Rio
Tinto was already under investigation by the powerful US Securities and
Exchange Commission when it self-reported three weeks ago to regulatory
authorities in the US, UK and Australia over payments made in relation to an
iron ore project in Guinea.The Australian Financial Review has confirmed that
the SEC has been running a high-level and confidential inquiry into the costly
aftermath of Rio Tinto’s $US4.16 billion acquisition of Riversdale, a
Brisbane-based operator of coal projects in Mozambique.
While
Rio Tinto says it is unable to comment on a US probe that pre-dates the
so-called Guineagate scandal over Rio’s Simandou iron ore project, sources in
Britain say the SEC has focused particularly on the pathway the global miner
took to accounting for the impairments triggered by a takeover that eventually
cost then chief executive Tom Albanese his job.
Rio
Tinto acquired Riversdale in a two-step takeover through April and August of
2011. Just 17 months later, with the coking coal resource falling short of
expectations and the Mozambique government ruling out Rio Tinto’s preferred
options for driving the coal to market, the miner took a $US3.269 billion
impairment on the investment.As an immediate result, Mr Albanese and Rio
Tinto’s then energy chief executive, Australian Doug Ritchie, left the miner.
That
the SEC probe has remained confidential suggests the regulator instigated the
investigation, and that the company did not invite the regulatory scrutiny as
it has with its concerns over the transaction in Guinea.The SEC, like Britain’s
Serious Fraud Office, has sweeping extraterritorial powers to investigate and
punish companies that operate within its national boundaries.One of the most
recent Australian expressions of those powers was the investigation BHP
Billiton invited on itself in 2009 after identifying possible breaches of
standards around gifts and payments offered in several of its frontier
jurisdictions.
That
investigation came to nothing, but along the way the SEC investigators turned
their focus on BHP’s management of the hospitality program that was associated
with it sponsorship of the Beijing Olympics. BHP eventually paid $US25 million
in civil penalties to settle the matter.On
November 9, Rio revealed that it had self-reported internal concerns over a
$US10.5 million to a French consultant that had worked with the company on iron
ore concessions in Guinea to the SEC, the UK Serious Fraud Office and the
Australian Securities and Investment Commission.In
the same announcement, Rio confirmed that an internal audit led by US law firm
Kirkland & Ellis had been made of a payment to Francois de Combret, who had
advised the company in its recovery of half of its Simandou iron ore leases in
Guinea.
Rio
Tinto’s executive and board launched the review after leaked high-level
internal emails were published on an internet forum called fnPaste. After an
interim report from the audit led by Kirkland & Ellis, Rio Tinto informed
the regulators of its concerns and announced that one senior executive would leave
the company while another had been suspended pending the results of further
review.Both of those executives, minerals and energy boss Alan Davies and the
head of legal and regulatory affairs, Debra Valentine, were summarily sacked
just seven days later.Mr Davies has since complained he was denied natural
justice in that he has not been told of the nature of Rio Tinto concerns and he
was not offered an opportunity to contest or explain the reasons for his
dismissal. Mr Davies indicated he would pursue legal options to defend his
reputation.Because Rio Tinto self-reported to the authorities, it has been able
to make public the risk of lengthy inquiries in the US, UK and Australia. As a
result it has been unable to detail publicly the information gathered by its
internal investigation.
Twice last week Rio Tinto’s chief executive,
Jean-Sebastien Jacques, reported that the “events of Simandou have been very
challenging” for the company. “I take integrity and our code of conduct very,
very seriously, for me it is actually non-negotiable, we must do the right
thing wherever we operate,” he said.What concerns the SEC has about the way Rio
Tinto accounted for its $4.16 billion coal folly in Mozambique remains unclear.The
original career-ending $US3.269 billion impairments and losses booked against
the 2012 accounts were an adjustment of three steps. There was a $US541 million
impairment to goodwill banked on completion of the transaction in 2011,
$US1.581 billion of impairments to exploration and evaluation assets that were
held on the intangibles account, and $US1.147 billion worth of impairments to
the equity account.The 2013 accounts were scarred by a further $US497 million
impairment forced by a terminal review of the three projects that were supposed
to form Rio Tinto’s new south-east African coal frontier.In September 2014, Rio
Tinto sold the renamed Rio Tinto Mozambique to India’s International Coal
Ventures. The price was just $US50 million.
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