Centre for the Study of Corruption

Nicknamed the ‘bulldozer’, Pombe Magufuli is fast becoming a proverbial knight in shining armour just weeks after he was sworn-in as the fifth president of Tanzania. His radical approach to public service reform, economic austerity and anti-corruption is being hailed across the African continent and has been a subject of viral memes on twitter.

A day after he was inaugurated, for example, the president took an unannounced and unguided tour of one of the national hospitals, and finding it in a shocking state – with patients sleeping on the hard floor and vital diagnosis machines broken – fired the board and acting director there and then (see here). In another surprise visit by Magufuli’s new Prime Minister, Kassim Majaliwa, to the port in Dar es Salaam, it was discovered that taxes amounting to 40 million USD had not been paid. The president immediately suspended the Tanzania Revenue Authority’s (TRA) Commissioner General and had him arrested together with five other top TRA officials.

Magufuli has also banned business class travels for all public officers except the President, Vice President and Prime Minister, introduced significant cuts in tax exemptions and replaced the often lavish national independence celebrations with a nation-wide clean-up campaign. He has promised zero-tolerance for corruption and ordered the creation of a special court for corruption cases (see here).

These unconventional methods raise some interesting issues concerning the fight against the endemic graft that has dogged the African continent in the past 40 years.

One argument is that when corruption is entrenched and normalised, as it is believed to be the case in Tanzania, such an abrupt intervention is critical. The radical approach can introduce ‘uncertainty’ in the corruption-prone environment, breaking the shared expectations and resulting predictability that sustain corrupt systems. The chain of corruption can be broken, albeit temporarily, when potential wrongdoers are unable to anticipate the type of response their actions will elicit from the top political echelons.

Additionally, the abrupt crackdown on corruption can instil fear among the ‘usual’ offenders working in cahoots that often straddle the private sector and government. This is already happening in Nigeria where the fear of the new president, Muhammadu Buhari, is said to ‘be whipping [the] Nigerian bureaucracy into shape’ (see here). Indeed, instilling fear was one of the important weapons in the anti-corruption arsenal of Singapore under the leadership of Lee Kuan Yew. When he was quizzed about his fear-instilling methods, Yew once remarked: “Between being loved and being feared, I have always believed Machiavelli was right. If nobody is afraid of me, I’m meaningless.”

But Yew seemed to understand that healing the cancer of corruption requires a careful combination of fear, voluntary compliance by public officials and broad-based community involvement. In addition to raising salaries of public officials, there were efforts to encourage the Singaporean public to be vigilant and to take full ownership of the war on corruption. Incidentally, the consistent show of political will and commitment to fight corruption is a decisive short-cut to winning the hearts and minds of the citizens to rally behind an anti-corruption campaign. A genuine commitment to tackling corruption by a country’s number 1 can inspire a badly needed citizens-led anticorruption movement and become the single most important bulwark for the islands of integrity or the so-called ‘positive-outliers’ in Tanzania.

The challenge is, however, that the political conditions that exist in Tanzania may not be conducive for the Singaporean approach to anti-corruption. Lee Kuan Yew could literally go after anyone suspected of corruption without risking his political career; he could afford to step on big toes and still remain in power. Being the most popular figure in his People’s Action Party (PAP), and in Singaporean politics in general, Lee was relatively unencumbered by political machinations, a luxury that Magufuli on the other hand can only dream of. Although he is credited with being one of the most consistently well performing ministers, is relatively young (55 years old) and has a chemistry PhD, Magufuli was not his party’s (Chama Cha Mapinduzi) first choice. He owes his nomination to the alleged fall-out between the party’s top brass and the former Prime Minister, Ngoyai Lowassa, who was more popular and viewed as the strongest contender.

While Magufuli’s impressively ‘clean’ record during his tenure as the minister of Public Works demonstrates his commitment to integrity, and lends credence to his anti-corruption drive, one wonders whether he has the political wherewithal to take on the big wigs of the Chama Cha Mapinduzi (CCM) when the need arises. He might be ‘clean’ but some influential members of the CCM may have put their hands in the cookie jar; can the president remain true to his word and crack the whip without fear and favour?

For someone who started so brightly, showing prejudice in an anti-corruption clampdown can cause more damage than was ever inflicted by all the former presidents combined. It has the potential to generate more cynicism among the ordinary Tanzanians who have pinned their hopes on him to take the country forward.

In the context of multi-party pluralism, the war on endemic corruption can never be a one man show. The new president needs to find strong allies within the CCM and the bureaucracy. The former is more urgent. Intra-party collective action against corruption will sustain the momentum and ensure that other arms of state, especially the judiciary, take anti-corruption much more seriously. But where the incentives for intra-party anticorruption collective action will come from is, so far, an enigma. Why should the CCM be more committed to the war on corruption now than ever before?

Moletsane Monyake, University of Sussex

Strange things have recently been afoot in the normally sanguine world of German party finance.   Back in October 2014 the Alternative for Germany (AfD), a new(ish) right-wing party, mutated in to a gold selling business so as to claim extra funds from the state (see here). This was quickly followed in December 2014 by ‘Die Partei’, a satirical party with one MEP (see here), deciding that it would take the oddness one step further. It began selling money to help it access public funds to which it otherwise wouldn’t have been entitled (see here for an English language summary of both cases).

By December 2015 the sublime was turning in to the ridiculous. The AfD was once again involved, although this time unwillingly. Despite a year marked by internal strife (see here), the AfD was flying high in the polls. Indeed, for the first time in its history it was registering around the ten per cent mark as it looked to make the most out of not only the Eurocrisis but also Europe’s summer of immigration trauma (see here for more on the AfD’s rise).

The AfD’s successes were clearly too much for some of its opponents. Members of ‘Die Partei’ (yes, them again) and a number of small, left-wing activists launched a campaign on the internet (see here) that had the potential to financially ruin the AfD. Not content with opposing the AfD’s policy package they called on the AfD’s opponents to donate money to the party.   How, one might ask, would donating money to a party potentially cause it problems? Surely the more money a party has, the easier it is for it to carry out its daily affairs? No, not always.

How was the ruse going to work? Anti-AfD Germans were asked to donate small amounts to the AfD – the numbers in play couldn’t get much smaller, in fact, with 10 cents being the amount mentioned. They were asked to do this online, by transferring money via companies such as PayPal or Sofort (simply a German version of PayPal). Every time a payment is made via one of these providers, the receiver (in this case the AfD) has to pay a commission. This varies from provider to provider, but Der Spiegel (Germany’s largest weekly newspaper) reported that the costs tend to be between 0.9 and 1.9 per cent of the value of the transaction (see here). On top of that every transaction comes with a flat fee – again this varies, but it’s generally between 25 and 35 cents.

So, in theory, a 10 cent donation could cost the AfD roughly 30 cents. The AfD would be able to claim back some of this via the system of state subsidies, but not enough to cover the transaction charges. For every Euro that the AfD raises it gets 38 cents from the state – it doesn’t take an expert in arithmetic to work out that that would still leave the party well short of being able to cover the costs that come with these donations.

On the one hand, the AfD reacted in a reasonably relaxed fashion to the threat of death by donations. It claimed, for example, that it had good relationships with the likes of PayPal and Sofort and that the contracts it signed forbad charges from being levied that were greater than the transactions involved. If that’s true, then the AfD is indeed covered and has nothing to worry about. Indeed, a few clever-dick activists trying to bring a party down can often help a party make itself look like it’s the victim of a campaign, and that can go down very well with potential supporters. A case of all attention being good attention, maybe.

On the other hand, if all really is that sanguine then one wonders why the AfD has threatened to take legal action against those pushing the initiative. The background to these concerns is quite complicated, but in essence the AfD is worried about hacking campaigns and data management. Come what may, the party made it clear that if any of these ‘campaigns’ are seen to help the AfD’s opponents undermine its online presence, then the AfD is clear about who it will be holding responsible.

Huffing and puffing to one side, all of this might ultimately be of little real relevance anyway.  By 11 December it was being claimed that the princely sum of Euro 167.23 had been donated in this fashion, hardly the stuff of which financial ruin is made.  But, for a party where money is very tight (see here for more on that), it’s clear that the insurgency is nonetheless an awkward distraction.

The sight of Germans ruthlessly applying rules in absurdum is in and of itself mildly amusing, but these cases also tell us a little more about what we should and shouldn’t expect from party-funding debates. The German party-funding regime is short on neither laws nor judicial attempts to interpret them, but that hasn’t saved it from parties and activists trying  to ‘play the game’. Party funding regimes never stand still as rational actors do their level best to get the most out of them – or indeed to attack their opponents via them if they can.

In and of itself it is unlikely that the AfD will fall apart at the seams on account of these donations, but it does show us that creative souls will use loopholes to further their own interests.  Sometimes in a decidedly comical way, but sometimes in potentially more serious ones.  One good reason to keep an eye on developments in funding regimes (in Germany and beyond) in the years to come.

Dan Hough

In August 2010 the then Communities Secretary, Eric Pickles, announced that he wanted to empower “an army of armchair auditors” to scrutinise the work of his department.  This move would signal the beginning of a “new era” of government transparency and accountability with any outgoings of £500 or more being publicly revealed online. The wider world was subsequently going to have access the nuts and bolts of how in excess of £300m (the departmental budget in 2010) was being spent.

And this was clearly only meant to be the start of things.  David Cameron’s Conservative/Liberal Democratic government embraced this new world of openness and accountability, opening up information on a whole range of things from crime statistics to spending commitments and from contract awarding to hospital waiting lists.  This new openness would not only help to clamp down on waste, but it would also drive both efficiency and responsiveness (see here).

Furthermore, the government promised to develop a system of performance management based around a range of performance indicators.  The 200 plus indicators would be an ideal tool for the public to hold those with entrusted power to account.   This was, or so it seemed, bordering on the revolutionary.  Engaged citizens would be able to unpack and dissect the minutiae of government performance and the age of Sir Humphreys pulling the strings facelessly from behind a cloak of anonymity would be behind us.

How, then, has this veritable army of auditors faired?  And how has government and the process of governing changed as a result?  The answer to the first question gives a very strong steer as to the answer to the second; impressive though the brave new world sounds, the army has not so much organised a mutiny as never really enrolled in the first place.  There are one or two notable, and quite specific, exceptions (see here and here), but as Ben Worthy and Robyn Munro have argued, there are plenty of good reasons why one can’t really blame prospective armchair auditors for falling at the first hurdle.

A recent report by the Institute for Government (IoG) outlines three specific reasons why this drive to increase people power has at best moved forward only patchily.  The IoG boils it down to poor quality data, poor communication (understood as inadequate explanations of what the data means) and very little evidence that there was any great public willingness to use the system in the first place.

Whilst the third of these is something that should probably not surprise us too much – minus the pay of a fully trained auditor it can’t be that big a surprise that people aren’t queuing up to be amateur forensic accountants – the existence of the other two problem areas are disappointments.

The IoG, to be fair, was quick to recognise that some government departments (and service providers more broadly) did do their best to be open with both data and explanations of it, but some appeared to take their obligations anything but seriously.  Data was often simply not available, or when it was available it was in a format that was unsearchable or very hard to actually use in any straightforward sense.  A pile of .pdf documents the size (if printed out) of a hefty doorstop might well fulfill transparency obligations, but it is hard to claim that all but the unhealthily obsessed can do anything with these things.

Over the course of the last few months a number of websites and apps have been developed to help make data-sifting easier.  And, more specifically, to enable the interested external observer to uncover potential malpractice.  If you’re interested in public procurement data, for example, then http://www.spendnetwork.com/ is a useful starting point, while https://openspending.org/ claims to ‘track and analyse public financial information globally’.  In November 2015 the University of Sussex and Transparency International UK took a closer look at what these websites and apps might offer, convening a focus group to try and unpack their usefulness.  15 students on the MA in Corruption and Governance plus 3 PhD students on the SCSC’s PhD programme sat down to see what they could make of them.  The students looked to try and uncover potentially interesting transactions or processes in a number of the UK’s local authorities.  They used the websites to help them, as well as conventional search engines such as google.  The aim was to see if an interested observer could find anything of note.

The outcome was predictable; the students found little of genuine substance.  On the one hand, the data remains both patchy and largely impenetrable.  The numbers mean little to those who don’t understand the context, and there is effectively nothing out there explaining why decisions were made, specific contracts awarded and government took the form that it did.  On the other hand, unless an armchair auditor possesses the talents of Lieutenant Colombo, the patience of a saint and, perhaps most importantly, some sort of tip or piece of inside information to help them head in the right direction, then he or she won’t be able to make much progress at all.  As one of the MA students, Koya Rahman, noted “I spent 90 minutes looking hard at all of this, but, in truth, if I’d been at home and not part of this experiment I’d have given up after 10 minutes”.  Who can blame her?

Perhaps it is nonetheless too soon to be so downbeat about people power in this area.  The rise of the open data agenda and the existence of a number of initiatives to both broaden its scope and streamline the processes that underpin it mean that things may look very different in the near(ish) future.  David Cameron, to be fair, does seem to have embraced the agenda rather more than many of his international contemporaries.  But, the devil really is in the detail, and unless both the IT infrastructure of the public sector can be improved and the accessibility of the data is enhanced then armchair auditing will remain the privilege of the (very) few.

Dan Hough

Colonel Sambo Dasuki, the former National Security Adviser to the Federal Government of Nigeria, is waiting to go on trial for corruption in the richest, most populated and many think the most corrupt country in Africa. This story (see here for more) is not in the same league as the case of Sani Abacha, a former corrupt General and President of Nigeria who stole billions, but it is still serious.

Dasuki was high on the new(ish) Nigerian president, General Mohammadu Buhari’s, hit list, and one of the first people to be charged with corruption when he took office in April. Buhari made it clear to the world that security and corruption were his first two national policy priorities and he wanted to be seen to act on both early on. That led to Dasuki quickly being put under house arrest.

Dasuki had played a prominent role in helping to destroy public faith in Nigeria’s once internationally respected army and it is to be hoped that the trial will shed more light on exactly how he did this. Buhari certainly thinks that Dasuki knows much more about large-scale corruption in the military and the theft of money than he will admit. This is money that was meant to help ordinary soldiers fight terrorists in the North-East of Nigeria, on the borders with Chad and Cameroon.

For his part, Dasuki had been the senior military officer responsible for advising President Goodluck Jonathan about national security and spending on the armed forces.  It appears that he had advised him of the need for a massively increased budget for the army in 2014 – all well and good, but, again, where precisely did all that money go? There is very little evidence that it was spent on new equipment, much needed weapons or vehicles (see here).

Dasuki’s job had also been to explain what the military were doing to fight terrorism, and, as became increasingly clear, to push any blame for failure on the part of the government on to others such as the main opposition party, the All Progressive Congress (APC).  The APC are dominant in the northern states of Nigeria where Boko Haram are most active and so are very much in the middle of Nigeria’s gruesome battle with a hard to pin down terrorist group. The then government’s (and Dasuki’s) argument was that the military could not defeat Boko Haram while APC Governors in the northern states supported Boko Haram and undermined President Goodluck Jonathan. This was a serious accusation that was understandably not taken lying down by the APC whose reputation was on the line in the run up to a national election in March 2015.

It also looked as if Dasuki may have gained traction in the UK with his defence of the Nigerian military’s obvious failure in the north, and his thinly veiled accusation against the APC. In the UK Parliament, for example, Andrew Rosindell MP asked the then UK Foreign Secretary, William Hague, how the UK was engaging with Nigeria’s leading opposition party (the APC).  This followed a debate in parliament in which Labour MP Sandra Osborne sought to examine allegations of links between the APC and Boko Haram (see here).

Was the APC part of a conspiracy funded by the northern states? Lai Mohammed, APC Press Secretary (and now Minister of Information), came to London at very short notice in September 2014 to argue the opposite case in the UK Parliament (see here for his reply to Dasuki). Dasuki’s pamphlets, meanwhile, describing how Boko Haram had increased its’ operations, were distributed by Nigerian Consulate officials in Portcullis House during Lai Mohammed’s speech.  Quite where this will all end is not clear, but it is a story that is worth following.  The trial is ongoing in Nigeria and this episode will tell us more about how the new president intends to deal with serious corruption allegations in the military.

Martin Brown

MA Student

Sussex Centre for the Study of Corruption (SCSC)

Just before the Lesotho parliament was dissolved ahead of the general election in February 2015, the then (and still) Deputy Prime Minister (DPM) provoked a social media storm by suggesting, in parliament, that government would have to pay off the interest free loans that legislators had taken as part of their benefits. This, he was quoted as saying, would ensure the MPs who fail to retain their seats do not default on their payments. It would also act as an added incentive for legislators to agree to the dissolution of the then 2 year old 8^th parliament.

At face value, this seemed to defy all political logic coming from a man cast as venal and greedy in both mainstream and social media circles. One would have thought the scandals in which he was embroiled would make him a fraction careful with what he says as he tries to endear himself to the public and hopefully do well in the election. But again, the whole thing seemed to fit the narrative that the DPM was playing a political trick of sorts, and trying to make friends on both sides of the political aisle as he projects himself as being concerned about the welfare of legislators regardless of their political affiliation.

Be that as it may, the political punditry was that the socio-economic and political dynamics that currently exists in Lesotho would not allow any government to ‘spit on tax payers’ by making such hefty payments on behalf of financially reckless individuals. There would be little to no room for political negligence, arrogance and gluttony of the sort that characterised previous regimes. Fast forward 8 months, the pundits are left with an egg on their faces; all but 2 of the 120 legislators who took out loans of M500, 000 (34750 USD) each, have now had these debts fully settled by the government of Lesotho.

Morally reprehensible

The fact that the government has forked out M32 million on behalf of these individuals is a clear indication of the level of rot that has for so long hindered this country’s progress. We are aware of the notion that this may not qualify as ‘corruption’ because government fulfilled its legal obligation as the guarantor, to pay off the loans in the event that MPs were defaulting or likely to default. But so far the evidence that MPs are in fact failing to service their debts has not been presented. For all we know, many of these guys are back in parliament while some are currently gainfully employed elsewhere. Even if these were not the case, it is morally objectionable for the country that consumes so huge a chunk of donor funding, is failing to reign on the spread of HIV/AIDS, violent crime, the bourgeoning graduate unemployment, crumbling basic education and healthcare systems and has its public infrastructure reeling in the shocking state of disrepair, to spend over 2 million USD writing off the debts of individual legislators.

It should be borne in mind that access to the interest-free loans does not reflect the generosity of the banks, but that of the Lesotho government towards the people who are, by national standards, already earning much higher than the majority of the tax-payers. These are the people who on top of their salaries have each a daily lunch allowance of 250 Maloti (18 USD). To put it in perspective, each MPs weekly allowance for lunch is equivalent to an average monthly salary of Lesotho’s textile factory worker.

What makes this even more morally apprehensible is that the “honourable” members who have failed to do the honourable thing of paying their debts are now said to be “entitled” to more interest-free loans. In other words, a bad debt is written off and rewarded with access to more debt, again with government as the guarantor. This is happening in the context in which 50% of the population lives below the poverty line, and where the government is said to be unable to sponsor all students admitted at various higher learning institutions, particularly the National University of Lesotho. These payments are being effected by the very government leaders who, as recently as April this year, complained about the fiscal irresponsibility of the previous administration, and as a result slashed the budget by approximately M3 billion with capital budget suffering the most.

Institutionalised corruption

Sadly, this is not the first time the legal framework is being used to justify the abuse of entrusted power for private gain. As recently as 2006/7, the Lesotho government invoked an obscure regulation to allow statutory employees to purchase its luxury cars for less than 5% of their current value; pricey Mercedes Benz cars were bought for as little as M4000 /280 USD (which is equivalent to what each MP earns as an allowance for lunch in 3 weeks). That caused a huge public furore in the urban areas and partly accounts for the modest performance in the 2007 snap election of the then recently formed All Basotho Convention (ABC).

Any law, policy or regulation that enables a government to do what the Lesotho government did in 2006 or inherit the private debts of individual legislators as it is currently doing, is intrinsically ‘corrupt’. Indeed as Dan Kaufmann argues, corruption includes “some acts that may be legal in a strict narrow sense, but where the rules of the game and the state laws, policies, regulations and institutions” have been shaped in ways that privilege private interests (of especially the ruling elite). In other words, corruption is not only confined to the output side of the political process, wherein officials violate laws, regulations and procedures for private gain. It encompasses the building and maintenance of a corruption-prone legal framework in order to promote and protect the interests of the political elites and their cronies. It is this type of corruption that cripples the entire political process and renders democracy meaningless for a majority of ordinary citizens.

The foregoing notwithstanding- and herein lies the conundrum- even if Lesotho’s laws explicitly prohibited these actions, there are grounds to suspect the government would have still gone ahead and executed its corrupt intentions. There are several incidences in which state officers blatantly ignored the laws when their private interests were at stake. Recent examples include refusals by the former Communications’ minister and the current commander of Lesotho Defence Forces (LDF) to vacate offices after they were legally removed. The LDF has defied several court orders in the past and recently failed to comply with the ruling to release the soldiers suspected of mutiny and hold them in open arrest. An audio clip that airs regularly in one of the local radio stations features the former Minister of Energy, Meteorology and Water Affairs (and currently, minister of Defence) as stating that ‘It DOESN’T MATTER WHAT THE LAW SAYS; no one has the right to prorogue our parliament ”. These are the indicators of the level of systemic corruption that characterises the political economy of Lesotho. In this country, laws and regulations do not mean much (if anything) when they are seen to clash with the interests of the government of the day or powerful individuals within it.

This is the context within which political pundits ought to have interpreted the DPM’s bold contention that government ought to inherit the debts of individual legislators. Seen in light of systemic corruption, that behaviour was not irrational or ill-advised. The suggestion came from the place of assurance that in a country where corruption is not an aberration, but a system in its own right, he would not suffer major political consequences. It is the same assurance that underpins Prime Minister Mosisili’s decision to spend- without flinching- a whopping 15 million (1 million USD) buying Principal Secretaries out of their contracts because his cabinet is uncomfortable working with senior officers who were employed by the previous administration.

The fish rots from the head down

With an ever increasing access to media, more Basotho, especially the youth, are becoming aware of the extent to which public power is being used to advance private interests. This has severe consequences. Firstly, it is eroding institutional trust and the sense of patriotism especially amongst the youth, at an alarming rate. It is becoming more and more difficult to convince young people to love and serve their country; why should they love the country when the political leadership doesn’t care about it?

Secondly, this rampant political corruption is directly linked to poor service delivery, vandalism and misuse of public resources (cars, telephones etc) by public officers and the increased normalisation of petty corruption by street level bureaucrats. The sharp increases in retail bribes for drivers’ licences and number plates is indicative of the fact that most public officials, taking cues from elected leaders, are (mis)using their positions for illicit financial benefits. This can only end when political leaders get their act together and resolve to collectively stop this rot from spreading further and wrecking more havoc on Lesotho’s fragile economy and politics.

Moletsane Monyake

University of Sussex

On 28 September 2015 the US Securities and Exchange Commission (SEC) issued a press release stating that the Japanese multinational conglomerate, Hitachi Ltd, had been charged with violating the Foreign Corrupt Practices Act (FCPA). Hitachi agreed to pay USD 19 million to settle the SEC charges which included the inaccurate recording of improper payments made to South Africa’s ruling political party, the African National Congress (ANC).

On the face of it Hitachi’s FCPA violation is nothing new; foreign company with poor internal controls pays politically-connected intermediary to secure contract. According to the SEC, Hitachi sold a 25% interest in its South African subsidiary to Chancellor House Holdings (Pty) Ltd., a company whose ultimate shareholding was held by the ANC. This allowed profits from power station contracts secured by Hitachi – using Chancellor House’s political influence – to be shared with the ANC backed company. Hitachi also paid a USD 1 million ‘success fee’ to Chancellor House which was inaccurately recorded in the company’s accounts as consulting fees. Despite the familiar pattern, both the nature and target of this SEC investigation indicates a changing regulatory focus.

The last ten years have seen a striking shift in tone from the US regulators who have adopted a more aggressive posture with respect to enforcing the provisions of the FCPA. The US authorities continue to target bribery offences committed outside the US through the use of more stringent investigative tactics and increased cooperation with other enforcement agents worldwide. The Hitachi case is illustrative of this new stance; often constrained by needing the relevant local governments to cooperate with them, on this occasion the SEC appears to have overcome the hurdle by enlisting the assistance of the African Development Bank’s Integrity and Anti-Corruption Department.

Moreover, this matter indicates the broadening sectorial scope of US regulatory interest. Previous FCPA enforcement actions have fallen within the oil and gas industry with the majority arising from West Africa; the Hitachi case is a first for South Africa and falls outside the extractive sector. Given that Japanese companies are increasingly involved across Africa, this change also represents heightened risks for their regional operations.

Growing Japanese FDI

Japan is one of world’s leading economies and whilst its progress into Africa has been slow, the country has made remarkable inroads in expanding its presence and influence. In 2014, the Japanese government promised USD 32 billion financial assistance to resource-rich African nations as part of its bid to cement relations with the continent. Japan recently signed a bilateral agreement with Mozambique – the first such agreement it has entered into with a sub-Saharan African country – and similar investment frameworks are in the process of being agreed with other African countries. These should all encourage more investment in the region.

This commitment to Africa is matched by Japanese companies. In September 2015, the African Development bank (AfDB) and the government of Japan agreed a USD 300m loan to support private sector business under a joint initiative named the Enhanced Private Sector Assistance (EPSA) for Africa. Several large trading entities, including Sumitomo and Sojitz, are active across the continent. Construction firms, such as Mitsubishi, Mitsui, and Hitachi, are also involved in various capacities in a number of infrastructure projects in Africa. According to Japan’s South African embassy, in 2013 the number of private Japanese companies in South Africa increased to 115. Direct investment from Japan has also increased in the country, and its cumulative total as of 2012 reportedly exceeded USD 26 million.

Notwithstanding the above, the popularity of Africa as a high-growth market is pushing Japanese companies into riskier investment terrains at a time when anti-corruption enforcement and awareness is at an all-time high. Hitachi is not the first Japanese company to face the wrath of the US anti-corruption regulators; Bridgestone, JGC Corporation and Sojitz have all been charged with FCPA violations in Latin America, Nigeria and Bahrain respectively. But as Japanese companies develop their new market strategies and pursue more opportunities in Africa, it is important that they are cognizant of the regulatory risks.

Establishing Proper Internal Controls

International anti-bribery legislation including the FCPA and UK Bribery Act (UKBA) require companies to make independent assessments of the ultimate shareholders and beneficiaries of their potential partners. Specifically, partnering with public or political figures and using their position in order to gain a commercial advantage is considered an offence under these laws. In many African countries, information that may identify both the political affiliations of immediate third parties and also the ultimate shareholders or beneficiaries of a company is not easily accessible. As such, Japanese companies should look to conduct comprehensive due diligence that goes beyond reviewing financial accounts and litigation files to include a less tangible narrative, which provides the story behind the public records.

Once a local partner is identified, it is important to ensure the necessary skills and expertise are in evidence, and that any fees paid are proportionate to the services rendered. Further to engagement, internal controls should ensure that all payments made to third parties are properly documented and regularly audited.

Although Japan is a member of the OECD, commentators note that its enforcement of domestic corruption laws is weak and there is no criminal liability for corporations under local laws. This is reflected in its position in Transparency International’s 2015 Exporting Corruption report; Japan ranked as having made ‘little or no enforcement’ in making bribery in foreign countries a crime for its companies and nationals. Whilst it may not be immediately obvious why the Hitachi case would fall foul of US regulations, it is important to be aware of the wide territorial reach of the FCPA, UKBA and other anticorruption legislation. Navigating the complex governance and regulatory environments is essential to international business and a particularly notable factor for Japanese firms establishing business in Africa.

Pamela Wadi

Author:

Pamela Wadi is a director of the Africa Global Risk and investigations Practice at FTI Consulting in London. Pamela also recently completed studying for an MA in Corruption and Governance at the University of Sussex.

Note

This article first appeared on http://www.fticonsulting-emea.com/en/insights/articles/navigating-japanese-african-business-environment