“The Company that bribed the world” – 7 risk lessons we learnt from Unaoil

Note: The phrase “The Company that bribed the World” was first used on theage.com

In business, perception is half the story about reputation.

The Unaoil story:

Since the turn of the century, slow growth in the West has forced major multinationals seeking new avenues for growth to gaze longingly towards the East; and now Africa. The only hiccup is that these new regions of growth are politically and economically different from what the western majors are used to; so in stepped Unaoil and co.

Unaoil is a firm based in Monaco, which has been implicated in investigation reports (the report) by Huffington Post and Fairfax Media as covertly bribing government and private officials to secure oil contracts for Unaoil’s clients.  According to reports, the FBI, US Department of Justice and anti-corruption police in Britain and Australia have launched investigations into Unaoil.

Unaoil operated by holding its self out as a credible business that could help multinationals wary of corruption and difficult policy terrains of the Middle East and Africa, win contracts. Unaoil claimed it had local know-how of the specific industries and policy environments that its clients wanted to operate in and, Unaoil’s proposition was for multinationals to leverage its country and industry knowledge to win contracts and without getting smudged by oil dirt. In exchange for helping, Unaoil was entitled to million dollar payments.

According to the reports, after securing a client’s instructions to help bid for a contract, Unaoil’s “operatives then bribe officials in oil-producing nations to help these clients win government-funded projects. The corrupt officials might rig a tender committee. Or leak inside information. Or ensure a contract is awarded without a competitive tender.”

But Unaoil was not the only one in the business of providing ‘local capability.’ For decades, companies in the West have been sold on the claim that it is nearly impossible to get deals through in the developing world without greasing palms. Well, while this is a half-truth, it is a significant half-truth. On 11 February, 2009 the US Securities and Exchange Commission announced that KBR and Halliburton had agreed to pay a total of $579 million in fines for paying about $180 million in bribes (as part of a joint venture of firms) to Nigerian officials over a ten year period in order to secure a $6 billion Dollar gas project in Nigeria. A SEC report reads “as early as 1994, members of the joint venture determined that it was necessary to pay bribes to officials within the Nigerian government in order to obtain the construction contracts” KBR was a subsidiary of Halliburton at the time. Interestingly, KBR was also indicted by the US Department of Justice for kickbacks related to Iraq war contracts that fetched the company $39.5 billion according to a report by the International business times.

Sometime in 2007, a multinational (Multi S) looking to win a multi-million dollar power project in Nigeria engaged another expatriate firm (Firm C) that claimed it had expertise of the Nigerian market and could provide the local capability needed to put together Multi S’ bid for the contract. Firm C in collusion with a Nigerian partner bid and won the contract in the name of another company (Company X), owned by Firm C and Company N. But the contract was eventually frustrated and overtaken by events. By this time Company N learnt of Firm C’s inappropriate behaviour, revoked its contract with it and sent its own employee to represent it in Nigeria. The government would later award a different contract to a consortium of Multi S and another company, different from the one previously awarded to Company X. But when Company N learnt of the contract awarded to the consortium, Company N and its lawyers sued Multi S and the other member of the consortium in 2 respective suits in claims worth more than $200 million Dollars for agent fees and legal fees. Company N learnt too late that outsourcing contract bidding to an agent with ‘local capability’ could be really expensive.

Among lawyers and professionals in compliance, the news of Unaoil’s massive bribery scheme is cause for concern. How Unaoil successfully managed to win clients such as Halliburton, Halliburton’s former subsidiary KBR, Rolls-Royce, Italian oil giant Eni, Hyundai and Samsung is ingenious.

What is interesting is that Unaoil seemed to have scaled some due diligence & anti-bribery reviews. It was the subject of due diligence investigation by a partner in the US law firm, Hughes Hubbard & Reed on the request of KBR after the Nigeria Halliburton scandal, and the report from the law firm again found Unaoil safe and not a corruption risk.

7 Quick Takeaways:

1. Businesses must begin to do more themselves and limit how much it outsources.– In 2007, Halliburton announced that it was moving its corporate headquarters to Dubai as it wanted to win more contracts in the East. David J. Leser, Chairman and CEO of Halliburton now operates from Dubai, according to information on Halliburton’s website.
2. If companies must outsource to agents who have local know-how, they may consider imbedding their own staff with the agent company’s team to monitor the processes. This may not eradicate the risks but it would substantially minimise them.
3. Finally, as the consequences of corruption are usually costly, businesses must develop more pragmatic approaches. One very important approach would be to look beyond the corporate veil and judge a company by the character of its owners and directors. Reputation is usually what a business sells to the world, it does not tell the story of the character of the people who run the business.
4. For KBR from winning no-bid contracts in Iraq under questionable circumstances, to involvements in the Nigeria bribery scam it appears that with some companies, corruption is institutional and like kleptomania, nearly involuntary. With so many red flags, who still needs to do a due diligence on KBR?
5. Directors must get involved in every way. There is no way of reading the minds of managers and employees but sometimes the signs that someone is acting unethically are always there. Trust is important in business, but no one says not to verify. The Report indicates that “a Rolls-Royce manager negotiated a monthly kickback for leaking information from inside the British firm.”
6. Law firms and consultancy firms must exercise even more care. Unaoil teaches us that conventional due diligence measures may not be enough. It has been suggested that probably the biggest limitation on the due diligence by Hughes Hubbard & Reed was that it relied on documents and information provided by Unaoil and not independent on the ground sources.
7. Following the Halliburton bribery scandal in Nigeria, KBR faced severe penalties in the US. Hughes Hubbard & Reed may be professionally liable for any punishments KBR may suffer as a result of the DD report. It is noteworthy that on the basis of the DD report, KBR positively recommended Unaoil to at least one more firm. Clearly while advising on risk, risk consultants run significant risks themselves.

In business, perception is half the story about reputation, but reputation is everything in business.

The Corporate Mask Risk – The young madness in Ibeju-Lekki

Over and over, we find that, businesses put profits first, ahead of their integrity and customer/client’s interests. Property transactions in Lagos are usually high value transactions, consequently the risks of getting it wrong are higher. Unsurprisingly, land owners in Lagos have made a business of defrauding as many people as possible by leading unsuspecting persons into buying land which had been previously sold, and in other cases selling land that does not belong to them. These land owners are commonly referred to as Omonile. Over the years, land buyers have grown cautious when dealing with the Omonile, and now lean towards buying from real property developers and corporates at higher prices. However, there is an emerging trend; corporates are now used to mask otherwise defective titles. And because of the “hasty” presumption that title passed on by corporates are “legit”, buyers lower their guards.

In the Ibeju-Lekki area of Lagos, property transactions are happening at a frenetic pace. Why? Because the Ibeju-Lekki area is going to be the next big hub of commerce. The new Airport, Dangote Oil Refinery and most importantly the Lekki Free Zone are all within a few kilometres of one another within the Ibeju-Lekki area. And where money goes, population growth follows. Rent in the area is going up, as construction workers and administrative staff of the respective companies move in. But the challenge here is that unscrupulous individuals and businesses are cashing in on the frenzy to rip-off unsuspecting individuals/corporates. Beside the well documented Omonile epidemic, the new risk is the “corporate mask racket”.

As with most “public interest” development projects, government usually acquires land belonging to private citizens in exchange for “compensation”. Upon acquisition, ownership of the land is transferred to the government. It is immaterial that government does not make use of the land when intended, or even at all. The original owners cannot deal with the land any more. In the Ibeju-Lekki area, the original land owners are not backing down. They are selling land already acquired by the government.  It is true that on the application of the land owners, government may excise any part of the land previously acquired. The implication of the excision is that the land can be used and dealt with as though it was never acquired. But before any land that was previously under acquisition may be dealt with, there “must” be an official government authorization by way of a gazette proclaiming the excision.

The average land buyer presumes that once it appears that the ownership of the land is not being contested or if the land appears unencumbered, then they may well proceed to pay for it. Worse still is that land owners in Ibeju-Lekki are “purportedly transferring” vast swaths of land under government acquisition to corporates who are in turn selling to unsuspecting persons. In some cases, because the land owners/corporates have applied for excision, they sell, without approval for excision from government, under the guise that the application for excision is as good as approved.

Corporates have always enjoyed the presumption of legality. Unlike the Omonile, land buyers presume that dealing with corporates affords certain safety nets that dealing with Omonile do not afford. For one, it is presumed that in the event of a defective title, it is easier to chase corporates for refund than Omonile. While this “may” be true in ideal cases, given the treacherously long time it takes to litigate land disputes, no buyer should enter into land transactions clinging to presumptions when a little due diligence can bring absolute certainty or considerably reduce risks and uncertainties about the title being transferred.

Proper due diligence may involve:

1. Visit to the land registry
2. The office of the Surveyor-General
3. Court
4. Physical examination of the land
5. Corporate Affairs Commission

Another peculiar risk of dealing with corporates is that in some cases they obtain only one certificate of occupancy in respect of large tracts of land. They then develop and sell or simply sell to different buyers. Typically, the corporates retain the certificate of occupancy. The challenge here is that, some corporates do not include renewal clauses in most of the documents of transfer in respect of the term of years transferred. A renewal clause is important because legally, land in Nigeria belongs to the Governor of the respective state. What a certificate of occupancy entitles a holder to is a term of 99 years. Without a renewal clause inserted in the document of transfer between the corporates and the buyers, it would appear that upon the expiry of the term of years in the certificate of occupancy, the title of persons who bought from the corporates also extinguishes, and without any duty on the corporates to apply for a renewal of the certificate of occupancy. Worse still is the uncertainty created by the possibility that the corporates can argue that upon the renewal, buyers may have to also renew/ or pay again, since technically the title of all those who bought extinguished on the expiry of the certificate of occupancy. There is no clarity about what would happen as most holders of the certificate of occupancy are well within the majority of the 99 years, but what is clear is that the persuasion of better judgement is for buyers to insist on inserting renewal clauses in their documents of transfer to take care of that uncertainty.

Risks are a part of commerce and business, but failing to do proper due diligence increases the probability that things could go wrong.

From Panama With Love – It May Be Legal But Still Risky

       “there is no way of playing in the mud that does not get you stained.”

 

It simply does not follow, that operating offshore accounts in offshore tax havens translates to illegality.

The overwhelming global opprobrium pouring out on individuals and companies named in the Panama Papers leak is understandable within the contexts of “some persons” looking to wriggle through tax legislations in order to maximize profit/income. You remember that loud argument that everyone needs to pay their fair share? While there are concerns about money laundering and individuals hiding proceeds of unlawful activity, anyone listening through the noise finds that the most wailing is about, people “purportedly cheating” the system.

It is true that some people are cheating tax systems, for the most part, this is simply a moral issue. For the rest, the authorities are well within their limits to scour the leaks and their books for evidence of wrong doing and then prosecute wrongdoers.

According to a recent Latham & Watkins Trace webinar, there are indeed legal purposes for “offshore” regimes such as:

• Tax Planning
• Avoiding double taxation
• Tax efficiencies
• Personal Privacy
• Reducing Regulation
• Sophisticated and Secure Financial and Wealth Management
• Favorable and Sophisticated Legal Systems
• Efficient and Inexpensive Registration Processes

Legitimate tax planning is a big part of global commerce. Credible businesses engage credible professionals to advice on tax planning. However, relevant professionals must clarify the blurry lines every time and at every opportunity so that clients understand rightly what the real issues are.

Clearly, a business for whom integrity and reputation are critical knows where and when to draw the line. An important principle for any business interested in maintaining its reputation is to keep far away as possible, because there is no way of playing in the mud that does not get you stained.

Reputational risks are easily the biggest risks any business can run, with the potential not just for loss of client/consumer confidence in the short term but also in the long term. Even if the company rights the wrong or eventually is not found  guilty of any wrong there is hardly a coming back from it. Arthur Andersen LLP is a case in point. According to a 2004 survey by PWC and Economist Intelligence Unit, reputational risk ranks as the greatest threat to a company’s market value.

Reputation is everything, and businesses must protect it with everything

The Nigerian risk – what we learnt from MTN Nigeria’s risk appetite.

For a business operating in Nigeria, the pitfalls can be many. Weak and unpredictable regulators and a debilitating culture of facilitation payments are an ever present concern. But also more concerning is a poor (in some cases, non-existent) culture of risk assessments and management among small to medium sized businesses and in some cases big businesses. Foreign multinationals bring with them a culture of risk management and compliance, fine-tuned by years of learning and strong enforcement regimes in their home countries. They understand risk and therefore invest time and resources into training employees to understand the importance of risk management.

Many years of operating in Nigeria can weaken a business’ culture of compliance and risk management. For many years, the attitude of the average public servant was to get “a cut” while there was still time, and so greased palms meant businesses did not have to worry about rules and regulations. In Nigeria, businesses operate without a management level awareness of the business’ compliance obligations and risks.  For some businesses, risk management and compliance comes down to email correspondence with a boutique lawyer somewhere in Yaba or Victoria Island. Such businesses do not maintain an inventory of risks nor have a method of measuring their exposure to such risks.

There are multibillion Naira businesses that do not have legal departments nor law firms on a retainer. There are many businesses who have never filed any statutory returns with the Corporate Affairs Commission since they commenced operations, not to talk of the FIRS.

It is very poor management for a business to treat risks lightly. Every business must have a management level officer whose responsibility it is to oversee risks and to report on them. Compliance and regulatory requirements must form part of a business’ management concerns, with proven professionals overseeing risk control systems and the business’ broad strategies for managing and dealing with them; there should be no half measures.

Every business must pursue a policy of regulatory compliance and risk enlightenment for employees. And for third and fourth parties, businesses must insist on compliance every step of the way. The reason is very simple, the actions of employees or management staff or business associates can have very significant implications for the reputation of a business. The existential imperative. Businesses have to weigh the cost of complying with regulations and the risks of default. Leaving the job of assessing risks to an individual who also has a job to grow profits can create a conflict that may usually be trumped by the usually stronger imperative to make more profit. But because risks can bring a business down there must be a more compelling existential imperative to treat them urgently.

All the foregoing could not be better illustrated than by reference to the MTN Nigeria fine. Sometime in October, 2015 the NCC fined MTN $5.2bn for MTN’s failure to disconnect some 5.2 Million unregistered subscribers on its network. Someone had a duty to know that MTN ran a substantial risk if unregistered subscribers were not disconnected. Did that individual assess the risk and appropriately flag it as a “high risk”, and not a mere compliance risk? Did that individual put the numbers on what MTN’s continued default amounted to in terms of Naira? Was the responsible management staff more concerned about the possible loss of revenue if the unregistered subscribers were cut off than the risk the business ran if the regulators acted? We may not know what transpired between the guys in MTN’s regulatory and compliance department and MTN’s management but clearly someone who had a duty to act on the risk failed to do so.

An interesting feature of doing business in emerging markets like Nigeria is that investors come to the table concerned about the risk and compliance landmines. They would have heard of Nigeria’s endemic corruption, its elaborate top to bottom level culture of facilitation payments and the confusion of multiple regulatory agencies.  These heightened apprehensions about the risks mean that such investors would be weary of dealing with a Nigerian business that does not have a culture and structure of risk management and compliance.

The need for risk management cannot be over-emphasised, and better judgment recommends that businesses act early and clearly.