Glencore's $200 Million Predicament: How to Handle Payments to Individual Under U.S. Sanctions

By Scott Patterson

Glencore PLC is grappling with a thorny problem: whether it can pay a former partner placed under sanctions by the U.S. government.

The Swiss mining giant will owe up to $200 million in royalty payments over two years to Israeli billionaire Dan Gertler, on whom the U.S. Treasury Department placed sanctions in December for alleged corruption in the Democratic Republic of the Congo, according to a report Tuesday by Resource Matters, a Brussels nonprofit organization that focuses on corruption issues in Africa.

Mr. Gertler is a friend of Congolese President Joseph Kabila, according to the Treasury Department. Mr. Gertler was a close partner with Glencore as it built a dominant position in copper and cobalt in a country where few Western mining firms work.

Investors and analysts often pepper Glencore, which reports 2017 financial results on Wednesday, with questions about its political risk in Congo. A Glencore subsidiary already faces an investigation by Canadian securities regulators into previous royalty payments made to a company owned by Mr. Gertler in Congo.

The subsidiary owes Mr. Gertler's companies royalty payments via a circuitous route. The payments were initially owed to Gecamines, the country's national mining company, but Gecamines has asked Glencore to divert the payments to Mr. Gertler to pay back loans he had made to the state company, according to Glencore, Gecamines and Mr. Gertler.

The U.S. Treasury Department sanctions prohibit U.S. firms from working with Mr. Gertler and a number of companies associated with him. The Treasury accused Mr. Gertler of amassing a fortune through "opaque and corrupt mining and oil deals."

A spokesman for Fleurette Group, Mr. Gertler's main company working in Congo, declined to comment. In the past, Fleurette has vigorously denied corruption charges from the U.S. government.

Glencore, which isn't accused of corruption, declined to comment on payments it could owe Mr. Gertler. But Glencore said U.S. sanctions on Mr. Gertler and the company's continuing financial obligations to him present a challenge that it is still figuring out.

"Glencore is still considering its position in relation to its pre-existing contractual obligations to companies owned by Mr. Gertler," the company said.

While Glencore is a Swiss company, U.S. sanctions are significant because the company's extensive ties to the U.S. financial system could be affected if it continued working with Mr. Gertler. The company said it has suspended its ties to Mr. Gertler, whose stake in two Congo mining operations Glencore bought out for about $1 billion in January 2017.

The Treasury Department didn't respond to a request for comment.

Glencore "is in limbo," said Elisabeth Caesens, director of Resource Matters and the author of the report. "If it keeps paying the royalties, it risks U.S. sanctions. If it stops, it risks upsetting a businessman with strong political connections in the Congo," she said.

Gecamines has declined to comment on the royalty payments and its relationship with Mr. Gertler. The state-owned firm has recently begun ramping up pressure on mining companies operating in Congo, alleging that they have manipulated costs and production figures, resulting in lower payment to the government.

The royalty payments to Mr. Gertler have been a recurring problem for Glencore. The Wall Street Journal in July reported that the Ontario Securities Commission is investigating more than $100 million in payments that one of Glencore's Congo copper-mining subsidiaries made to Fleurette. The investigation stems from payments that the subsidiary, Katanga Mining, was expected to make to Gecamines, but instead diverted to Mr. Gertler's company.

Glencore has said the shift in payments, which began in 2013, was done at the request of Gecamines. The money was shifted to Mr. Gertler to pay back a $196 million loan that Fleurette made to Gecamines in 2013.

The Ontario Securities Commission didn't respond to a request for comment.

Mr. Gertler was also a central figure in a $412 million settlement in September 2016 between the U.S. Justice Department and the Securities and Exchange Commission with New York hedge fund Och-Ziff Capital Management Group LLC. The Justice Department alleged in a criminal case that Och-Ziff went into business with Mr. Gertler despite a consultant's warning that he used political connections in Congo to benefit himself and his associates.

Mr. Gertler hasn't been charged. His spokesman has denied the Justice Department allegations. Congolese government officials haven't responded to requests for comment. Daniel Och, chairman and chief executive of Och-Ziff, has said the firm's conduct scrutinized by the Justice Department was "inconsistent with our core values."

Write to Scott Patterson at scott.patterson@wsj.com

(END) Dow Jones Newswires

February 20, 2018 17:12 ET (22:12 GMT)

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