Powership company trails corruption claims in its wake

• The Turkish company that plans to moor floating power plants at three South African ports has been embroiled in corruption scandals abroad, though it denies wrongdoing.
• In Lebanon, it is threatened with a $25-million fine over allegations of commission payments to people with ties to politicians. 
• In Pakistan, the company faced compelling accusations of paying bribes to clinch a deal worth over half-a-billion dollars.

The Turkish Karadeniz group has faced controversies abroad that call into question the outcome of South Africa's tender for emergency power in which Karadeniz subsidiary Karpowership SA was named a preferred bidder.

AmaBhungane and others have already questioned the government's handling of the tender. Below, we give two troubling international examples, from Lebanon and Pakistan, in which allegations of bribery have been raised involving the Turkish company.

The allegations are neither new nor secret, but did not affect the outcome if they were considered as part of doing a due diligence on the bidders.

• In Lebanon, Karadeniz is accused of paying commissions to a company linked to politically connected businessmen. Lebanon's financial public prosecutor has impounded the two ships it operates in that country as surety for a potential $25-million fine.

• In Pakistan, a Karadeniz subsidiary stands accused of paying politically connected middlemen over $5 million to clinch a five-year contract worth $565 million. The deal was rescinded by the country's Supreme Court in 2012, setting off an epic seven-year legal battle and an ongoing corruption investigation.

Lebanon: 'Commissions' and perhaps a $25-million fine

As the controversy over Karpowership SA's local bid unfurled in recent weeks, the Turkish group was also making headlines in Lebanon.

Like South Africa, Lebanon is beset by a prolonged electricity shortage. It is also in the midst of a crippling financial crisis.

In 2012, Karadeniz subsidiary Karpowership signed a contract with the state utility Electricité du Liban (EDL) to deploy two powerships of 404 MW in total; around 20-25% of Lebanon's electricity supply. 

The powerships have been in operation since 2013 and in June 2018 the contract was extended for three more years.

Controversy has swirled around the awards from the start, including concerns over their cost and temporary nature.

A 2020 World Bank-funded study said the long duration of the emergency supply tariffs paid to Karpowership meant that "with hindsight, it would likely have been cheaper to have invested in permanent capacity, rather than keep paying high take-or-pay charges".

In its annual report for 2019, Malta-registered Karadeniz Holdings recorded gross profits from the Lebanon operations of $67 million (R940 million now) and $89 million (R1.25 billion) for 2018.

By December 2020, it was reported that EDL was in serious arrears, owing more than $100 million to Karadeniz, which was refusing to be paid in Lebanese pounds.

Then in February this year, the Lebanese television show Yaskot Hokm El Fased (roughly translated as "down with corrupt rule") broadcast details of commission agreements allegedly negotiated around the time the 2012 contract was concluded.

A central piece of evidence is a letter of 28 March 2012 titled "Advisory Services – Electricity Sale Agreement with MoE/EDL".

The letter carried the signature of Ralph Faisal, an engineer who represented Karpowership's interests in Lebanon and is said by Lebanese media to be close to politicians. It was addressed to Fadel Raad, an alleged associate of the finance minister at the time of the Karpowership deal, Mohammad Safadi.

The letter referred to "our discussions during the last day concerning the tender" between Karadeniz and EDL and "the advisory services that you intend to provide us on this project, especially the improvement of commercial and financial contractual conditions (including environmental consultancy services) which are necessary to shape our offer and subsequent electricity sale contract".

The letter said that Raad would be entitled to a commission of $0.08 per kilowatt hour if Karadeniz won contracts for both the ports of Zouk and Jieh (which it did) and half that amount if it was awarded only one ship, in Zouk. The cost of the electricity provided by the ships, excluding fuel, was around $0.50 per kilowatt hour.

Commissions may be legal, but they raise red flags, especially when they are secret, and may become illegal if they are intended to exert undue influence on public officials.

This particular commission agreement appears to have gone through various iterations and was later changed to a fixed amount. In a modified letter of agreement from June 2012, the commission was $5 650 000 (about R80 million now). In January the following year it had changed again, with the letter now stating that "you shall be entitled to a fee of 3 550 000 USD".

The reports seemingly prompted action. In March, financial prosecutor Ali Ibrahim, whose position is akin to that of an investigating judge, applied for arrest warrants for Faisal and Raad.

Early last month, Ibrahim ordered the Lebanese finance ministry to halt further payments to Karpowership pending a potential $25-million fine against it over possible corruption or bribery. He also ordered that Karpowership's vessels be detained as surety. The Lebanese customs authority and security forces were told to prevent the ships from leaving Lebanese waters.

Ibrahim's order, in Arabic, referred to a preliminary investigation done by Ibrahim's office and also to an anti-corruption pledge from Karpowership in July 2012.

Signed by Karadeniz chief executive Orhan Karadeniz, the pledge vouched that "neither Karpowership … nor any of its directors, employees or agents … has offered, gave or promised any material benefit" with the aim of influencing public officials.

"In case a breach of this Letter of Undertaking is proven in a Lebanese competent Court of Law … we undertake to pay 25 000 000 USD … as pre-agreed penalty damages to the government of Lebanon in addition to the penalties applied as per Lebanese Law."

In response to Ibrahim's order, Karadeniz warned the Lebanese authorities to revoke the arrest of its vessels and sort out the arrears or it would shut down its electricity supply to the country.

Karpowership managing director Zeynep Harezi told a Turkish news agency the company's "assets, reputation and business … are under threat due to the unlawful and unjust payment demanded by the Lebanese local authorities".

"We notified the Lebanese authorities that we would stop the electricity supply if this situation, which lacks legal basis, is not reverted."

On 14 May, Karpowership made good on its threat, powering down generators on the two ships, citing the $100 million Lebanon allegedly owed it.

In the weeks that followed, Yaskot Hokm El Fased broadcast leaked voice recordings in which Faisal, Raad and a nephew of Safadi, the former finance minister, can supposedly be heard discussing commissions. The recordings also implicated Gebran Bassil, who was minister of energy and water at the time Karpowership originally clinched the Lebanon deal.

Bassil subsequently claimed the show "distorts the truth", including by alleging that the discussion had mentioned "commissions" when what had been discussed were "tensions".

Safadi distanced himself from the actions of his nephew, reportedly alleging that his nephew was using his name without his knowledge.

Faisal, who was arrested alongside Raad following Ibrahim's application for arrest warrants, reportedly denied wrongdoing and said the recordings were taken out of context. His lawyer was quoted as claiming the prosecutions were being carried out "based on recordings made and edited … with the intention of blackmailing".

In a statement, Karpowership affirmed its "full confidence in Mr Ralph Faisal". The company asked the Lebanese judiciary to prioritise the case to end what it called a campaign of "extortion and defamation".

Faisal reportedly fled the country after being released on bail.

This was not the first time Karadeniz had been ensnared in corruption allegations. It had already spent years fending off similar allegations in Pakistan.

The Karadeniz group has consistently denied being party to corruption in its quest for power contracts, including in Pakistan, where its subsidiary Karkey was accused of paying a politically connected local agent.

Its decision to walk away from a successful $1.2-billion (about R17-billion now) damages award against Pakistan has raised questions about the credibility of that denial.

It happened like this.

According to evidence set out during Karkey’s initial $1.6-billion claim at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), Pakistan had in 2007 faced one of the worst energy crises in its history.

Blackouts lasted up to sixteen hours daily.

To overcome the power crisis the government adopted a policy of Rental Power Projects (RPPs) as a fast-track solution to power generation – an emergency procurement initiative remarkably similar to South Africa’s tender for emergency power in which Karpowership SA is a preferred bidder.

In 2008, Karkey won a $565-million slice of the action, alongside other private power producers.

But public concerns were raised almost immediately.

In July 2009, the Pakistan chapter of Transparency International requested a review of the RPP awards, which it said did not comply with public procurement rules.

In September that year, a Pakistani MP wrote an open letter to the chief justice stating that he "had raised the issue of corruption in the award of RPPs before every forum" but had been ignored.

The chief justice opened a case the following day. He directed the MP to furnish evidence, which he did in a nine-page letter alleging that individuals involved in the RPP programme were receiving kickbacks.

Meanwhile, Karkey proceeded to deliver its powerships and was certified for commercial operation by the state-owned Lakhra Power Generation Company.

But, perhaps because of the public outcry, Lakhra dragged its feet on making fuel payment arrangements as stipulated in the contract.

On 30 March 2012, Karkey served Lakhra a "notice of termination effective immediately", demanding the payment of about $200 million in termination charges.

This date was not arbitrary. It was the same day the Supreme Court of Pakistan gave judgment concluding that the 2008 RPP contracts had breached procurement rules.

The court instructed the contracts be rescinded and ordered an investigation by the National

Accountability Bureau (NAB), though it made no specific finding of corruption, including against Karkey.

In other words, Karkey proactively terminated the contract and claimed termination damages the day it was announced that the deal was being rescinded and that there would be an investigation.

The following month, Pakistan impounded four Karkey ships moored at Karachi and imposed a $183-million counterclaim. Karkey, in turn, retaliated with its own damages claim of over $1.6-billion at the World Bank’s ICSID.

In 2017, after considerable legal wrangling, the ICSID ultimately ordered Pakistan to pay $846-million in compensation, which ballooned further due to interest.

Pakistan’s case relied to a large extent on alleging corruption, which would invalidate the Karkey contract and consequently also the damages claim. The central figure in the allegations was Karkey’s local agent, Raja Babar Ali Zulqarnain.

The ICSID judgement ultimately relied on Pakistan’s failure to present any evidence of corruption, including in relation to the conduct of Zulqarnain.

Karkey argued successfully that their agent played a legitimate role and there was no evidence that he engaged in corruption.

The ICSID award noted that it was reasonable to accept that Karkey, as a foreign investor going to a new country, needed a local representative. The evidence showed that for his services over the course of three years, Zulqarnain was paid $115 000 – which the tribunal found reasonable considering Karkey had invested $250 million in the project.

"Although it was reported that Mr Zulqarnain had some family relationship with the then Prime Minister, Mr [Yousef] Gilani, there is no evidence in this case that they were so close … as to give rise to a suspicion of corruption. There was also no witness expressly alleging, let alone, confirming the payment of bribes."

In 2016 the NAB, Pakistan’s equivalent of the Hawks, had arrested Zulqarnain and raided his house, looking for evidence of illicit payments.

Instead a bizarre scene ensued when his brother Omar, who was at the house, allegedly "physically attacked the investigators and escaped with all the documents incriminating Mr Zulqarnain", according to Pakistan’s version.

Following the 2017 ICSID damages award, things looked bleak for Pakistan. By the end of 2018 the country faced a bill that with interest had reached about $1.2 billion. The NAB kept digging.

Those efforts paid off.

In January 2019, lawyers acting for Pakistan unveiled their bombshell in a letter applying to the ICSID for a revision of the award to Karkey.

"NAB has uncovered evidence of corruption that goes to the heart of Karkey’s defense and reveals that the Tribunal’s jurisdiction was premised on facts now known to be false," they wrote.

"Despite Mr Zulqarnain’s lies, Pakistan has discovered a trail of transfers of over USD5-million from a Swiss bank, through a Lebanese bank, on to a Dubai bank, and then finally into Pakistan. These transfers contain prominent notations of ‘Karkey’ and ‘Lakhra’ and describe the underlying contract.

"This money trail shows that Karkey was not honest with the Tribunal and has substantially concealed a corrupt scheme to influence the award of the contract and its execution."

An affidavit in support of the revision application was submitted by Ahmad Irfan Aslam, a divisional head in the office of Pakistan’s attorney general, the following month.

He set out claims that Karkey had set up a bribery channel at the outset.

Zulqarnain, who had no experience in the power industry, was hired as Karkey’s "local representative" on 13 June 2008, a week after the company first indicated it was going to bid under the RPP programme.

Hiring Zulqarnain gave Karkey instant access to the levers of power, according to Aslam’s affidavit.

"Mr Zulqarnain has personal connections with the then Prime Minister, Yousuf Gilani.

His father and Mr Gilani were from the same political party and his wife was very close to Mr Gilani as well.

"In addition, Mr Zulqarnain’s father was at one time president of Azad Jammu Kashmir (‘AJK’), an autonomous region in Pakistan, and served with Mr Gilani in the Azad Jammu Kashmir Council."

Some witnesses had testified about how this influence was brought to bear, Aslam said.

"Mr Shahid Rafi, the then Secretary to the Ministry of Water and Power stated that Mr Zulqarnain would ‘regularly call and visit my offices to lobby either for changes to Karkey’s contract or for things to happen more quickly or in a different way… Often, having refused Mr Zulqarnain’s requests, I would subsequently receive a call from the offices of the then Prime Minister, Mr Yousuf Gilani.’"

A key modification meant Karkey was entitled to an increased "advance payment" of $80 million (14.16% of the contract price). Karkey received the money on May 11, 2009, only five months after the original contract was awarded in December 2008.

Crucially, the NAB investigation uncovered what looked like a convoluted channel for paying kickbacks set up shortly after Karkey got its contract.

The money trail started with a Panamanian company called Desroches Advisors Corp, registered in January 2009, the month after Karkey landed its RPP contract. The money started flowing soon after Karkey got the $80-million advance.

Desroches paid just over $5 million to a company called Leadburn Global Limited in the British Virgin Islands. To complicate matters a little more these payments were from a Lebanese bank account and received in Leadburn’s Swiss bank account.

From Leadburn’s Swiss account, money flowed to three bank accounts in Dubai and four accounts in Pakistan controlled by Zulqarnain as well as "other individuals involved with Mr Zulqarnain", Aslam stated.

The Pakistani accounts were all opened in June 2009, after the $80-million advance.

Apart from the suspect timing, the link between these payments and the Karkey contract appeared obvious once investigators knew where to look.

Aslam quoted the reference on the first in a series of Desroches payment: "IN SETTLEMENT OF THE CONSULTANCY FEE RELATED TO THE ELECTRICAL POWER SUPPLY (231.8 MW) PROJECT – LESS CHARGES."

Other payments had references such as "Consultancy Fees, Supply of 231.8MW to Lakhra, Lakhra Contract, Karkey Agreement."

By February 2013, $3.67 million had already flowed along this channel, Aslam stated. He claimed: "This money was not spent on the project itself but was used for the purpose of bribing government officials."

On top of that, $900 000 flowed to accounts in Karachi and the Turkish capital, Ankara, held by Zulqarnain’s brother Omar – he who allegedly attacked the NAB investigators.

Yet another fixer, who was arrested in April 2019 shortly after Aslam produced his affidavit, allegedly got $350 000 via another British Virgin company called Cannock Global Enterprises. He was Zulqarnain’s brother-in-law, Laeeq Sheikh.

If Aslam’s affidavit is accurate, it suggests Zulqarnain had lied – secretly he had received much more than his overt $115 000 fee for being Karkey’s agent.

Despite the sleuthing, the layers of shell companies and accounts hid the ultimate paymaster: there was no concrete proof that Karkey was behind the secret flow of the $5 million.

In other words, the evidence against Karkey was not slam-dunk.

Yet, in November 2019, Pakistani prime minister Imran Khan announced that his government, with the help of Turkish president Recep Tayyip Erdogan, had "amicably resolved" the ICSID dispute, meaning that Pakistan would be spared the $1.2-billion penalty.

Karkey blinked. The question is, why?

In Pakistan it is assumed that Karkey settled because of the solidifying allegations against Zulqarnain. Aslam from the attorney general’s office and two colleagues from the Pakistani intelligence services, were awarded the Sitara-e-Imtiaz, a high national honour, in March this year.

According to local media they were explicitly rewarded for uncovering corruption and sparing the country the massive penalty.

* This article was updated at 14:15 on Saturday 19 June to include additional information regarding Pakistan.