetic way among the London commentariat,” ENRC wrote.
Herbert Smith LLP, a law firm, raised allegations of corruption in a document before ENRC sold shares, according to lawmaker Binley. In a statement, Global Witness also gave details of the Herbert Smith report.
“Would you ever consider resigning?” Binley asked the FCA’s Lawton. He asked whether there was “one scintilla of concern” for the people who invested.
Binley asked Lawton whether the name of the Financial Conduct Authority promised more than it can deliver.
Lawton countered that the authority regulates capital markets, not corporate behavior. The FCA considers whether a company is “eligible” for listing and not whether it is “suitable,” he said.
“We take no view on the appropriateness of an issuer’s business model, nor whether it might be the sort of company that we would like investors to have the opportunity to invest in,” the FCA said in written evidence provided to the committee.
Lawton said the FCA planned to change listing rules to give minority investors more protection.
After the questioning of the FCA’s Lawton, Labor lawmaker Adrian Bailey asked Glencore’s Watenphul whether the London regulator was sufficiently rigorous when the commodities trader sold shares in 2011 or whether it was getting a “stamp of respectability.” Watenphul said the regulator did a “thorough review.”
Simon Clark
