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Special Report: Soccer club Man City boosted finances through creative plays, documents show

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Special Report: Soccer club Man City boosted finances through creative plays, documents show

Special Report: Soccer club Man City boosted finances through creative plays, documents show
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PHIL NOBLE(Reuters)
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By Tom Bergin and Cassell Bryan-Low

LONDON (Reuters) - When soccer's governing body in Europe began to get tough on the sport's finances from 2009 onwards, the British club Manchester City came up with a two-pronged counter-attack, a trove of documents relating to soccer shows.

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One Man City plan was to get more money from sponsors; another was to offload some costs relating to players' image rights. In both cases, the owner of Man City, an Abu Dhabi royal, would foot some of the bill, according to "Football Leaks" documents obtained by the German publication Der Spiegel and reviewed by Reuters in partnership with European Investigative Collaborations, a consortium of media organisations.

In 2009, the executive committee of sport's governing body in Europe, the Union of European Football Associations (UEFA), approved introducing Financial Fair Play rules to prevent clubs piling up too much debt and super-rich owners dominating the game. The rules were implemented from 2010 onwards. Under those rules, sponsors, suppliers or other commercial partners related to the owner of a club must pay only a market rate in transactions with that club. Related parties cannot simply funnel in unlimited money on behalf of the owner. Breach of the rules can lead to clubs being banned from UEFA competitions.

On Nov. 2, Reuters reported how UEFA's regulatory arm, the Club Financial Control Body (CFCB), took the view that some Abu Dhabi sponsors of Man City were related parties and their deals with the club were above market rates. The club disputed that view, and UEFA's control body ultimately allowed Man City to record the sponsorship deals at favourable levels that boosted its income.

Today Reuters details new information from emails and other documents relating to further arrangements involving Man City, which was bought by Sheikh Mansour bin Zayed Al Nahyan, half-brother of the ruler of Abu Dhabi, in 2008. Those arrangements boosted the club's finances by tens of millions of pounds, helping it to buy star players.

Manchester City said in a statement responding to questions last month: "We will not be providing any comment on out of context materials purported to have been hacked or stolen from City Football Group and Manchester City personnel and associated people. The attempt to damage the Club's reputation is organised and clear."

The club did not respond to further questions put this month. The club said in an April 2014 response to UEFA investigators about sponsorship that it had complied with the rules and "adopted a good faith and correct interpretation of the regulations."

UEFA said in an emailed response to Reuters that it could not comment on specific cases due to confidentiality obligations. The UEFA control body chairman declined to comment, citing confidentiality obligations.

In an overall statement about the Financial Fair Play rules, UEFA said the rules were there to help clubs become financially sustainable and it was "very satisfied" with how they had been applied and the results achieved, noting an improvement in the finances of European soccer clubs. "No system is perfect but on the whole FFP (the Financial Fair Play regime) has increasingly protected European football from financial difficulty since its introduction in 2010," UEFA said.

The documents provide insight into the nature of the huge sums flowing through Man City and could supercharge one of the biggest controversies in soccer. Some rivals have alleged that Man City has benefited unfairly from the financial firepower of its Gulf owner. The club has rejected those claims. The issue is of interest to millions of fans who pay to support soccer teams.

Man City's arrangements for boosting income from sponsors and offloading some costs formed part of a programme termed 'Project Longbow' by executives, according to club presentations and emails between managers. It is unclear from the emails reviewed by Reuters whether Sheikh Mansour was aware of the arrangements. Nor do the documents show Man City had an intention to deceive UEFA or its investigators about the state of the club's finances. And nor do documents reviewed by Reuters show UEFA or its control body accusing the club of deception.

The arrangements were as follows, according to the documents. In early 2010, Man City negotiated a three-and-a-half year sponsorship contract with Aabar, a state-controlled investment fund in Abu Dhabi, worth about 15 million pounds a year. But correspondence between the club and Aabar said some of the money would come from other sources.

In early 2010, Man City director Simon Pearce emailed Aabar's then chief executive, Mohamed Badawy Al-Husseiny, saying: "The annual direct obligation for Aabar is GBP 3 million. The remaining 12 million GBP requirement will come from alternative sources provided by His Highness." That appears to refer to Sheikh Mansour.

A spokesman for Sheikh Mansour and the Abu Dhabi government referred questions to the club. Man City director Pearce did not respond to requests for comment. A spokesman for Aabar, the investment fund, said he could not comment on "any information that came from what appears to be hacked or stolen emails." The club did not make any comment on specific questions beyond its statement above.

Other emails discuss the flow of funds from Abu Dhabi United Group (ADUG) - the company through which the Sheikh owns Man City's parent company - through sponsors to the club.

In an August 2013 email, Jorge Chumillas, then chief financial officer at City Football Group, the company through which Sheikh Mansour controls Manchester City Football Club (MCFC), asked Pearce about the arrangement by which money flowed through Etihad, an airline owned by the Abu Dhabi government.

"I need to understand the mechanism by which additional sponsorship flows through ADUG. Ii [sic] it ADUG Shareholder->ADUG->Etihad->MCFC? Or is it rather ADUG Shareholder->Etihad->MCFC?," Chumillas wrote. ADUG is "a private investment and development company belonging to His Highness Sheikh Mansour bin Zayed Al Nahyan," according to the Man City website.

Chumillas could not be reached through Man City, and did not respond to requests for comment sent to City Football Group and via LinkedIn.

Other emails describe funds being "routed" through sponsors. An email sent to Pearce in December 2012 by Man City's head of finance, Andrew Widdowson, said: "In summary we need the following: £27m to be funded via Etihad, £15m to be funded via Etisalat, £42m in Total. Can I ask that the relevant amounts be routed through the partners."

Reuters was unable to verify whether the payments were made.

Corporate governance and accounting experts said the sponsors and other counterparties in the transactions with Man City in all likelihood did not break any rules because their shareholders were not disadvantaged by the arrangements and because the amounts were likely not material enough to require detailed disclosure to investors or the public.

A spokesperson for Etihad Airways said in a statement: "The airline's financial obligations, associated with the partnership of the club and the broader City Football Group, have always been, and remain, the sole liability and responsibility of Etihad Airways." The spokesperson added: "Our partnership with Manchester City and the broader City Football Group continues to deliver important ongoing and accumulative returns on our investments."

Etisalat is a state-controlled telecoms company headquartered in Abu Dhabi. A spokesman for the company said in a statement that football had become a highly competitive market for sponsors and that "we believe that Etisalat has delivered excellent returns from its investments in this area." He added: "As a publicly listed company Etisalat is driven to create returns for its shareholders in all of its investments, including our commercial partnerships."

Tobias Troeger, a professor of law at Goethe University, Frankfurt, said the directors of sponsoring companies would not be breaking their fiduciary duty to their shareholders if they paid over the odds for a sponsorship contract providing the overpayment was covered by another party and the directors believed the overall transaction was in the best interests of the company and its investors. In other words, if the payments from Sheikh Mansour's ADUG were covering any potential overvaluation of Man City's sponsorship deals, there would be no loss to the sponsors' shareholders.

"All the jurisdictions we're talking about have a 'business judgement rule' so executives can essentially determine, without being held liable, how they want to pursue the corporate interest, if it's a reasonable judgement they make with sound information," Troeger said.

Provided all the payments were recorded correctly in the accounts, there would likely be no breaches of corporate reporting rules, he added.

Luca Enriques, Professor of Corporate Law at the University of Oxford, said that while a football club might be bound by UEFA's rules, the club's sponsors or business partners would not have any legal obligation to follow the governing body's rules. "I don't see how you can put third parties under the domain of football rules," he said.

Widdowson, Man City's head of finance, did not respond to requests for comment on what was meant by funds being routed through sponsors.

PROJECT LONGBOW

Another strand of Project Longbow focused on a quirk in how top players are paid, known as "image rights." Leading clubs in Britain and some other European countries often declare that around 15 percent of what they pay players is for the right to use their images for marketing.

Man City decided to sell those rights to a new company it created, receiving 24.5 million pounds and shifting costs of around 10 million pounds a year off its books. The manoeuvre would have the double benefit of boosting the club's income and reducing its expenses.

So, on May 13, 2013, Man City sold its top players' image rights to its new company, called Manchester City Football Club (Image Rights) Ltd and known as MIR. On the same day, the club then sold MIR to Fordham Sports Management Ltd., according to the documents. Fordham Sports Management is ultimately owned by David Rowland, a British financier based in Guernsey, according to publicly available financial filings. Rowland did not respond to requests for comment.

MIR had agreed to pay Man City 24.5 million pounds and to take on costs of over 10 million pounds a year. In return it received the right to sell the players' images, but only under restricted terms. Existing sponsorship contracts between marketers and players were excluded, and MIR did not receive the right to use the players' images in association with club logos or colours. Also, in some cases, MIR's contracts required it to share any revenue it generated with the players.

In the following years, MIR began to rack up large losses - more than 70 million pounds up to the end of 2017, publicly available accounts show.

But its new owner, Fordham, had a safety net. Emails and other documents indicate that Abu Dhabi agreed to cover expenses Fordham incurred in relation to MIR. A Man City presentation from April 2013, attached to emails between executives, outlined how the arrangement could work, stating: "AD commitment to cover the balance of MIR cash deficit at the end of every season." AD appears to refer to Abu Dhabi.

Other Man City presentation slides contained in an email folder from 2012, before the MIR deal was concluded, sketched diagrammatically how the safety net arrangement could work. They show an arrow annotated with the words "Funding of losses" pointing from Abu Dhabi United Group (ADUG), Sheikh Mansour's company, to the image-rights purchaser, which is not identified in the slide.

The spokesman for Sheikh Mansour and the Abu Dhabi government referred questions to Man City. Man City did not address specific questions on this issue.

Other emails suggest the arrangements for ADUG to cover the losses of the image-rights purchaser went ahead as planned.

A June 2013 email from Man City director Pearce to David Rowland's son, Jonathan, discussed "the next scheduled payment re: Fordham" and said that 8 million pounds had been paid to date to cover costs incurred by MIR in paying Man City for the image rights and for payments to players.

Jonathan Rowland did not respond to requests for comment.

In an email on Sept. 4, 2013, Chumillas, the City Football Group finance chief, asked Pearce to arrange an additional payment of 10.7 million pounds to cover Fordham's costs for the second half of 2013. According to a Sept. 12 email, Pearce agreed the payment should be made. It is unclear from the emails reviewed by Reuters whether the transaction was completed.

Accounting experts said that providing all transactions were recorded properly in the accounts of the companies involved, there would be nothing unlawful about the arrangements.

Man City declined to answer questions about the motivation for the transactions.

NO COMFORT

UEFA investigators, tasked with making sure clubs complied with Financial Fair Play rules, examined the image rights arrangement. In June 2015, UEFA's Club Financial Control Body told Man City in a letter that the club could not offload costs via the MIR deal. The control body required the club to take back into its accounts more than 10 million pounds in image rights payments a year.

The evidence submitted by the club "did not provide the necessary comfort … about the economic rationale of the transactions," the letter said. UEFA's control body did not say in the letter that Man City had intended to evade its Financial Fair Play rules or deceive it.

UEFA's control body ultimately did allow the club to retain the benefit of the 24.5 million pounds it received for selling the rights. UEFA's control body did not disclose the reasons for that decision. The 24.5 million boost to its income helped the club comply with UEFA rules limiting the amount of losses clubs can incur.

According to letters and emails between UEFA's control body and the club, and correspondence between club executives, UEFA investigators also challenged some of Man City's accounting of sponsorship income, questioning whether the arrangements conformed with the rules on Financial Fair Play, as Reuters outlined on Nov. 2.

Documents reported here show UEFA investigators said that two Abu Dhabi sponsors – state investment firm Aabar and state-controlled telecom firm Etisalat - were parties related to Man City's owners. Under Financial Fair Play rules, such sponsorship deals had to be recorded at fair market value when calculating whether the club had broken even or not. But independent experts hired by UEFA said the contracts were at above-market rates.

UEFA investigators said the Aabar contract had a "fair value" of 6.1 million euros (£5.3 million), according to a preliminary view report; but the sponsor was paying 19.2 million euros. The Etisalat sponsorship rights were estimated to have a "fair value" of 6.7 million euros a year; but the sponsor was paying 20.1 million euros a year.

UEFA investigators, in the May 2014 preliminary view report, also noted that they had found no evidence of a commercial negotiation over the deals, "leading to the conclusion that this was not an arm's length transaction between unrelated parties."

Etisalat said it strove to create returns from all its investments. UEFA did not respond directly to questions about individual sponsorship deals, but said one of its aims was to "encourage clubs to operate on the basis of their own revenues." UEFA's control body declined to comment for reasons of confidentiality.

Under the final 2014 settlement, UEFA's control body required adjustments to the club's 2011-12 and 2012-13 financial reports. However, for 2014 and the following two years, UEFA's control body did allow the club to recognise the sponsorship contracts at values that independent experts had said were above market rates, according to the settlement documents.

In other words, in those years the sport's European governing body allowed Man City to count far more income from sponsors under Financial Fair Play rules than UEFA's external experts thought was appropriate.

(Reporting by Tom Bergin and Cassell Bryan-Low; Editing By Richard Woods and Janet McBride)

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