zoom lens New opportunities, unfamiliar third parties

zoomlens
February 2013
New opportunities, unfamiliar
third parties
The importance of due diligence in
Mozambique
Those looking to Mozambique as a destination for business growth might be dazzled by
the array of natural resources that has jump-started the country’s economy in recent
years.
But to make the most of this potential, they will need to take a closer, more analytical look
before they leap, for like other emerging markets, Mozambique presents challenges, as
well as opportunities. Read on to gain insight into this young market and the importance
of due diligence in pursuing growth there.
Following the end of its civil
war in 1992, Mozambique’s
gross domestic product
(GDP) grew at an average
annual rate of 7.5% from
1993 to 2009. Last year,
the country’s economy
grew 7.1%.
Projections derived from the
International Monetary
Fund’s World Economic
Outlook Database:
http://www.imf.org/external/pubs/ft
/weo/2012/01/weodata/index.aspx.
Emerging from its status as one of the world’s poorest countries upon gaining
independence from Portugal in the mid-1970s, Mozambique today boasts one of the
highest growth economies in Africa and is Sub-Saharan Africa’s fastest growing non-oil
economy. It’s expected to grow at more than 7% annually through 2017,1 largely on the
strength of a virtual revolution in natural resource discoveries, from natural gas to gems
and precious metals — diamonds and gold among them.
Those who are excited by the possibilities this implies should not lose sight of the
significant value of performing due diligence in such markets. Rapid growth can
overwhelm still nascent laws and institutions, as well as the regulations governing the
nation’s extractive industries, while opening the door to corruption.
Given today’s growing global anti-corruption mindset and international regulatory zeal,
those entering new markets should gain a thorough understanding of the rules. This is a
particular concern in a low-income, resource-rich country, where resource rents2 can buy
political power, compromising governance and breeding corruption. Lured by a fastgrowing economic pie, an entrenched group of elites may try to capture the country’s
newfound wealth and swallow it whole — along with the fortunes of unwitting foreign
investors.
1
Projections derived from the International Monetary Fund’s World Economic Outlook Database:
http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx.
2 The greater amount of a resource’s sales value versus its extraction costs
Absent an adequate regulatory and
enforcement framework, more mature
Mozambique has made some strides toward structure, and appropriate resources,
keeping pace with its dramatic growth. Its
corruption will continue to limit the extent
investor protection regime is more mature
to which investors can enjoy smooth market
than many of its Sub-Saharan peers3 and in entry or expansion.6 Deals in Mozambique
the past year, it’s cut some of the red tape
have already come under regulatory
associated with construction permit
scrutiny. The Securities and Exchange
acquisitions and streamlined business
Commission (SEC) in 2010 charged two US
launch processes; five years ago, it took
tobacco companies under the Foreign
more than 100 days to establish a business Corrupt Practices Act (FCPA) with making
in Mozambique. Today, the wait is just 13
improper payments, recorded as consulting
days.
fees, commissions, and gifts, to
Mozambican government officials and their
But the gap between strong legal principles
relatives to gain concessions. What they got
and truly effective practices remains
instead? Multi-million dollar
substantial. While Mozambique has antidisgorgements and fines.7
corruption laws on the books and a
government office dedicated to corruption
There’s likely more of the same to come.
investigations,4 it’s lacking in enforcement, Recently enacted laws, such as the UK
resources, and independence from political Bribery Act and the Dodd-Frank Wall Street
interference.
Reform and Consumer Protection Act, have
ratcheted up global anti-corruption
Anti-corruption legislation proposed in
standards. Specifically, with respect to the
2011, with provisions on asset disclosure,
extractive sector, Dodd-Frank’s Section
ethical conduct requirements for public
1504 mandates disclosure of any payment
servants, and conflict of interest restrictions
or series of payments above $100,000
on public officials, remains stalled. And,
made to a foreign government for the
while the country signed and ratified the
purpose of the commercial development of
UN Convention Against Corruption
oil, natural gas, or minerals by a company
(UNCAC) and the African Union
that is an SEC filer. It also requires
Convention on Preventing and Combating
additional detail about the kind and total
Corruption and recently joined the
amount of payments made for each
Extractive Industries Transparency
extractive project.8 Such disclosure,
Initiative, a voluntary global standard that
effective beginning October 1, 2013, has
promotes revenue transparency,
already prompted similar legislative
implementation remains a work in
proposals in the European Parliament.
progress.5
Corruption: A closer look
Mozambique is perceived as a
slightly cleaner market in
which to operate than oil and
gas producers such as
Nigeria and Angola, where
FCPA prosecutions are
frequent; but the country is
seen as more prone to
corruption than Zambia,
Tanzania, and South Africa,
according to Transparency
International.
Transparency International,
Corruption Perceptions Index 2011,
http://cpi.transparency.org/cpi2011/
6
3
The World Bank, Doing Business 2012:
http://www.doingbusiness.org/~/media/FPDKM/Doi
ng%20Business/Documents/AnnualReports/English/DB12-FullReport.pdf.
4 Gabinete Central de Combate à Corrupção
5 Extractive Industries Transparency Initiative,
http://eiti.org/Mozambique
US Department of State, 2012 Investment Climate
Statement – Mozambique, June 2012,
http://www.state.gov/e/eb/rls/othr/ics/2012/191204.
htm; European Union Business Anti-Corruption
Portal, Mozambique Country Profile,
http://www.business-anticorruption.eu/index.php?id=16053.
7 US Securities and Exchange Commission, "Sec Files
Anti-Bribery Charges Against Two Global Tobacco
Companies," Press Release, August 6, 2010.
http://www.sec.gov/litigation/litreleases/2010/lr2161
8.htm
8 Federal Register, Vol. 75, No. 246, December 23,
2010, Proposed Rules for Disclosure of Payments by
Resource Extraction Issuers.
http://www.sec.gov/rules/proposed/2010/3463549fr.pdf
PwC New opportunities, unfamiliar third parties: The importance of due diligence in Mozambique 2
Recent discoveries in Mozambique’s northern Rovuma basin unveiled natural gas reserves that some energy industry
estimates put at over 100 trillion cubic feet. The central Mozambican provinces of Manica and Zambezia have
significant reserves of gems and precious metals, including diamonds and gold.
The country is also on the brink of a burgeoning coal rush. Thanks to largely undeveloped reserves in its northwestern
Tete province, Mozambique was able to begin exporting coal in 2011 and is expected to become Africa’s second largest
coal exporter by the end of the decade.
These discoveries have launched a construction boom, with emphasis on building infrastructure to support energy
exploration and mining, much of it in main logistics corridors of Maputo, Beira, and Nacala.
The African Development Bank, African Economic Outlook 2012 – Mozambique Country Note:
http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Mozambique%20Full%20PDF%20Country%20Note.pdf
Doing it right:
Due diligence
Today’s increasingly robust global
anti-corruption alliance renders due
diligence a must for any business
leader looking to exploit emerging
market growth. For starters, those
who have cast an eager eye on
Mozambique’s growing economic pie
need to develop a thorough
understanding of any and all third
parties involved in a business
transaction; such due diligence is a
fundamental component of a sound
corporate anti-corruption program.
In Mozambique, where so much
change is underway at such a brisk
pace, it’s essential that you remain
aware of the third parties that touch
your business and can harm your
brand and bottom line.
In addition to making good business
sense, in today’s climate, where
corruption is viewed nearly
universally as intolerable, it’s also a
regulatory imperative, with guidance
emphasizing third party due
diligence issued by a global chorus,
including the UK Ministry of Justice,
the Organisation for Economic Cooperation and Development, the
World Bank, and the World
Economic Forum Partnering Against
Corruption Initiative.
How much due diligence is enough?
That depends on a number of factors,
such as the nature and risk profile of
the transaction and the third party;
at a bare minimum, you should
research publicly available
information. Unlike other SubSaharan countries, Mozambique
provides a relatively large cache of
corporate public record information
online, even on certain privately held
entities; this degree of corporate
record transparency not only
facilitates due diligence, but it also
helps lower the cost of doing
business.
The country’s official gazette9 offers
some information online relating to
Mozambican companies, the
identities of their principals, and the
number of shares held. Identifying
whether a local partner or third
party’s principals are politically
exposed persons (PEPs) or the
relatives or agents of PEPs is crucial
to thorough due diligence. While the
gazette’s information has its
limitations and may not be sufficient
to answer every necessary question,
it can serve as a useful tool as a
starting point in conducting public
record due diligence on Mozambican
entities.
Note that this is just an opening
gambit. Market entry or expansion in
Mozambique, as in other emerging
markets, demands proactive due
diligence and monitoring that far
transcends public records scrutiny.
Many companies rely on surveys and
required self-disclosure when
embarking on new local third party
relationships, but this, too, is just a
next step. In frontier markets such as
this, it’s always wise to conduct
9
deeper due diligence, including indepth, on-the-ground interviews with
sources that have detailed knowledge
of the third party, its principals, and
its reputation in the market. Leading
businesses also systematically track
third parties over time to account for
changes in management, new
compliance issues, and adverse
coverage in the local media, blogs,
and other channels. In addition to
evaluating the third party’s
reputation, compliance efforts must
continually confirm that the
information they gather adequately
and accurately reflects their
relationship in terms of what services
the party provides and what
transactions are taking place.
A robust, well documented due
diligence program can mitigate
potential fines and penalties in the
event of a regulatory action while
demonstrating to authorities that
your organization is dedicated to
controlling against corruption risks.
But more than that, an effective,
proactive program can boost your
brand in the global marketplace by
vetting your relationships with third
parties, streamlining third party
management, and weeding out
problem players. The cumulative
effect? Greater return on investment.
Otherwise, do you really want to go
all the way to Mozambique for
naught?
Boletim da República
PwC New opportunities, unfamiliar third parties: The importance of due diligence in Mozambique 3
Contacts
A special acknowledgment to the authors of this piece:
Shanti Salas
PwC
(703) 918-6058
[email protected]
Andrew Rennemo
PwC
(703) 918-3198
[email protected]
For a deeper discussion, please contact:
Glenn Ware
PwC
(703) 918-1555
[email protected]
George Prokop
PwC
(703) 918-1148
[email protected]
Worth MacMurray
PwC
(703) 918-3313
[email protected]
Laura Laybourn
PwC
(703) 918-1430
[email protected]
Jennifer Moll
PwC
(617) 530-7663
[email protected]
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