. . . as major shareholder accused of using offshore tax haven, transfer pricing
THE main shareholder for the country’s largest milling company, Lesotho Flour Mills (LFM), has been accused of using an offshore tax haven and transfer pricing to avoid paying its partner, the government, dividends over a 19-year period, MNN Centre for Investigative Journalism (MNNCIJ) has learnt.
LFM was established in 1979 and privatised in 1998, when multinational agro-processor Seaboard Overseas and Trading Group and a sister company bought a controlling stake for about US$10 million, while a 49 percent stake remained with the Lesotho government.
Headquartered in Kansas, United States, Seaboard runs milling facilities in South America, the Caribbean and Africa, among other locations.
LFM operates in four product categories namely: Lesotho Farm Feeds Mills for animal feed, Flour Mills with products like cake flour, easy bake and others, Lesotho Maize Mills which produces maize meal and samp and lastly the Lesotho Sugar Packers which packages sugar.
According to former LFM board member Ramahooana Matlosa, who resigned from the board on 1 August 2017, the contract between the government and Seaboard was skewed in favour of the latter.
“Much needs to be done to protect the interests of the government, as the agreements signed in 1998 are written in a manner that is clearly skewed in favour of Seaboard interests against those of our country,” he said in an interview recently.
“Seaboard indulges in extensive manipulation of their financial statements and transfer pricing to paint a negative financial picture which negates the payment of dividends.”
The MNNCIJ understands that despite making an annual M10 million profit before it was privatised, the milling company has never paid a dividend to its government partner.
The MNNCIJ also understands that Prime Minister Thomas Thabane and his cabinet are giving careful thought to whether Seaboard’s management contract with LFM should be extended by another 10 years when the initial agreement lapses next year.
The MNNCIJ saw a copy of the proposal sent to Finance Minister Moeketsi Majoro.
When contacted for a comment, Dr Majoro said it was “too early” for him to comment on the matter.
The transfer pricing is allegedly carried out through the use of a Seaboard subsidiary based in the Bahamas, a tax haven that has the exclusive right to handle the procurement of grain for the multinational company.
Officials of the milling company familiar with Seaboard’s operations, who spoke on condition of anonymity, said they were shocked when they were told after the American firm took over that LFM would be purchasing grain exclusively from Seaboard.
Mr Matlosa and other sources also alleged that non-executive board members representing the government had no influence on key company decisions and policies.
Lesotho’s former Finance minister, Timothy Thahane, last week told MNNCIJ that when he was in office, cabinet voted in favour of increasing the government’s stake in the company, but that Seaboard strongly resisted this.
Dr Thahane said that while he was in government, he was “concerned that I didn’t see the mill performance leading to profit”.
The former minister said that he suspected transfer pricing by Seaboard as it continued to pour money into a loss-making company and “its grain procurement was run in a way that no one could prove that it was overcharging LFM”.
Dr Thahane said he had urged cabinet at the time to increase the government shareholding in the milling company. This was eventually approved by cabinet but was strongly opposed by Seaboard.
“We failed (to increase shareholding) because Seaboard and Saxonvale tightened their grip on the company,” said Dr Thahane, adding that the only viable option for the Lesotho government was to hire professionals to advise on how to increase its shareholding and turn around the mill’s performance.
Asked about the allegations, LFM Managing Director Ron Mills told MNNCIJ reporters that he reserved any comment.
Mr Mills had initially received questions emailed to him and responded telephonically by saying: “I can’t say anything until the chairman of the board has given me an indication of what he wants me to say.”
For his part, LFM Board Chairperson Mohlomi Rantekoa refused to comment or to authorise Mr Mills to comment, asserting that the entire board needed to engage with the MNNCIJ’s questions.
“We have a meeting scheduled for September that shall deliberate on these questions, as they indicate that someone has breached the confidentiality of the company,” he said.
Mr Rantekoa also said that because the LFM is not a public company and government was a minority shareholder, “we cannot comment on the board’s discussions, as there are issues of a breach of confidentiality among board members”.
Insiders said that after Seaboard bought into LFM, its Bahamas-based subsidiary — Seaboard Overseas Management Company, took over procurement for the Lesotho operation.
Seaboard Overseas Management Company is said to provide management and technical advice in the operation of the flour mill, maize mill, feed mill, sugar packaging plant and silo storage complex in Maseru.
Seaboard’s sister company, Saxonvale Investment, which holds the remaining one percent of the company, is registered in the British Virgin Islands, another tax haven.
Under the agreement, which the MMCIJ has seen, Seaboard provides a managing director, director of finance and administration, a technical director “and such other staff as may be agreed with the LFM for a yearly US$300 000 (about M3.99 million) management fee adjusted in line with inflationary charges that LFM pays”.
The management contract provides that for all trips to LFM beyond the annual inspection and consultation visits, the Lesotho company reimburses Seaboard to the tune of US$500 (about M6 659) per day per employee.
Sources said Seaboard had failed to make the profits needed to declare dividends to its shareholders for almost 20 years.
The MNNCIJ team has established that since it took over the management of the LFM, the milling company has exclusively procured its raw materials from or through Seaboard.
When it took over management of the LFM, Seaboard moved from just being a majority shareholder to being also the sole decision-maker such that non-executive board members representing government have allegedly been rendered powerless.
The agreement provides in clause 6 on the quorum of shareholders’ meetings that in “order for a valid shareholders meeting to take place, a minimum of 51 percent of shares must be represented”.
According to some LFM employees who asked not to be named, Seaboard changed the company’s procurement policies to buy from Seaboard and its subsidiaries only.
They added that the company also sells the LFM products to some of its subsidiaries at “very low prices with high credit allowed, but without guarantees they will repay their debts”.
The MNNCIJ was given the name of a South African-based bakery thought to be a Seaboard subsidiary which is alleged to have credit line of about M35 million with LFM.
Sources added there was no guarantee that the bakery would eventually settle its debts with the milling company, “yet credit continues to be extended”.
Asked about this, Mr Matlosa said while serving as a board member he “questioned this wicked practice, but those Seaboard managers do not want to change their position”.
This was corroborated by a former chairperson of the LFM board who asked not to be named.
This chairman also alleged Seaboard was double-dipping by being paid management fees and salaries for its officials at the helm of LFM.
Mr Matlosa also claimed that while serving on the board, he discovered that the Seaboard managers running LFM saved the American firm from paying heavy prices on storage in South Africa by taking grain that LFM does not need to Lesotho and storing it in LFM silos.
“They get storage for free and then later on invoice it when they realise that the rand-dollar exchange rate is favourable,” said Mr Matlosa, adding that the expectation would be that the invoices would accompany the delivery of the grain.
“Seaboard only invoices LFM when the rand-dollar exchange rate is favourable. Thus, Seaboard makes a profit from the grain it stores for free and then sells it when it is convenient.”
The MNNCIJ also learned that LFM managers recently reported a loss of M10 million as one of reasons for failure to declare dividends to shareholders in 2016.
The report to shareholders was allegedly due to losses sustained as a result of an unregulated M10 million credit line given to a Chinese-owned wholesaler.
Mr Matlosa informed MNNCIJ he personally pursued this issue but it was brushed aside whenever he brought it up at board meetings.
“I simply wanted the company to pursue the legal means of recovering the M1 million from the Chinese man, who I’ve learned is still in communication with LFM’s managing director (Mr Mills),” added Mr Matlosa.
The MNNCIJ has also sent questions on email addresses that appear on the Seaboard’s website but there was no response until the time of publishing this story.
- MNN Centre for Investigative Journalism (MNNCIJ) produced this story. All views are ours. See www.lescij.org for our stories, activities and funding sources.