Will SNC-Lavalin Burn the Caisse?

Jesse Feith of the Montreal Gazette reports that SNC-Lavalin paid more than $118 million to a shell company:
A forensic accountant who analyzed SNC-Lavalin’s financial statements says the firm transferred more than $118 million to Swiss bank accounts tied to a shell company established by a former executive.

Of that money, Sophie Déry said on Monday, $14 million was transferred to former vice-president Sami Bebawi and another $11 million was sent to his uncle’s bank account.

Riadh Ben Aissa, the former executive behind the shell company, received $35 million.

“The amounts went in and out almost on the same day,” Déry told jurors. “It was an account used only as an extra layer when distributing money.”

Déry was hired by the Royal Canadian Mounted Police to investigate the firm’s dealings in Libya between 2001 and 2011. She testified Monday during Bebawi’s fraud and corruption trial at the Montreal courthouse.

Déry told the jury she spent 1,500 hours looking through the firm’s finances. The accountant looked into several bank accounts in play, including two belonging to Bebawi, converting the different currencies the firm used to make payments — Euros, U.S. dollars, Libyan dinars and Deutsche Mark.

The money all came from contracts the firm signed in Libya, Déry said.

“We wanted to know where the money went and what, specifically, was done with each amount,” she said. “There were a lot of bank accounts and a lot of transactions.”

The jury has heard how the company in question, Duvel Securities Inc., was established by Ben Aissa while he acted as SNC-Lavalin’s main executive in Libya.

The Crown argues the money paid to Duvel was used to pay bonuses and kickbacks, including to Saadi Gadhafi, son of Libyan dictator Moammar Gadhafi.

Déry told jurors Monday roughly $27 million of the money transferred to Duvel was used to buy Saadi Gadhafi a yacht.

Ben Aissa has testified it was Bebawi who was instructing him what to do in Libya, pressuring him to settle a claim the firm had filed over a money-losing contract.

He later pleaded guilty in Switzerland to charges of corrupting a foreign official and laundering money.

Bebawi, 73, faces charges of fraud and bribing a foreign public official.

His trial continues Tuesday.
A friend of mine sent me this article early this morning stating the following: “How can a company transfer $118M without CEO, CFO and, even, Board approval? No doubt in my mind that the entire C-suite should be indicted. If I was a shareholder, I would be screaming for recovery of the funds.”

My friend added this: “Let’s put it this way. You don’t start a corruption scheme at $100 million and more. You start small and build. So there must have been a series of bribes leading up to this one.”

The corruption and kickbacks at SNC-Lavalin are nothing new, what is new is the amount of money involved and how it's almost impossible not to believe that upper management and SNC's board weren't aware of these kickback schemes.

I told my friend flat out that "every major construction company in the world is shady to one degree or another but SNC-Lavalin perfected the art of kickbacks and took it to a whole other level."

He responded: "This type of stuff became illegal in the mid 1990s. In Germany, senior executives of construction companies went to jail for bribing foreign officials. Unfortunately, SNC didn’t get the memo. Also, their management wasn’t using the funds just to 'facilitate' transactions. They were misappropriating funds for their own benefit."

SNC-Lavalin poses a serious problem for the Caisse. In early August, shares of the company plunged after the after Caisse issued a warning:
Shares of SNC-Lavalin Inc. plummeted to the lowest level in nearly 15 years Tuesday (August 6) in reaction to its largest shareholder, the Caisse de depot et placement du Quebec, warning that the embattled engineering firm had to move to emergency mode to improve its project execution.

The Montreal-based company's shares fell to a low of $16.10 in early trading on the Toronto Stock Exchange and were down eight per cent at $16.38 around midday. The TSX was closed Monday because of the Civic Holiday in Ontario and several other provinces.

Caisse CEO Michael Sabia shone the spotlight on SNC-Lavalin Monday during a discussion about the Quebec pension fund manager's results for the first half of 2019. It posted a modest return of 6.1 per cent, well below that of 7.5 per cent of its reference portfolio. Nevertheless, its annualized return of 8.3 per cent over five years exceeds the 7.2 per cent return for the same reference.

The Caisse booked a $700-million loss from its SNC investment during the first six months of the year and Sabia's impatience was clearly evident.

Although Sabia has said a few times that the Caisse is and will remain "a long-term investor in SNC-Lavalin during this turbulent period," he said that the engineering giant "must move quickly and must focus on execution."

Unwilling to comment on the risk of a hostile takeover bid of SNC by foreign investors, Sabia acknowledged that the Caisse remains watchful and that SNC is important to Quebec and to Canada and "the engineering ecosystem in Canada."

Paraphrasing famed inventor Thomas Edison, Sabia said: "A plan without execution is a hallucination."

"That's why we insist so much on the execution, on the daily discipline (...) It is a change of culture, a higher level -- significantly higher -- of discipline."
Shares of SNC-Lavalin (SNC.TO) rebounded nicely since early August but the share price is down considerably in the last three years and the rally has run into trouble lately. If you look at the 5-year weekly chart below, the share price is unable to break above its 50-week moving average and it looks like a great short to this pension commentator:

Also, notice how quiet Sabia has been on SNC-Lavalin lately? Some of us saw this coming and thought Sabia was exposing himself and the Caisse to massive losses and reputational risk, especially if a criminal trial proved that there was criminal activity that took place.

This is the fundamental problem I have with the Caisse's "dual mandate" and saving all major Quebec companies at any cost. I'll be blunt, some of these companies deserve to die, stop using pension money to bolster them.

SNC-Lavalin has always been a cesspool and the people running it were major cowboys who never played by the rules and now that the skeletons are coming out, a lot of major shareholders are getting very nervous and understandably so.

There's an old saying, "where there is smoke, there is fire". If you think Sami Bebawi was the only former SNC-Lavalin exec on the take, you're either delusional or a complete fool.

I have no doubt that the Royal Canadian Mounted Police, FINTRAC and other police and regulatory bodies are taking a much closer look at SNC-Lavalin's past activities and who knows what they will uncover.

This poses a problem for all shareholders, in particular the Caisse which has a dual mandate to promote economic activity in Quebec and maximize returns without taking undue risks.

SNC's new CEO Ian Edwards is looking to settle these charges but a deferred prosecution agreement with the Canadian government is unlikely.

[Note: My friend said it best: "If SNC wants to really put these scandals behind it, its board of directors would hire an independent forensic accounting firm to conduct an in-depth investigation of all transactions at the firm going back 15 years."]

As I stated, there are plenty of nervous shareholders, including other large Canadian pensions, which are all probably pondering what to do with their shares and how to properly defend their interests given these new allegations. If they do nothing, it's a gross violation of their fiduciary duty.

I hate to say it but the fate of this once towering Canadian engineering powerhouse lies in the hands of a few institutional investors, including Jarislowsky Fraser which two months ago increased its participation in SNC Lavalin Group to more than 10% as part of a broader asset growth strategy in Canadian equities.

Back in April, Stephen Jarislowsky, a Canadian investing icon and billionaire, and former director for SNC-Lavalin, was calling on the engineering firm at the center of a scandal in Ottawa to allow shareholders to vote on the sale of a lucrative stake in the 407 toll road.

In August, SNC-Lavalin agreed to sell a 10.01 per cent stake in the Toronto toll road for as much as $3.25 billion in cash to CPPIB, a much needed move to bolster its balance sheet.

While Jarislowsky was fuming over that sale, he failed to realize much bigger governance lapses in the company he once sat as a board of director.

The irony in all this is Stephen Jarislowsky co-founded the Canadian Coalition of Good Governance (CCGG) along with Claude Lamoureux, Ontario Teachers' inaugural CEO.

None of these governance experts had a clue of the rot pervading SNC-Lavalin and how badly corrupt this company really was. Or maybe they knew and turned a blind eye to it.

The problem is you simply can't turn a blind eye to it because this is a criminal trial, a very public one and there will be more shoes to drop before it's all over.

When it comes to SNC-Lavalin, I'd say the Caisse got the short end of the stick and CPPIB got away with the golden prize (Highway 407).

Lastly, there are many good employees working at SNC-Lavalin but I have to wonder how long they will be there. Some of its competitors, like WSP, have been quietly hiring away top talent from the embattled engineering company and I expect this will continue and accelerate in the coming months.

All this to say, I openly question the future of SNC-Lavalin. It desperately needs to turn the page from these criminal trials but it also needs a long-term strategy or else this company is toast.

Culture makes a company and culture destroys a company. It doesn't matter whether it's SNC-Lavalin, Bombardier or another big Quebec company, if the culture is all wrong and rules aren't followed and respected, you're doomed.

That goes for all organizations but I'm particularly hard on large construction companies which have a history of corruption and are the biggest benefactors of public finances. Enough is enough already, clean up your house and stay clean.

Below, a clip covering the corrupt dealings of former SNC-Lavalin exec Sami Bebawi (in French). Like I said, where there is smoke, there is fire, and a lot of big Canadian institutional investors including the Caisse and Jarislowsky Fraser need to make sure they don't get burned with SNC.