Minimising corruption risks in African investment opportunities

July 2014  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

July 2014 Issue

July 2014 Issue


Sub-Saharan Africa is poised for major economic growth. Yet of the legal risks facing investors and businesses that wish to take advantage of these growing investment opportunities, corruption is the most significant. Involvement with bribery and other forms of corruption – or even failing to prevent bribery from occurring – can lead to criminal liability for individuals and companies alike. Africa – which presents one of the more attractive investment opportunities in the world – faces serious issues with entrenched corruption, and avoiding corruption must be part of any investment plan involving Africa.

The International Monetary Fund predicts that by 2015, seven of the 10 fastest growing economies will be in sub-Saharan Africa, outpacing Asia as the fastest growing region in the world. For example, the Nigerian economy is expected to be one of the largest in the world by 2050. Booming economies in Nigeria and elsewhere are expanding investment opportunities, especially in the infrastructure, banking and consumer-facing sectors, while opportunities in extractive industries, such as oil and gas and mining, remain robust. Foreign direct investment in sub-Saharan Africa is also becoming increasingly diversified, focusing on less capital-intensive industries such as manufacturing and seeking to meet the needs of the expanding consumer base in the region.

Many sub-Saharan economies are perceived to have serious corruption problems. Transparency International’s Corruption Perceptions Index is widely used as a measure of corruption risk in emerging markets. According to its surveys, 90 percent of sub-Saharan Africa is perceived to have entrenched corruption. Comparatively, 64 percent of Asian countries are perceived to have such entrenched corruption. The level of corruption varies from country to country. Botswana is one of the less corrupt countries in the world, ranking 30th out of 177 countries in 2013 and ranking higher than Italy, Spain and Poland. Other sub-Saharan economies present a more moderate corruption risk. For example, Ghana, South Africa and Senegal rank on par with other emerging markets such as Saudi Arabia, Brazil and China. Importantly, corruption problems are pronounced in many of the African countries that present the most attractive investment opportunities, including Nigeria, Angola, Tanzania, Kenya and Uganda. For example, approximately 45 percent of respondents surveyed in Kenya indicated that they had paid a bribe in 2010 and over 50 percent of the population believed corruption had worsened or stayed the same over the preceding three years.

Limiting corruption, and at a minimum ensuring adequate controls to prevent corruption, are vital steps towards minimising exposure to criminal sanctions such as fines and incarceration. The UK has one of the most comprehensive and wide-ranging anti-corruption laws in the world. Effective 1 July 2011, the UK Bribery Act establishes four punishable offences related to the payment and receipt of bribes. Both offering and receiving a bribe are criminalised, and there is a separate offence for bribing a foreign official. Most significantly, the Bribery Act creates a strict liability offence for any company that fails to prevent anyone performing services on its behalf (including employees, subsidiaries, and certain third parties) from paying a bribe. The only defence to this crime is if the business can prove that it had ‘adequate procedures’ in place to prevent bribery.

The jurisdictional reach of the Bribery Act is wide-ranging and is designed to address criminal behaviour that may occur in any part of the globe. For the bribery-related offence, prosecution can occur in the UK if any act or omission that forms part of the crime takes place within the UK. For example, a citizen of an African nation who agrees to accept a bribe while at a meeting in London could be prosecuted under the Bribery Act. The law also allows for prosecution when acts are committed wholly outside of the UK by individuals and companies that have a ‘close connection’ with the UK, including British citizens, residents, corporations and Scottish partnerships. Thus, a British citizen who engages in bribery while abroad can be prosecuted under the Bribery Act even if no action related to the bribe occurred on British soil.

The strict liability offence for failing to prevent bribery is also broad in application. Prosecutions can be brought against non-UK companies for conduct that occurs anywhere in the world if the company ‘carries on a business’ or part of a business in the UK. The exact parameters of what it means to carry on a business in the UK have yet to be defined by British courts.

There have been few chances to interpret the parameters of the Bribery Act. So far there have been no criminal convictions of corporations or high-ranking executives under the law. Due to funding difficulties, there exists a perception that the SFO is currently unable to pursue multiple, simultaneous investigations into corporate misbehaviour. However, investors should assume that this current funding situation in no way lowers the risk of criminal prosecution. In fact, the cash-strapped SFO has recently been given several million pounds in so-called ‘blockbuster’ funding to pursue its investigation into Rolls Royce Holdings PLC. Additionally, the SFO has recently implemented a new Deferred Prosecution Agreements Code of Practice, which encourages corporate cooperation, and will allow the SFO to investigate corruption even with limited financial resources. Further, there is no time limit on when the SFO can pursue a criminal case under the Bribery Act, meaning the SFO could initiate an investigation several years after any conduct has occurred. For example, some of the alleged misconduct in the Rolls Royce investigation took place more than 10 years ago.

Involvement with corruption in sub-Saharan Africa could also subject investors to prosecution in non-UK jurisdictions. Most significantly, UK investors could find themselves enmeshed in an investigation by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). These agencies are responsible for enforcing the Foreign Corrupt Practices Act (FCPA). Broadly speaking, the FCPA’s anti-bribery provisions prohibit authorising, offering, promising or paying money or anything else of value to a ‘foreign official’ in order to influence that official’s actions, or to otherwise secure (or retain) an improper business advantage. Similar to the Bribery Act, the jurisdictional reach of the FCPA is far-flung and designed to cover conduct involving entities, investors and governments throughout the world. Without realising it, a UK investor could find himself exposed to an investigation – or prosecution – in the United States.

UK investors can find themselves subject to the FCPA due to activity with merely a tangential connection to the US. An officer, director, employee or third-party agent of an issuer of securities on a US stock exchange – including any issuer of US-registered ADRs – can be subject to prosecution for FCPA violations. Thus, an individual may be liable for an FCPA violation even if he or she has never travelled within the US or worked for a US-based company. Similarly, the FCPA prohibits using any ‘instrumentality’ of interstate or foreign commerce in furtherance of a violation of the FCPA. Thus, sending an email or making a call while in the United States could be enough to establish jurisdiction. Moreover, investors could potentially be prosecuted in the US even after resolving a similar matter in the UK. FCPA investigations can directly follow an investigation by UK authorities because overseas prosecutions are typically not considered to be the ‘same offence’ under the double jeopardy principles of the US Constitution. As part of the broad enforcement of the FCPA, British executives and attorneys have been extradited from the UK to the United States to face prosecution for FCPA violations and other offences.

 Fortunately, there are a number of concrete steps investors can take to mitigate corruption risks when investing in sub-Saharan Africa. Prosecutors in both the UK and the US look for similar hallmarks of a culture of compliance and anti-corruption controls. As an initial step investors should conduct a thorough due diligence investigation into any investment target. Such due diligence is one way that a company can establish that they have ‘adequate procedures’ in place to prevent bribery, a defence under the Bribery Act. Similarly, a rigorous due diligence process is one factor that US prosecutors may consider before bringing charges. In many countries, investors will need to partner with local agents, vendors and stakeholders. In fact, many local laws require foreign investors to engage local partners either for legal or commercial reasons. Nigeria, for its part, has several local content requirements that govern investment into its oil and gas sector. Similarly, South Africa’s Black Economic Empowerment program requires certain firms to hit employment, ownership and management targets concerning the involvement of black South Africans. To comply with these laws, while not falling afoul of the Bribery Act or the FCPA, investors should first conduct a rigorous review of any local partners.

Second, investors should ensure they have strong representations and warranties in all purchase agreements, as well as agreements with agents, vendors or investment partners. Investors should push for audit rights in agreements with high-risk parties such as local distributors and wholesalers. Third, investors and their underlying business investments should adopt and enforce a comprehensive compliance program that takes into account any relevant diligence or ongoing monitoring findings. These compliance programs should be designed to ensure compliance both by local subsidiaries operating in Africa as well as any distributor, joint venture partner or high-risk vendor. Taking these concrete steps will allow investors to tap into the growing opportunities in sub-Saharan Africa, while minimising exposure to corruption risks and criminal prosecution.

 

Alexandre Rene, Kirsten Mayer and Amanda Raad are at Ropes & Gray LLP. Mr Rene can be contacted on +1 (202) 508 4812 or by email: alexandre.rene@ropesgray.com. Ms Mayer can be contacted on +1 (617) 951 7753 or by email: kirsten.mayer@ropesgray.com. Ms Raad can be contacted on +44 (0)20 7822 2415 or by email: amanda.raad@ropesgray.com.

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