$1 billion per year lost to corruption: a Nigerian saga

A protester sports an anti-corruption T-shirt in Lagos.

$1 billion per year lost to corruption

Recently, AAF reported on the multi-faceted PR efforts of the new Buhari regime to clean up the soiled image of “corrupt Nigerian politics” — among other things, by staging photo ops with World Bank leaders, charging former government officials with bribery, and moving ahead on basic appointments.

Today, the Guardian reports that the Nigerian Minister for Information, Lai Mohammed, “kicked off a corruption awareness campaign appealing to Nigerians to join the fight,” noting that the previous regime’s embedded corruption had “enriched a small elite but left many Nigerians mired in poverty, despite the country being Africa’s top oil producer and having the continent’s biggest economy.”

AAF spoke with John Oxenham, a legal expert on anti-corruption measures with Africa advisory firm Pr1merio.  Oxenham comments:

“The Buhari administration is finally making good on its promises, it would seem, as it had thus far been slow to implement even the most basic of administrative tasks, such as appointing a proper cabinet.  As previously pointed out on your site, the visit with Ms. Lagarde and her advisors serves to enhance visibility and (hopefully) honest dedication to the anti-corruption efforts.  At Primerio, we work with several foreign private entities that express concern over doing business in Nigera, given its reputation.  While we can advise on compliance and risk-avoidance (keyword FCPA etc.), the Nigerian government’s efforts to stamp out corruption from within are helpful, as well, in developing a more robust foreign-direct-investment climate.”

That said, the Buhari camp must be careful not to create the appearance of using the “war against corruption” as a sham front for silencing the opposition under the guise of rooting out fraud.  “Employing the help of the courts — presumptively more impartial and fair than the political process — is therefore key to the government’s fight against graft in Nigeria,” says Andreas Stargard, also with Primerio.

“The estimated $1 billion per year lost to corrupt dealings over the past 7 years is staggering, especially when taking into account that these are merely the official figures — our Africa economists estimate that the actual loss to corruption amounts to an even larger share of the (significant) Nigerian GDP.”

And so the Nigerian saga continues…

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In sync with greater enforcement: Firms’ compliance budgets grow

deloittecompliance

CCOs say that with more investigations comes (slightly) more money

According to a recent survey, the budgets allocated to compliance have grown over the last year, including those of African participants in the study.  Consulting giant Deloitte has released its 2015 Compliance Trends report, the result of its survey in which 20 large corporations across Africa (out of 364 total qualified respondents) participated.

Below, we summarise some its key conclusions on…

The Role of the Chief Compliance Officer

Taken together, these statistics … suggest that most CCOs, especially those at larger corporations, now have an opportunity to participate in high-level discussions about corporate strategy, values, and culture.

The key items under the CCO’s responsibility were:

  1. compliance training,
  2. code of conduct, and
  3. whistleblower hotline.

Primerio director John Oxenham observes that, “unfortunately, the assessment of culture was perceived as the least important among the CCOs’ responsibilities.  This is a serious problem, as pointed out in prior articles emphasising the importance of a culture of compliance, rather than sterile top-down pronouncements that often go unheeded by mid-level management.”

African Companies

While firms from the continent have increased their compliance budgets (about 16% by 10 to 19%, and many more by 1 to 9% over the past year) along with their U.S. and European counterparts, they are perceived to be dilatory in their evaluation of their own compliance efforts and results, and lacking in their ability to make full use of their compliance efforts.  In short, many still (wrongly) view dollars spent compliance as a “grudge cost.”

Significant enforcement in Africa (both in the anti-corruption and competition-law domains) across various sectors of the economy (food, technology, construction, to name a few) have awakened many corporate boardrooms across Africa to the reality of effective home-grown government enforcement.

Information Technology and Compliance

IT Systems have not fared well in the latest report:

One possible disconnect emerges when asking CCOs about the IT systems they use to fulfill their missions: Most are not terribly confident in their IT systems’ ability to do the job. Only 32 percent of respondents were confident or very confident in their IT systems, down from 41 percent in 2014

Interestingly, smaller organisations with less than $5 billion in annual revenues showed higher levels of confidence in their IT systems when juxtaposed to their larger peers.

Increased anti-corruption enforcement across Africa?

Chimera

Chimera or Reality — Is Africa stepping up its anti-graft game?

If one is to believe the media attention that has been bestowed upon anti-corruption enforcement by various African jurisdictions, there has been an uptick in successful anti-graft campaigns across the continent.  Or is there…?  Has Africa truly embraced the prosecution of well-to-do businessmen and government officials?  As one practitioner observes, mere penalty statistics (albeit impressive in terms of pure figures) are far from enough:

“You will read about record-breaking fines imposed; and you will hear about ever-longer jail sentences for violators.  African nations are no different in this regard than the U.S., where the DOJ has an annual tradition, almost invariably touting record-setting numbers resulting from its various enforcement divisions.  Even a quarter billion dollars of cumulative fines in South Africa are insufficient evidence of true deterrence, however — what is needed going forward is a culture of anti-corruption compliance, which goes deeper and spreads its roots more widely throughout the business & governmental community than any single record fine or jail sentence can ever accomplish,” says Andreas Stargard, an attorney with Primerio, an Africa-focused law firm and boutique business consultancy, advising on anti-corruption and competition & regulatory matters across the continent.

Over the next weeks, AAF will be investigating this “trend” of enhanced enforcement — and analyse whether it is real or only perceived.  Today, we begin with two case examples, one from the East and one from the South, both of which have recently been featured in the media with seemingly impressive news to report…

The Ethics and Anti-Corruption Commission offices in Nairobi

The Ethics and Anti-Corruption Commission offices in Nairobi

Example ‘A’: Kenya

George Wachira, a director of Petroleum Focus Consultants, writes in the Business Daily that, “over the past six months a series of events have given Kenyans some hope that this time around we may be on the right path in shaking the roots of corruption.”  He cautions, however, that the ongoing fight against corruption will yield results only “if sufficiently supported by all,” echoing Andreas Stargard’s observation of the importance of a universal “culture of compliance”:

The fight against corruption cannot survive merely on the push of top leadership. There must be in place support from effective and sustainable systems and institutions that can routinely function without prompting or interference. And recently some of these institutions have been undergoing a real-life test. … With clear and strong messages and actions from the top leadership it becomes easier to address corruption. This is an essential and critical starting point.

Second in line in the crusade against corruption is certainly the media which has been consistent in its anti-corruption messages and analysis.

The other key anti-corruption voices have included the Opposition, civil society, and a number of foreign offices with well intentioned interests in Kenya.

… I judge that the D-Day on the fight against corruption occurred when the list of shame was published with names of senior public servants suspected to have engaged in corruption. … If this process succeeds and achieves these standards, then Kenya will have moved a major step ahead in the war against corruption. If the process is derailed by whatever causes, then I am afraid we shall have lost momentum on the war on corruption. … [Another] recently launched system with similar detective capacity is the e-procurement system that can document the audit trails of all public procurement.

It is evident from recent events that Kenya can and should keep on the path towards a country with reduced corruption. We need to appreciate the efforts of all the players in this anti-corruption crusade.

As a general matter, AAF concurs with Mr. Wachira’s comments and the tenor of this article: it takes  more than just one element to create an effective anti-corruption system that both prevents as well as detects and punishes violations swiftly.

As he points out, this system may well start “from the top,” as is the case with the Kenyan presidents recent pronouncements on his unwillingness to tolerate corrupt government dealings.  The question is, however, what happens if society cannot rely on its top officials to provide such guidance, nor rely on even lip-service paid to the anti-graft movement.  An example is South Africa, our next case study, where the recent worldwide FIFA corruption scandal resonated with particular momentum, given the country’s past hosting of the FIFA soccer World Cup.  As several news outlets have reported, the South African government (at its highest levels, including the Ministry of Sports and Recreation), has tried to keep details of the FIFA bribery allegations from the country’s public, specifically by instructing ex-Cup local organising committee (LOC) members not to give interviews and to hand over any evidence to the Ministry only.  Other corporate fraud scandals (ex.: Nedbank) continue to embroil the country, whose economy (and currency) appear on a perpetually and dangerously downward-sloping curve.

Example ‘B’: South Africa

In our FIFA article, we pointed out with significant concern that “the South African Government’s, particularly under the auspices of President Zuma, dismantling of key enforcement agencies, especially the National Prosecution Services … has effectively prevented proactive enforcement of corrupt activities.”

Nonetheless, in the South African daily Times, Babalo Ndenze recently summarised the “most successful year yet” for the country’s Asset Forfeiture Unit — some of the few corruption-busters that have remained intact since a sweeping and politically-driven “overhaul” of the anti-graft investigative units in Africa’s southernmost Republic has caused the effective number, quality and fervour of public fraud prosecutors to dwindle to dangerous lows.  As we observed in a prior article on the perception of corruption in the country causing less foreign direct investment, “a new report released by the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School, concludes that corruption remains one of the major obstacles to Africa’s economic rise: among the Southern African Development Community (SADC), South Africa suffers particularly from the perception of a high prevalence of bribery and corruption in the granting of South African government contracts and procurement tenders …”

Nonetheless, the Times chimes in with healthy enforcement statistics, and we will conclude today’s instalment with a recitation of those numbers:

The crime-fighting unit recover R2.8-billion [that’s almost $250 million] during the 2014-2015 financial year. Its biggest haul involved freezing contracts worth R1.8-billion issued by the Gauteng health department.

The unit also froze orders worth R4.2-million against a company that was awarded a tender to transport mourners to Nelson Mandela commemoration events in the Eastern Cape. The tender process was rigged.

A number of Buffalo City Municipality officials, including former mayor Zukiswa Ncitha, were implicated in the case.

The unit also recovered a farm worth R1.5-million in the Free State that had been illicitly obtained by an SA Police Service detective.

The unit froze and recovered R59-million in various bank accounts of people who defrauded the Social Housing Regulatory Authority in East London . The unit also recovered some of the authority’s R4.8-million that had disappeared for “personal purposes”.

It was assisted by the National Treasury to recover more thanR61-million that was swindled from the authority’s coffers.

A list of the unit’s major recoveries appears in the National Prosecuting Authority’s latest annual report, which has been tabled in parliament.

According to legislation, the seized money goes into the central revenue fund.

“The unit achieved its best-ever performance, obtaining freezing orders to the value of R2.8-billion, significantly exceeding the annual target of R755-million by 265% and last year’s performance by 293%,” the report read.

The unit’s head, Willie Hofmeyr, said this success can be attributed to working closely with other crime-fighting institutions such as the Hawks, the police and the Special Investigating Unit.

“We’ve had a few good years in the past but this was probably our best,” he said.

“It’s true that working together has made a difference

Halliburton to Goodyear: FCPA risks and due diligence in foreign acquisitions

Averting their eyes from Africa: Goodyear’s $16m Kenya/Angola settlement highlights risk of insufficient due diligence

Andreas Stargard.

“Foreign acquirers must understand and — likely — challenge the status quo of their new African subsidiaries”

When acquiring an African company, nothing is “business as usual.”  Neither pre- nor post-acquisition can foreign parent corporations simply avert their eyes and let their newly acquired business units be run as before.  The status quo must be understood and – likely – challenged.

Case in point: Goodyear’s Africa troubles (plural, because they originate in both Kenya and Angola).

In its February 24, 2015 news release, the Securities and Exchange Commission (SEC) announced Goodyear’s disgorgement of over $14 million in profits, plus over $2 million in prejudgment interest, as well as reporting, remediation and compliance obligations for a period of 3 years: “Public companies must keep accurate accounting records, and Goodyear’s lax compliance controls enabled a routine of corrupt payments by African subsidiaries that were hidden in their books,” said Scott W. Friestad, Associate Director of the SEC’s Enforcement Division.”

The release details the following alleged violations of the two African subsidiaries, acquired by the Ohio-based Goodyear Tire Company incrementally between 2002 (minority shareholding) and 2006 (when it became a majority owner):

[The Kenyan subsidiary] bribed employees of the Kenya Ports Authority, Armed Forces Canteen Organization, Nzoia Sugar Company, Kenyan Air Force, Ministry of Roads, Ministry of State for Defense, East African Portland Cement Co., and Telkom Kenya Ltd.

Goodyear’s subsidiary in Angola bribed employees of the Catoca Diamond Mine, which is owned by a consortium of mining interests including Angola’s national mining company Endiama E.P. and Russian mining company ALROSA.  Others bribed in Angola worked at UNICARGAS, Engevia Construction and Public Works, Electric Company of Luanda, National Service of Alfadega, and Sonangol.

In the accompanying Order, the SEC alleges that:

1. … From 2007 through 2011, Goodyear subsidiaries in Kenya (Treadsetters Tyres Ltd., or “Treadsetters”) and Angola (Trentyre Angola Lda., or “Trentyre”) routinely paid bribes to employees of government-owned entities and private companies to obtain tire sales. These same subsidiaries also paid bribes to police, tax, and other local authorities. In all, between 2007 and 2011, Goodyear subsidiaries in Kenya and Angola made over $3.2 million in illicit payments.

2. All of these bribery payments were falsely recorded as legitimate business expenses in the books and records of these subsidiaries which were consolidated into Goodyear’s books and records. Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance controls at its subsidiaries in sub-Saharan Africa.

Failing to conduct proper due diligence on an African target company is risky at best.  Leaving its day-to-day operations thereafter unchecked and unaltered, however, is the downright equivalent of requesting a cease & desist order (or worse yet, a judgment) from an American or European enforcement agency or court.  As the SEC noted, “the day-to-day operations of Treadsetters continued to be run by Treadsetters’ founders and the local general manager.” (Id. at para. 7).  Goodyear notably “failed to implement adequate FCPA compliance training and controls after the acquisition.”

Luckily for Goodyear (which has since then shed its Kenyan business and is in the process of selling its Angolan interests), the Department of Justice decided not to pursue parallel criminal charges for the same conduct, and so the SEC went ahead solo, culminating in the Order quoted above.

Would Goodyear have benefited from Halliburton?

Generally speaking, a buyer acquires the target’s liabilities — neither the FCPA nor the antitrust laws provide a unique exception to this rule.  A quick look at General Electric’s experience (GE agreed to pay $23.4 million to settle the SEC’s charges, including against two subsidiaries for which GE assumed liability upon acquiring) and eLandia ($2 million payment for its subsidiary Latin Node’s bribery scheme pre-acquisition) amply prove the point.

That said, under certain circumstances where proper and fulsome due diligence is “severely compromised,” a future corporate parent may insulate itself from FCPA liability: flash-back to June of 2008, when the Department of Justice issued valuable FCPA guidance in the form of its Halliburton “opinion procedure release”: In it, the DOJ discussed how it would treat the liability of an acquiring company whose pre-closing investigative ability to conduct full-scale due diligence is, by (foreign) statute or other circumstance, insufficient to guarantee discovery of any existant FCPA liabilities of the acquisition target.  In particular, the DOJ said:

[A]n acquiring company may be held liable as a matter of law for any unlawful payments made by an acquired company or its personnel after the date of acquisition. … Under the
circumstances […] there is insufficient time and inadequate access to complete
appropriate pre-acquisition FCPA due diligence and remediation. As represented by Halliburton, under the application of the U.K. Takeover Code, it has no legal ability to require a specified level of due diligence or to insist upon remedial measures until after the acquisition is completed. As a result, Halliburton’s ability to take action to prevent unlawful payments by Target or its personnel during the period immediately after the closing has been severely compromised. Assuming that Halliburton, in the judgment of the Department, satisfactorily implements the post-closing plan and remediation detailed above, and assuming that no Halliburton employee or agent knowingly plays a role in approving or making any improper payment by Target, the Department does not presently intend to take any enforcement action against Halliburton for any postacquisition violations of the antibribery provisions of the FCPA committed by Target during the 180-day period after closing provided that Halliburton: (a) discloses suchconduct to the Department within 180 days of closing; (b) stops and remediates such conduct within 180 days of closing, or, if the alleged conduct, in the judgment of the Department, cannot be fully investigated within the 180-day period, stops and remediates such conduct as soon as it can reasonably be stopped; and (c) completes its due diligenceand remediation, including completing its investigation of any issues that are identifiedwithin the 180-day period, by no later than one year from the date of closing.

Setting aside the difference in enforcement agencies (SEC in Goodyear vs. DOJ in Halliburton), had Goodyear made an effort similar to that of Halliburton (which, of course, is no stranger to significant FCPA enforcement actions itself (see also here and here on the Bonny Island debacle), despite having sought and obtained this favorable opinion back in 2008), it would have stood to benefit from similar lenience — but only insofar as it concerned initial determination, through due diligence (ideally pre-acquisition, but potentially still within a 180-day window), whether or not its African acquisition posed a corruption risk back in the U.S.

In light of the ongoing nature of the FCPA-violative conduct post-acquisition, however, there appears to be little effort made on behalf of the parent entity to uncover (or, for that matter, halt) the offending actions in Goodyear.  In this regard, notably excluded from the DOJ’s relatively lenient position is, of course, similarly ongoing conduct.  The Department expressly reserves the right to enforce:

(a) any FCPA violations committed by Target during the 180-day period that are not disclosed to the Department during this same time period; (b) any FCPA violations committed by Target at any time where any Halliburton employee or agent knowingly participates in the unlawful conduct; and (c) any issues identified within the 180-day period which are not investigated to conclusion within one year of closing. In no event does this Opinion Release provide any protection for any conduct which occurs after the 180-day period.

Concerns over FCPA & bribery issues prevent African expansion

Misconceptions of real risk limits outside investment in Africa

This headline from today’s Wall Street Journal captured our attention: “FCPA Fears Hinder U.S. Companies Considering Africa“!

It is an interview by Ben DiPietro of Aubrey Hruby, visiting fellow at the Africa Center / Atlantic Council.

Atlantic Council (image via WSJ)

Aubrey Hruby, visiting fellow at the Africa Center at the Atlantic Council.

Ms. Hruby’s key insight shared in the interview is – while perhaps not surprising at all – certainly worth sharing with our AAF readership: Companies subject to the Foreign Corrupt Practices Act (FCPA) perceive themselves as limited in their investment opportunities in the 54 African countries, thereby reducing their overseas competitiveness.  Says Hruby: “General counsels tend to play more of a role in market decisions when it comes to Africa than in other places, and there still is a general stereotype that African countries are very corrupt, though if you look at the Transparency International rankings, many other countries rank higher than African countries in terms of their level of corruption.”

Concerns include the extended families of government employees or leaders, which may create FCPA pitfalls even where there is no intentional bribe or other law-breaking on the horizon — the mere hiring of a consultant with family ties to a government official may be enough to prompt an investigation and incur potential liability.

Her advice to U.S.-based companies is that they should not let the perceived FCPA risk “dominate how they look at the markets” in Africa, and that they “pick partnerships with people who can thoroughly assess the risks. Maybe it’s partnering with an African bank or a local consulting firm or a firm that’s been there for a very long time. They can help you do due diligence on partners, help you identify the right partners and help you overcome concerns with being FCPA compliant.”

In her estimation, “Ninety percent of business in Africa is done cleanly. They really need to know it can be done with serious partners and done in a clean and compliant fashion.”  Her key advice — shared by us at AAF, of course — is to “pick[] the right partners” and to commit to your strategy.

 

 

Thought of the day: Cost of compliance is relative

As former U.S. Deputy Attorney General Paul McNulty has been quoted as saying at a 2009 FCPA conference:

“If you think compliance is expensive, try non-compliance.”

(Note: Mr. McNulty is not the first to use the juxtaposition of costs in this manner.  That honour goes to Derek Bok, also a lawyer and the 25th President of Harvard University, who is quoted as having coined the phrase: “If you think education is expensive, try ignorance.“)