Openness is key to Africa’s success in a data-driven world

Shift to a services era

While Africa’s trajectory remains full of daunting challenges, there is reason to be optimistic. Ratification of the Continental Free Trade Agreement demonstrates critical collaboration between African leaders, and promises to unlock the region’s potential. Equally important, growing investments in broadband ensure that affordable access to leading technology will accelerate the continent’s productivity.

However, the tried and true path to higher income economies through manufacturing is changing. Research by McKinsey Global Institute finds that developing countries have a lot of cheap labor at a time when decisions based on labor cost are declining. Conversely, global trade in services has grown more than 60 percent faster than traditional goods traded over the past decade, and the U.S. International Trade Commission reports that half of all global trade in services depends on access to cross-border data flows.

Globalization is entering a new phase defined by “information,” where millions of small and midsize businesses are building e-commerce marketplaces to trade with the rest of the world. In a digital world, technologies like cloud computing, blockchain, artificial intelligence and machine learning are the drivers of future economic growth. These technologies don’t just benefit from the open flow of data across international borders, they depend on it, and so will Africa’s future.

Cross-border data flows are critical to Africa’s prosperity

The most recent DHL Global Connectedness Index — which ranks 169 countries by international flows of trade, capital, information and people – indicates that African countries lag behind with considerably lower averages of connectedness. The index shows that the gap is greatest in information flows where advanced economies are nine times as deeply integrated as developing countries.

Progress in some African jurisdictions may be undermined by regulations requiring that data remain within national borders. Data localization requirements fall in three categories. The first category includes the broad application of laws designed for outdated methodologies in a digital era where information is captured and processed in a fundamentally different way. The second category stems from growing anxiety around cyber and national security concerns, despite data classification standards that enable organizations to categorize and manage data based on different priorities and levels of sensitivity. A third category appears to be fueled by catchy claims that “data is the new oil.” Is it? The underlying logic suggests that African states should keep and process that “oil” within their borders. But when one realizes that oil is a scarce resource that can be used only once, whereas information is infinitely plentiful and reusable, the analogy falls apart. One thing that is clear in a growing digital age, the future of Africa’s development depends on African states being connected to and trading goods and data-driven services with the rest of the world.

A study by the European Center for International Political Economy on the economy-wide impact of data localization policies in the European Union shows diminished innovation and productivity, and finds that restrictions on the movement of data far outweigh any marginal gains for the domestic Information and Communications Technology sectors. But unlike the European Union, the African continent lacks a common and enforceable data protection regime. Most African states have no specific data protection regulation, and instead rely on a patchwork of civil, criminal and constitutional laws for a data protection framework and individual rights of privacy — which may explain the rush to protect our “new oil.”

Africa’s policymakers are on track to get it right

Africa is at a critical inflection point. The continent’s ability to compete in a services and data-driven global economy hinges on whether African entrepreneurs and enterprises will be free to innovate and scale their products and services using the most advanced commercial cloud technologies powered by cross-border data flows.

Trust in the security of cross-border data flows will increase as the continent adopts harmonized privacy and data protection policies and regulations in line with the most measured and enabling international standards. The African Union Convention on Cybersecurity and Personal Data Protection (Malabo Convention), which seeks to create a continental data protection framework, has been signed by 14 of 55 member states. A working draft of the Digital Transformation Strategy for Africa reflects a priority to support ratification of the Malabo Convention and the Budapest Convention on Cybercrime during the 2020 session of the African Union.

Bottom line: There is good reason to be optimistic about Africa’s development trajectory. Overly broad data localization requirements would undermine the continent’s progress. With global trade in services growing more than 60% faster than traditional trade in goods, Africa’s success in a data-driven era will depend on modern and harmonized regulations that protect the open flow of data across international borders. Africa’s policymakers have every opportunity to get it right.

 

This article was first published by The Africa Report.

 

 

 

 

 

Articulating the Business Case for Investing in Compliance Programs

In our experience, compliance professionals spend a significant amount of time and resources focusing on the “how” – designing, implementing, sustaining, and improving effective compliance programs. This focus is no doubt warranted given recent emphasis by enforcement authorities on the need for corporates to test the effectiveness of their compliance programs. However, we believe it is critical for compliance professionals and their business clients not to lose sight of the “why” behind their compliance agendas, including how to best articulate the business case for investing in a robust compliance program.

When asked why a particular compliance initiative or resource is necessary, compliance professionals may have the urge to rely on guidance from enforcement authorities, framing their response under the rubric of “the regulators’ expectations.” While pronouncements from enforcement authorities can, and should, be a part of such a conversation, relying solely on such pronouncements may not be fully satisfactory to business stakeholders who are not experts in compliance. Worse, it can give business stakeholders the impression that the compliance professional’s response to the “why” question is effectively “because I said so.”

Regardless of the maturity of a company’s compliance program, the ability to effectively articulate the business case for the program can be a vitally important item in a compliance professional’s toolkit, and critical to the overall effectiveness of the program. Among other things, achieving buy-in and support from employees, executives, and directors, as well as external stakeholders, such as business partners, will depend in large part on whether they believe that compliance initiatives are ultimately actually worth the time, resources, and effort.

With this in mind, we briefly outline below some of the key aspects of the business case for investing in a compliance program. As the business case will vary depending on the risk profile, operations, and culture of the organization, there is no “one size fits all” solution here.

  • The Insurance Policy

A number of international legal regimes provide powerful incentives for the development and implementation of effective compliance programs by offering the prospect of more favorable resolutions in enforcement actions. Most notably for companies with potential exposure to U.S. law are the U.S. Sentencing Guidelines, under which a company can receive substantial discounts to criminal fines where it can demonstrate the maintenance of an effective compliance program. Along similar lines, under the U.S. Department of Justice’s (“DOJ”) Foreign Corrupt Practices Act Corporate Enforcement Policy, a company may be entitled to the presumption of a declination of prosecution altogether, or considerable discounts on applicable fines, if, in addition to voluntarily disclosing misconduct and cooperating in DOJ’s investigation, it demonstrates the “[i]mplementation of an effective compliance and ethics program.” In both cases, the ability to put a dollar amount on the value of an effective compliance program, at least as regards the costs of resolving an enforcement action, can be quite powerful in making the case for additional compliance resources.

The UK Bribery Act takes a different approach, providing an affirmative defense for the corporate offense of failure to prevent bribery where a company can demonstrate that it has put in place “adequate procedures.” And even in legal regimes where such incentives are not hard-wired into the enforcement framework, enforcement authorities may consider the strength of a company’s compliance program as a matter of prosecutorial discretion, e.g., as a mitigating factor in the assessment of penalties, or a reason to decline to bring an enforcement action altogether.

  • The Security System

While the potential for more favorable resolution of enforcement actions is, in our experience, one of the most compelling aspects of the business case for investment in a compliance program, compliance officers should also focus on the potential for effective programs to detect and prevent potential fraud, corruption, and other compliance breaches either before they happen, or soon enough for companies to take meaningful mitigation actions. In this sense, a company’s compliance program functions as an early warning detection system.

The potential cost savings in this regard can be substantial. In its 2018 Report to the Nations, after analyzing over 2,600 cases of corporate fraud, the Association of Certified Fraud Examiners estimated median direct losses of USD 130,000 per case, with more than 20% of cases involving losses of USD 1 million or more. Moreover, given that these estimates do not include indirect downstream losses such as loss of business, legal fees, or costs from personnel turnover, they likely understate the true cost of compliance breaches, and, correspondingly, the true value of effective compliance programs in avoiding or reducing such losses.

  • Avoiding Bad Deals

Along similar lines, when it comes to investment transactions or other transactions with business partners, a robust compliance program can help companies avoid bad deals. For example, robust integrity due diligence on potential business partners and investments can help a company identify significant fraud and corruption risks before the ink is dry and deals are consummated, thereby reducing the risk of follow-on investigations and/or enforcement actions. Additionally, robust pre-investment compliance measures can reduce the risk of adverse operational and financial consequences, such as overpayment for assets, the need to unwind problematic relationships with business partners, or exiting markets or business lines altogether due to compliance concerns.

  • Enabling Business and Creating a Competitive Advantage

While much of the foregoing discussion focuses on avoiding losses, compliance professionals should also make the case for compliance efforts as activities that affirmatively create value for a business enterprise.

At the highest level, an effective compliance program provides guardrails that help a company to achieve business objectives while mitigating compliance risks. Good compliance officers are “business enablers” who do not say “no” reflexively, but instead work with the business to fully understand risks and business objectives and devise tailored, fit-for-purpose mitigation measures.

A company with an effective risk-based compliance program may be able to function successfully in a high-risk market, whereas a company with a weaker compliance program may decide that it is not up to the challenge of operating in such a market, or worse, may go into the market unprepared for the compliance challenges it will face. This dynamic is particularly noteworthy in Africa, where we sometimes encounter companies who perceive the compliance risks of certain markets as too high, leading them to pass on opportunities that could be realized if they had sufficiently robust compliance programs. Realization of efficiencies from well-run compliance programs, e.g., streamlining vendor diligence and on-boarding processes with the use of technology, can also impact the bottom line by freeing up valuable resources.

The ability to operate efficiently in higher-risk environments can give companies a significant competitive advantage, but they are by no means the only competitive advantages that companies can realize from maintaining robust compliance programs. In the procurement context, for example, many of our clients evaluate the strength of their suppliers’ compliance programs alongside traditional commercial criteria such as price and quality of services. In addition, lenders and investors are increasingly factoring compliance considerations into their decision-making processes. Finally, in an environment where issues such as sustainability and human rights are driving consumer and employee choices, companies should be prepared for integrity issues to become increasingly relevant to consumers and employees, who may vote with their feet if they are unsatisfied with a company’s commitment to compliance.

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The factors outlined here are by no means exhaustive, and the framing of a business case will be informed by the information available to a company. It may go without saying that companies that are better able to capture and analyze information that quantifies the return on investment from their compliance programs are better able to articulate a compelling business case. This provides additional reason for companies to focus on the use of metrics in designing, implementing, and evaluating the effectiveness of their programs.

If you have questions about corporate compliance matters, please contact Ben Haley at bhaley@cov.com, Sarah Crowder at scrowder@cov.com, or Mark Finucane at mfinucane@cov.com. This article is intended to provide general information. It does not constitute legal advice.

 

© 2019 Covington & Burling LLP. All rights reserved.

Five Key Considerations For Handling Internal Corporate Investigations

Companies today face increasingly complex regulatory frameworks globally and intense levels of corporate scrutiny from government enforcement agencies around the world. As government agencies embrace sophisticated crime-busting technology and the world shrinks through greater inter-agency cooperation, there are more ways than ever for governments to identify misconduct and hold companies to account through criminal prosecutions and steep fines. Accordingly, companies faced with a potential compliance issue need to be prepared to respond to these issues with an effective internal investigation.

An effective internal corporate investigation can benefit a company in a number of ways. Not only does it assist a company in uncovering compliance failures and putting remedial measures in place, it also assists the company, when faced with evidence or allegations of potential wrongdoing, to respond deliberately and thoughtfully, ensuring that it understands all the facts. Effective internal investigations can also benefit the company by influencing the amount of a criminal fine, the type of government resolution potentially available, and protecting the company’s reputation. To maximize these benefits, corporate defendants need to be able to show prosecutors that the internal investigation was independent, reliable, and credible.

In a previous article, we have outlined the unique challenges of conducting effective internal investigations in Africa. Here, we revisit some of the lessons learned from our investigations practice (in Africa and elsewhere), outlining five universal considerations for effectively handling sensitive internal corporate investigations.

  • Define the Scope of the Investigation

Investigations can be initiated for a multitude of reasons, from allegations of wrongdoing by the media, civil litigation, whistleblower complaints, regulatory inquiries, or even findings in an unrelated investigation. The potential issues to probe can be just as varied. Defining the scope of the investigation is therefore a crucial step to be taken at the outset of the inquiry. Among the questions to ask in order to ensure that the investigation is appropriately scoped are the following:

  • What are the specific allegations?
  • What is the company’s potential legal exposure?
  • Who are the potential perpetrators?
  • What are the relevant timeframes?
  • Who are the potential witnesses?
  • Who may possess documentary evidence relevant to the inquiry and where can these documents be found?

A written investigation plan is a useful tool to outline the goals of the investigation and the investigative steps, and more generally to keep the investigation on track. The contents of the investigation plan and the proposed investigative steps will of course have to be determined on a case-by-case basis, but it should generally include at least a review of documents and interviews with key individuals and witnesses. Bearing in mind that it is never possible to predict the entire course of an investigation, from the outset, with mathematical precision, it is important to ensure that the investigation plan allows for a degree of flexibility, providing the investigation team the ability to adapt the plan as the investigation progresses and evidence is reviewed.

  •  Preserve All Potentially Relevant Data – Documents, Devices and Testimony

Document and data preservation is a vital consideration in any investigation. Generally, companies should consider issuing a document hold (sometimes called litigation hold) to all individuals who potentially have relevant documents. There are, however, sometimes strategic reasons for not publicizing an investigation through a document hold, such as where there are concerns that notice of the investigation may raise the risk that employees will make efforts to destroy relevant documents and data. In such cases, companies can mitigate this risk of spoliation through advanced imaging of employee devices, disabling deletion functionality on company platforms, and other preservation measures as may be appropriate.

To the extent that preserving witness accounts by interviews is concerned, there may be instances in which the investigation team is faced with the imminent departure of an employee from the company. In those instances, it will be important that the employee’s account is obtained as quickly as possible. If a government agency is or becomes involved in the investigation, the company is likely to be called upon to explain what steps it took to preserve potentially relevant data, and it is therefore essential that all steps taken to do so are well documented.

  • Interview Witness At The Right Time

Companies need to be thoughtful about the appropriate timing of witness interviews. In an ideal world, interviews would not take place until a company has been able to review and digest all of the relevant documents necessary to have a full picture of the written record. Documents not only provide the interviewer with context to ask targeted questions, they also serve as a vital tool to jog forgetful interviewees’ memories, or to confront witnesses with facts they may be reluctant to acknowledge.

But investigations are often fast-moving, with real-time implications for the company and unique circumstances that merit accelerating certain witness interviews before a full document review can be completed. These situations include instances where an employee is imminently departing the company, where misconduct may be ongoing, or where they are necessary to meet the demands of government agencies.

Additionally, to account for circumstances where witnesses may speak to one another regarding the substance of the interviews (despite instructions not to do so), the company should consider the order and timing of interviews, including potentially conducting simultaneous interviews.

  • Consider Whether To Voluntarily Disclose

Deciding whether or not to make a voluntary disclosure to prosecutors is often a vexing question for the company, with the potential for significant ramifications. Depending on the laws of the relevant jurisdiction, there may be significant incentives to making a voluntary disclosure in the form of a more favorable resolution of an enforcement action, or a declination from prosecution altogether.

While there is no magic formula to make these decisions, some of the factors a company should take into consideration include the likelihood that enforcement authorities will come to learn of the investigation findings in the absence of voluntary disclosure, the seriousness of the alleged conduct, and the risk posed to the company should the allegations come to light.

  • Remediate

With the benefit of a credible and reliable investigation, a company will be well positioned to make effective decisions about how to remediate any issues identified.

The critical element of any remediation plan is that the actions taken be appropriate and proportional to the conduct identified. The appropriateness of the remedial steps taken by a company, including initiating disciplinary action against the responsible employees and potentially terminating their employment, and implementing and/or enhancing existing practices, policies and procedures, are critical factors taken into account by government agencies when assessing an appropriate resolution of potential civil or criminal charges.

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Conducting an effective corporate internal investigation that is well-designed, with a specific work plan that addresses key elements such as document preservation, witness interviews, and prompt remediation, can yield many benefits for a company facing allegations of misconduct.

While no two investigations will ever be the same, building an investigation with these five building blocks in mind will provide companies with a solid foundation from which to move their organizations forward while minimizing disruption to the extent possible.

If you have questions about handling internal corporate investigations, please contact Ben Haley at bhaley@cov.com, Mark Finucane at mfinucane@cov.com, Sarah Crowder at scrowder@cov.com, or Ahmed Mokdad at amokdad@cov.com. This article is intended to provide general information. It does not constitute legal advice.

© 2019 Covington & Burling LLP. All rights reserved.

It’s Time for AGOA 2.0

The African Growth and Opportunity Act (AGOA) is set to expire in 2025. That may be the distant future for some but given the time required to pass trade legislation in the U.S. Congress, it’s the functional equivalent of tomorrow’s mid-day meal. Preparation for the post-AGOA trade relationship between the U.S. and Africa needs to begin now.

AGOA has had important successes but improvements need to be made to the program. The legislation, which removed all tariffs on 6,400 products available for export to the U.S., helped to move the U.S.-African relationship from aid to trade, from donor-recipient to one of mutual benefit and gain. In return, the U.S. required only that the nearly 40 participating African countries be making progress on economic and political reforms and pose no threat to U.S. national security. These conditions constituted a low bar as the number of AGOA countries has been relatively stable since the legislation went into effect in 2000.

In terms of promoting exports to the U.S., AGOA has had measured success. Some countries, such as South Africa, have benefitted significantly. South Africa’s auto exports to the U.S. under AGOA have created tens of thousands of jobs in that country and in the auto supply chain in neighboring countries.

Apparel exports from other countries, such as Lesotho, Ethiopia, Mauritius, eSwatini and Kenya have also created a similar number of jobs. These apparel exports are important not only for the jobs created but for the labels that say Made in Mauritius, Made in Lesotho and Made in Kenya, for example. When apparel from AGOA exporting countries are found by American consumers in their favorite stores next to clothing from Canada and Mexico, not to mention China, they begin to think about African nations as reliable and cost-effective suppliers to American households.

AGOA’s shortcoming is that not enough African countries have benefitted on a scale that genuinely moves the needle when it comes to job creation, exports of apparel and how Americans perceive the continent. The call by Congress in 2015 for all AGOA beneficiaries to develop export strategies to take advantage of the program has borne little fruit as barely half of AGOA countries have created such strategies.

Yet other important benefits have been generated by AGOA. It put trade and investment at the center of the U.S.-African relationship which the Trump administration is trying to deepen through its Prosper Africa initiative. Passage of the legislation also created an enduring bipartisan consensus between Democrats and Republicans in Congress based on the recognition that the U.S. has interests in Africa worth investing in. This bipartisan consensus funded the President’s Emergency Plan for AIDS Relief (PEPFAR), the creation of the Millennium Challenge Corporation and most recently led to the establishment of $60 billion U.S. Development Finance Corporation, in addition to a host of other programs. In short, AGOA is the cornerstone of the U.S.-African relationship.

The principal challenge to AGOA, apart from the fact that only a small number of nations have taken advantage of the legislation, are the dramatic changes that have occurred in Africa in the twenty years since President Clinton signed the law into effect. The region has become home to half of the world’s twenty fastest growing economies and a middle class in the tens of millions. The African Continental Free Trade Agreement (AfCTA) is poised to significantly increase intra-regional trade. In addition, China has overtaken the U.S. as the continent’s leading trade partner, the European Union is implementing Economic Partnership Agreements (EPAs) across the continent and countries such as Turkey, India and Russia have become significant commercial actors on the continent.

It is time therefore to update the AGOA framework. Most specifically, reciprocity needs to replace the non-reciprocal structure of the current trade relationship. AGOA 2.0 also needs to be developed in a manner consistent with the implementation of the AfCFTA. AGOA’s benefits should be extended past 2025 as long as agreement has been reached on the phase-in of mutually reciprocal trade benefits. The phase-in periods should be different for Africa’s low income, lower-middle income and upper-middle income countries.

Revising the AGOA framework should be a priority in the U.S.-African relationship as U.S. goods and services are being increasingly discriminated against in Africa—at a time when the commercial relationship should be deepening. Given the EPAs, for example, a refrigerator or tractor being exported from an EU country will enter the South African market with a 4.5 percent tariff. That same refrigerator or tractor coming from the U.S. will face a 18.4 percent tariff. Not only does this stifle the U.S.-African commercial relationship but it also discriminates against African consumers and companies who will automatically find American products to be more expensive.

The task of AGOA 2.0 therefore is not only to level the commercial playing field for U.S. goods and services in Africa but to do it in such a way that it facilitates the implementation of AfCFTA. Negotiations for a modernized AGOA framework should be well underway by the time of the next U.S.-Africa trade ministerial to be held in Washington in 2020. At the same time, the Trump administration should jettison its time-consuming and unproductive effort to find a single African government with whom to negotiate a “model” free trade agreement and double down on its welcome endorsement of the African Continental Free Trade Agreement. Supporting the implementation of the AfCFTA and ensuring American competitiveness in all of Africa’s markets is the most immediate and important U.S. commercial objective in the region.

 

This post was originally published on The Africa Report.

 

Forests are on Fire: What the UN Climate Action Week Means for Africa

Fires have ravaged Brazil’s Amazon rainforest, burning over 1,330 square miles of tree cover, and placing people, wildlife, and their habitats at risk. Experts warn that further degradation could inhibit the forest’s ability to release oxygen and absorb heat-trapping carbon dioxide—a key function for combatting climate change.

The fires in the Amazon have been met with an international response. The G7, for instance, offered to contribute approximately $20 million to fight the blazes.

Yet the Amazon is not the only forest whose welfare is key for habitability. The Congo Basin forest, also known as the Earth’s “second lung,” is the second largest tropical rainforest behind the Amazon. It too is on fire.

In the month of August alone, at least 70% of the fires burning worldwide on an average day were in Africa, many of which were in the Congo Basin. Though fires can serve a critical component of savanna ecosystems, deforestation from practices such as “slash and burn,” pose a great threat to the forest. Continued deforestation could impact rainfall patters and exacerbate insecurity of freshwater and food supplies.

While a direct comparison as to which fire is worse remains unclear, it is evident that deforestation strains the environment in the short-term, and can have far-reaching implications long-term.

Below are two critical mechanisms through which the international community can unify stakeholders to address deforestation and climate change, particularly as they relate to Africa.

The Paris Agreement

The Paris Agreement is an international agreement under the UN Convention on Climate Change that codifies States’ pledges to reduce greenhouse gas emissions, and sets a framework for these reductions, beginning in 2020. Entered into force on November 4, 2016, the Agreement was ratified by 186 parties, including 90% of African countries.

In principle, the Agreement was intended to improve upon and replace the Kyoto Protocol, which bound signatories to emission reduction targets. The Paris Agreement specifically aims to do two things:

  1. Strengthen the global response to the threat of climate change by pursuing efforts to limit warming this century to 1.5 to 2 degrees Celsius above pre-industrial levels; and
  2. Strengthen the ability of countries to deal with the impacts of climate change.

As the Intergovernmental Panel on Climate Change has indicated, “most African countries are highly vulnerable to climate change.”

To address this concern, the Agreement envisions putting in place appropriate financial flows, a new technology framework, and an enhanced capacity building framework to support action by the most vulnerable countries. Importantly, these frameworks are designed to be in line with States’ own national objectives, known as nationally determined contributions (“NDCs”) (Article 4, para 2).

Of particular importance to many African countries, the Agreement recognizes the different positions of developed and developing countries and adjusts the goals accordingly. Where for instance, the Agreement states that “developed countries should the lead by undertaking economy-wide absolute emission reduction targets,” it recognizes that developing countries should instead “continue enhancing their mitigation efforts, and are encouraged to move over time towards economy-wide emission reduction or limitation targets in the light of different national circumstances” (Article 4, para 4).

UN Climate Action Summit

The UN Climate Action Summit (the “Summit”) on September 23, 2019, brings together leaders from governments, the private sector, civil society, and other international organizations to accelerate actions to implement the Paris Agreement. Specifically, the Summit encourages these stakeholders to create concreate, realistic plans to enhance their NDCs by 2020, in line with reducing greenhouse gas emissions by forty-five percent over the next decade. The Summit focuses on the following areas:

  • a global transition to renewable energy;
  • sustainable and resilient infrastructures and cities;
  • sustainable agriculture and management of forests and oceans;
  • resilience and adaptation to climate impacts; and
  • alignment of public and private finance with a net zero economy.

One area directly concerns deforestation, while another concerns adaptation—both relevant to Africa’s landscape. Moreover, the UN Secretary General has prioritized several action portfolios, which are recognized as having high potential to curb greenhouse gas emissions and increase global action on adaptation and resilience. The two below offer potential for increased participation from African countries:

  • Finance — mobilizing public and private sources of finance to drive decarbonization of all priority sectors and advance resilience;
  • Resilience and Adaptation advancing global efforts to address and manage the impacts and risks of climate change, particularly in those communities and nations most vulnerable.

In tandem, the mechanisms above provide avenues through which stakeholders can address climate change in Africa at an international level. Due to increased forest fires, in part caused by deforestation, there is a need to continue supporting climate governance in Africa and ensure progress towards the articulated goals.

There is still an opportunity for governments and the private sector to fight the fires—by innovating within this framework to develop actionable regional approaches.

Zimbabwe: Challenges Persist After Fall of Mugabe

Momentous events in Zimbabwe during the last two years inspired hope among many Zimbabweans that they would experience meaningful political change and sustainable economic growth in their lifetimes. In November 2017, former President Robert Mugabe—who ruled Zimbabwe for nearly 40 years—was ousted in a military coup and his former deputy President Emmerson Mnangagwa was installed as head of the transitional government and continues to rule today. Unfortunately, despite this change in the country’s leadership, the people of Zimbabwe continue to face pressing challenges, including political repression, hard currency shortages, power-cuts, an inadequate fuel supply, and spiraling retail prices. Is there room for optimism? Swift action is necessary on the key issues discussed below to make President Emmerson Mnangagwa’s promise that Zimbabwe is “open for business” a reality.

Political environment

Following the coup that ousted former President Mugabe, general elections to elect a new President and members of both houses of Parliament were held at the end of July 2018. The elections were peaceful, and had a 75 percent voter turnout. ZANU-PF, President Mnangagwa’s ruling party secured 50.8 percent support. Soon after the elections, demonstrators took to the streets claiming that the election results were a sham. They were shot by the Zimbabwean military with live ammunition, resulting in six deaths and dozens of injuries. Media and electoral observer reports subsequently confirmed that the general election, like elections during President Mugabe’s reign, were not free and fair. Observers from both the European Union and U.S. reported that there was voter intimidation, some of which was by the military at the direction of ZANU-PF.

Nelson Chamisa, the leader of MDC Alliance (Zimbabwe’s official opposition) challenged President Mnangagwa’s election victory in Zimbabwe’s Constitutional Court. The court dismissed Chamisa’s challenge, confirming President Mnangagwa’s election victory. Subsequently, Zimbabwe experienced several months of protests over inflation, currency depreciation, and the high costs of basic goods. In January, the government doubled the price of gasoline, leading to riots and a brutal crackdown by the military. On January, 22 2019, the Zimbabwe Human Rights Commission condemned President Mnangagwa’s government for deploying the military to enforce law and order in the country, and for allowing the military to use excessive force and military-style torture in the process. President Mnangagwa has called for a “national dialogue” and has promised to investigate the brutal crackdown.

Against this backdrop, Zimbabwe is facing significant and complicated economic woes, many of which have festered for decades.

Economic woes

Zimbabwe sought to court international investors after the fall of Mugabe with its “open for business” slogan and many potential investors were hopeful that an economic revival would flourish in Zimbabwe under Mnangagwa’s new Administration. New investments are slow, however, for three primary reasons: (i) sanctions; (ii) indigenization policies; and (iii) currency convertibility and repatriation.

Sanctions

Several western countries have imposed sanctions on Zimbabwe since 2002, largely because of human rights abuses and political repression. The U.S. imposed sanctions on Zimbabwe with effect from March 7, 2003 through a George W. Bush-issued Executive Order. Currently, there are U.S. sanctions on 141 entities and individuals, including President Mnangagwa.

Following the ousting of President Mugabe, many African leaders, including South Africa’s President Cyril Ramaphosa, called for the sanctions imposed on Zimbabwe to be lifted. However, in March 2019 President Donald Trump extended U.S. sanctions for an additional year on grounds that the new government’s policies continue to pose an “unusual and extraordinary” threat to U.S. foreign policy noting that the sanctions will remain in place until Zimbabwe’s laws restricting media freedom and allowing protests are changed.

Early in June 2019, the European Union, which initially imposed sanctions in 2002 but only continues them on Grace and Robert Mugabe and one defense company, kicked off political talks with the Zimbabwean government. Those talks, which are focused on economic development, trade, investment, rights, rule of law and good governance, could culminate in EU sanctions on Zimbabwe being lifted.

Indigenization Policies

Zimbabwe passed the Indigenisation and Economic Empowerment Act (IEEA) in 2008. The IEEA has been a source of consternation for foreign investors. The law limited foreign ownership interest in local businesses to 49 percent, thereby compelling foreign investors who wholly owned local businesses to dispose of no less than 51 percent of their equity interest in those businesses to Zimbabwean nationals. Divergent interpretations and inconsistent application of the law created uncertainty for investors. Amended in 2017, the law now only applies to equity investment interests in diamonds and platinum. It is a positive step in the right direction that the IEAA no longer applies to business interests in other minerals or other sectors of the economy.

Currency and economy

Zimbabwe adopted the RTGS (or real-time gross settlement) Dollar as its official currency in February 2019 as a “substitute” for the bond note. The bond note was introduced as the country’s official currency in October 2016. Upon launch, the bond note was pegged at par to the US Dollar; however, the bond note lost value rapidly and was trading at a huge discount to the US dollar. The RTGS Dollar was meant to serve as an interim measure to end the so-called “dollarisation” of the economy. The RTGS Dollar is represented by RTGS balances (i.e. bank balances and mobile money wallet balances), together with the physical bond notes and coins.

Unlike the bond note, the RTGS Dollar has been made subject to market forces, but like the bond note, the market rejected the RTGS Dollar causing it to rapidly lose value. The RTGS Dollar has no convertibility, and limits placed on investors’ ability to convert their RTGS Dollar reserves into US dollars has increased black market speculation. This ultimately caused the Zimbabwean government to outlaw the use of US dollar and other foreign currencies as legal tender effective June 26, 2019.

Inflation in Zimbabwe is a 10-year high of 75.86 percent, while fuel hikes in recent months have been in excess of 100 percent.

Knock-on implications

Zimbabwe’s political woes weigh heavily on the country’s economy. While the EU appears to be laying the groundwork for a normalization of relations, U.S. sanctions will remain in place for at least the next year. As long as these sanctions are in place, the country’s ability to attract substantial levels of foreign direct investment from responsible investors will be hampered. This in turn will limit the country’s growth prospects and exacerbate the country’s economic and financial challenges.

Public-Private Collaboration is Key to Building Africa’s Digital Future

Over the past four decades, three key barriers prevented most Africans from benefitting from the technology innovations and services that have changed the world. First, a failure of leadership led to mismanagement and theft of billions of dollars that should have built the healthcare, education, and other infrastructure and services critical to development. Second, Africa’s 54 countries have had highly fragmented trade regimes and weak distribution channels that made the continent an unattractive place to do business. Third, the historically prohibitive cost of access to information technology meant that during the first forty years of the personal computing and internet revolution, only the most privileged entrepreneurs could afford the on-premise hardware, networking, and other capabilities required to build a technology-enabled business. Even after cloud computing substantially reduced the cost of access to world-class IT infrastructure and services, access to the internet was still out of reach for most Africans.

A new and promising era for Africa

The ratification of the African Continental Free Trade Area, which creates a single market of over 1.3 billion African consumers, demonstrates a shared vision by African leaders on a complex policy initiative built on free market principles.

This initiative seeks to increase intra-African exports from a current average of 18 percent, to levels comparable to the 59 and 69 percent for intra-Asia and intra-Europe exports, respectively. As Africa builds a more interconnected and prosperous continent through trade, affordable access to modern technology will play a central role in empowering our young people in manufacturing, processing and the creation of value chains across all sectors.

The continent’s internet penetration is now at 36 percent, compared to the rest of the world’s average of 56 percent. While still low, this is a remarkable accomplishment considering it was achieved in the past 10 years. The African Union, with support from the World Bank Group, has set the goal of connecting every individual, business, and government in Africa by 2030, effectively lowering broadband cost by as much 90 percent.

As the world’s fastest-growing mobile region, GSMA estimates that Africa will reach 650 million unique mobile subscribers in the next five years. The mobile ecosystem alone is expected to add more than $150 billion in value to the continent’s economy by 2022. Increased connectivity and access to the cloud through mobile phones and other edge devices will connect us to infinite sources of information, analytics and expertise that enable African innovators and entrepreneurs to envision and shape a new reality.

As a result of these positive developments, governments and businesses from all around the world are rushing to strengthen diplomatic and commercial ties with Africa. The pursuit of new opportunities on the continent is amplified by the fact that leading platform companies are making huge investments to accelerate the digital transformation and the adoption of advanced technologies such as artificial intelligence and machine learning—all readily available through the cloud at a fraction of the initial cost of information technology.

The threat of cybercrime to Africa’s transformation

Cloud-based technologies and services are unrivaled in their ability to offer integrated storage and computing capabilities at economies of scale that substantially increase productivity, while lowering historical capital and production costs. But as we’ve learned with the alarming increase of cyberattacks, the more powerful the tool, the greater the potential to benefit or harm society.

Over 77 percent of the cyber-attacks launched in 2018 were successful, leading to trillions of dollars in economic losses suffered by civilians, companies, and governments. We’ve also seen that these advanced technologies can be misused by terrorists, companies, and governments intent on suppressing fundamental rights like privacy and freedom of expression.

The rising threat of cybercrime is galvanizing many of our clients to strengthen public-private collaboration on the development of enabling and harmonized regulations that affirm international norms on privacy, cybersecurity, and other critical policies and regulations “aimed at promoting an open, secure, accessible and peaceful ICT environment.”

Public-Private partnerships for harmonized and enabling regulations

Technology adoption is at the heart of Africa’s socio-economic transformation agenda at the African Union and other important forums like the Smart Africa Alliance where twenty four (24) African Heads of State, with the support of a talented Secretariat, are providing critical leadership to accelerate development through ICT.

The most effective way to ensure sustainable transformation is to create ecosystems of excellence that are governed by harmonized legal and regulatory frameworks that adhere to global standards. Given the rapidly evolving capabilities of new and advanced technologies, close collaboration between policy makers and the private sector is the key to striking the right balance between the protection of individual liberties, while helping governments obtain the electronic evidence they need to protect us from serious crime and digital terrorism.

Can the U.S. and Africa Prosper Together?


Prosper Africa, the core of the Trump administration’s policy, is a state of mind.

This is not a criticism.

The program is an ambitious effort to get every American political appointee, diplomat, and civil servant engaged on African issues to be on the look-out for commercial opportunities for American businesses and to help American companies capture those opportunities. Prosper Africa wants nothing less than to change the culture of American diplomacy in Africa so that the success of American business on the continent is as much of a priority as American security and Africa’s economic development.

This message, repeated last week at the Corporate Council on Africa’s U.S.-Africa Business Summit in Maputo, Mozambique, by Deputy Commerce Secretary Karen Dunn Kelley, USAID Administrator Mark Green, Assistant Secretary of State for African Affairs Tibor Nagy, and Commerce Under Secretary for International Trade Administration Gilbert Kaplan, among others. To those present it appeared to be well received by the presidents, vice presidents, ministers, and other senior African officials who came from more than 20 countries on the continent, and the more than 1,000 U.S. and African business leaders who participated in the summit.

Implementing Prosper Africa

The implementation of this new mindset will be challenging, to say the least.

A Prosper Africa website went live during the conference but, at best, it is a placeholder for things to come. Administration officials at the summit talked about creating “deal teams” in the U.S. and at U.S. embassies, yet few details were given about the make-up of the “teams” or how American businesses can engage them. One senior official mentioned that the Trade and Investment Hubs will be transformed into “multi-agency platforms” but little information was provided on what form that will take.

There is a Prosper Africa secretariat co-led by USAID and the Commerce Department but, again, information on that was scarce. And then there is the money, of which not much has been allocated to the initiative. USAID has budgeted $50 million for Prosper Africa, less than that devoted to Power Africa, and far less than one half of one percent of the $8 billion that USAID invests in Africa annually in its other programs.

Indeed, the success of Prosper Africa will be judged by its ability to increase the volume of commercial flows between the U.S. and Africa. Right now, though, some U.S officials say that they want to double U.S. trade and investment while others speak more cautiously about “substantially” increasing the volumes.

Despite the lack of detail, the Trump administration has generated momentum for its commercial policy in Africa. One welcome development was the announcement that a fourth Trade and Investment Hub will be established in North Africa, hopefully in Morocco. The passage of the BUILD Act and the creation of the $60 billion U.S. Development Finance Corporation (USDFC) set to open its doors on October 1, is a once-in-a-generation opportunity. The USDFC can make American companies competitive in Africa in a way they have never been before. Finally, at the summit, Commerce announced a reconstituted President’s Advisory Council on Doing Business in Africa (PAC-DBIA), a creation of the Obama administration, that has played an important role in identifying challenges for U.S. business on the continent. In May, the U.S. Senate voted to restore the full financing authority of the U.S. Export-Import Bank, with the confirmation of three new board members. These are important tools for boosting U.S. business in Africa.

Competition on all sides

When it comes to U.S. investment in Africa, the trend line has been positive. Not only does the U.S. have the largest stock of investment in Africa of any of the continent’s commercial partners, but that number has been steadily increasing. In 2017, U.S. investment was $50 billion up from $9 billion in 2001. During the Maputo summit, oil and gas company Anadarko announced a $20 billion investment for the construction of a Liquified Natural Gas (LNG) plant in Mozambique’s Offshore Area 1. According to Standard Bank, this is the largest investment ever in Africa. ExxonMobil is expected to soon announce an even larger investment to develop Mozambique’s natural gas resources.

It will be more challenging for the Trump administration to have success on the trade front. For one, the level of two-way trade was $61.8 billion last year. This was 57 percent less than its 10-year high of $142 billion in 2008 (Figure 1).

Figure 1. Two-way trade in goods with Africa

Source: United States Census Bureau.

Several factors explain the dramatic decrease. First, with the emergence of U.S. energy self-sufficiency, our historically high need for African oil is now zero. On the other hand, the long-term competitive issue for U.S. trade in Africa is the proliferation of the European Union’s Economic Partnership Agreements (EPAs). These agreements provide EU goods, services, and companies with tariff advantages with more than 40 African countries. As the United States Trade Representative (USTR) noted in its March 2019 National Trade Competitiveness report, the EPAs have “eroded” U.S. trade competitiveness with South Africa and the countries of the Southern African Development Community. This erosion will only intensify across the continent as the EPAs come into force, and as Africa implements the new Continental Free Trade Agreement.

Another challenge for the U.S. trade position in Africa is China’s tied-aid commercial policy that leverages debt onto African governments in return for their obligation to use Chinese goods, services, and labor for much-needed infrastructure projects. It is also worth noting that the U.S.-Africa Trade and Investment Summit coincided with the annual meeting of the African Export-Import Bank (Afreximbank) that was being held in Moscow and was opened by Russia’s Foreign Minister, Sergei Lavrov. Clearly, competition for market-share in Africa is rapidly intensifying, and not just from China and Russia.

It is difficult to see how the Trump administration’s desire to find a willing African partner with which to negotiate a “model” free trade agreement will be sufficient in scale and time of implementation to prevent a further erosion of U.S. trade competitiveness in Africa.

The Maputo bounce  

U.S.-African commercial relations were energized by the U.S.-Africa Trade and Investment Summit in Maputo, but the administration needs to keep that momentum going. The AGOA Forum in Côte d’Ivoire in August will be another opportunity for U.S. officials to show their commitment to the African continent and Prosper Africa. The Trump administration should also consider convening a third high-level U.S.-Africa Business Forum on the margins of the U.N. General Assembly in September. The previous forums, in 2014 and again in 2016, proved to be major catalysts to U.S. business success in Africa.

Witney Schneidman chairs Covington’s Africa Practice. Jay Ireland serves as a Senior Advisor to Covington’s Africa Practice. Mr. Ireland is the former CEO of GE Africa and Former Chair of the President’s Advisory Council on Doing Business in Africa.

Beyond The FCPA: New U.S. Regulator Enforcing Against Foreign Corruption

Yet another U.S. regulator is entering the foreign corruption space. The Commodity Futures Trading Commission is a civil agency that oversees commodity and derivatives markets in the United States. It enforces the Commodity Exchange Act, a set of statutes that are enforced criminally by the U.S. Department of Justice. The CFTC has authority to impose financial penalties in the many millions of dollars, and it has broad investigatory powers.

Earlier this year, the CFTC announced that, for the first time in its history, it is looking at foreign corruption that impacts commodity and derivatives markets in the United States. No charges have been brought so far, but the agency appears to be ramping up its enforcement efforts. As one indication, the agency recently issued an advisory directed at would-be corporate whistleblowers, explaining that individuals who report foreign corruption may qualify for financial awards.

In the initial announcement, the CFTC’s Director of Enforcement referred to multiple “open investigations” into foreign corruption. So far, only one has been publicly confirmed. Brazil’s state-owned oil company, Petrobras, revealed that the CFTC requested information relating to several companies’ involvement with “Operation Car Wash,” which involved the alleged payment of bribes to employees in Petrobras’ trading division.

The CFTC’s new focus has important implications for companies with international operations, particularly in the commodity-rich regions that span much of the African continent.

Drawing on our recent experience serving in the CFTC’s enforcement division and expertise counseling companies on anti-corruption compliance, we find the following points salient:

  • The CFTC has authority to investigate and bring enforcement actions in cases involving fraud, manipulation, and false price reporting, among other things, but not bribery itself. Foreign corruption is not explicitly illegal under the CEA. Thus, foreign bribes will be an aspect of these cases, but the CFTC will still need to prove all elements of a traditional fraud, manipulation, or false reporting charge. However, the CFTC will not need to establish an actual violation of the FCPA to support a bribery-based CEA charge.
  • The CFTC and DOJ are coordinating their efforts in this area. (The Acting head of the Fraud Section of DOJ’s Criminal Division even said that the CFTC’s new focus is “great news.”) This means that companies and individuals active in the extractives and commodities industries should expect that, in some instances, there will be overlapping civil and criminal investigations and enforcement actions, and the agencies will share information and coordinate investigative efforts.
  • The CFTC has promised to avoid “piling on.” The Director of Enforcement has said that, where the CFTC is investigating foreign corruption, it is the only U.S. civil regulator with jurisdiction—meaning that the CFTC is choosing to investigate cases where the SEC lacks jurisdiction under the FCPA. Unless that policy changes, the SEC and CFTC will not be bringing overlapping charges.
  • The CFTC’s international jurisdiction is broad, but it is not unlimited. The agency’s new overseas focus will undoubtedly present important and novel questions of the limits of its reach, and provide grounds for potential legal defenses.

As part of a comprehensive anti-corruption compliance program, companies that have involvement in U.S. commodities markets will want to take note of the CFTC’s new focus in this area. Understanding the reach—and limits—of the CFTC’s authority under the Commodity Exchange Act will be important in preparing for this new legal risk.

If you have questions about the CFTC and foreign corruption, please contact Laura Brookover at lbrookover@cov.com, Ben Haley at bhaley@cov.com, or Jennifer Saperstein at jsaperstein@cov.com. This article is intended to provide general information. It does not constitute legal advice.

Angola: Ramping Up the Fight Against Corruption

For the first time in 133 years, Angola has a new penal code. On January 23, 2019, the National Congress of Angola approved the new code, which will replace the one put in place by the Portuguese just after the Congress of Berlin, where the European powers divided Africa into colonial spheres of influence. The new code is one of the central pillars of President João Lourenço’s criminal justice reform program, and is supported by both the ruling MPLA and the main opposition party, UNITA. The law was approved by the Parliament with only one dissenting vote and will come into force 90 days after its approval publication.

The new penal code is being celebrated by the government as making important progress toward adapting the law to modern Angolan society. The new code proposes a structural change of the Angolan penal system and, particularly regarding the fight against corruption, it promotes more transparency consistent with the global trend to increase anticorruption enforcement, as we previously covered here and here. In this post, we outline the main changes promoted by the new penal code related to corruption and economic crimes and the implications for companies operating in Angola.

New Provisions Related to Corruption and Economic Crimes

Since he took office in September 2017, President Lourenço has taken concrete actions to promote economic stabilization, fight corruption, and attract foreign direct investment. In March 2018, the new administration created a specialized anti-corruption (“SCI”) unit within the executive branch tasked with preventing corruption-related crimes. Since then, there has been a significant increase in the number of investigations related to economic crimes, including cases involving ministers and public managers. According to the former Deputy Attorney General of Angola João Coelho, the most investigated areas are the banking sector and employees from the Tax General Administration (AGT). The SCI and the National Police of Angola have been also been cooperating internationally, including with partners such as Interpol.

Anti-Corruption Provisions of the New Code

Chapter IV of the code criminalizes “whoever offers, promises or gives” to public officials (article 360) or to judges or arbitrators (article 362) an undue benefit, either patrimonial or not; and the crimes of passive corruption, which penalizes the public officials (article 361) or judges and arbitrators (article 363) who “ask for, request, or accept, for himself or for third parties” any undue benefit or promise of benefit. Chapter IV also criminalizes other economic crimes, such as “influence traffic” (article 368) and the embezzlement of public assets (article 364) (“peculato”).

Anti-Money Laundering Provisions of the New Code

In an effort to protect the financial system and strengthen anti-money laundering measures, the code creates new limits on economic conduct and punishes crimes against consumers. One of the most significant changes is that article 470 limits cash transactions to prevent the circulation of large amounts of money outside the formal financial system. The limitation is three million kwanzas (8,522 euros) for citizens and five million kwanzas (14,285 euros) for companies.

Such limits were not covered by the previous penal code, nor by the Anti-Money Laundering and Countering Financing of Terrorism Law (Law 34/11). The new provisions will allow disciplining and punishing some practices that harm the financial market. According to the Deputy Attorney General Mota Liz, these changes also provide “greater security for the national currency” and assures more “fluidity to the national financial system.” These changes may create a more secured environment for investors in Angola, particularly in the banking sector.

Notable Arrests and Investigations

In addition to enacting new legislation, numerous government officials have been terminated or face legal prosecution for alleged corruption. One of the most significant cases involved Filomeno dos Santos, son of the former president. After being terminated from his position as head of Angola’s $5 billion sovereign wealth fund, Mr. dos Santos was arrested in September 2018 by Angolan authorities in connection with a fraud pertaining to a $500 million transaction out of Angola’s sovereign wealth fund and other crimes. On March 24, 2019, Mr. dos Santos was released from prison after the Attorney General’s Office announced that it recovered $2.34 million from banks in the UK and in Mauritius.

Isabel dos Santos, the former president’s daughter, was also fired by Lourenço from her position as the head of Sonangol, Angola’s state oil company, and there are indications that the Attorney General’s office will start an investigation against her. Other high profile individuals are under investigation by the Attorney General’s Office for alleged corruption, such was the former president of the Congress, Higino Carneiro, and the former vice president of Angola Manuel Vicente.

Looking to the Future

The anticorruption and anti-money laundering provisions of the new penal code reinforce the government’s commitment to far-reaching reforms. Although it is still too soon to assess the extent to which these provisions will be enforced, the approval of the new code is undoubtedly a sign that the Angolan government will take a more aggressive approach to combatting corruption and money laundering in the country. If fully implemented, the new code will increase the legitimacy of public institutions and help level the playing field for the private sector.

 

Juliana Rodrigues is an international associate in Covington’s New York office. Juliana received her bachelor and master degrees in law in her home country of Brazil before receiving her LLM from New York University of Law.

 

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