Large projects in corrupt environments often face disruptive demands by politicians or officials seeking personal gain. The operational and reputational risks these pressures pose are compounded by the threat of prosecution of senior executives under the US Foreign Corrupt Practices Act, and the UK Bribery Act – which hold company executives legally responsible for ensuring their organisations do not act corruptly. As a starting point companies must implement a no-tolerance culture within the organisation. This must be led from the top and have clear control systems in place. Beyond this there are a number of innovative approaches companies can take, limiting the risk of cancellation of licenses, legal proceedings against key executives and reputational damage.
This note highlights patterns to watch out for when working in a corrupt environment, and further approaches that may be helpful. The list below is broad-brush, in contrast to the detailed strategies we develop for clients, and is intended simply to provide some food for thought.
Common pitfalls companies face*
- Contracts awarded under questionable circumstances are often reviewed and even revoked years after they were signed. A change in government can often bring about a review of past contracts, and result in government action against the license holder – whether or not it was involved in the original agreement.
- In countries with a reputation for corruption, resource companies may face the double jeopardy of pressure to pay bribes and a perception that they must have done so in order to make progress at their projects.
- In smaller economies there may be limited choice of contractors, some of which will be controlled by close friends or relatives of ministers or senior officials.
- Politically connected individuals may subvert a company’s social investments through, for example, trying to govern who is admitted to company scholarship schemes or ensuring supportive parts of the electorate receive the greatest share of project benefits.
Examples of firms facing tough operating environments
- Vale suggested it may have to write down its entire $500m investment at the Simandou project in Guinea after a government committee accused its joint venture partner BSGR of paying bribes. The previous license holder Rio Tinto has also launched legal action against both Vale and BSGR alleging they were part of a conspiracy to steal its rights. BSGR and Vale both strenuously deny any wrongdoing and all the allegations and claims against them.
- At an Anglo American’s project in Latin America, well-intentioned social investment in a maternity hospital was manipulated by a mayor to bolster his popularity in the lead up to elections, exposing the company to potential accusations of supporting a political candidate.
- A number of major oil companies operating in Equatorial Guinea suffered international reputational damage due to their association with the allegedly highly corrupt regime. Avoiding perceptions of corruption is particularly difficult because political and business interests in the country are often closely interwoven.
- In 2011 Tullow was accused by a member of the Ugandan parliament of securing oil contracts through bribery, in a move seemingly motivated by an intensifying political power struggle. Despite strong denials by Tullow the incident garnered considerable media coverage.
Expert comment: Edward Bickham, Critical Resource Senior Advisor
Edward was Executive Vice President, External Affairs for global mining group, Anglo American, 2000-2009. His responsibilities included the delivery of the company’s corporate ethics and anti-corruption approach.
“When operating in a corrupt environment, a consistent and unambiguous commitment from senior leadership to the anti-corruption strategy is vital. It must be clear to employees and stakeholders that the anti-corruption strategy is not mere ‘lip service’, but a fundamental corporate value. Where there is any suspicion of malfeasance, strategies and policies must be backed-up by swift action.”
Best practice approaches*
- Companies must ensure that the basic foundations are in place to guard against corruption. These include: ensuring proper due diligence is carried out; building awareness of and compliance with any national and extra-territorial regulation; and pursuing measures to promote transparency where appropriate.
- Corporate guidance on managing corruption may be viewed cynically on the ground, and therefore needs strong reinforcement
- Firms should seek out partners including, for example, donor agencies, business alliances and civil society groups. A company can win trust and support by contributing funds or expertise to anti-corruption and transparency initiatives.
- License concessions and fiscal/royalty arrangements are more secure against allegations of corruption when based as far as possible on standard terms. Where there is a deviation, and the risk of revealing commercial secrets is not pressing, firms should consider pro-actively publishing the key terms.
- Where other approaches have been unsuccessful firms should not be afraid to report attempts at extortion to the top in the host country. Where senior political leadership is made aware of such incidents by a major inward investor issues can on occasion be swiftly resolved.
Examples of best practice
- Cerrejon Coal in Colombia tackled opacity around its royalty payments to local administrations, and sought to create pressure for better quality of expenditure by the provincial authorities, through multi-stakeholder initiatives to encourage transparency around revenues and expenditure, and capacity building programs for local government.
- Nexen established an independent project steering committee, including a broad group of stakeholders drawn from government and civil society, to ensure that entry to its scholarship program in Yemen remained meritocratic. Initially influential individuals had exerted pressure for their preferred candidates to be admitted, but Nexen’s steering committee had sufficient respect to resist pressures and remain meritocratic.
- Newmont insisted that the Ghanaian government put the terms of its Ahafo concession into the public domain, including by tabling the agreement in parliament. This was intended, among other things, to make it more difficult for opposition parties, in the run-up to any future election, to disavow the agreement and to imply that it was based on unequal terms.
- By taking a public leadership role on transparency companies can win civil society support. Rio Tinto and Anglo American won praise for voluntarily disclosing tax payments in the main countries in which they operate, while Tullow Oil and Kosmos Energy were applauded by NGOs for their commitments around project-by-project reporting, and voluntary publication of key contracts, respectively.
*Please note these points are illustrative, synthesised and do not reflect the complexity of the situations or management approaches used