Africa Anti-Corruption Compliance Trends and Five Areas to Watch in 2022
Winter 2022, Covington Alert
As we have observed in previous client advisories, we have noted an overall upward trend in anti-corruption enforcement activity in Africa in recent years. A review of material developments in 2021 suggests that this trend will only continue, and that companies doing business in Africa should expect increased focus from U.S. enforcement authorities under the Biden administration. Against this backdrop, below we outline five areas to watch in 2022.
1. Significant U.S. strategic and policy initiatives signal aggressive enforcement efforts and increased focus on Africa.
In early December 2021, the White House published a multi-dimensional strategy for fighting corruption around the world, titled the United States Strategy on Countering Corruption (the “SCC”). Taken in combination with previous statements from the White House and from U.S. Justice Department ("DOJ") officials, the SCC is yet another tone-setting proclamation underscoring the Administration’s commitment to detecting, deterring, and punishing corruption abroad. While the SCC outlines a holistic approach to combatting corruption, enhancement of U.S. enforcement efforts, including by stronger cooperation with foreign enforcement authorities and increased focus on illicit financial flows, is a centerpiece of the strategy. The so-called Mozambique “Tuna Bonds” matter is a case in point, where U.S. enforcers have aggressively employed the U.S. Foreign Corrupt Practices Act (“FCPA”), AML, and wire fraud laws to pursue both financial institutions and individuals, including a focus on the “demand side” of a bribery scheme through efforts to extradite the former finance minister of Mozambique to face trial in the U.S.
Of particular note to companies doing business in Africa, the SCC, as well as a precursor memorandum issued by the White House in June 2021, (covered in our previous alert), treat anti-corruption initiatives as a “core United States national security interest,” linking corruption with state fragility concerns that are currently all too common on the continent. While the SCC is global in scope, there is no doubt that its authors were heavily focused on Africa, including by noting that “every year an estimated $88.6 billion—equivalent to 3.7 percent of Africa’s GDP—leaves the continent in the form of illicit capital flight.”
In parallel with the development and issuance of the SCC, in November 2021, the U.S. DOJ announced various policy changes designed to undo certain Trump-era enforcement policies and provide prosecutors with expanded tools to demand cooperation, investigate misconduct, and punish corporate and individual offenders. This includes restoring the Obama administration policy that to be eligible for any cooperation credit in DOJ investigations, “companies must provide the department with all non-privileged information about [all] individuals involved in or responsible for the misconduct at issue,” which had been narrowed during the Trump administration to cover only those individuals “substantially involved in or responsible for the criminal conduct.” DOJ also reversed a Trump-era policy disfavoring the appointment of independent compliance monitors, making clear that “there is no default presumption against corporate monitors.” Finally, while not indicative of a policy change, DOJ has emphasized the need for companies to be proactive in assessing and enhancing their compliance programs, noting that “[c]ompanies need to actively review their compliance programs to ensure they adequately monitor for and remediate misconduct—or else it’s going to cost them down the line.”
The import of these pronouncements for companies operating in Africa is significant. Taking the increased focus on corruption in Africa as a strategic priority for the Biden administration together with policy changes intended to make it easier for DOJ to investigate and prosecute companies and individuals, the enforcement calculus in Africa may now skew towards higher risks. Companies operating in Africa are thus well advised to heed DOJ’s warning and proactively develop well-resourced and risk-tailored compliance programs, founded on in-depth risk assessments.
2. Increased diplomatic support and engagement from the U.S. in anti-corruption efforts in Africa.
Recognizing that an effective anti-corruption strategy cannot be founded solely on enforcement efforts, one of the SCC’s five pillars focuses on diplomatic efforts and deployment of foreign assistance resources. For example, the SCC identifies as a strategic objective efforts to “elevate and expand the scale of diplomatic engagement and foreign assistance” including “[d]eveloping U.S. embassy-specific strategies for bilateral and public diplomacy to support local and U.S. Government-funded anti-corruption initiatives.” The SCC suggests that such efforts are targeted in particular at so-called “strategic corruption”—“when a government weaponizes corrupt practices as a tenet of its foreign policy.” To this point, the SCC notes that “[c]orruption in the form of state-directed cross-border investments from authoritarian states, for example, has had a corrosive effect on institutions in developing countries.” We read this statement as a pointed reference to Chinese investment in countries such as the Democratic Republic of Congo (“DRC”). To this point, the U.S. government has recently highlighted its efforts to support anti-corruption efforts in DRC, and media reports have noted U.S. financial support for efforts such as DRC’s review of historical mining contracts.
While the SCC’s objectives of increased diplomatic engagement and foreign assistance may be read to be generally focused on government-to-government engagement, they also signal receptivity to engagement with non-governmental actors, which should include private sector interests. For example, if a company is contemplating an investment in Africa that poses significant corruption risks, that company may consider whether engagement with U.S. authorities (who may in turn engage with the local government in the host country) can assist in mitigating risks. This approach may be particularly attractive and effective where a company’s commercial interests are closely aligned with U.S. policy interests, e.g., where there is concern that valuable natural resources could fall under the control of a hostile authoritarian regime.
3. Will we see sustained and effective anti-corruption enforcement efforts from African authorities?
While we expect that U.S. anti-corruption enforcement efforts will continue ramp up on the continent, local enforcement efforts are more of a mixed bag. Although local enforcement activity has been trending upward in some jurisdictions (e.g., South Africa and Angola), we have yet to see major corporate enforcement actions in those jurisdictions. In other jurisdictions, such as Nigeria and Kenya, recent efforts to improve anti-corruption enforcement have been widely perceived as failures.
In South Africa, the Commission of Inquiry into Allegations of State Capture (the “Zondo Commission”), created in 2018, finally completed its evidence-gathering phase in late 2021, and issued Part 1 of a three-part report in early January. At over eight-hundred pages, Part 1 concludes that “state capture has been established.” Beyond detailed examinations of widespread corruption at South African Airways, the South African Revenue Service, and more broadly in South Africa’s public procurement systems, the report provides a set of ambitious recommendations, ranging from calls for investigation and prosecution of numerous entities and to individuals to significant structural and legislative changes. On the latter front, the report recommends legislation to introduce deferred prosecution agreements, a “failure to prevent” offence akin to Section 7 of the UK Bribery Act, whistleblowing rewards and enhanced whistleblower protections, and an independent anti-corruption agency. With the remaining two parts of the report yet to be issued, and the Presidency unlikely to respond to the Commission’s recommendations before mid-year at the earliest, we do not expect to see meaningful movement on these structural reforms in the near term, and the question persists whether the political will exists to support such fundamental reforms. On the enforcement front, there is also a great deal of uncertainty on whether the Commission’s work will translate into prosecutions and convictions, in large part due to fundamental capacity challenges facing the National Prosecuting Authority.
Regardless of this uncertainty, companies are well advised to consider relevant lessons learned from the Zondo Commission’s report. The report catalogues scores of corruption typologies in areas such as empowerment transactions and public procurement, which companies operating in South Africa must be alive to. In that regard, given the lack of corporate enforcement precedent in South Africa, the Zondo Commission report may come to serve as a valuable resource for compliance professionals that will inform diligence exercises and risk and control assessments in much the same way as settled enforcement actions do in the U.S. and UK.
4. Increased activity in M&A and investment transactions underscores the need for robust pre- and post-investment risk mitigation measures.
After a considerable downturn in deal activity owing to the COVID-19 pandemic, 2021 saw a surge in M&A deals in Africa. There is no reason to expect a slowdown in 2022. As competition for growth and strategic assets in Africa – particularly in the energy and extractives sectors – heats up, so does corruption risk.
Against a backdrop of increased enforcement activity as discussed above, and fundamental structural risks arising from the outsized role of state-owned entities in African economies, as well as local content and shareholding requirements, companies must be more focused than ever on effective pre-acquisition diligence and risk mitigation, and taking swift action to identify root causes and remediate identified compliance issues post-closing. In our experience, and as illustrated by numerous enforcement actions, inadequate preparation for market entry and failure to implement an effective compliance program in acquired entities and new operations are common and persistent sources of compliance challenges for international companies investing in Africa. The risks of inadequate integration can be particularly acute where a company leaves an existing local management team fully intact post-acquisition without effective training or oversight.
5. Authorities are increasingly using AML and sanctions tools to target corruption.
We have previously noted U.S. DOJ’s increasing reliance on the criminal AML statutes to target individuals involved in cross-border corruption schemes. The breadth and jurisdictional reach of the AML statutes, which can extend to transactions that touch the U.S. banking system and “promote” the violation of foreign anti-corruption laws, makes them well-suited to targeting corrupt conduct abroad, including efforts by corrupt government officials to make use of illicit funds. Additionally, recent amendments to the U.S. AML laws establish a new criminal offense for, under certain circumstances, concealing, falsifying, or misrepresenting that senior foreign political figures or their family members or associates are the source of funds in a transaction.
An example of U.S. prosecutors’ use of the AML statutes, and their reach, came in the July 2021 guilty plea on FCPA and AML charges by a former commodities trader, Anthony Stimler, reported to have worked for a subsidiary of commodities giant Glencore. While Stimler was at all relevant times a UK citizen and resident, DOJ alleged that his involvement in corrupt transactions in furtherance of bribes to officials at the Nigerian National Petroleum Corporation established jurisdiction under the AML statutes by virtue of corrupt payments to intermediaries made “through” a bank in New York.
Further signaling an increased focus on AML enforcement, the SCC places particular emphasis on the need to identify and address vulnerabilities in the international financial system that facilitate cross-border corruption. It calls for heightened anti-money laundering enforcement against corporations and individuals alike, spotlighting the role that money laundering and unlawful trafficking play in permitting criminal actors to “shelter the proceeds of their illicit activities.” To further identify anti-money laundering violations, the SCC highlights the creation of the Kleptocracy Asset Recovery Rewards program, which allows for payments to individuals who provide information leading to the recovery of such assets. The SCC also contemplates efforts to enact legislation to criminalize the “demand side of bribery”—the receipt of bribes—which may bolster the work of the bipartisan Congressional Caucus against Foreign Corruption and Kleptocracy, which was announced in June.
Along similar lines, in 2021, the U.S. issued sanctions under the Global Magnitisky sanctions program to target corrupt actors and networks in several countries in Africa. This included sanctions targeting Isabel dos Santos and other former Angolan government officials for their involvement in significant corruption through the embezzlement and misappropriation of state funds, and sanctions targeting corrupt actors in DRC linked to Dan Gertler. These designations follow the imposition of similar sanctions in previous years targeting the likes of the Gupta family in South Africa, and kleptocratic leaders such as the former President of The Gambia, Yahya Jammeh. Given the SCC’s emphasis on the use of sanctions and visa restrictions to target corrupt actors, we can expect to see increased activity on this front going forward. Against this backdrop, companies operating in Africa need to pay increased attention to sanctions compliance measures, particularly in countries such as DRC and Angola, where sanctioned parties may have a web of interconnected and opaque ownership interests in a range a commercial entities.
In the UK, enforcement authorities continue to target ill-gotten gains from corrupt conduct under the Proceeds of Crime Act, and have shown real intent to return to African nations money recovered as proceeds of crime. In November 2021, the Foreign, Commonwealth & Development Office ("FCDO") confirmed that £4.4 million recovered by the Serious Fraud Office through civil proceedings had been returned to Chad (in the form of aid to address food insecurity and malnutrition, and to support the country's COVID-19 response) in relation to "a series of corrupt transactions involving personnel and companies connected to staff at the Chadian Embassy in [the U.S.]” The FCDO stated that this "was the first time the UK has agreed to channel money from a civil corruption case into critical global aid projects." Similarly, in March 2021, the FCDO announced that it would return £4.2 million in stolen funds recovered by UK authorities from associates of former Nigerian politician James Ibori. The Nigerian government agreed to use the returned funds for projects that will benefit the country, including infrastructure projects, which will be administered by the Nigeria Sovereign Investment Authority. The agreement to return the funds built on a 2016 MOU between the UK and Nigeria, which established the countries' commitments to return seized proceeds of bribery and corruption and a framework for doing so.
The following Covington lawyers assisted in preparing this client update: Ben Haley, Ian Hargreaves, Matthew Beech, and Thomas McGuire.
If you have any questions concerning the material discussed in this client alert, please contact Ben Haley or other members of our Africa Anti-Corruption Practice.
Back
