As a continent rich with mineral resources, Africa offers abundant business opportunities for international companies and foreign investors. According to a recent KPMG report, Africa received 15% of global exploration expenditure and mining investment in 2012. Not surprisingly the African extractive industry is dominated by foreign-owned companies. However, if you are looking to Africa as a profitable market to expand into, you must ensure that your business strategy does not overlook the increased exposure to risk from investing or operating in the African extractive industries sector; a big part of which is the risks associated with corruption.

The African extractive industries sector is considered by most enforcement agencies to be “red flagged” for corruption risk. According to Transparency International’s Corruption Perceptions Index 2014, all of the major African countries where extractive industries dominate are perceived to suffer from a significant to high level of corruption. This is despite many of those countries having ratified international anti-corruption conventions and/or implemented local anti-corruption laws. Further, the extractive industries sector itself is generally considered as suffering from significant to high level of corruption: the OECD Foreign Bribery Report 2014 reports that 19% of all foreign bribes were paid in that sector, and Transparency International’s Bribe Payers Index 2011 reports that companies in that sector are perceived as more likely to bribe than those in other sectors.

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That is not to say that companies in that sector are inherently are more corrupt, rather, it is that the nature of the industry exposes companies to a number of the factors known to increase corruption risk: these are usually large scale multi-national operations, often dealing in emerging markets where corruption can be systemic and entrenched, and doing business generally means dealing with governments or state-owned or controlled entities, having regular contact with government officials, and depending on third parties (suppliers, contractors, financiers, joint venture partners).The OECD Foreign Bribery Report 2014 reports that bribes were offered or given most frequently to employees of state-owned enterprises, followed by customs officials, and that third party intermediaries were involved in 3 out of 4 foreign bribery cases.

Which leads into to the next key risk area: in addition to being liable for their own conduct and that of their directors and employees, companies can be held accountable for corrupt practices of certain associated third parties (e.g. subsidiaries, partners, agents, distributors or other related entities). Therefore, even if your company is not directly operating in the African extractive industries sector, you will need to consider corruption risk if it has any associated third parties in that sector.

Of course, controlling third party conduct will always be an issue. Unsurprisingly, we are seeing an increase in companies requiring that their counterparties, in ordinary commercial contracts, give anti-corruption warranties – e.g. that they and their group companies will not bribe and that they have procedures in place to ensure all reasonable steps are taken to prevent acts of bribery. You might want to consider whether you should be asking for such warranties from your counterparties. If you have been asked to give such warranties, then that in and of itself adds risk. Do you know what exactly you are warranting? Have you considered whether you should, or even could, give an anti-corruption warranty?

The corruption risk set out above means that those operating or investing in the African extractive industries sector (including via third parties) are at risk of falling foul of anti-corruption laws – and not just local laws. Increasingly, anti-corruption laws of other nations have extra-territorial reach. Key examples are the US Foreign Corrupt Practices Act (the “FCPA”) and the UK Bribery Act 2010 (the “Bribery Act”).  It is usually these two laws that foreign-owned operators and investors in Africa will be concerned about. The US and the UK have consistently been the jurisdictions most active in enforcing anti-corruption laws, with extractive industries companies amongst those hit with significant penalties, and both have proved willing to exercise their powers in respect of conduct and companies beyond their borders. In the table below are few examples of recent US and UK enforcement actions against companies in the African extractive industries sector.

Investigations and prosecutions are costly, time consuming and damaging to business (both economic and reputationally). If found guilty, a company faces significant fines, often running into tens or even hundreds of millions of dollars, and directors and employees face jail sentences. There is also a real risk that a company investigated for alleged cross-border corruption will face successive, or sometimes parallel, investigations and prosecutions in multiple jurisdictions. We have seen in recent years a marked increase in cooperation in investigations and enforcement between international and national enforcement agencies, their counterparts in other countries and international institutions (e.g. the World Bank). As a result, where a company is investigated by one agency, it is common to see other agencies also investigate whether their respective laws have been breached.

This is not to say that companies should avoid investing or operating in the extractive industries in Africa. But what it does mean, put simply, is that if you are considering investing or operating in this sector and region, your business needs an anti-corruption strategy.

Over the next few blogs, we will explain and discuss key anti-corruption laws with extra-territorial reach, in particular the FCPA and the Bribery Act, and what you and your business can do to minimize the risks of falling foul of those laws.

Examples of recent Africa-related enforcement in the US and UK

  • In November 2013, in the US a Geneva-based oil services firm with substantial operations in Texas paid US$153 million to settle FCPA, commercial bribery and sanctions allegations involving multiple countries (Angola, Congo, Algeria and Albania).
  • In 2013, in the US a Texas-based drilling company settled bribery allegations for US$15.9 million in connection with bribes paid by the company and its logistics service provider, to Nigerian officials. (The logistics service provider and six of its other clients had resolved related matters in 2010.) In 2013, in the US the SEC took enforcement action against one of the largest international oil and natural gas service companies for books and records violations in connection with commercial bribery and violations of US economic sanctions and export controls laws, as well as bribery of foreign public officials.
  • Press reports indicate US, UK and Guinean authorities are investigating a Swiss-based mining company for allegedly bribing Guinean officials in order to secure rights to develop a Guinean iron ore deposit.
  • In August 2013, in the UK a UK company, two of its directors and an employee were charged for allegedly paying bribes to influence the award of business contracts to the company relating to transactions in Mauritania, Ghana, Somaliland and Kenya.
  • In June 2013, in the UK the former CEO of a UK registered oil and gas exploration company, was jailed for paying a bribe to a director at the European Bank for Reconstruction and Development.
  • In April 2013, the UK’s SFO commenced a criminal investigation into allegations of fraud, bribery and corruption by a leading Central African/Kazakhstan-focused private multinational diversified natural resources company headquartered in the UK and its subsidiaries in Africa and Kazakhstan. Press reports indicate US authorities are also investigating this company over the same allegations.
  • In early 2014, US enforcement actions brought two years ago against the former CEO of an offshore oil drilling contractor, and the current head of that company’s subsidiary in Nigeria, in connection with their involvement in payments to Nigerian customs brokers, who in turn allegedly paid bribes to Nigerian government officials, were finally settled.
  • In 2012, in the US the DOJ commenced a FCPA and money laundering investigation into a US-based energy company in connection with the company’s charitable activities and acquisition of certain oil and gas exploration rights in Guinea. In
  • December 2012, in the UK four employees and agents of a Nigerian subsidiary of a UK oil and gas contractor  were charged with bribing Nigerian tax officials.
  • In July 2012, in the UK a wholly owned subsidiary of a UK registered company which supplies goods in east Africa was ordered to pay approximately £1.9 million for unlawful conduct by its subsidiaries incorporated in Kenya and Tanzania in obtaining public tenders.