South Africa: No Free Lunches

Last Updated: 2 November 2005
Article by Roger Wakefield

The South African law on corruption has its roots in a Dutch plakaat of July 1651 which provided that-

"certain …. dangerous and mischievous persons do to the …. contempt of the Supreme Government … so much embolden themselves, that, should they have anything to request from the said High Government, they do dare to attempt to present to members of [Government] certain gifts or presents, whilst they, on the contrary, should have such esteem for the faithfulness, sincerity, virtue and uprightness of the member of the Government ….. So therefore, we …. Do most expressly interdict and forbid any person, to give or promise … any gift or presents of anything, however small these may be, …"

The 1992 Corruption Act sought to expand the common law crime of bribery (which concerned benefits given to and received by government officials) by including, under the general label "Corruption," any improper payments made to, and accepted by, individuals in the private sector.

The Act was poorly drafted and it was difficult to obtain convictions under it.

The Prevention and Combating of Corrupt Activities Act (12 of 2004) repealed the Corruption Act. In wide and convoluted language, it creates numerous crimes of corruption, including corruption relating to public officers, foreign public officials, contracts (both with private and public bodies), procurement, auditors and sporting events (the so-called Hansie provision) and constitutes one of the most far reaching anti corruption statutes in the world.

On the face of it, the Act prohibits even lunch invitations offered with an improper motive. The penalties for corruption are dire with a maximum penalty of an unlimited fine or life imprisonment.

A great deal has been written about the Act and its provisions, but how does it affect the common corporate practices of hosting existing (and prospective) customers and clients to lavish lunches, weekends at exclusive game lodges and, in some instances, elaborate holidays abroad? When, in other words, does the giving and receiving of such benefits constitute a crime of corruption? The answer lies in the minds of the giver and the receiver of the benefit.

s3 of the Act creates the general offence of corruption and provides that -

"3 Any person who, directly or indirectly –

(a) accepts or agrees or offers to accept any gratification from any other person, whether for the benefit of himself or herself or for the benefit of another person; or

(b) gives or agreed or offers to give any other person any gratification, whether for the benefit of that other person or for the benefit of another person,

in order to act, personally or by influencing another person so to act, in a manner-

(i) that amounts to the-

(aa) illegal, dishonest, unauthorized, incomplete, or biased; or

(bb) misuse or selling of information or material acquired in the course of the

exercise, carrying out or performance of any powers, duties or functions arising out of a constitutional, statutory, contractual or any other legal obligation;

(ii) that amounts to -

(aa) the abuse of a position of authority;

(bb) a breach of trust; or

(cc) the violation of a legal duty or a set of rules;

(iii) designed to achieve an unjustified result; or

(iv) that amounts to any other unauthorised or improper inducement to do or not to do anything,

is guilty of the offence of corruption".

s12 creates the crime of corruption in respect of activities relating to contracts and provides that-

"12(1) Any person who, directly or indirectly –

(a) accepts or agrees or offers to accept any gratification from any other person, whether for the benefit of himself or herself or for the benefit of that other person or of another person; or

(b) gives or agrees or offers to give to any other person any gratification, whether for the benefit of that other person or for the benefit of another person,

(i) in order to improperly influence, in any way -

(aa) the promotion, execution or procurement of any contract with a public body, private organisation, corporate body or any other organisation or institution; or

(bb) the fixing of the price, consideration or other moneys stipulated or otherwise provided for in any such contract; or

(ii) as a reward for acting as contemplated in paragraph (a),

is guilty of the offence of corrupt activities relating to contracts.

Gratification is broadly defined to include any benefit or advantage of any description.

Take the following simple and commonplace example: The Chief Executive Officer of X Co, which is a client of services company Z Co, is sent on a trip (with representatives of Z Co) to watch a World Cup rugby match abroad. Z Co pays all the expenses associated with the trip.

X Co is party to a 10-year services contract with Z Co which expires in a year's time. X Co has an option to renew the contract which can be exercised six months before the expiry date. Assume that the services are supplied in a fiercely competitive market and that in the normal course it is obvious that X Co will shop around for the best priced provider when the contract expires. Has an offence been committed?

The trip is clearly a gratification (it is a wrongful act). The next enquiry is whether the gratification was given in order "to improperly" influence the promotion, execution or procurement of a contract. This is the enquiry into the minds of the parties to determine their culpability – that is, whether they had the requisite guilty state of mind when the gratification was given and received. It is a subjective test based on inferential reasoning which takes into account the parties actions and the surrounding circumstances.

Having regard to the facts in the example, particularly the impending expiry and possible renewal of the contract, can it be said that the gratification was for any purpose other than to influence its renewal? Can this form of influence be anything other than improper?

In my view, both the conduct of X Co's CEO in accepting the trip and the conduct of Z Co in paying for it may well fall foul of s12. If the state fails to gain a conviction in terms of s12, it has the safety net of s3 – the general crime of corruption. By accepting the gratification, the CEO of X Co has placed himself in a position where, in deciding whether or not to renew the contract, his personal interests conflict with X Co's interests.

He is, in other words, placed in conflict with his duty towards his principal. The receiving of the gratification could obviously influence him to act in a biased manner towards Z Co when considering renewal of the contract. In turn, this would amount to an abuse of his position of authority, a breach of trust towards X Co and a breach of his fiduciary duty to X Co.

The situation might very well be different if the gratification was offered and accepted in the third year of a fixed 10-year contract.

The purpose of the example is to highlight the dangers of offering and receiving such benefits in the face of some of the most stringent anti-corruption laws in the world.

It is a canon of good corporate governance to avoid conflicts of interest. In a free market, there is arguably no room for the giving and receiving of lavish gifts. Price and good service should be the sole factors determining the decision to contract with company X or company Y.

There is no reason why a service provider should be preferred over his competitors because of the size of his gifts. This is precisely what the Act seeks to avoid.

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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