According to the Transparency International Corruption Perceptions Index for 2014 (hereafter the “International Corruption Index”), the nine countries that make up southern Africa rate from “average” to “corrupt.” The South African countries with the worst ratings include Zimbabwe, Madagascar, Malawi, and Zambia.
- Zimbabwe (21 on the International Corruption Index, with 0 being “highly corrupt” and 100 being “very clean”): President Mugabe’s government is considered highly corrupt and inefficient. The labor market is highly restrictive, business licensing is oppressive, and the government’s land reform policies—characterized by disorder and violent land seizures—have badly damaged commercial farming.
- Madagascar (28 on the International Corruption Index): After years of military coups, political violence, and corruption, Madagascar’s newly elected government has pledged to fight corruption, and international organizations and donors that previously severed ties with the country have reengaged. However, corruption persists in the government and judiciary and stymies expansion of small businesses and entrepreneurs.
- Malawi (33 on the International Corruption Index): Despite strong anti-corruption laws in Malawi, there remains a gap between law and practice. Corruption persists in the police registry, lower government services, and the judiciary, and its effects are compounded by inefficient business regulations, a rigid labor market, and an underdeveloped financial sector.
- Zambia (38 on the International Corruption Index): Corruption is widespread in Zambia. Its business sector is hampered by complicated administrative requirements and facilitation payments are common due to the bureaucratic procedures for obtaining licenses. The judiciary is inefficient, underfunded, and susceptible to government influence.
Companies looking to conduct business in southern Africa should perform their due diligence beforehand to assess the validity and lawfulness of their potential business partners. Businesses in countries with corrupt scores on the International Corruption Index should receive additional scrutiny by corporate compliance departments. In addition, many African countries have local content laws aimed at ensuring that the majority of the goods, labor, and/or services used by foreign companies doing business in the region are locally supplied. Foreign companies looking to do business in Africa must understand and be prepared to implement local content in order to mitigate risk and win business opportunities, while being carefully attuned to potential corruption concerns with their local partners.
Notwithstanding southern Africa’s red flags for corruption, until last year, neither the Securities and Exchange Commission nor the U.S. Department of Justice had brought an FCPA enforcement action in the region for several years.
This changed on September 28, 2015. In what is believed to be the first FCPA enforcement action to allege improper conduct in South Africa, the SEC announced a settlement with Tokyo-based Hitachi, Ltd. The SEC’s complaint alleges that Hitachi violated the FCPA by inaccurately recording $10.5 million in improper payments to South Africa’s ruling political party, the African National Congress. In 2005, Hitachi formed a South African subsidiary, which in turn was purchased in part by Chancellor House Holdings Ltd. As alleged by the SEC, Chancellor House was just a front for the African National Congress, and South Africa’s government soon awarded Hitachi two contracts worth $5.6 billion to build power plants in the country. Hitachi then paid Chancellor House about $5 million in “dividends” based on profits from the contracts, and over $1 million in “success fees” that Hitachi recorded as consulting fees in the company’s books. The SEC charged Hitachi with violating the FCPA’s books-and-records provisions and requirements for internal accounting controls. Hitachi did not admit or deny wrongdoing but agreed to pay $19 million to settle the charges.