zoom lens New opportunities, unfamiliar third parties
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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] © 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.