New Opportunities, But Risks Remain

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According to the World Bank, GDP growth (5.3%) in sub-Saharan Africa will outpace that of developing countries such as Brazil (4.4%) and Russia (4.2%) in 2011. Combined with looming elections in Tunisia and Egypt, and economies that are rich in resources such as oil (Nigeria) and cocoa (Ivory Coast), renewed economic development could pave the way for greater investment by multi-national corporations in the region.

But before making an investment in Africa, a multi-national should consider the quality of the local country’s governance and in particular, its anti-corruption laws. The continent is comprised of diverse local economies, each with its own identity and unique political and economic institutions. This article seeks to address those risks in several countries that could offer for potential foreign investment opportunities.

 
ANTI-CORRUPTION GOES GLOBAL

We are in the midst of a multi-jurisdictional focus on corruption: 140 state parties are signatories to the United Nations Convention against Corruption. Thirty -eight countries adopted anti-bribery recommendations under the OECD Anti-Bribery Convention in 2009, which establishes legally binding standards that criminalize the bribery of foreign public officials in international business transactions.

The Foreign Corrupt Practices Act (or FCPA)enacted in 1977, has been bolstered by whistleblower incentives under the Dodd-Frank Act. Meanwhile, the United Kingdom’s (UK) Bribery Act of 2010 extends the extraterritorial reach of law enforcement in its application to all companies with operations in the UK, UK citizens, and residents irrespective of where bribery occurs.

It’s important to note that practices in some foreign countries that could be considered violations of the FCPA or other anti-bribery laws may be viewed as acceptable forms of conducting business in the local country. This may be true regardless of whether the practice adheres to local laws; what might be a bribe under the FCPA, for example, could be seen as a gesture of appreciation in some countries.
 
Our experience has shown that exposure to corruption in Africa is not limited to local companies. A wide range of entities — U.S. and European, publicly traded and private-equity owned — have faced allegations of FCPA and other anti-bribery violations. 
 
INVESTING IN AFRICA

Despite the potential for returns, certain risks remain in investing in Africa. Historically, multi-nationals have avoided doing business on the continent because of the potential for corruption within the economic and political institutions of its governments. The absence of transparency and accountability in dealing with public officials has led to a lack of confidence in their countries’ private sectors. Chief exports in industries such as oil and agriculture have, at times, been vulnerable to corruption through the use of agents and subsid¬iaries to offer bribes to customs and other officials, as well as related books and records issues. This environment has posed risks to companies that lack proper internal controls and anti-corruption programs. And, companies have faced FCPA allegations in Africa in the past, including Siemens ($800 million FCPA settlement, the largest ever im¬posed under the Act) and KBR and its parent Hal¬liburton ($579 million FCPA settlement).

The instability that has historically been found in Africa’s political and economic institutions has led countries there to fare poorly in Transparency International’s Corruption Perceptions Index, the key barometer of public-sector corruption. According to the Corruption Perceptions Index, which tracks 180 countries, Africa had the highest level of corruption in the world in 2010, with five of most corrupt countries located there (Somalia, Sudan, Chad, Burundi, Equatorial Guinea). However, our focus is on those countries that could offer potential investment returns for companies seeking to do business in Africa.

NIGERIA #134 on the 2010 Corruption Perceptions Index
Much of Nigeria’s economy (and therefore its risk exposure) lies within its oil industry. According to the International Monetary Fund (IMF), the oil sector accounts for more than 95% of Nigerian export revenues. Forty percent of the U.S.’s oil imports come from Nigeria, according to the Energy Information Administration, with several major oil producers operating there, primarily via joint ventures. Nigeria has been the subject of corrupt practices in the past and, as a result, has posed challenges for U.S. and foreign companies doing business there. Over the past decade, both the United States Department of Justice and Securities and Exchange Commission have either taken action against or investigated companies operating in Nigeria related to alleged violations of the FCPA. The allegations include illegal payments to customs officials, as well as accounting and internal controls violations. Technip (France), Eni S.p.A. and Snam¬progetti (Italy/Netherlands), JGC Corporation (Japan) and KBR/ Halliburton (U.S) each reached settlements related to allegations over books and records and internal controls violations of the FCPA in Nigeria. Other investigations and reviews have focused on the use of consultants to negotiate and reduce tax assessments, offshore payments to officials made outside the local books and records, and general bribery concerns.

GABON # 110 on the 2010 Corruption Perceptions Index
Gabon was involved in the first FCPA enforcement action ever brought by the SEC. In 1978, the SEC alleged that PageAirways violated the FCPA related to the sale of aircraft to several African countries. And although Gabon has since avoided FCPA scrutiny, it is still perceived as having some risk to investors. New president Ali Bongo Ondimba is beginning to court foreign invest¬ment in Gabon in areas such as oil and timber and hopes to increase transparency into government. According to a repor t by the State Depar tment, the government initiated the arrests of several public officials suspected of corruption in 2009. Still, the report notes, organizations such as the Commission to Combat Illicit Enrichment, an anti-corruption authority created in 2004, have had limited impact. It has imposed only one fine since its inception, despite launching more than 50 cases.

IVORY COAST # 146 on the 2010 Corruption Perceptions Index
After years of instability, one of Africa’s most fruitful economies could be on the upswing. Ivory Coast is the largest producer of cocoa in the world, supplying a third of the world’s total cocoa production. Ivory Coast is the third-largest economy in sub-Saharan Africa and, according to the IMF, the country’s economy is set to grow by 6% in 2011. With a new president in place, the country restarted shipments of cocoa beans from its port at Abidjan for the first time since January. And recently, the International Cocoa Association projected that the country’s cocoa production would rise to 1.34 million metric tons of beans, giving the country a surplus for only the second time since 2006. Still, the country has had its share of bribery issues. Previously, Alcatel-Lucent admitted to violations of the internal controls and books and records provisions of the FCPA related to hiring agents in Ivory Coast, among other countries. Since then, the cocoa industry has been the subject of a crackdown on corruption by former President Gbagbo and there have been a number of arrests of public officials.

TUNISIA #59 on the 2010 Corruption Perceptions Index
Though currently in the midst of a democratic uprising, Tunisia could become one of the fastest-growing economies in Africa. Tunisia’s 2010 ranking on the Corruption Perceptions Index improved compared with its 2009 ranking (65th). Historically, Tunisia has possessed a relatively stable regulatory environment and mature private sector. Yet, the recent political unrest and ripple effects from neighboring Libya have impacted its economy, specifically its tourism sector. Those concerns have led to downgrades of its government bond ratings and lower economic growth forecasts for 2011. Still, a new democratic government and a continued move to reduce barriers to foreign investment by privatizing once state-owned businesses (a program advocated by previous governments) have fueled optimism. Tunisia is set to receive billions in emergency loans that may be directed to infrastructure development and modern-ization of its economy. Leaders from G-8 countries have pledged economic assistance and the World Bank, African Development Bank, and European countries have offered a $1.4 billion loan package.

POTENTIAL PITFALLS

Despite the attractive investment opportunities, there remain pitfalls associated with doing business in Africa. Before making a decision to do so, companies should implement adequate internal controls and compliance programs that can help reduce the risk of corruption. Whether acquiring an existing entity, entering a joint venture, or building an operation from scratch, due diligence may require more than simply evaluating management and controls within the operation itself. It may also be necessary to look at relationships with vendors such as consultants and brokers, who may deal with governments on the company’s behalf. And once companies have begun to do business in a country, it is important to make sure that adequate internal controls are in place and are effective. This may require more than proper internal polices and control procedures. It may be necessary for management to set the tone and develop appropriate employee training programs. Once an investment has been made, ongoing monitoring and reviews of these programs may help to further reduce risk.

Organizations should closely monitor political developments in the region, as governmental changes may impact the viability of doing business in a particular country. In some cases, a new government could represent an opportunity for greater stability and increased transparency and accountability into economic infrastructures. Yet, anti-corruption laws may not eliminate the risks completely. According to Transparency International, enforcement of the OECD Convention’s recommendations on anti-bribery has been limited. Of the 38 member countries more than half (21) were perceived as having little or no enforcement of its provisions.

Multinationals have before them great opportunities in this region, however the risks and uncertainties associated with corruption in political and economic infrastructures may pose challenges. Companies seeking to invest in the region should be mindful of these risks and consider proactively developing a control environ-ment that can account for them. This is particularly true as the heightened policing of anti-bribery laws on a global scale ushers in a new era in enforcement.

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