Some African governments are taking steps to increase enforcement. But there’s a long way to go.

The clean-up of corrupt business practices in Africa continues to fall to foreign-based investors and criminal authorities. Investors who are subject to the extra-jurisdictional reach of their home countries’ anti-corruption laws, in a way, lend foreign enforcement agencies a free pass. That’s not to say Africa isn’t committed to tackling the issue. Governments do rely on foreign agencies, but indications suggest enforcement by domestic authorities is set to rise.

Although the corruption risks investors face vary across the continent, they are generally high. Of course, there are vast regional and country-specific differences. Still, Africa is the worst performing continent in Transparency International’s 2017 Corruption Perceptions Index. Of the 10 lowest ranked countries in the world, six are African.

There is an ostensible willingness to change this. Most African Union member states have ratified its Convention on Preventing and Combating Corruption. In Nigeria, for example, legislative change has followed the 2015 election of President Buhari. In 2016, the Nigerian government adopted the National Anti-Corruption Strategy. Developments include moves to establish specialized corruption courts and a whistle-blowing policy with financial incentives. Attitudes are changing within government agencies, too.

In 2018, South Africa’s National Credit Regulator and the Financial Sector Conduct Authority imposed fines of some US$2.3 million (R33.6 million).

In South Africa, authorities have been enforcing more established corruption laws, often with severe penalties. In Scholtz & others v The State, in 2018, South Africa’s Supreme Court of Appeal upheld a 15-year sentence for a senior politician convicted of corruption for awarding lease agreements. Also, the Prevention and Combating of Corrupt Activities Act and the Prevention of Organised Crime Act together expose anyone found guilty of corruption to the risk of having their assets seized. This is no idle threat: the legislation has been used.

A checklist for due diligence

As a foreign investor, when you look to acquire companies in Africa, you are exposing yourself to their liabilities. This clearly impacts investment value, but can extend to civil and criminal liability for acts committed before your investment, not to mention reputational harm. Due to the difficulty in quantifying the risks, contractual protections — such as warranties and indemnities — alone will be insufficient.

This is where proper due diligence, or not, proves its worth. The U.S. Securities and Exchange Commission (SEC) pursued Canada-based mining company Kinross Gold on books and records offenses after it acquired two African subsidiaries. Neither had anti-corruption policies or internal accounting controls. Kinross took three years to put in place adequate controls, which the SEC claimed were not adhered to. The company agreed to a US$950,000 settlement with the SEC, despite a lack of clear evidence of bribes or corruption.

Joint ventures are common, but such close relationships expose you to different risks. This makes your need for thorough due diligence all the more important. When there’s buy-in from multiple investors, you have less control over the operating company than if you were the sole investor. This reduces your ability to address any corruption issues that come to light post-acquisition and must be addressed in your contractual documentation.

Lack of up-to-date, publicly available information about local companies (such as registers of ultimate beneficial owners) is a big problem. Another is lack of corporate governance regulation and unbiased press reporting on corruption. You need a different approach to due diligence in Africa — local and regional expertise is vital. It is essential to understand who your business partners are, their political links and all the details of their chequered past. You should also look into business partners to reduce the risk of working with people who are politically exposed or have corrupt histories.

The risks of dealing with politically exposed people are clear in the recent case of France-based logistics group Bolloré. A former subsidiary, SDV Africa, and the group’s chairman, Vincent Bolloré, are both under investigation by French authorities following arrests in April 2018. In December 2018, it was announced that the group’s French holding company, Bolloré SA, is also under investigation. The allegations relate to supposed bribes paid in Togo and Guinea. Communications firm Havas (also part-owned by Bolloré) is alleged to have discounted services to the presidents of those countries during elections in 2009–10 in exchange for granting another Bolloré Group company license to operate container ports in Conakry in Guinea and Lomé in Togo.

Equally important is that you understand the role of asset expropriation. There are high-profile examples of African states revoking or expropriating licenses from multinational extractive companies. These actions are often borne out of political motives — that is, to punish links to previous ruling parties or presidents. Assessing such risk can be difficult, and getting clear legal advice on the risks is not always enough.

Effective procedures to put in place

Once you complete your acquisition, the clean-up operation can begin. You should put in place appropriate procedures, including robust policies, training, formal due diligence on third parties, monitoring, and financial controls. Crucially, you must understand local risks by conducting a thorough assessment of bribery risk. Both by reference to what controls are in place and by what the opportunity risks of bribery are.

There are important benefits to a thorough approach. Putting appropriate systems in place will help you if a corruption investigation were to arise. For example, having “adequate procedures” is a defense to the UK Bribery Act corporate offense. The evidence suggests that prosecutors treat businesses working to tackle corruption in new subsidiaries more favorably.

Your role as an investor  

Enforcement of corruption laws is increasing in Africa, though progress is slow. And international businesses are often subject to many anti-corruption regimes. You should thoroughly investigate target companies and implement robust anti-corruption policies post-acquisition. By playing your part to stamp out corruption, you can invigorate African economies, increase the sustainability of business in those jurisdictions, and maximize their long-term profitability.