On Friday many South Africans awoke to the news that Ajay Gupta, Atul Gupta and Rajesh Gupta and their close associate Salim Essa, had been sanctioned by the United States government for their alleged involvement in what was described as a “significant corruption network” by the US Office of Foreign Asset Control (OFAC).
In the US, OFAC maintains a list of so-called Specially Designated Nationals (also referred to as “SDNs”). This is the list that the Guptas and Essa have been placed on.
It is important to note that neither the Guptas nor Essa have been found guilty of any crime by a court. OFAC is not a judicial body, but rather a department within the US Treasury Department that operates within legislative, regulatory and executive mandates. OFAC’s decision is based on information available to it and unlike a criminal prosecution, there has not been any formal trial in which evidence was presented.
Even though the Guptas and Essa have not been found guilty of any crime, the implications of being included on the list are severe. US citizens and entities are prohibited from engaging in any business dealings with the Guptas and Essa. To do so would entail a risk of facing criminal and/or civil penalties, and historically sanctions breaches have resulted in some of the largest fines imposed in US history. In our experience, even non-US entities avoid transacting with individuals and entities that are on the SDN list for fear of potential punitive steps by OFAC.
The sanctions are not confined to the Guptas and Essa. In this regard, OFAC applies the so-called 50 percent rule to entities that are owned (or ultimately owned) by sanctioned individuals or entities. In terms of the rule, all entities that are 50 percent or more owned by sanctioned individuals or entities will automatically also be blocked. In effect this means that all entities in which the Guptas and Essa (either individually or collectively) own (or ultimately own) 50 percent or more of the shares are automatically blocked.
The practical implications for the Guptas, Essa and any entity that falls under the 50 percent rule, are that doing business will be extremely challenging as no US companies are likely to risk transacting with them, and even non-US companies will likely steer clear to avoid the potential risks. Banks in particular will likely avoid holding accounts for the Guptas, Essa or any of the blocked entities given that most major banks are exposed to the US.
The implications of the mounting allegations against the Guptas over the last few years has received extensive media coverage in South Africa, including for example the closure of bank accounts held by the Guptas and entities that they own. Many companies have taken a decision to stop doing business with the Guptas and their companies. In our experience, the decisions made by companies have largely been driven by their own policy considerations, particularly a consideration of reputational risk and the cost of compliance. The inclusion of the Guptas and Essa on the SDN list has materially changed the situation - for US citizens and entities there is now material legal risk in doing business with the Guptas and Essa (and the companies that they own). For US citizens and entities transacting with the Guptas and Essa could result in a criminal prosecution and/or civil fines. For non-US companies there is secondary risk that will also undoubtedly be taken into account before doing business with the Guptas and with Essa.
The 50 percent rule referred to above creates further challenges for companies to manage the relevant risk. In South Africa company shareholding is not publicly available. It is therefore difficult to determine whether an entity that you engage with is 50 percent or more owned by the Guptas and/or Essa. This problem highlights the importance of carefully managing third party relationships and ensuring that appropriate due diligence is conducted when establishing a relationship and at appropriate intervals. Companies should have a well-developed due diligence methodology that determines the type of information obtained from third parties, as well as the types of checks done.
The sanctions imposed on the Guptas and Essa will undoubtedly not be the end of the ongoing State Capture developments. The steps do signify a willingness of the US to police corruption globally and it should serve as a warning against engaging in corruption.