By Justin McCarthy | –
On the 5th of August, the US Securities and Exchange Commission (SEC) issued US oil company, Cobalt International Energy Inc., with a Wells Notice in response to its operations in Angola. The Wells notice was a formal notification to Cobalt stating that the company is likely to face disciplinary action for breaches of ‘certain federal security laws’, namely the Foreign Corrupt Practices Act (FCPA). Though allegations of corruption and illicit government dealings with foreign corporations in Angola are hardly a new phenomenon, it is more worrying that Angola is plagued by the ‘resource curse’ of jobless growth and poor development. This ‘curse’. typifies other countries across sub-Saharan Africa as well, particularly petro-states such as Nigeria and Equatorial Guinea. From 2011 to 2013 Angolan oil revenues totaled $87.4 billion, yet the country has an unemployment rate of 24%, and an appalling 36% of the population lives below the international poverty line of $1.25 per day.[1]
Thus, Angola’s biggest threat is not piracy in the Gulf of Guinea, and most certainly not terrorism, but instead it faces a a loop of chronic corruption, underdevelopment, and complete lack of multinational corporate social responsibility. This entire operation is carefully (though sometimes not so carefully) overseen by President José Eduardo dos Santos, a man who has ‘presided over an oil-rich country for 34 years, lining his family’s pockets with billions of dollars,’ and, not to be outdone by Idi Amin or Robert Mugabe, since at least 2012 dos Santos has been said to extinguish ‘his opponents by torturing them to death and feeding their bodies to crocodiles.’[2]
Current efforts to ensure transparency of oil flows, like the Extractive Industries Transparency Initiative (EITI) Pilot Programme, typically focus on the oversight of multinational corporations (MNC). They are required to publish information regarding their deals with the companies where they operate. However, a report published in 2014 by the Natural Resource Governance Institute highlights a far less transparent sector: sales by parastatal and state-owned oil companies processed via Swiss companies such as Glencore and Vitol.[3] As it happens, Glencore is currently involved in an investigation for possible collusion with President dos Santos to set up an elaborate web of anonymous shell companies that facilitated the disappearance of $386 million in 2011.
Cobalt Energy’s offshore exploration began in 2008 in partnership with parastatal Sonangol, Alper Oil and Nazaki Oil & Gas. Cobalt only drew SEC suspicion in 2011, when claims were made by investigative journalist Rafael Marques de Morais, stating that Nazaki was secretly owned by a trio of government officials: Vice-President Manuel Vicente, General Manuel Helder Vieira Dias Junior, and General Leopoldino Fragoso do Nascimento. Cobalt claimed they had no knowledge of Nazaki’s involvement and were simply assigned to a contractor group with the Nazaki via Sonangol. Sonangol is responsible for the licensure issuance for oil exploration and receives license taxes from foreign oil companies.[4]
Incidentally, these revenues are supposed to be transferred to the Angolan government, though the IMF has noted that these transfers are often unpredictable and that there are significant differences between Sonangol and the Finance Ministry’s payment records. Ultimately, the personal nature of President dos Santos’ rule makes foreign oil exploration without Sonangol’s involvement in Angola impossible. This is further compounded by the fact that Sonangol possesses a number of powerful connections with the ruling elite, including President dos Santos’ daughter, Isabel dos Santos, who is a significant shareholder and the richest woman in Africa.
Direct ownership of state and private enterprises by Angolan politicians is outlawed, but the law is weak and beneficial ownership via friends and family is not. Because Manuel Helder Vieira Dias Junior and General Leopoldino Fragoso do Nascimentos’ shares were held via a third party company, Cobalt will undoubtedly plea its case to the SEC, stating that the process of due diligence prior to investment could not have been expected to register this problem. Furthermore, Manuel Vicente, owner of Nazaki, was also CEO of Sonangol in 2008. This is a clear conflict of interests and is illegal under both Angolan and international law.
Consequently, regulatory fines and litigation costs are risks that must be assessed when considering business ventures in developing countries with high levels of corruption. In 2011, just months after receiving a fine for bribery in relation to Nigerian operations, Halliburton announced an internal investigation for possible breaches of the FCPA following similar allegations in Angola. Cobalt knew the risks were high and decided to proceed with oil exploration. To stop the endless circle of logo centric finger pointing, ignorance or naivety cannot be deemed a legitimate defense.
However, government mismanagement and corruption in Angola does not stop at the at the oil sector. Nothing better encapsulates the other side of the government-foreign direct investment (FDI) nexus and narrative than the Portuguese Banco Espîrito Santo (BES) debacle. During the 2008 financial crisis, BES allowed its subsidiary and the second largest bank in Angola, BESA, to loan out $7.7 billion, which was over 220% of its total deposits. Superficially, Portuguese investment in Angola pre-2008 made sense. This consisted of unprecedented GDP growth rates, low inflation, and a large Portuguese expat population in the capital of Luanda, which all made large profits. In the immediate aftermath of the Euro crisis, however, BESA has become critically dependent on BES for funding because of its extraordinarily high loan/deposit ratio. The quality of BESA’s loan portfolio has been questioned in recent months, and worries of both entities’ solvency and liquidity have graced Portuguese and Angolan newspapers.
BES was always aware BESA had a strong alliance with the dos Santos family, though it is only now realizing just how close those ties were. BESA’s official role as a ‘partner of the state’ is a rather mild title, as it was not awarded because of its productive investment in the Angolan economy. When BESA opened in 2002, Álvaro Sobrinho directed daily operations as CEO until 2012 before stepping down. Sobrinho is also a majority shareholder in Akoya, a Swiss asset management company. Akoya is now embroiled in the ‘Russia-Angola debt deal,’ serving as an asset to money-laundering in the establishment of shell companies in tax havens. Investigative journalist Rafael Marques de Morais has noted that much of BESA’s loans were motivated by Angolan political interests and were often directly connected with the dos Santos regime. On August 1st, the Bank of Portugal stepped in and forced BES to split its loans into two tranches of ‘good and ‘bad’ securities. Perhaps unsurprisingly, the Angolan securities were placed in the ‘bad’ bank and the ‘good’ securities were temporarily nationalized.
‘So how exactly does the Presidential clique own BESA?’ asked the Financial Times. Well, like most business practices in Angola, it’s complicated, or ‘not exactly clear’ as stated by the Financial Times.[5] In 2009, BES sold 24% of its stake in BESA to the Angolan company Portmill Investimentos e Telecomunicações. Coincidentally, the very same triumvirate implicated in the Cobalt Energy investigation originally owned Portmill. However, in June of 2009, their stakes were sold to Lieutenant-Colonel Leonardo Lidinikeni, officer of the President’s security detail. Records indicate that Geni Group, which is, again, allegedly partly owned by the President’s daughter Isabel dos Santos, owns a further 19% of BESA. Although she may not legally own or control Geni Group, Isabel dos Santos is known to use close family and associates to disguise her personal involvement in business enterprises. Thus, the dos Santos family probably controls at least 43% of BESA.
It is ironic that the BES/BESA debacle occurred through a process in which a developing country’s regime took advantage of a foreign bank, which was seeking quick access to profits from resource extraction. This may also offer insight into the Portuguese debt crisis and more importantly, into the the Cobalt Energy investigation because it completes the other half of the governance-MNC cycle. It exposes the shear depth of the intricate web of personal relationships and inept leaders. Foreign investors and International Financial Institutions (IFIs) speak critically of these connections, which often pervade Angolan and African politics. For all the World Bank’s rhetoric concerning ‘better governance,’ both the Cobalt Energy corruption investigation and the BES/BESA debacle highlight the challenges African governments continue to face. Capitalism as an ideology is, after all, at the very best amoral, and, above all, corporations have a responsibility to their shareholders. It would be both unrealistic and excessive to expect Total, BP, Shell, or Chevron to build entire cities in the name of development in the Global South. Yet, the most basic principle governing corporate responsibility must be to the adherence of the basic law primum non nocere, meaning ‘do no (direct) harm.’ Dependency is mutually constitutive, as it is foreign governments and corporations that help sustain the vicious circle. They do so either by intentionally investing in countries with weak regulatory regimes, or, worse, they invest in corrupt countries, anticipating greater profits from illegal dealings.
Conversely, corporations give kleptocratic governments the responsibility of handling high inflation and stagnating economies, while African elites attribute underdevelopment, high unemployment, and poor economic diversification to opaque dealings by foreign governments and corporations (i.e. ‘Dutch Disease’). Conversely, many MNCs complain of poor governance and weak laws, yet invoke state sovereignty, quickly sign ‘stabilization clauses,’ and are hardly coy in their efforts to avoid domestic law. In the case of Cobalt Energy, the clear incentive for higher profits, encouraged by the potential for evading international and domestic regulations, clearly outweighed business ethics and the fear of litigation. The SEC should ultimately set a strong precedent and prosecute Cobalt executives that possess any knowledge of the underhanded dealings in Angola.
Nonetheless, there are small but significant steps the international community can take to encourage better governance. Most importantly, the EITI argues, ‘Every country should maintain a low-cost, searchable public registry of all corporate entities registered or operating within its territory.’[6] These registries would contain information about any individual with a substantial stake in the company, including their names, dates of birth, residential address, nationality, up-to-date contact information, and any other companies used to carry their stake. Falsifying beneficial ownership information should also be made illegal with the penalty of prosecution. Additionally, in the future, stiff SEC penalties may also encourage corporations to expand compliance compartments and fulfill the requirements for greater due diligence.
[2] http://www.theguardian.com/commentisfree/2013/nov/27/britain-angola-silence-british-media-colonial
[3]http://www.resourcegovernance.org/sites/default/files/BigSpenders_20140720.pdf
[4] http://www.forbes.com/sites/kerryadolan/2013/09/23/angolan-journalist-rafael-marques-arrested-roughed-up-and-later-released/
[5] http://www.ft.com/cms/s/0/f1a56358-1b5b-11e4-a633-00144feabdc0.html#axzz3FbeIuj4X
[6] https://eiti.org/files/English_EITI%20STANDARD_11July_0.pdf
