Sovereign Wealth Funds: Contributing to African growth or abetting corruption?

Back in 2016, AAF published a story about Och-Ziff’s FCPA trouble involving, among Congolese diamond mines, the so-called Libyan Investment Authority (LIA).  The LIA was a sovereign wealth fund (“SWF”), recalls Andreas Stargard, an attorney with Primerio Ltd., focused on anti-corruption and antitrust matters in Africa: “In the case of Och-Ziff, the LIA was allegedly implicated in an elaborate corruption scheme, whereby an O-Z employee paid off a third-party agent to ensure the Libyan SWF provided the necessary investment funding.”

SWFStargard’s Primerio colleague, Roger Tafotie, has now published an incisive paper, evaluating the role sovereign wealth funds occupy in Africa.  He notes that SWFs represent “a large and growing pool of savings and, together with national investment funds, have been gaining in prominence over the past few years, especially in natural resource exporting countries of Africa.”

Tafotie2.jpgTafotie continues: “Acknowledging that there is controversy about the relative merits of the SWFs and their added value, my paper discusses the multiple interests of using SWFs by African states, particularly those exporting natural resources. Attempting to contribute to the answer to the question whether African countries need SWFs or not, I argue that a well-structured and governed SWF with a clear and sound mandate and professional management and staffing can serve, along its traditional functions, signaling, capacity-building, and governance purposes in African states. Beyond their role in stabilizing local economies, SWFs can therefore play an important role in fostering economic and social progress as well as governance and political accountability.”

Speaking to AAF, attorney Tafotie, who originally hails from Cameroon and practices both there as well as in the European Union, continues:

The basic idea behind the paper is that SWFs can help address the issue of state capture and/or corruption as I have argued in different parts of the paper.  This is because the establishment of a SWF must be part of a broader package of institutional reforms designed to improve a country’s capacity for resource revenue management and overall governance, these being among the rationales of creating SWFs.

However, it will be naïve not to see that SWFs can aggravate state capture/corruption since it has been demonstrated that in some context, the resilience of resource revenues is of critical importance to maintaining the existing structure of political power and, consequently, there is an incentive for the ruling elites to effectively manage resource wealth over the long term.

That is why I have expressly mentioned that: “unless numerous accountability mechanisms — that include the judiciary, legislature, regulatory agencies, external auditors, and civil society organizations — are adopted by resource-rich countries for monitoring the performance of their SWFs, a SWF should not necessarily be an institutional innovation that counteracts the resource curse and the concentration of power in the hands of a few” (i.e. contributing to state capture).

In addition, I consider SWFs as learning organizations. In this respect, SWFs can undoubtedly contribute to educate on public resources management and therefore help fighting against mismanagement and corruption. In fact, empirical researches have convincingly demonstrated that the correlation between development and good political outcomes occurs because more education improves political institutions.



By Peter O’Brien

Cases of corruption are so common that you need a good excuse to write about another one. So how do we justify commenting on the South African scandals involving the Gupta family, at least one of the country’ most significant state-owned enterprises (SOE), a slew of well-known international firms, prominent local law offices, the uses of public law and actions of key monitoring and regulatory bodies –and ultimately the chronic misuse of political power for private gain? The justification is that what has been happening in RSA reveals in the clearest and richest form the way corruption behavior and patterns evolve across the globe. The Gupta model allows us to spell out exactly what to expect elsewhere. In a word, Gupta is generic, it is the DNA for the species.

Where should we start among the several streams that form part of the big river that is Gupta?  Let’s take a wedding as entry point. In 2013, four partners of KPMG South Africa attended a wedding, held in Sun City and spread over four days, of a prominent Gupta family member. The reported bill for the event was around R30mn. That cost was put down in the 2014 accounts, audited by KPMG South Africa, as a business expense of an RSA registered company, Linkway Trading, controlled by the Gupta family.  Linkway had received funds, to the tune of more than $8mn, from another Gupta controlled entity called Estina, which is a dairy producing enterprise in the Orange Free State. Estina itself was at that time receiving substantial subsidies (reported by 2014 to amount to some R210mn) from the Orange Free State government.

Examination of emails obtained from KPMG showed that, from 2008 onwards, the firm had helped the Gupta group to establish at least 36 entities, mostly shell companies set up in Dubai. It appears that Linkway had received the money for the wedding from one such firm – after transferring at least part of the Estina subsidy cash to Dubai. In short: Orange Free State government money intended to help the dairy industry in that State was being spent to pay for a wedding in the Gupta family, that expenditure was then made tax deductible for a Gupta owned firm audited by KPMG South Africa, and partners of KPMG were invited to the wedding financed by the subsidy money (at which wedding it seems likely that more than the bride and groom were being toasted). Who was being milked in the whole process? Answer: the tax payers in RSA.

The Independent Regulatory Board for Auditors (IRBA) in South Africa was already uneasy about KPMG/Gupta group relations in 2014, and began enquiries in that year. In 2015 KPMG itself was also clearly feeling jittery, so it terminated its 15 year relationship with Linkway. While IRBA work was going on, KPMG involvement in another serious matter, the so-called SARS (South Africa Revenue Service) case, was under scrutiny and the firm claims that it terminated that relationship as well in March 2016. By the following month, April 2016, the Head of KPMG in RSA decided to terminate services to Gupta related firms, citing “association risk” to other KPMG business. Furthermore, the Companies and Intellectual Property Commission (CIPC), the official body responsible for compliance with the RSA Companies Act, began to check behavior of three KPMG Directors to discover whether that was compliant with legal stipulations. As of now (late September 2017), even the Institute of Directors of Southern Africa has suspended all “cobranding activities” with KPMG, to limit possible image damage to other firms stemming from association with that entity. Corporate corruption is clearly a transmissible disease. Once a virulent strain is identified, everyone seeks to protect themselves.

The second major process concerns McKinsey, Eskom (a major, perhaps the major, SOE), and Trillian Capital Partners (a private RSA financial advisory firm linked with the Gupta family). Here the corruption chain centers around public tenders and the allocation of monies related to them. Some three years ago McKinsey was awarded contracts by Eskom worth around one half of McKinsey’s total revenue in the country. In 2015-2016, approximately 30% of this contract money was paid to Trillian, allegedly because Trillian was a company subcontracted by McKinsey to help fulfil the undertakings with ESKOM. The investigative work surrounding these transactions, work which includes the Budlender Report delivered on 29 June 2017 to the current non-executive President of Trillian, Tokyo Sexwale, indicates very strongly that Trillian has not performed any substantive work in return for the very large amounts of money it has received (based on accounts data, paid invoices and similar information, ESKOM has paid approximately R1.6bn to McKinsey and Trillian).

McKinsey must have realized at a relatively early stage that the whole process was dubious. In March 2016 it ended its relationship with Trillian, and in June 2016 did the same with ESKOM. When, at the beginning of 2017, Budlender was asked to investigate Trillian dealings, the issues he was requested to examine included (but were not confined to) the politically exceptionally delicate matter of the dismissal, in 2014, of the then RSA Finance Minister Nene and his replacement by Minister Van Rooyen. Specifically, Budlender was asked to determine whether the CEO of Trillian had prior knowledge of the dismissal; if so, whether Trillian had used such information for commercial purposes; whether Trillian had provided the Special advisor to the new Finance Minister and that this person would arrange for public tenders from the National Treasury and SOEs to be directed (at least in part) towards Trillian; and whether Trillian had subsequently invoiced some SOE for work which had not been done.

Budlender’s report, of 29 June 2017, lists a veritable litany of instances where Trillian totally failed to cooperate with an enquiry which had been launched by the firm itself. The mechanisms through which it stonewalled, employing the services of a well- known RSA law firm to do this, are set out in the report. Given non-cooperation, definitive proof of the various illegalities alleged to have been committed by Trilian, ESKOM officials, McKinsey and possibly others, has so far proved impossible to obtain. It is for that reason that Budlender concludes, inter alia, that an official enquiry is required which would thus allow persons and documents to be sub-paened.

This month, September 2017, Corruption Watch South Africa has laid Corruption and Bribery Charges against McKinsey in front of the US Justice Department. On the basis of the material summarized here, plus additional information, McKinsey is being accused under the Foreign Corruption Practices Act. Corruption Watch has noted that a number of McKinsey staff had not been in favor of the linkages with Trillian but that their misgivings had apparently been ignored by senior management.

The third issue concerns a very well- known public relations firm called Bell Pottinger. In January 2016 it was hired by a private South African firm, Oakbay Investments Productivity Limited. Oakbay also has significant links with the Gupta family. Bell Pottinger was asked to work on two things: corporate communications, and a campaign to promote “economic emancipation”. This fine sounding phrase was a front for an effort to shift the investment field in  favor of certain groups in the population. Both the aim of the campaign, and the specific way it was carried out, led to Bell Pottinger being accused of fueling racial tensions in RSA.

Bell Pottinger has claimed that it only took on these “high risk clients” and “high risk mandates” after much discussion at top level. It seems safe to say that the heads of the company figured that the prospective rewards justified the risks. The work continued until April 2017, by which time there was so much adverse publicity hitting this public relations firm that it called a halt. It asked an RSA law firm, Herbert Smith Freekills LLP, to look into possible failings of its decision making and monitoring procedures. The brief summary of that report which is publicly available concludes that there was indeed poor management and poor monitoring. Bell Pottinger has responded by saying that it will “develop an ethics committee”, “develop and train staff on social media policy”, and “reissue corporate policy in a new employee handbook”. This verbiage carries as much conviction as the English Prime Minister (still, as I write) Theresa May, claiming she wants a “strong and special relationship with the EU”.

The Democratic Alliance of South Africa, noting what had happened, accused Bell Pottinger of “exploiting racial tensions on behalf of the Gupta family”, and took its complaint to the Public Relations and Communications Association (PRCA). This an international professional body comprising some 20,000 members in 55 countries. It seeks to create, maintain and monitor the highest professional standards in this ever more delicate field. PRCA began its investigation on 5 July, and both the Democratic Alliance and Bell Pottinger presented written and oral evidence. The Professional Practices Committee of PRCA delivered its verdict on 18 August. Bell Pottinger appealed the verdict but the Board of PRCA confirmed the verdict on 4 September.

The conclusions are damning. Bell Pottinger was found to have breached four very important clauses of the PRCA code of conduct. The behavior of the firm was held to have been faulty at every level and to have brought the reputation of the industry into disrepute. Bell Pottinger has been expelled as a member of the PRCA. This is the most severe penalty ever imposed in the near 50 year existence of PRCA.

The three cases allow us to describe the key features of the anatomy of corruption.

First, public and private entities, and their governing bodies/principal officials, are always tempted to sail very close to the wind. Enough prospective rewards will induce almost every group to take major risks.

Second, where there is political protection from the top of the State, the chains involving Ministries, SOE, Private firms and sometimes legal entities can divert and misuse public monies.

Third, the costs suffered by an economy/society will usually come in various forms. These include direct theft of funds; excess costs of investments and operations financed by public funds; loss of confidence in public institutions; and international damage to the reputation of the country.

Fourth, the reactions of private firms implicated in the gathering storms are too little, too late and too timid. This is true for major international groups as well as national firms.

Fifth, it follows that self-regulation and self-correction are non-starters. Without sharp sanctions from external bodies, that could in some instances be industry related, the patterns will continue.

Sixth, it is paradoxical that greed (or hubris) may often be the best hope to stem the corruption. As those practicing dishonesty become more successful, so they become over confident. It is when over stretch occurs that there is the best chance for crippling the corruption.

Seventh, public actions, usually channeled through active organizations and NGOs, can be effective. Still more, they can also succeed in securing international penalties for actions carried out in a specific country. International firms will have to pay greater attention to that kind of “collateral damage”. Their ability to engage in internal monitoring of their whole networks must be improved – “no affiliate is an island”.

This analysis has used three examples from RSA where a common theme has been the influence exerted by a powerful family, the Guptas, and their linkage with the political pinnacle of the State. But, alas, there are countless similar examples, in countries across the world and at every level of economic development. Evidence seems to suggest that the incidence of this behavior is increasing, despite the vigilance and activism of so many people and organizations.

How can we improve capacities to prevent and correct corruption? In the past, efforts centered around four things – the moral, the economic, the political, and the legal. The moral focused on the ethics of behavior. Individuals were supposed to have sufficient personal and professional principles such that their behavior would reject corrupt practices. The economic focused on market morphology. Companies would be kept at “arms -length” from each other, so that competition would prevent carve-ups. Still today, competition law exists primarily to preserve that kind of corporate distance. The political focused on the separateness of private from public decision making, and on the separation of the executive, legislative and judicial arms of government. Finally, the legal focused on assessing cases where corruption was thought to have occurred, determining appropriate penalties, and ultimately feeding back findings so that law making could be improved.

Across the globe, those four areas have come under ever greater siege. There are no reliable “barriers to corruption” under any of those headings. Seemingly infinite drafting of codes of voluntary conduct, regulations, national laws, and international agreements, seems to have provided precious little protection. The odd case might be prevented, the odd penalty might frighten people for a while. Yet that’s about the sum total. RSA itself will, as of 2023, introduce mandatory audit firm rotation every 10 years (thereby echoing a similar step taken in the EU earlier this decade). But this is a very timid move, and nobody seriously expects it will make much difference (either in RSA or the EU).

Perhaps it is time to long at the problem from a different angle. Which one? Corruption comes when groups, institutions and individuals that should be operating independently decide to collude for mutual benefit. So would it be smart for actors on the other side to collaborate a lot better? Put it this way. Suppose official legal bodies started to work much more closely with private associations and the media (the latter including activist organizations) to prevent malpractice, expose it where it does occur, and devise fresh ways of retribution on those responsible for corruption. Of course there is a certain degree of collaboration already (even including international collaboration, where the RSA examples here are revealing). But it seems the scope for it is considerable. It won’t take us to any ideal situation – the risk/reward  link will always be a major temptation. Still, things might improve a bit, and that is what we must strive for.


Peter O’Brien, Bratislava, 24 September 2017




Och-Ziff’s African (formerly lucrative) nightmare

Och-Ziff Capital Management Admits To Role In Africa Bribery Conspiracies And Agrees To Pay $213 Million Criminal Fine

From the U.S. Attorney’s Office for the Eastern District of New York: “Och-Ziff Enters into 3-Year Deferred Prosecution Agreement; Och-Ziff Subsidiary Pleads Guilty to Conspiracy to Violate the FCPA”

BROOKLYN, NY – The U.S. Attorney’s Office for the Eastern District of New York and the Criminal Division, Fraud Section are prosecuting a New-York alternative investment and hedge fund manager, Och-Ziff Capital Management Group, LLC (Och-Ziff), which has agreed to pay a $213 million criminal penalty and enter into multiple criminal resolutions with the Department of Justice to resolve charges related to widespread bribery of officials in Libya and the Democratic Republic of Congo.  As part of the resolution, Och-Ziff, the publicly traded parent company, entered into a three-year deferred prosecution agreement (DPA) with the Department of Justice.  An Och-Ziff subsidiary, OZ Africa Management GP, LLC (OZ Africa), pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA).  Today’s guilty plea and proceedings in connection with the DPA took place before United States District Judge Nicholas G. Garaufis in the U.S. District Court for the Eastern District of New York.  Sentencing for OZ Africa has been scheduled for March 29, 2017, at 2:00pm.

U.S. Attorney Robert L. Capers of the Eastern District of New York, Principal Deputy Assistant Attorney David Bitkower of the Justice Department’s Criminal Division, William F. Sweeney, Jr., Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office (FBI), and Richard Weber, Chief, Internal Revenue Service, Criminal Investigation (IRS-CI), made the announcement.

“Och-Ziff, one of the largest hedge funds, positioned itself to profit from the corruption that is sadly endemic in certain parts of Africa, including in Libya, the Democratic Republic of the Congo, Chad, and Niger.  Despite knowing that bribes were being paid to senior government officials, Och-Ziff repeatedly funded corrupt transactions.  One Och-Ziff employee was so bold as to order the removal of language from their African joint venture’s internal audit report that called for an investigation of suspected bribery payments by a business partner.  Today’s corporate resolutions, which include a more than $213 million criminal penalty and an independent compliance monitor, hold Och-Ziff accountable for placing profits above the law and will help ensure that the conduct brought to light here never happens again at this company,” stated United States Attorney Capers.

“This case marks the first time a hedge fund has been held to account for violating the Foreign Corrupt Practices Act,” said Principal Deputy Assistant Attorney General Bitkower.  “In its pursuit of profits, Och-Ziff and its agents paid millions in bribes to high-level officials across Africa.  By exposing corruption in this industry, the Criminal Division’s Fraud Section continues to root out wrongdoing of all types in the financial sector.”

“Gaining the upper hand in a business venture by engaging in corrupt practices is bribery in its purest form,” said FBI Assistant Director in Charge Sweeney.  “Doing so with the intention of influencing a foreign official in his or her capacity is nothing short of corruption.  In this scheme, payments of millions of dollars were paid out to senior officials within certain parts of Africa in exchange for access to profitable investment opportunities.  This type of behavior can’t and won’t be tolerated.  I commend the investigators and prosecutors who continue to work together at home and abroad to vigorously enforce the law within the confines of the Foreign Corrupt Practices Act.”

“Today’s plea and deferred prosecution agreement result from the unraveling of complex financial transactions orchestrated by Och-Ziff Capital Management Group, LLC and its subsidiary to facilitate illegal payments to foreign government officials,” said IRS-CI Chief Weber.  “IRS-CI will continue to investigate pervasive bribery schemes used by corporations in the pursuit of attractive international investment opportunities.”

Under the DPA, Och-Ziff admitted to multiple conspiracy charges in a four-count criminal information, including two counts of conspiracy to violate the anti-bribery provisions of the FCPA, one count of falsifying its books and records and one count of failing to implement adequate internal controls.  Additionally, OZ Africa pleaded guilty to conspiring to bribe senior officials in the Democratic Republic of Congo in connection with obtaining valuable mining concessions.  Collectively, Och-Ziff and OZ Africa agreed to pay a criminal penalty of $213,055,689, and Och-Ziff agreed to retain an independent compliance monitor for a period of three years.

The DRC Bribery Scheme

Between 2005 and 2012, a businessman operating in the DRC with significant interests in the diamond and mining sectors in the DRC paid more than one-hundred million dollars in bribes to DRC officials for special access to attractive investment opportunities.  In late 2007, Och-Ziff employees began discussions to partner with the businessman based upon his special access to these investment opportunities.  Between 2008 and 2011, Och-Ziff entered into several DRC-related transactions with this businessman despite the fact that at least two Och-Ziff employees knew, and a senior Och-Ziff employee believed it was likely, that the businessman gained access to these attractive investment opportunities by making corrupt payments to government officials.  Och-Ziff personnel funded these transactions understanding that Och-Ziff’s funds would be used in part to pay substantial sums of money to high ranking DRC officials to secure access to and preferential treatment for the investment opportunities.  In late 2008, after an Och-Ziff employee was alerted that an audit of the businessman’s records revealed payments for DRC officials, that employee instructed that any references to those payments be removed from a final report of the audit.  The businessman did, in fact, make corrupt payments to and for the benefit of DRC officials to secure the investment opportunities.

The Libya Bribery Scheme

Separately, but also beginning in 2007, a senior Och-Ziff employee engaged a third-party agent to assist the company in securing an investment from the Libyan sovereign wealth fund, the Libyan Investment Authority (LIA).  At the time of the engagement, the senior Och-Ziff employee knew that the agent would need to make corrupt payments to Libyan officials to secure that investment.  The agent was engaged without formal approval by Och-Ziff and without any due diligence conducted on the agent by Och-Ziff.  From February 2007, the agent worked on behalf of Och-Ziff to obtain an asset placement from the LIA, including setting up a meeting between the senior Och-Ziff employee and the Libyan official who was empowered to make investment decisions for the LIA.  In late November 2007, Och-Ziff received a $300 million investment from the LIA into Och-Ziff hedge funds.  Shortly thereafter, Och-Ziff entered into a consulting agreement to pay a sham “finder’s fee” of $3.75 million, knowing that all or a portion of the fee would be paid to Libyan officials in return for their assistance in obtaining the LIA’s investment.  The agent did in fact make corrupt payments to and for the benefit of Libyan officials to influence the LIA’s investment.

Internal Controls Failures and Falsified Books and Records

Further, Och-Ziff admitted that it knowingly and willfully falsified and caused to be falsified records related to its retention and payment of the agent in Libya.  The falsified records concealed the true purpose of the payments, which purported to be for consulting purposes, but which actually would be used for corrupt payments to Libyan officials in return for their assistance in obtaining the LIA’s investment.  Och-Ziff also failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent the misappropriation of assets by its employees, agents, and business partners.  As a result, the company failed to prevent bribe payments from being made in the DRC, Libya, as well as in Chad and Niger, where an Och-Ziff joint venture made mining-related investments.  For all the criminal conduct included in these resolutions, Och-Ziff reaped more than $210 million in illegal profits.

The Corporate Resolutions

The Department entered into this resolution, in part, due to Och-Ziff’s failure to voluntarily self-disclose the offense conduct and the seriousness of the conduct including the high-dollar amount of bribes paid to foreign officials and involvement by a high level employee within Och-Ziff.  Notwithstanding, Och-Ziff received a 20 percent reduction off the bottom of the U.S. Sentencing Guidelines range for its cooperation with the government’s investigation.    Och-Ziff also committed to continue to enhance its compliance program and internal controls, to cooperate with the Department in ongoing investigations, and to retain an independent compliance monitor pursuant to the terms outlined in the DPA.

*          *          *

In connection with the government’s investigation, Samuel Mebiame, a Gabonese national, was charged on August 16, 2016, by criminal complaint with conspiring to bribe foreign government officials to obtain mining rights in Chad and Niger, as well as Guinea.[1]  According to documents filed in court, Mebiame worked as a “fixer” for a mining company that was owned by a joint venture between Och-Ziff and a Turks & Caicos incorporated entity.  In that capacity, Mebiame paid bribes to high-ranking government officials in Niger and Chad to obtain the mining rights.  During the charged conspiracy, Mebiame repeatedly traveled to the United States to further the scheme, including to meet with coconspirators at the Plaza Hotel in New York and to start companies and open bank accounts through which he could receive international wire transfers from coconspirators.

*          *          *

In a parallel proceeding announced today, the U.S. Securities and Exchange Commission (SEC) filed a cease and desist order against Och-Ziff Capital Management Group LLC and OZ Management LP, whereby Och-Ziff agreed to pay approximately $199 million in disgorgement to the SEC, including prejudgment interest.  The total amount of the global resolution is thus approximately $412 million.

The FBI’s New York Field Office and IRS-CI’s New York office are investigating the case.  The department appreciates the significant cooperation and assistance provided by the SEC in this matter.  The Swiss Federal Office of Justice, the British Virgin Islands Central Authority, the Maltese judicial authorities and authorities in Jersey and Guernsey also provided assistance.

*          *          *

The case is being prosecuted by Assistant U.S. Attorneys James P. Loonam, Jonathan P. Lax, and David Pitluck of the Business and Securities Fraud Section of the U.S. Attorney’s Office for the Eastern District of New York, and Assistant Deputy Chief Leo Tsao and Trial Attorney James P. McDonald of the Criminal Division’s Fraud Section.  The Criminal Division’s Office of International Affairs provided significant assistance in this matter.

“Apartheid stole the past, corruption steals our future” – South Africa protests graft

Wake-up call for Zuma government?  Unlikely as ANC battles crises on many fronts

On September 30, 2015, several major South African cities saw a significant turnout of the Republic’s denizens taking to the streets, protesting rampant perceived corruption in their country: demonstrations took place, inter alia, in Pretoria, Cape Town, Polokwane, and Durban.  They numbered in the tens of thousands, signifying for the first time in years a substantive expression of unhappiness with the ruling African National Congress‘s politics and handling of graft.

Of note here is not merely the protest against problems of purely domestic or otherwise internal corruption (case in point, President Zuma’s infamous $22m+ renovation of his personal Nkandla country homestead), but the broader picture of governmental fraud, waste and abuse — notably including those involving foreign entities.

As The Economist poignantly observed in its current edition, “[t]housands marched in South Africa against corruption. The protest coincidentally took place soon after Hitachi, a Japanese engineering firm, agreed to pay $19m to settle charges brought by American regulators over payments made to the African National Congress, South Africa’s ruling party, in connection with contracts to build power stations.

The Hitachi investigation, spearheaded by the U.S. Securities and Exchange Commission (not the Department of Justice in this instance), is a fascinating one, and hits South Africans in a particularly hurtful spot: electricity has been scarce for years, and its availability has reached a new nadir in 2015.  For this particular industry to be affected by proven corruption is (if that is possible) “worse” for South Africans than the run-of-the-mill scandal: virtually every citizen has experienced dark nights, marred by rolling black-outs, which have necessitated the need for expensive household generators.

A “success fee” to the “Chancellor”…

The SEC’s settlement and complaint (read here) allege truly scandalous, yet entirely classic, corrupt conduct.  They read, in relevant part:

In 2005, Hitachi created a subsidiary in South Africa for the purpose of establishing a local presence in that country to pursue lucrative public and private contracts, including government contracts to build two new major power stations.

Hitachi sold 25% of the stock in the newly created subsidiary to Chancellor House Holdings (Pty) Ltd. (“Chancellor”), a local South African company that was a front for the African National Congress (“ANC”), South Africa’s ruling political party. Hitachi’s arrangement gave Chancellor- and by proxy the ANC- the ability to share in the profits from any power station contracts secured by Hitachi. Hitachi also entered into an undisclosed “success fee” arrangement with Chancellor, wherein Chancellor would be entitled to “success fees” in the event that the contract awards were “substantially as a result” of Chancellor’s efforts.

During the bidding process, Hitachi was aware that Chancellor was a funding vehicle for the ANC. Hitachi nevertheless continued to partner with Chancellor and encourage Chancellor’s use of its political influence to help obtain the government contracts.

As a result, Hitachi was awarded power station contracts in South Africa worth approximately $5.6 billion. In April and July 2008, Hitachi paid the ANC- through Chancellor- “success fees” totaling approximately $1 million.

Hitachi’s South African subsidiary inaccurately recorded its “success fee” payments to Chancellor as “consulting fees” in its books and records for the year ended December 31, 2008. The inaccurate books and records of Hitachi’s subsidiary were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2009, which were filed with the Commission.

In 2010, Hitachi’s South African subsidiary also inaccurately recorded a dividend worth over a million dollars to be paid to Chancellor, its 25% shareholder. The journal entry recorded this dividend as “Dividends Declared” in the subsidiary’s books and records for the year ended December 31, 2010. The books and records did not reflect that the dividend was, in fact, an amount due for payment to a foreign political party in exchange for its political influence in assisting Hitachi land two government contracts. The subsidiary’s inaccurate books and records were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2011, which were filed with the Commission.

Andreas Stargard, an attorney with Africa-based consultancy firm Pr1merio, observes that:

“Hitachi’s corporate tag line reads ‘inspire the next…’ — one can only hope that the inspiration resulting from this particular corruption scandal, is not one of imitation by others, but rather avoidance of the same mistakes.  On the local South African (government) front, we view it as  unlikely that these protests, well-intentioned as they may be, will have much of an impact on actual politics in Pretoria.  President Zuma is battling too many fires to focus on this particular issue in any different manner than what he has done thus far, which is simply firing those responsible for, and competent at, uncovering graft.”

Nota bene, the Hitachi electricity-generating scandal is not all that has rocked South African corruption news lately — just over a week ago, the opposition party Democratic Alliance launched corruption allegations over Danny Jordaan’s involvement with the FIFA mega-scandal (he was the head of the country’s 2010 football World Cup).

Stay tuned for more…

“Just a math issue”: Anti-Corruption Efforts in Kenya take Center-Stage for Obama

File Jul 25, 11 51 17 AM

Anti-Corruption Efforts will Require some “Visible Prosecutions”

President Obama opined that it was “absolutely the right thing to do for President Kenyatta [to] emphasize” the Kenyan government’s stepped-up anti-corruption efforts.  He called public corruption potentially “the biggest impediment to Kenya growing even faster.”

“Just a math issue”

Business efforts being “constantly sapped” was a real risk to foreign direct investment, as Obama pointed out: “International businesses are concerned if the price of investing in Kenya is 5-10% going to some place that doesn’t have anything to do with the project.  It’s just a math issue.”

Acknowledging that corruption is not only an African problem (noting that even the U.S. and his hometown of Chicago had faced significant public fraud & bribery problems), the President highlighted what AAF has often stated: anti-corruption efforts imply serious cultural changes and necessary at both the top as well as the grassroots levels.  They will “require some change in habits,” and most notably “require some visible prosecutions,” according to Obama.

It is not hard to predict that President Kenyatta’s cabinet will see more shake-ups as a result of the promised stepped-up anti-corruption efforts.

The Ethics and Anti-Corruption Commission offices in Nairobi

As we noted in “Increased anti-corruption enforcement across Africa?“:

“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.

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.



FCPA investigation hits FedEx in Kenya


Kenya and FedEx: Possible breach of FCPA anti-bribery provision

According to Wall Street Journal and Law360 reports, two powerhouses (one country, one company) are involved in a recent self-reported FCPA violation: FedEx Corporation has reported possible infractions of the foreign anti-bribery law in Kenya to the United States Department of Justice.

According to the articles, “FedEx says it told the authorities at the DOJ and the SEC that it had received an email in December outlining allegations of potential bribery in the Republic of Kenya and possible violations of the FCPA. The shipping giant has been investigating the matter since 2013 but has been unable to substantiate the reported claims, the company said.”

“FedEx informed the DOJ and SEC of these allegations shortly after their receipt and have been engaged in a cooperative dialogue with both agencies since that time,” a FedEx spokesperson told Law360 late Tuesday night. “To date, FedEx has not found anything to substantiate the allegations, but the investigation is ongoing.”

The company was allegedly tipped off anonymously late last year, involving claims made in an e-mail (which the sender also threatened to send to the DOJ and Securities and Exchange Commission) that its on-the-ground agent, Pan Africa Express, was implicated in bribing Kenyan government officials in return for favorable conduct, such as “customs officials to clear shipments without inspection, as well as to government vehicle inspectors and others, the person alleged,” according to the WSJ article.

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.“)

“I will be disbarred” — Final bit of Nigeria gas bribery scheme blows up

Natural gas bribery scheme leads to attorney disbarment: FCPA forfeiture of $148+m, 2 years prison, disbarment

After being sentenced by a Texas court to 21 months for Foreign Corrupt Practices Act violations committed during his tenure as KBR Inc.’s attorney, 65-year old Jeffrey Tesler, prone to wearing hats, has now been disbarred by a Disciplinary Tribunal of the Solicitors Regulation Authority for the same conduct: fronting illegal payments on behalf of a consortium of international construction firms in order to obtain approx. $6bn worth of construction work at the Bonny Island gas facility – one of the largest civil construction projects worldwide in 1993.

Bonny Island facilities, Nigeria

“I will be disbarred”

British-Israeli (now former) solicitor Tesler, “who operated from run-down offices in Tottenham, north London, admitted that he acted as a middleman for the consortium and routed the payments through bank accounts in Monaco and Switzerland between 1994 and 2004,” according to reports.  “US prosecutors discovered that Tesler arranged for $1m in $100 notes to be loaded into a pilot’s briefcase and then passed on to a politician’s hotel room to finance a political party in Nigeria.”  (See U.S. v. Tesler et al., case number 4:09-cr-00098, in the U.S. District Court for the Southern District of Texas).  At his sentencing hearing before a Texas judge, Tesler predicted his own professional fate by saying, “… I will be disbarred.”