NABA member of the month for March is global audit, tax and advisory services firm KPMG. Ms. Anniken Esbensen and Ms. Christy Lorgen from KPMG’s Oslo office have written this mini guide on risk navigation.
Succeeding in sub-Saharan Africa, and still maintaining the integrity demanded by Norwegian companies, is a matter of risk navigation. The risk of being exposed to corrupt practices is substantial, and so are the penalties from Norwegian, EU, UK and US legislators should you be caught conducting your business unlawfully. Maintaining an ethical and sustainable standard of doing business is still possible; it does however require a diligent and inquisitive approach to who you engage with, and how.
NABA members operate in industries like oil and gas, shipping, and mining, where you often are confronted with a very different approach to issues like corruption and concealment of beneficial ownership than you find in Norway. To protect your reputation as well as your investment, it’s crucial to understand the risks associated with the third parties you’re engaging. Not every risk is a ‘red flag’ or a ‘show-stopper’, but you need to know what the risks are to be able to manage them. A more informed decision is always a better one.
Failure to assess adequately agents, business partners, and vendors, and to know how they operate can expose organizations to reputational damage, operational risk, and government investigations, as well as monetary penalties and potential regulatory and even criminal liability.
What are the risks?
- Corruption poses considerable risk – reputational, financial, and regulatory – to Norwegian companies investing in Africa. A third party with a track record of paying bribes to secure contracts or to influence politicians may consider this ‘business as usual’ in some African jurisdictions, but an increasingly strict regulatory environment, characterized for example by the US Foreign Corrupt Practices Act or the UK’s Anti-Bribery Act, means that this cavalier attitude may be too risky.
- Political exposure, including the stability of regimes, the security of extractive contracts, issues around democracy and the rule of law, and the involvement of politically exposed people with a business partner must be understood. Many African countries have considerable overlap between the political and economic spheres. The fact that a relative of the president or another leading politician is involved with a company does not necessarily rule out a business relationship with the company, but such political exposure should not come as an unwelcome surprise.
- Other risks include exposure to fraudulent practices, tax evasion, money laundering, human rights violations, and hidden beneficial ownership.
How can you mitigate your risks?
- Be ahead of the situation and manage your risks. Do your homework before committing to new business relationships. Find out about any exposure to corruption, bribery, fraud, tax evasion, money laundering, conflict of interest, human rights abuses, environmental damage, hidden beneficial owners, or links to offshore jurisdictions. Sometimes information like this can be found through exhaustive searches of public records: local corporate registries research, searches of media databases with a focus on local language media aggregators, databases for litigation, sanctions, and bankruptcy. However, in many African countries, very little information is publicly available. In these cases, it can be wise to consult vetted and reliable sources, often through a trusted advisor who has experience conducting integrity due diligence investigations.
- Be very careful when using agents, market representatives and other high risk third parties. Reduce incentives such as big commissions to agents.
- Help your counterparty with training and understanding your code of ethics. Ask your counterparty clear and direct questions: Who are your beneficial owners? Why do you own a company in a tax haven? Promote and reward genuine ethical conduct in business.
- Update your risk assessment in the course of the contractual relationship. Monitor and review your investment, including the audits of books & records.
- Follow and respect international best practices such as UN guidelines for business and human rights, OECD and IFC standards, as well as Norwegian and local laws.
- Be aware that identifying risks associated with a potential partner is not just about avoiding risks. If a company wants to avoid risks, it’s probably better off staying in Norway. Knowing the risks allows a company to manage them.
- Set an example: Norwegian companies can set examples of best practice with regard to anti-corruption efforts, compliance, and transparency in all of the jurisdictions where they operate around the world, including sub-Saharan Africa. In particular it is crucial to demonstrate that due diligence and ethical standards are of the utmost importance for your investment. You don’t want the other party to think you’re sticking your head in the sand.
By Anniken Esbensen and Christy Lorgen, Risk Management, KPMG