MASERU — The Lesotho Revenue Authority (LRA) on Monday raided China Garments Manufacturers (CGM)’s offices as the net closed in on the company that is accused of money laundering and tax evasion, the Lesotho Times can reveal.
CGM, Lesotho’s biggest textile factory by way of employees and garment volumes, is accused of ducking tax worth millions of maloti for the past 24 years through an elaborate scheme involving expatriate staff.
The company which makes products for Levi Strauss, an American clothing brand, is also accused of externalising millions of maloti in the past 24 years through dubious transactions that involve companies based in Hong Kong.
CGM is the company that recieved a M30 million bail-out from government after pleading poverty.
The LRA also believes there is evidence that the company could also have laundered some of the money that was meant to come into Lesotho.
The revenue authority has been told by whistleblowers that CGM could have prejudiced this country of nearly M300 million in potential revenues over the past two decades by avoiding tax and externalising its earnings.
The Lesotho Times understands that the LRA pounced on the company on Monday afternoon in a raid that lasted from around 3pm to around 1am on Tuesday.
Armed with a search warrant, the LRA team took computers, files, servers and other records.
The investigators also confiscated desktop and laptop computers belonging to the chief executive, Madhav Dalvi, and his senior management.
It is understood that LRA’s head of investigations, Borotho Matsoso, arrived at CGM around 3pm with a team of 26 LRA officers.
First they confiscated Dalvi’s mobile phones and cut his landline phone before impounding his computers.
After that they sealed off his office and that of another senior official only identified as Shellina.
Shellina is apparently the one responsible for paying the expatriates and the LRA believes she will provide crucial information they need to understand how the company evaded tax.
The officials then took her computer, phones and all the documents that were in her safe.
After that they moved to other officers in the accounts and finance department.
The investigators will start analysing the seized documents, computers and servers next week.
This paper was told on Tuesday that the LRA investigators were able to gather most of the crucial documents, computers and servers because they had received information from a whistleblower who had fallen out with the management after working for the company for 24 years.
The whistleblower’s name is Krish Moodley, a South African man who fell out with CGM last November after the Taiwanese-owned firm refused to pay his severance package.
Moodley has confirmed that he is helping the LRA with investigations and agreed to have his name published in this report.
“Yes it is true that I told the revenue authorities about the illegal transactions at CGM but I now fear the company might come after me with vengeance,” Moodley said on Tuesday afternoon.
“I have reason to be afraid of retribution because they have just got a former colleague of mine who was just about to spill the beans deported back to Sri Lanka in the weirdest of circumstances.
“It was a suspicious deportation because it was done in contravention of a clear High Court order,” he added.
Investigations into CGM’s financial affairs started last week following Moodley’s tip-off to the LRA’s investigations department.
This paper broke the story alleging that CGM was evading tax and externalising money in July last year.
At that time CGM management vehemently denied the allegations and accused what it called “bitter workers” of “spreading lies”.
But now CGM’s management will have to deal with the LRA’s probing questions as well as incriminating evidence from a number of former and current workers who are willing to expose the elaborate scandal that has gone undetected for more than two decades.
The probe is likely to take the LRA investigators to Hong Kong, India and Taiwan as they try to trace the money trail.
There is also a possibility that some former workers in Pakistan, India, Taiwan, Sri Lanka and the Philippines might be called to testify in what some LRA insiders see as their biggest catch in years.
A number of CGM’s current employees are willing to spill the beans.
The LRA has confirmed the raid and the investigation but refused to give further details.
But for the past six months this paper has also been gathering evidence to prove that CGM was indeed avoiding tax and externalising funds.
The result of that investigation are pay slips, emails, invoices, bank transfers and payroll records that indicate that CGM is evading tax and illegally siphoning money out of Lesotho.
Evidence this paper has reveals that CGM is evading tax by paying its expatriate staff directly into their foreign bank accounts.
At the centre of the illegal dealings is a Hong Kong-based company called Soimex International.
It would seem Soimex came into the picture in July 2011 after another Hong Kong registered company, Bloomson Company Limited, was exposed by the Lesotho Times as the one CGM was using for its illegal operations.
After the exposé CGM started using Soimex as a conduit through which money was shipped out of the country and paid to expatriates.
While the conduit company has changed from Bloomson to Soimex, the modus operandi that CGM uses for the illegal transactions has not changed.
The money is transferred into a Hong Kong account belonging to Soimex from where it is then distributed into expatriates’ accounts in Taiwan, China, India, Sri Lanka and the Philippines.
There are currently more than 200 expatriates in the CGM group who receive a portion of their salaries in foreign accounts.
At its peak CGM was operating five factories that employeed 12 000 locals and about 500 expatriates who were paid illegally through the same scheme.
The chief executive and his senior management are also paid in the same way.
CGM’s management pays 66 percent of the salary into an expatriate’s foreign bank account and the other 34 percent into his Lesotho account.
It is the 34 percent that CGM declares to the LRA for tax purposes.
This paper has dozens of pay slips from current and former CGM employees showing that only 34 percent of their earnings is subjected to the pay-as-you-earn tax.
In one of the pay slips an expatriate who earns US$2 200 received US$1 136 in their foreign account while the US$1 063 which was taxed was deposited into a Lesotho account.
An exchange rate of US$1: R7.43 was used to calculate his salary.
In the end the employee was paid only R7 803 from which he paid R1 561 in tax and got a net pay of R5 338. If CGM had taxed that employee properly then he would have paid R4 867 on his M16 347 (US$2 200) gross salary, according to the LRA’s tax table.
To calculate how much an employee gets in their Lesotho account CGM uses the monthly average exchange rate of the maloti to the United States dollar.
Documents show that CGM transfers the money from Lesotho to Hong Kong on the first day of every month.
The money will reach Soimex’s accounts on the fourth day and three days later Soimex will wire the money to Taiwan.
On the ninth day the transfer from Soimex will reach a Taiwanese bank which will wire the money into every expatriate’s account.
By the 15th of every month all the expatriates would have received their salaries in their foreign accounts.
There are also other documents like emails between the top management indicating that CGM is avoiding tax.
In one email sent in February 2011 two managers discuss how the salary of an expatriate who had just been offered a job will be paid.
The email shows that after the employee has been offered a salary of US$1 300 he asked how CGM was going to deal with taxation and what will be his net salary.
The email explains that the prospective employee will receive part of his salary in Lesotho and another in a foreign account.
“His overseas portion will vary every month as per the exchange rate. CGM Industrial finance dept (department) takes the monthly average rate for calculation purposes,” the email said.
“Therefore giving an example and using the average exchange rate of 7.00 (US$1:M7.00) his monthly overseas salary will then be US$1 300 X 7.00 = M9 100 (gross) –M4 480 (paid in Lesotho) = M4 620 ÷ 7.00 = US$660 (transferred into foreign account).”
The evidence also shows that the company might have inflated the prices of fabric from some suppliers so that it can transfer more money out of the country than it has to.
This has been done by using front companies that CGM controls as middlemen.
Fabric comes from a genuine supplier but the invoice does not come to CGM directly.
Instead it goes to the front company which puts a hefty mark-up on the price before handing the invoice to CGM.
This invoice is the one that CGM then presents to the Central Bank of Lesotho when it wants to transfer the payment outside the country.
The front company takes its mark-up and then pays the supplier.
Because CGM controls the front company the mark-up effectively belongs to itself.
When Dalvi was asked about the allegations three weeks ago when this paper had found additional information he vehemently denied it.
He said the Sri Lankans he had fired were trying to get back at the company.
Yesterday Dalvi confirmed that the LRA investigators went to his office but said they were just doing their routine job.
He however declined to comment further, saying he was preoccupied with running the company not commenting in newspaper articles.