South Africa: Forensics – A Study Of Cases

Last Updated: 28 November 2011
Article by Dave Loxton

The best way of demonstrating the applicability of the UK Bribery Act (the UKBA) and the US Foreign Corrupt Practices Act (FCPA) in South Africa is by way of case studies.

The applicability of the US-enacted FCPA to agencies

The FCPA specifically provides that payment to third parties to facilitate corrupt acts is a violation and includes onerous penalties for doing so.

For example, a company constructing subsea oil equipment in Nigeria authorised an agent to pay processing fees to Nigerian customs officials. Over a period of five years, the agent made more than 400 payments involving an amount of some USD 2,5 million. Following an investigation into the company's corporate operations worldwide, it was found that these payments amounted to a violation of the FCPA. The corporation cooperated and pleaded guilty, incurring a fine of USD 26 million.

In South Africa, the legislation is still quite new and untested because it applies only to US corporations with a presence in this country. It also has an exemption that allows for so-called "facilitation payments". General consensus among legal analysts is that the legislation is deficient in that it allows this exemption, whereas the British and South African legislation do not.

Suggested risk mitigation measures

  • Institute a proper due diligence of all agents.
  • Include the entitlement to follow every payment that an agent makes (to ensure that it is above board) in all agents' contracts.
  • Investigate the circumstances of a suspected violation and, if it is confirmed, terminate the contract immediately and institute proceedings against that agent.

The FCPA and import duties

The FCPA cracks down on US corporations seeking to avoid foreign import duties and other taxes by bribing customs officials.

This has emerged from a recent case in which an American company exporting rice to a subsidiary in Haiti issued false shipping documents to reduce the amount of customs duties and sales taxes due to the Haitian authorities. The corporation was convicted of paying bribes to customs officials totalling some USD 530,000 which saved it more than USD 1,5 million in import tax.

In this case, the vice-president of marketing and the president of the corporation were acquitted in the American District Court, but the decision was overturned by the US Court of Appeals. It ruled that the FCPA is sufficiently broad to include violations designed to obtain a tax benefit. The vice-president of marketing was sentenced to 37 months in jail, followed by a two year term of supervisional release, as well as a fine of USD 1,3 million. The president of the corporation was sentenced to 63 months in jail and ordered to pay a fine of USD 1,4 million.

The lines of accountability and liability in violation of the FCPA were clearly drawn in this case. They rested with the individuals involved, extending upwards to the executives who were aware of this practice - in this case the vice president of marketing and the president of the corporation itself.

Testimony in the trial was that the corporation believed that these payments were necessary to compete with other companies that paid lower - or indeed no - taxes on similar imports. The Appeals Court held that the fact that other companies were guilty of bribery did not excuse this particular corporation's actions, and that multiple violations of a law do not make those violations legal, or create vagueness in law.

Suggested risk mitigation measures

  • Request legal counsel to provide advice on compliance, potential risks and grey areas.
  • Undertake compliance audits, which include examining processes against the FCPA legislative requirements and identifying risk minimisation programmes.
  • Implement a monitoring system to deal with possible abuses of the law.
  • Institute internal disciplinary proceedings against the individual(s) concerned if corrupt activities are uncovered.
  • Cooperate with the authorities in their investigations fully as this may help to minimise any fines or penalties that may accrue.

Hospitality and gifts under the UK Bribery Act

Distinguishing between genuine hospitality, promotional gifts and what could constitute a bribe, is a grey risk area that South African companies need to be aware of – particularly those associated with British companies.

Defining this legal distinction presents a challenge across jurisdictions worldwide. However, the UKBA is different to the FCPA in the US, and the South African legislation, in that it specifically provides for a strict liability offence (where intention is not a requirement) to cater for corporations that do not have adequate measures in place to mitigate their risks.

For example, consider a company that invites its business partners to a variety of events, such as dinners and sporting occasions, to cement relationships. In this instance, private bodies and individuals pay their own travel and accommodation costs, but the cost of the travel and accommodation of any foreign public officials attending is met by the host company. Is this bona fide marketing, or does it constitute bribery in contravention of the UKBA?

In addition to fines, jail sentences can be imposed on those people who are in breach of the UKBA.

Suggested risk mitigation measures

  • Apply criteria when deciding the appropriate levels of hospitality and the type of hospitality that is appropriate in different sets of circumstances.
  • Publish policy statements indicating commitment to "transparent, proportionate, reasonable and bone fide hospitality and promotional expenditure".
  • Create internal guidelines on procedures that apply to hospitality and/or promotional expenditure - indicating areas where employees might potentially be in breach of the legislation.
  • Provide appropriate training and supervision to employees. Monitor, review and evaluate internal procedures, as well as compliance with them regularly.
  • Conduct a bribery risk assessment covering dealings with business partners (and in particular foreign public officials) and specifically investigate the provision of hospitality, entertainment and other promotional expenditure.
  • Ensure that recipients of hospitality and gifts are not to be given the impression that they are under any obligation to confer business advantages, or that their independence will be compromised.
  • When faced with contraventions of the UKBA, follow due disciplinary processes in dealing with employees, to send a clear message to other employees that such activities will not be tolerated.
  • Co-operate with the authorities in full and - if necessary - agree to criminal prosecution of the employees concerned. This may help mitigate any fines and damages that the company may be in line for.

The impact of the UK Bribery Act on charities and donations

South African businesses with associate links to UK corporations – or who are represented by agents in their dealings with such companies – need to be aware of the potential implications of the UKBA on a business transaction relating to donations and charities.

While there is no case law from which to draw legal precedents in this area, the UKBA impacts South African companies "associated" with UK companies. An agent acting on behalf of a particular UK company would also fall under the ambit of the UKBA.

Take the example of an exporter who sends a representative to a foreign country to discuss supplying a new strain of seed to a local farming co-op. In this meeting, the head of the co-op tells the representative that there is a scarcity of anti-retroviral drugs in the face of a high local HIV infection rate. In a subsequent meeting an official of the co-op suggests to the representative that the exporter could pay for the necessary anti-retroviral drugs. He says that this would be a very positive factor for the government in considering whether or not to grant a licence to import the seeds.

Hidden in that particular proposal is the inferred undertaking that if the company pays to help solve that country's Aids problem, they will be given the licence. In a further meeting, the same official indicates that the company should donate money to a certain charity, which would purchase and distribute the drugs. Clearly this is a potential bribery risk.

The UK legislation is fairly wide-ranging in that it does provide for allowances to be made for the effect of local legislation in jurisdictions where a business transaction relating to donors or charities is taking place.

So where the local legislation requires government involvement and, for example, payment for - or shared costs of - corporations doing business in that particular country, then it will not fall foul of the UKBA. But this is a very grey area. A charity such as the one in this case study could well be a slush fund for government officials and the money could find its way into the hands of the wrong people.

And where the local legislation provides for facilitation payments, but it is clear from the nature of the business transaction that such payments are not in fact facilitation payments, then the UKBA will kick in.

Suggested risk mitigation measures

  • Undertake a proper due diligence of the official.
  • Investigate particular countries and their approaches to corruption.
  • Include a clause in the sales agreement terminating the relationship the moment there are any inklings of corrupt payments.
  • Make contractual allowances to chase the funds or follow the payment of monies.


Risk mitigation measures would go a long way towards assisting South African companies with foreign links to avoid the onerous consequences of violating UK and US anti-bribery and corruption legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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