Over the last several decades, Foreign Direct Investment (FDI) by multinational companies has become a critical engine of economic growth in Africa, with FDI in the extractive industries particularly significant. A common response by local governments in Africa to increased FDI is “local content” requirements, which are designed to ensure the participation of the local population in economic activity flowing from FDI. Due to weak oil prices and other challenges, the United Nations reported in June 2018 that FDI in Africa fell to $42 billion in 2017, a 21 percent decline from 2016. Nevertheless, according to the World Bank, economic growth in Africa is recovering steadily since the 2008 economic crisis and is expected to reach 3.1 percent in 2018 and tick up to 3.6 percent between 2019 and 2020. As companies assess opportunities on the continent, understanding local content requirements—and how to mitigate compliance risks when navigating this challenging area—is critical.

What are Local Content Requirements?

While local content requirements can take a number of different forms, their general purposes are to ensure the participation of nationals in the workforce, and the promotion of local suppliers, goods, and services. While short-term job creation is part of the local content equation, local content requirements also target longer-term gains in technical capacity and workforce development. An example of a fairly typical local content requirement is a preference for qualified nationals in hiring. Some countries may set a specific percentage requirement for the employment of country nationals. For example, Angola’s Petroleum Activities Law of 2004 sets the local workforce target at 70 percent, and oil companies are required to submit an annual “Angolanization” plan to the Ministry of Petroleum detailing how they plan to achieve this target. Additionally, many local content requirements establish some preference for qualified local suppliers and may require multinationals to partner with local businesses in a joint venture.

Compliance and Fraud Risk from Local Content Laws

Local content requirements create a number of significant compliance and fraud risks. They may create convenient opportunities to channel money or other things of value (e.g., jobs) to government or parastatal entity officials, their families, or affiliates. The most obvious way that this can happen is for a company to contract with a local content provider for overpriced, or even non-existent, goods or services. As described in a Transparency International paper on the topic, “[p]oliticians and public officials may abuse their power and influence to use local content requirements to benefit their allies and/or family members, and international companies may pay bribes and kickbacks to local companies to serve as the ‘front’ in bidding processes.” Even if government or parastatal officials are not the beneficiaries of local content transactions, these transactions can raise self-dealing concerns, because they present opportunities for employees to steer lucrative contracts to relatives or associates.

For an example of how these risks can manifest, consider the 2017 U.S. Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action against oilfield services company Halliburton. The SEC’s cease-and-desist order—to which Halliburton agreed without admitting or denying the allegations—focuses on a series of transactions dating back nearly a decade. In 2008, Halliburton officials were advised by Sonangol, Angola’s state-run oil company, that Sonangol was considering vetoing further subcontract work for Halliburton because the company was not in compliance with local content requirements.

The SEC alleged that following this warning from Sonangol, Halliburton identified a local company owned by a former Halliburton employee who was the friend and neighbor of the Sonangol official with authority to approve Halliburton subcontracts. According to the SEC, a Halliburton employee then undertook a series of efforts to engage the local company to fulfill local content requirements. When an alleged effort to engage the local company as a “commercial agent” with commission fees based on existing revenues from Halliburton’s Angolan operations was rejected because, among other reasons, it would require an extensive integrity due diligence process, Halliburton allegedly turned to an arrangement where the local company would provide ill-defined “real estate transaction management consulting services.” This consultancy arrangement was approved, the SEC alleged, on a sole-source basis outside of Halliburton’s standard procurement processes, and resulted in the payment of $3.7 million to the local company for no meaningful services.

While the SEC did not allege that any of this $3.7 million was channeled to any Sonangol officials, it alleged that the engagement of the local company outside of Halliburton’s applicable procurement processes, and the concealment of the true purpose of the engagement, violated the FCPA’s accounting provisions. Whereas Halliburton allegedly earned $14 million on the underlying services subcontracts approved during the period of the local company’s engagement, Halliburton paid nearly twice that—$29.2 million—to settle with the SEC, and was required by the SEC to retain an independent compliance consultant for a period of 18 months to review and evaluate the company’s anti-corruption policies and procedures.

Risk Mitigation Strategies

There are a number of risk mitigation steps companies can implement to reduce and mitigate compliance risk flowing from local content requirements.

First, as a baseline risk mitigation measure, companies facing local content issues should perform compliance risk assessments and develop and implement anti-corruption compliance policies and controls, and ensure that employees and third parties in sensitive positions are trained on these policies and controls. Apart from being a critical item in meeting regulatory expectations, risk assessments, in which companies review their operations and compliance risks, typically through both desktop review and interviews of employees and relevant third parties, enable companies to better focus their compliance efforts. Because effective compliance programs are not “one size fits all,” risk assessments are a necessary step to allow companies to target their key risks and efficiently deploy resources in the development, implementation, and maintenance of their compliance programs.

Second, because of the significant compliance and fraud risks that may arise from local content requirements in certain jurisdictions, companies operating in high-risk markets and industries should consider developing special compliance policies procedures for local content transactions. Given how local content requirements involve cross-cutting commercial, human resources, procurement, and government affairs issues, they require holistic, cross-functional, and practical solutions with input from multiple stakeholders other than just compliance professionals.

Third, regardless of whether a company has special procedures for addressing local content issues, it is critical that local content partners be subject to appropriate integrity diligence and contractual obligations. Robust, risk-based diligence on third parties is a critical part of any anti-corruption program, but it is even more important when dealing with local content partners. Attention must be given to whether the local partner is a government or parastatal official, is owned (directly or indirectly) by such an official, or has close economic or familial ties to such an official. If these circumstances are present, the likelihood that the official could be viewed as receiving an improper benefit related to the company’s desire to further its business interests is significant. Beyond diligence, it is often appropriate to include various compliance-related provisions in contracts with local content partners, including affirmative obligations to comply with applicable laws or compliance policies, audit and investigation rights, and termination rights.

Finally, companies engaging local content providers should implement an oversight plan, and be proactive in addressing compliance issues. While diligence and contractual provisions are critical front-end risk mitigation steps, close oversight is necessary throughout the entire life cycle of a local content relationship. This includes close scrutiny of contracts, scopes of work, invoices, and deliverables to ensure that local content partners are providing actual services in line with agreed upon terms and conditions. If red flags arise, such as invoices for services outside the provider’s contractual scope, or excessive charges, they should be promptly investigated.

This article was prepared by Covington attorneys qualified to practice law in the United States and the United Kingdom. It does not constitute legal advice. If you have further questions about your compliance programs, how to conduct due diligence on a local partner, or Covington’s anti-corruption work in Africa, please contact Ben Haley at bhaley@cov.com or David Lorello at dlorello@cov.com.

 

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Photo of Benjamin Haley Benjamin Haley

Ben Haley leads the firm’s compliance and investigations practice in Africa. With deep experience representing clients before U.S. regulators in high-profile matters and a history operating on the ground across the continent, he helps clients assess and mitigate complex legal and compliance risks…

Ben Haley leads the firm’s compliance and investigations practice in Africa. With deep experience representing clients before U.S. regulators in high-profile matters and a history operating on the ground across the continent, he helps clients assess and mitigate complex legal and compliance risks in Africa.

Clients often call upon Mr. Haley to assist in the resolution of complex government enforcement matters and commercial disputes. For more than a decade, Mr. Haley has handled complex government enforcement matters and internal investigations, with particular expertise in anti-corruption, anti-money laundering, fraud, and financial crime matters. He has guided clients across a range of industries to favorable outcomes in government investigations, as well as parallel shareholder litigation, insurance recovery matters, and employment disputes.

Photo of David Lorello David Lorello

David Lorello is a partner in the firm’s London office and serves as a vice chair of the firm’s International Trade and Finance practice group.  Mr. Lorello advises clients concerning a range of international regulatory, white collar, and commercial matters under both European…

David Lorello is a partner in the firm’s London office and serves as a vice chair of the firm’s International Trade and Finance practice group.  Mr. Lorello advises clients concerning a range of international regulatory, white collar, and commercial matters under both European and U.S. laws.  Mr. Lorello is recognized in the leading peer review publications for his work on trade controls and anti-corruption compliance and investigations matters, with Chambers Global describing Mr. Lorello as a “compliance authority” in those areas.

Anti-Corruption Compliance and Investigations

Mr. Lorello regularly assists clients in investigating anti-corruption compliance issues arising under the U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and other related U.S., UK, and European anti-bribery and anti-money laundering laws.Mr. Lorello has particular experience in managing corporate investigations and developing anti-corruption compliance programs for companies operating in Europe, including coordinating advice concerning parallel risks under U.S. and European anti-corruption laws, advising clients concerning European criminal enforcement and debarment risks, and ensuring compliance with European data protection and workplace laws in the course of investigations and compliance matters.

Mr. Lorello also regularly represents clients before the World Bank, and other international financial institutions, in debarment proceedings concerning allegations of corrupt practices in connection with contracts financed by those institutions. In addition, Mr. Lorello advises clients concerning the commercial liability risks arising from corrupt practices, including private rights of action that may arise for parties that suffer losses as a result of corrupt practices.

Export Controls and Economic Sanctions

Mr. Lorello regularly represents clients before the major agencies responsible for export controls and economic sanctions laws and regulations, both in the United States and European Union. He has assisted clients in export and sanctions licensing and compliance issues with regard to a variety of industries and products, including encryption and other computer technologies, satellites, oil and gas products, military items, and other goods and technology controlled for export due to national security reasons. Mr. Lorello has extensive experience assisting clients in developing effective export compliance strategies, including preparing export license requests, voluntary self-disclosures and intra-company agreements as well as policies necessary to ensure export controls and economic sanctions compliance.

Mr. Lorello has particular experience in assisting clients in economic sanctions matters relating to the financial services industry. He has represented financial services clients in various matters before U.S. and EU Member State regulators, and he has worked with financial services clients in developing tailored internal controls focused on economic sanctions compliance.

Photo of Kimberly Stietz Kimberly Stietz

Kimberly Stietz is an associate in the firm’s Washington DC office where she practices in the Litigation, White Collar, and Africa group.