By Scott Patterson
Swiss mining giant Glencore PLC said it would resume multimillion-dollar payments to a former business partner sanctioned by the U.S. Treasury Department, setting up a test for whether Washington is willing to give Western firms more wiggle room in dealing with sanctioned counterparts.
Glencore stopped paying royalties to Israeli billionaire Dan Gertler in December after sanctions were imposed for alleged corruption in the Democratic Republic of Congo. On Friday, it said resuming the payments was the only viable option to avoid the risk of losing its assets. It said, though, it would make the payments in euros and ensure no American citizens had any role in the arrangement to comply with U.S. sanctions.
The company's move could measure the level of tolerance in Washington for allowing workarounds by western firms linked a growing list of sanctioned companies and individuals. While Glencore didn't receive an explicit exemption from the sanctions from the U.S., a spokesman said it has been in talks with U.S. officials about the matter. Glencore didn't disclose which bank is handling the transactions with Mr. Gertler.
"They appear to have found a way to structure a payment that doesn't run afoul of the U.S. sanctions," said Brad Brooks-Rubin, a former Treasury Department official in the George W. Bush administration and managing director for The Sentry, a Washington, D.C., group that investigates corruption in Africa. He said Treasury should pay close attention to how the payments to Mr. Gertler are used.
The U.S. in the past year has rolled out sweeping sanctions against companies it says violate international and U.S. law, often forcing businesses that deal the with those companies to cut financial ties. In April, the Treasury Department sanctioned Oleg Deripaska, the main owner of giant Russian aluminum maker United Co. Rusal PLC, for allegations of money laundering and other charges.
The sanctions sent shock waves through global aluminum markets as western companies pulled away from Rusal and banks froze credit lines. Mr. Derispaska has described the sanctions as "groundless, ridiculous and absurd."
The U.S. has also imposed extensive sanctions against Iran, forcing shipping operators and other businesses to pull back from the big oil-exporting nation. Since few western banks deal directly with Iran, it is unlikely businesses would be able to follow Glencore's blueprint for getting around the sanctions.
A spokesperson for the U.S. State Department didn't immediately respond to a request for comment.
Glencore, in its discussion with U.S. officials, said that failure to continue making the payments could put the operation of its assets in Congo as risk, posing a threat to copper and cobalt prices world-wide, according to people familiar with the talks. Glencore, through its Congolese mines, is the world's biggest producer of cobalt, a key commodity for electric-vehicle batteries. More than 60% of the world's cobalt reserves are in Congo.
Hours after Glencore announced its move, the U.S. Treasury ratcheted up heat on Mr. Gertler. It said Friday it imposed new sanctions on 14 entities affiliated with Mr. Gertler, accusing him of using his close friendship with Congolese President Joseph Kabila to act as a middleman for mining asset sales in the country. Spokesmen for Glencore and Fleurette Group, Mr. Gertler's main Congo company, declined to comment on the new round of sanctions Friday.
Mr. Gertler in April launched a legal action against Glencore in a Congolese court seeking $3 billion in damages in response to the company's decision to halt payments. Mr. Gertler had also obtained high court injunctions which, if they had become final, would have enabled him to permanently seize assets at Glencore's mines, causing severe disruption, the company said.
The Treasury Department's sanctions prohibit U.S. firms from working with Mr. Gertler and several companies associated with him. That presented a challenge to Glencore, which, while a Swiss company, is tightly linked to the U.S. financial system.
Glencore said it believes the arrangement announced Friday "would appropriately address all applicable sanctions obligations." As a result of the agreement, Glencore said its subsidiaries and affiliate companies of Mr. Gertler agreed to withdraw all pending and threatened litigation between them.
The payments to Mr. Gertler have been a long-running headache for Glencore. Canadian regulator, the Ontario Securities Commission, or OSC, launched an investigation into the payments, which had originally been designated for Congo's state-run mining company, Gecamines, but instead were diverted to Mr. Gertler, The Wall Street Journal reported in July. Glencore said the shift in payments was done at the request of Gecamines.
Glencore in November disclosed that the OSC had launched a probe into financial statements and disclosures related to international bribery and anticorruption laws by Glencore's Toronto-listed Katanga Mining subsidiary. Three Katanga directors stepped down from its board following an internal review that found weaknesses in the company's controls over financial reporting.
Then came the U.S. Treasury Department's December allegations that Mr. Gertler had amassed a fortune through "opaque and corrupt mining and oil deals." Mr. Gertler's main company working in Congo, Fleurette Group, has vigorously denied corruption charges.
Mr. Gertler is a friend of Congolese President Joseph Kabila, according to the Treasury Department. He was also a close partner with Glencore as it built a dominant position in copper and cobalt in a country where few Western mining firms choose to work.
Glencore said it expects to start paying Mr. Gertler's company, Ventora Development, in July at a rate of about EUR10.5 million, or $12.2 million, a quarter, from its Mutanda Mining SARL operation. It will also make a "true-up" royalty payment of EUR4.6 million, or $5.3 million, when the settlement is signed.
Payments from Glencore's other copper and cobalt mine in Congo, Katanga Mining's Kamoto Copper Co. unit, estimated to be about EUR16.5 million a quarter, or $19.1 million, will begin in 2019.
Totally royalties paid to Mr. Gertler from both mine will amount to about $130 million a year, according to an estimate by Goldman Sachs, an amount it says "is not material" to Glencore.
Mr. Gertler was a central figure in a $412 million settlement in September 2016 between the 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 to benefit himself and his associates.
Mr. Gertler hasn't been charged in the case and his spokesman has denied the allegations. Daniel Och, chairman and chief executive of Och-Ziff, said the firm's conduct scrutinized by the Justice Department was "inconsistent with our core values."
Following the allegations against Mr. Gertler, Glencore purchased Mr. Gertler's stakes in its two Congo copper projects for $534 million in cash.
Write to Scott Patterson at [email protected]