Sub-Saharan Africa (“SSA”) owing, to a large extent, to its abundance of natural resources, is a land of exceptional opportunity and wealth potential. The region, which includes, as the name implies, countries located fully or partially south of the Sahara, remains to this day heavily undeveloped and ripe for foreign investment.
Despite the region’s attractiveness, U.S. investors and businesses seeking to tap into SSA's supply of natural resources must acknowledge and address (at the outset and on an ongoing basis) a number of fundamental concerns.
The principal risks associated with doing business in SSA are corruption and bribery, which have reached epidemic levels and are estimated by the African Union to lead to continent-wide losses of approximately $140 billion every year. To put that number in perspective, $140 billion represents approximately 25 percent of SSA’s total annual Gross Domestic Product. Public corruption, the dominant and most damaging form of corruption in the region, is of particular concern in the extractive industries, as extraction rights are almost unquestionably premised upon the signing of a Production Sharing Contract (PSC) between the extractor and the host government. The structure of these agreements is intrinsically precarious in a highly corrupt environment, especially in light of the fact that the Foreign Corrupt Practices Act (FCPA) makes it unlawful to make payments to foreign government officials to assist in obtaining or retaining business. Given the prominence and scope of recent FCPA enforcement efforts and penalties, FCPA compliance and due diligence must be a top priority for any individual or entity considering investing in SSA.
In addition to the FCPA, U.S. entities operating in the extractive industries in SSA must keep in mind a number of other industry-specific regulations including the following proposed rules derived from the Dodd-Frank Wall Street Reform and Consumer Protection Act:
- A proposed rule by the SEC that would require each resource extraction issuer to disclose, in its annual report, information relating to any payment made by the issuer, its subsidiaries, or entities that it controls to a foreign government ,or to the U.S. federal government, for the purpose of the commercial development of oil, natural gas, or minerals.
- A proposed rule by the SEC that would require any issuer for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer to disclose in the body of its annual report whether its conflict minerals originated in the Democratic Republic of the Congo or an adjoining country.
Finally, the political risk of investing in SSA cannot be overlooked. Political risk is defined as the risk that an investment’s returns could suffer as a result of political changes or instability in a country. In SSA, where governments are notoriously unstable and subject to high rates of turnover, political risk is particularly poignant — even more so when one considers the up-front costs associated with the extractive industries and their reliance on concessions contracts.
Pursuing extractive industry opportunities in SSA can be an extremely rewarding endeavor, both for the investor and for the host community. Nevertheless, the risks associated with these activities cannot be discounted. The best approach for U.S. individuals and entities desiring to hedge risks and remain compliant with U.S. law is to proactively (and certainly prior to the signing of a PSC) engage seasoned compliance professionals who are not only experts in their respective fields (legal, accounting, insurance, government affairs, etc.) but also well-versed in the language and culture of the country in which they intend to operate.