Managing Regulatory Risk in Africa

On 1 October 2021, the Financial Action Task Force (“FATF”) published its Mutual Evaluation Report of South Africa, which report detailed the findings of the FATF’s “comprehensive review” of the effectiveness of South Africa’s anti-money laundering and counter-terrorist financing (“AML/CTF”) measures. The Mutual Evaluation Report identified a number of deficiencies in South Africa’s AML/CTF regulatory and enforcement environment which required remediation in order for South Africa to comply with the FATF Recommendations. A failure to remedy these deficiencies put South Africa at risk of being placed on the FATF’s list of “Jurisdictions under Increased Monitoring”, the so-called “grey-list”. Faced with the prospect of “grey-listing”, a number of legislative amendments received Presidential assent during December 2022. These amendments sought to remedy, amongst others, one of the key deficiencies identified by the FATF, being the lack transparency in respect of beneficial ownership of legal persons in South Africa.  

Whilst the South African government ultimately failed to prevent South Africa from being placed on the “grey list”, the steps taken to increase beneficial ownership transparency are nevertheless welcomed. Of particular interest are the amendments to the Companies Act, 2008 (“the Companies Act”) requiring all companies to record beneficial ownership information in some form[1].  The term “beneficial owner” has been defined broadly in the Companies Act to cover, amongst others, individuals who are holders of beneficial interests as well as those individuals who are able to exercise different forms of control over the company concerned (e.g. voting rights etc.) even where such control is exercised “through a chain of ownership or control”. Based on the foregoing, it appears that determining who will fall within this expansive definition may be challenging in the context of more convoluted ownership and control structures.

In addition to introducing the above record-keeping requirements, access to beneficial ownership information is sought to be enhanced by requiring companies to submit copies of their securities register and beneficial interest register (where such information is not included in the securities register) together with their annual return to the Companies and Intellectual Property Commission (“the Commission”). In addition, the draft Companies Regulations, which were published for public comment on 10 March 2023, include a provision requiring the Commission to provide electronic access: (i) to any person to view copies of a company’s annual returns; and (ii) to copies of electronic documents filed together with an annual return to “such persons and on such conditions as may be determined by the Commission after consultation with the Minister of Trade, Industry and Competition and the Financial Intelligence Centre…”. Exactly who “such persons” will be remains to be seen but it seems that law enforcement agencies and other relevant bodies are likely candidates. The success of these changes will ultimately depend on the extent to which the Commission is able to exercise effective supervision to ensure compliance and this will likely only become clear in the coming years. Notwithstanding this, the changes are at least illustrative of a policy direction of enhancing transparency, which is welcomed.

As outlined above, these and other legislative amendments were introduced in an attempt to avoid “grey-listing”. Whilst this end was not achieved and more will be required to get South Africa removed from the “grey-list”, comfort may at least be sought that the benefits of these changes may be enjoyed in the interim. In particular, enhanced access to beneficial ownership information should facilitate more robust counterparty due diligence. Whilst FATF’s primary focus is on combating AML/CTF and customer due diligence, access to beneficial ownership information is also of incredible importance in the context of supply chain due diligence. Supply chain due diligence may be conducted for a variety of purposes depending on the potential risks prevalent in a particular supply chain. For example, supply chain due diligence may be conducted to determine the existence of risks in respect of engaging with entities which are: (i) sanctioned; (ii) known to have a history of human rights abuses; or (iii) politically exposed. To conduct effective supply chain due diligence, it will typically be necessary (as far as possible) to go beyond a surface-level assessment of the identified legal persons in the supply chain and to also examine the “warm bodies” involved. It is in this context that transparency in respect of beneficial ownership is critical, and implementing mandatory beneficial ownership disclosure requirements should (if effectively enforced) facilitate more robust supply chain due diligence in South Africa.

Adrian Roux - ENSafrica

The 27th United Nations Climate Change Conference (UNFCCC), also known as Conference of the Parties, took place in Sharm El Sheikh in 2022 (COP27). It had a central focus on Africa and there were four initiative's launched at the conference aimed at providing climate solutions, enhancing global climate action and ensuring the countries involved are able to fulfil their Nationally Determined Contributions (NDC's) and meet the goals of the Paris Agreement:

• Friends of Greening National Investment Plans in Africa and Developing Countries initiative

This aims to to shape the process of plannng and designing economic policies to factor in the impact of climate change whilst expediting the implementation of the UNFCCC, Paris Agreement and the NDC's, documents which represent each countries commitments to reduce greenhouse gases and adapt to climate change.

• Low Carbon Transport for Urban Sustainability (LOTUS) initiative

Facilitated by Stitching Partnership on Sustainable Low Carbon Transport (SLOCAT) and the Boston Consulting Group (BCG) and developed in collaboraton with the UN Environment Programme, the initiative is designed to help decarbonise cities by improving access to low carbon urban mobility solutions e.g. implementation of electric courier services.

• Sustainable Urban Resilience for the next Generation (SURGe) initiative

Launched by the COP27 Presidency, in collaboration with UN-Habitat and with facilitation of the International Council for Local Environmental Initiatives, SURGe aims to address the barriers that limit urban emission reductions by accelerating local and urban climate action and addressing the need for urgent multilevel co-operation.

• Global waste 50 by 2050 initiative

Seeks to treat and recycle at least 50% of the solid waste produced in Africa by 2050.

In addition to these initiatives agreed during COP27, there have been a number of further measures and agreements since the conference ended which involve or will materially impact African nations and their economies.  Breakthrough achievements include the creation of a fund to mitigate loss and damage suffered by vulnerable countries as a result of climate disasters.  A large proportion of African countries will be significantly negatively affected by climate change and could benefit from this fund. A further $105.6 million in new funding was announced for the Global Environment Facility fund targeting the immediate climate adaption needs of low-lying and low-income states.

Ahead of COP28 which is being held in the UAE at the end of 2023, countries representing more than 50% of  global Gross Domestic Product (GDP) - including U.S., China, Japan, Germany and India -  have launched a package of 25 new collaborative actions to be delivered by COP28 to speed up decarbonisation under five 'key breakthroughs' in the sectors of power, road transport, steel, hydrogen and agriculture.  The agriculture breakthrough intiative, led by Egypt and the UK, aims to make climate-resilient, sustainable agriculture the most widely adopted option by 2030. There are now 47 countries endorsing the agenda, including Nigeria and Morocco.

The G7 and V20 ("the Vulnerable Twenty") launched the Global Shield against Climate Risks with new commitments and $200 million of initial funding with implementation starting immediately. Countries eligible for OECD funding and support are also eligible for support under the Global Shield.  African countries eligible include Angola, Chad, Ethiopia, Somalia and Algeria.

Stuart Wardlaw - Addleshaw Goddard

Increased supply chain diligence requirements are becoming a central part of the global focus on developing long -term, sustainable business models, fit for a carbon neutral future.

The UK has had the Modern Slavery Act in place for almost 10 years.  Ground-breaking at the time, the MSA requires large organisations proactively to report on steps taken in the business to stamp out forced labour in supply chains.  However, this "reporting model" to combat modern slavery, as used in the UK, California and Australia, is now being substantially overtaken by new, and much more onerous laws, which have the potential to substantially impact suppliers and supply chains based in Africa and other parts of the world.

France was one of the first countries to legislate for responsible business and sustainable supply chains. The Duty of Vigilance law (Loi de Vigilance) came into force in 2017, requiring due diligence to ensure respect for human rights and ensure environmental responsibility by the company's parent and subsidiary operations as well as within its wider supply chain.

A new German Supply Chain Due Diligence Act came into effect on January 1, 2023, which requires larger companies to conduct mandatory and detailed supply chain diligence to find and assess human rights and environmental violations within their supply chains, as well as develop risk management, monitoring, and reporting strategies, with significant fines for noncompliance.

The German law is the latest in a growing body of legislation that is pushing large global firms to take responsibility for cleaning up their supply chains rather than relying on voluntary systems. Other countries are contemplating similar legislation, and a new European Union Supply Chain Directive, presently in draft form, is expected to go even further, in that it may include provisions allowing victims to seek direct restitution in court from businesses which benefited (directly or indirectly) from forced labour or other modern slavery issues.

Although the new legislation will only affect a small percentage of EU businesses in its early form, and final standards may change, the trend towards stricter, binding social and environmental regulation is obvious. The pivot is part of a reinvention of global supply chains, which are essential to the global economy as the primary channel of global trade and a major source of employment creation. The brittleness and unfairness of globalised production networks have been exposed by crises such as the COVID pandemic and the war in Ukraine, as well as the accompanying energy shock. The climate emergency's danger to long-term growth, combined with consumer, investor, and civil society calls for fairer, greener manufacturing, means that pressure to create more sustainable, and hence robust, supply chains will continue to grow.

So what do these "diligence" supply chain laws require?

Typically, businesses within scope must undertake due diligence responsibilities throughout their supply chain, including to small suppliers many levels down in the supply chain from the end customer. This includes identifying negative impacts on human rights and the environment, both actual and potential from the supply chain. Then, businesses must implement preventative, mitigating, and corrective measures, including complaints and whistleblowing procedures, as well as making transparent public statements about how the company has met its due diligence obligations.  This is likely to mean that businesses will come under pressure to cease business with suppliers which do not meet acceptable standards of business ethics.

In these newer laws, the obligation to exercise due diligence applies not only to an organisation's own business activities or those of its subsidiaries, but also to direct and indirect suppliers (provided the relationship is established or permanent).

Those businesses may also have a duty to ensure that they, their customers, and their suppliers do not violate human rights, biodiversity, or the environment, for instance by respecting:

• Freedom of association, prohibition of child and forced labour, equal pay, non-discrimination in employment and occupation, etc., as outlined in the fundamental labour standards of the International Labour Organisation (ILO).
• Human rights such as freedom and security of the person, physical integrity, legal capacity and equality before the law, privacy, spatial freedom, food and essential services, as well as recreation and leisure, are protected by international law. 
• Conservation of species and ecosystems.
• Ensuring sustainable business models to combat climate change.

At one level, these incoming rules should lead to better regulatory harmonisation and the spread of cleaner, safer technologies and working environments, mitigating some of the negative effects of globalisation. It may also accelerate innovation as organisations upgrade to meet new standards, giving them greater access to global supply networks. There are studies which show that higher levels of environmental and social engagement among downstream companies can help suppliers all the way up the supply chain.

African firms are particularly well placed to support "green industrialision" as key suppliers of resources such as cobalt and lithium, in high demand in many climate focused industries. At the same time, those same firms have a unique opportunity (and challenge) to build a labour force and infrastructure which will be the blueprint for a longer-term, ethical business model.

However, the blanket imposition of onerous new requirements, particularly if designed by reference to Western business norms, rather than complex and varied supply chains which exist in other parts of the world, will present a challenge.  The amount of data and compliance information which producers and supplier may need to now collect and keep, is likely to increase costs and be a particular challenge for smaller and medium sized businesses in Africa.

Those African businesses which find a way to engage with these incoming supply chain diligence laws are likely to see increased business from European firms over time as well as helping to set the global standards for sustainable business over the next five years.

Harriet Territt - Addleshaw Goddard

The African Mining Indaba that begins in Cape Town today comes less than a month after the Future Minerals Forum in Riyadh, Saudi Arabia, which this year hosted about 7,000 delegates — including two of the authors of this article.

The forum brought together the global mining industry for a stock-take on the state of the sector, with a particular focus on the Middle East, Africa and Central Asia.  

During a keynote panel discussion at the forum Rio Tinto’s new chair, Dominic Barton, emphasised that one of the impediments to the mining sector’s growth potential is its public image. It is clear today that the social licence and environmental issues affecting the industry are impeding the green energy transition, which depends on access to critical minerals and rare earth elements. If a just energy transition is to be achieved, the industry must address the issues that affect its image. This requires support across the value chain.

Read the full article here

Following FAST: Convening Africa, Xolisile Khanyile, Director of South Africa’s Finance Intelligence Centre and Chair of the Steering Committee for the South African Anti Money Laundering Integrated Task Force (SAMLIT) joins Daniel Thelesklaf of the UNU-CPR FAST initiative to reflect on the measures the financial sector can take to address human trafficking and modern slavery risks in Africa.

The COVID-19 pandemic has exposed the deep and entrenched inequality of our economic systems. One extremely worrying consequence has been a sharp rise in the number of victims of human trafficking and modern slavery – an increase of approximately 10 million worldwide since 2017.

We are clearly backsliding in our efforts to attain Target 8.7 of the UN’s Sustainable Development Goals (to end modern slavery) and protect vulnerable individuals and communities. This includes many Africans: of the 49.6 million victims worldwide, 7 million live on the continent.

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The President of Challenging Heights, James Kofi Annan, has urged member countries of the African Continental Free Trade Association (AfCFTA) to take urgent steps to address issues of modern slavery and human trafficking in their business supply chains or risk not gaining anything from the AfCFTA initiative. He said most African countries have enacted laws against human trafficking and modern slavery, but none so far is known to have enacted such laws directed at businesses, to address supply chain issues.

James Kofi Annan was addressing the global business leaders and government ministers around the world, at this year’s Bali Process Government and Business Forum (GABF), held in Adelaide, Australia.  This year’s Bali Process was jointly chaired by Australia and Indonesia’s Foreign Ministers and two business co-chairs—Andrew Forrest (Australia) and Garibaldi Thohir (Indonesia).

The President of Challenging Height told the gathering that Ghana is presently hosting the Secretariat of the Africa Continental Free Trade Association (AfCFTA), a continental zone created for companies in Africa to compete on the global market.

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Even though the practice of slavery has been formally abolished, an estimated 49.6 million people are in forced labour globally, a quarter of which are children.

Modern slavery is an umbrella term that refers to situations where exploited individuals cannot leave because of threats, violence, coercion or the abuse of power. It includes a variety of practices such as forced labour, bonded labour and human trafficking.

Modern slavery affects the supply chains of many goods and services used everyday. ChatGPT, which has an estimated 13 million daily users, was developed using contractors from Kenya earning between $1.32 and $2 per hour.

Read the full article here

European Investment Bank has refused to reopen investigation into bankrupt Kenyan construction company despite whistleblower’s data cache.

The EU’s lending arm, the European Investment Bank, has been accused by two NGOs of failing to properly investigate allegations of the fraudulent use of its funds by directors at a now-bankrupt Kenyan construction company.

The EIB, which is owned by the EU’s 27 member states and is the world’s largest multilateral bank by assets, has said that it would not examine a whistleblower’s data cache despite acknowledging evidence of “possible embezzlement” at the company. Counter Balance and The Corner House, two financial and social justice NGOs, claim the cache presents unreviewed documents detailing alleged bribery and misuse of funds by British directors at Nairobi-based Spencon.

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Challenging Heights, a non-governmental organisation (NGO), has petitioned the Africa Continental Free Trade Area (AfCFTA) over human trafficking and modern day slavery in the supply chains of AfCFTA participating companies.

This petition was submitted to the AfCFTA Secretary General through the AfCFTA Secretariat, urging the organisation to address human rights issues, especially those bordering on human trafficking, modern slavery, forced labour, and other human rights abuses throughout company supply and value chains.

Challenging Heights says this is to avoid the risks of international product sanctions, as well as to enhance international consumer and investment confidence in the participating companies within the AfCFTA agreement.

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A French court has rejected a first bid by human rights activists to suspend TotalEnergies’ multibillion-dollar oil pipeline project in Uganda, as part of an early battle in a wider war being waged by campaigners to force companies to act over environmental damage and climate change.

Judges ruled on Tuesday that the request for a suspension to Total’s project was inadmissible on a technicality. But the decision did not address the underlying merits of the complaint, which the written ruling said would have to be examined by another judge.

The setback in the action brought by Friends of the Earth France, Survie and four Ugandan civil society organisations is an early skirmish ahead of a series of lawsuits that have been filed under the auspices of a novel 2017 French law.

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What are the implications of the decision of a global financial crime watchdog to place South Africa and Nigeria on its ‘grey list’? And what does the classification mean for businesses and wealth holders with a connection to grey-listed jurisdictions?

South Africa and Nigeria have been placed on the Financial Action Task Force‘s ‘grey list’, designating them as countries that need to do more to combat problems in areas ranging from money laundering to terrorism financing.

Concerns had previously been raised, meaning the global watchdog’s decision was not necessarily a surprise to the two leading African economies. But membership of the 23-strong grey list is an unwanted and damaging development, which could take years to undo, experts told Spear’s.

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[1] Certain categories of “affected” companies are required to maintain a separate beneficial ownership register. However, the Companies Act provides that a company which is not “affected” must also include information regarding the natural persons who are beneficial owners of the company in that company’s securities register.