Rio Tinto Faces Fraud Charges and Fines over Investment in Mozambique Coal Assets

SEATTLE (Scrap Monster): The iron ore company Rio Tinto and two of its former chiefs have been charged with fraud by the U.S. Securities and Exchange Commission (SEC). The charges are based on a lawsuit filed in U.S. Federal Court in Manhattan which alleges the company and the top executives for allegedly inflating the value of its Mozambique coal assets. Meantime, the UK Financial Conduct Authority (FCA) has imposed a financial penalty of £27.4 Million on the company for breaching disclosure rules in connection with the transactions of the above mentioned coal asset.

The lawsuit alleges that Thomas Albanese, Former CEO and Guy Robert Elloit, Former CFO failed to follow accounting standards and company policies, thereby making serious mistake in valuing and recording the assets. The company had purchased the Mozambique coal assets in 2011 for $3.7 billion. However, immediately after the purchase, it realized that the acquired assets would yield less quantity of coal and that too at a lower quality than expected.

According to the US Securities Regulator, the company and its top executives concealed this fact from investors, mainly on fears that the failed deal would spoil their careers, especially after the company had reported huge loss in connection with the Alcan acquisition in 2007. By misleading investors, the company managed to garner around $5.5 billion for the project. Following the discovery of accounting irregularities by another executive, Tom Albanese had resigned from the company. The assets were later sold for just $50 million, the SEC noted.

In a statement, Tom Albanese refuted the charges and stated that there is no truth in any of the charges. Also, a spokesperson for Guy Elliot said that the charges will be vigorously contested. Rio Tinto also issued a press release stating that the company would also strongly defend itself against the allegations raised by SEC.

The UK FCA alleged that Rio Tinto had breached the Disclosure and Transparency Rules by failing to carry out an impairment test, as required by international accounting standards. By not conducting the impairment test, it has failed to record impairment loss in its 2012 half year interim results. Subsequently, the company continued to value its mining asset at the acquisition price, clearly in violation of the generally practiced accounting standards. The inaccuracy in accounting continued until January 2013, when Rio Tinto declared impairment of the Mozambique assets by writing off more than $3 billion from the value of its investment.

Meantime, sources indicate that the Australian Securities and Investments Commission too looking into Rio Tinto’s accounting of the Mozambique assets.