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Foreign Investors Against South Africa’s Black Economic Empowerment Policies

Foreign Investors Against South Africa's Black Economic Empowerment Policies
South Africa is the world’s most unequal society with White settlers controlling most of the country’s wealth

AFRICANGLOBE – Earlier this year, the government of South Africa announced that it was extending from this October to next April the deadline for companies to comply with last year’s new, tougher regulatory requirements under the Broad-Based Black Economic Empowerment Act.

Yet it may take more than a relaxed time frame to bring companies on board. Critics say the new provisions expose companies both to higher risk, including risk of criminal prosecution, and to a compliance Catch-22: meeting the requirements of B-BBEE can sometimes lead to violations of the U.S. Foreign Corrupt Practices Act.

The B-BBEE legislation has since 2003 encouraged companies to offer ownership, hiring and other preferences to Black people. The amendments define “Black people” to encompass “Africans, Coloureds and Indians,” and emphasize “in particular women, workers, youth, people with disabilities and people living in rural areas.”

Companies receive a scorecard ranking that not only affects their own ability to win government contracts but can also affect the competitiveness of their supply chain partners, because the ranking of a company’s suppliers affects a company’s own ranking.  Thus, companies that do business with the government are better positioned if they deal with suppliers who have high B-BBEE rankings. Last year’s amendments raised the compliance bar and reduced flexibility for companies to compensate for a shortfall in one empowerment category by going beyond the mark in another.

As a result, companies that formerly enjoyed high rankings are likely to face steep downgrades unless they do more to improve their scores, attorneys and business people told Risk & Compliance Journal in interviews. The changes seem to have some wondering whether South African business is worth the trouble of complying. One source familiar with the thinking of U.S. companies in South Africa requested anonymity but emailed, “The new Codes that will be implemented in April 2015 are seen as very difficult to comply with.  Ownership will be a mandatory requirement…the new Codes are going to have the effect of firms looking elsewhere to set up office. ”

B-BBEE has also been helping shape investment strategies of some money managers. “Black Economic Empowerment is a risk that needs to be quantified when making investment decisions,” said Harold de Kock, an asset manager for high-net-worth individuals in South Africa.  Mr. de Kock primarily invests in large capitalization, global companies where the exposure to South Africa is limited.

Some approaches to compliance with B-BBEE can put companies at risk of non-compliance with the U.S. Foreign Corrupt Practices Act. Companies often achieve ownership targets through up front share grants to Black partners, with the purchase price paid out of subsequent dividends. “It is almost a government-enforced slush fund,” said one Washington D.C. based international trade attorney. “The requirement to cut in Black South Africans basically invites companies to find a mechanism to transfer wealth to a select group.”

The companies that feel the most pressure to comply are those whose business depends on winning government approvals and bids; they in turn pressure their suppliers. “These are perilous waters that should be navigated with the requisite care and vigilance,” said Beatrice Hamza Bassey, partner and member of law firm Hughes Hubbard & Reed’s global anti-corruption practice. She said it is “routine” for government officials to guide companies to preferred partners under Black Economic Empowerment ownership initiatives: “Especially with major companies they will suggest who you should partner with.”

However, giving economic benefits to someone recommended by a government official from whom a company is seeking a favorable decision can mean violating the the FCPA, which forbids bribery. Ms. Hamza Bassey explains, “What often happens is you find that the local companies have opaque ownership and if the foreign company has not done the requisite due diligence before going forward with this partnership it could find itself with partners that would make them violate statutes like the FCPA.”

The example of Gold Fields Inc. shows how this can work in practice. Last year, the South African mining company announced that it was under investigation by the U.S. Securities Exchange Commission in connection with a Black Economic Empowerment Transaction that awarded shares to a consortium including the chairwoman of the ruling African National Congress, Baleka Mbete. (Ms. Mbete has denied allegations of bribery and a spokesperson for the SEC said that the agency could neither confirm nor deny the existence or nonexistence of any investigation.)

Gold Fields admitted in a separate statement that the transaction did not meet its standards and its chief executive officer, Nick Holland, offered to waive his bonus because of the deal. The former board chair of Gold Fields told South Africa’sBusiness Day that the South African government had threatened to withhold a mining license if the company didn’t include some government-preferred names among the beneficiaries of the BEE deal.

Smaller businesses are also feeling the pain of complying. Mario Pretorious, chief executive of publicly listed telecommunication services company TeleMasters Holdings Ltd., pointed to a shortage of qualified people from dis-empowered groups, noting, “Only 6% of graduates are Black, but 75% of management must be Black. It’s a mathematical impossibility to do that, but that is the law.”


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