Why an Anti-Corruption Programme is essential for African startups looking to scale up

In this insightful podcast, Brendon Jones, founder, Connect Africa speaks to Ben Haley of the law firm Covington and Burling LLP, who leads the firm’s White Collar and Anti-Corruption Practice in Africa and is a vice chair of the firm’s broader Africa Practice, on why African startups must put an anti-corruption programme in place from the outset if they wish to attract investors and sustainably scale up.

Ben notes that he started working in Covington’s White Collar and Anti-Corruption Practice since 2006 and, as the FCPA enforcement boom really picked up in 2008 through to around 2010, anti-corruption work also picked up significantly. But it was finally thanks to a client who did a massive M&A in 2015, with little or no presence in Africa, that he found himself coming down to the continent to undertake the deal’s post-acquisition integration exercise under which he worked in Sub-Saharan Africa over a fairly concentrated period in the clients’ new offices in Nigeria, Uganda, Tanzania and South Africa.

“Through that work, what we saw as a firm was that there was a real need for international best practice standard compliance advisory and counselling for firms facing the challenge of doing business in Africa. In May 2017, we opened an office in Johannesburg in project finance and development, before we decided to have a US trained lawyer based in the continent to counsel Africa-centric companies on compliance best practices. I convinced my family to move and was here on the ground by late 2018. Over time, we have been vindicated in setting up this practice as we see that clients really need the specialised services that we provide. So far, we are doing fantastic!” he avers.

Here are the key takeaways from the podcast, which makes for fascinating listening for those planning to foray into the continent, be it for investment or doing business:

  What is the scope of Covington’s White Collar and Anti-Corruption Practice?

 Ben emphasised that the practice is broad indeed as it covers the full range of client needs on Anti-Corruption and other compliance areas. At the front end, the team works for US or UK or European companies that have exposure to the Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act or large African corporates who have a risk profile where there is a real need for the best practice advice and compliance capabilities that the firm offers.

He stated that a company coming to do business in Africa would typically need to do some sort of risk assessment around entering the market. Here, they would need to look at corruption risks, compliance risks and any others; the operating environment on the ground; the need, if any, to partner with a local company because of a local content or local shareholder requirement; and whether such local partners are likely to be politically exposed persons (PEPs) and the different types of corruption risks that may arise out of that framework. On the operating front, the common questions companies must ask themselves are:

• What kind of commercial partners do they have in the way of distributors or intermediaries?
• What kind of procurement opportunities are there?
• Are they working with selling products to government clients or state owned entities?; and
• What are the corruption risks that emerge from such transactions?

He stressed that Covington provides advisory services around such requirements, both due diligence as well as assistance in setting up contracting models that are intended to mitigate corruption risks. He added that the firm also undertakes general programme improvement work for clients towards helping them build an effective anti-corruption programme.

“We serve our clients from the cradle to the grave – and yes, it does unfortunately happen at times that we need to counsel clients on exiting African investments while avoiding expropriation of their assets, and ensuring they part on good terms from government bodies or third parties that they have been dealing with. Ultimately, we provide our clients with holistic advice – not just anti-corruption advice. Be it advice around disputes, contracting, or the regulatory environment they operate in, we try to be a one-stop shop for all our clients’ compliance needs,” emphasised Ben.

 What exactly does an anti-corruption programme encompass?

Ben defined an anti-corruption programme as a system of policies, controls, culture and people – all designed to identify and mitigate corruption risk.

He went on to note that an effective programme must be much more than a set of policies and procedures. When an external auditor, business partner, or company looking at acquiring or doing a JV with a business in Africa delves deeper into its anti-corruption programme, they wish to understand if the programme is more than just a paper tiger where the company has well written policies and procedures but they are rarely, if ever, applied in practice.

“Next, I refer to culture and people because anti-corruption programmes are focused on getting employees, agents, and third parties – all individuals that act on a company’s behalf – to make ethical decisions and do the right thing. Ethical decision making is more about whether a company has a culture of integrity and is doing things the right way,” Ben emphasised, adding, “That starts with management setting the right tone at the top, and ensuring that the messaging has the right process, people, system, controls and audit behind it.”

 How can organisations ensure their entire value chain subscribes to such a programme?

 Ben called this ‘the billion dollar question’ and noted that companies which understand this space realise that, depending on what their route to market and their business model is, third party risk is the most significant risk that they have. As an oft quoted statistic, as many as 90% of FCPA enforcement actions involve conduct by third parties.

On this note, he also stressed that not all third parties are created equal. “A printer paper supplier is not going to expose you to the same degree of compliance and anti-corruption risk as, say a customs broker who is working to get equipment into a country and dealing directly with customs authorities one-on-one in a way that is not always transparent to the company, or a sales agent or intermediary who is ‘acting as your legs in a country’ to deal with government procurement,” he explained, adding that third party risk assessment cannot be a one-size-fits-all process.

“If you have a riskier profile for a third party, what you need to do in terms of diligence must be calibrated to the risk of the third party. If you are a defence aerospace company and are selling a bespoke defence solution to a Ministry of Defence in a country that you know is fairly high risk and this was not done through a competitive tender but through a third party that was helping you sell that product and the third party is proposing a success fee where they take a cut of the amount, that would be quite a high risk transaction. In that situation, we would recommend a more aggressive set of diligence procedures where we wouldn’t just look at the third party on paper (Where they are incorporated or what their turnover is) but really look at it in terms of – Who is this third party? How do they own the business? How are they connected to the government customer in any way? – and think of any potential mitigating steps we could put in place to identify the risks around that person,” he elaborated.

As the natural culmination to the process, the firm will watch what the third party is doing to establish if they are actually rendering the service they were contracted for carrying out, or if this third party is effectively a cut out for someone on the other side of the deal, Ben explained.

A final aspect Ben highlighted is that of larger organisations training their third parties right. “The US Department of Justice does have an expectation, as do other enforcement authorities, that sophisticated and well-resourced companies are going to train their third parties on integrity and anti-corruption risks so they can identify those risks as they operate on the ground and understand what the expectations are in dealing with a particular business,” he averred.

 Recommendations for startups to balance costs while factoring compliance from the start

 Ben soberingly noted that while many small businesses are looking at getting up a head of steam in their business and make themselves attractive acquisition targets, what he would recommend is that even before they look at the ‘how’, they must look into the ‘why’ of it.

“If a UK or US company that is exposed to the FCPA or the UK Bribery Act is looking at an acquisition target in Africa, it will undoubtedly be asking about the assets that company has, and whether such assets have been procured by bribery – which all boils down to the kind of anti-corruption programme that they have. Obviously these areas will require some degree of investment and resource but I do think that the anti-corruption programme you need to have at Siemens or an international mining company is not the same as you need for a small Kenyan tech startup, for instance,” he explained.

He went on to note that Covington advises a lot of companies on frameworks for risk assessment so they can better deploy their resources and have a better sense of what needs they have within the programme. For instance, do they need a full time Chief Compliance Officer or an existing finance director or head of internal audit or an external general council can perform the same role? The only way to know your resource requirement is to do that risk assessment at the outset, he averred.

“Moreover, if a small company has a partner that’s a multinational, that could have benefits in itself, because the customer of the small and medium enterprise (SME) should be invested in the SME having an effective compliance programme,” he reiterated, also underlining that  the process is really about ethical decision making, “Ultimately, you cannot underestimate the power of effective culture in risk mitigation. That doesn’t cost a whole lot to build at the beginning but you must have your eye on the ball at the very inception of your company.”

How is investor appetite for Africa likely to play out against ongoing compliance needs?

To this, Ben replied that Covington’s clients look at Africa and they realise they need to be here – and that, while the anti-corruption risks are significant, they are not insurmountable in any way.

“It takes resilience, commitment, resource and creativity (sometimes) but as I look around, we have a suite of clients from the US, UK, Asia and South Africa that are committed to operating in very high risk markets because they recognise that there is a business imperative to do so. They recognise that there is a massive infrastructure gap and they need to increase access to technology in countries in Sub-Saharan Africa and that they need to be there to drive financial inclusion. While the risks that come from corruption issues on the ground are serious, the risks of not being there on the ground for their company and for the economies and environments in a number of countries in Sub-Saharan Africa are greater,” he concluded, as he highlighted Covington’s role in terms of being an external advisor that helps companies operate safely in the continent while acting as an enabler for critical investment activity on the ground.