It has been highlighted numerous times on these pages. The root cause of certain FCPA enforcement actions is a local law or regulation that force companies into a relationship that is not necessarily market driven – but a distortion of the market.
Pointing out this root cause is not meant to excuse the conduct at issue in an FCPA enforcement, but only to put it in the proper perspective.
As explained in this useful summary from Baker & McKenzie, South Africa’s “broad-based black economic empowerment (B-BBEE) is a policy and legislative framework which seeks to redress the historic economic inequalities created primarily as a result of the implementation of apartheid in South Africa.”
One of the requirements is “requiring that every organ of state and public entity must apply any relevant code of good practice issued in terms of the B-BBEE Act when, amongst other things, determining the qualification criteria for the issuing of licenses, permits or other authorizations, when determining their procurement policies and when developing criteria for entering into partnerships with the private sector.”
The recent Foreign Corrupt Practices Act enforcement action against Julian Aires is the latest example of several FCPA enforcement actions involving South Africa to mention B-BBEE.
As discussed in this prior post, Aires was associated with JM Aviation South Africa, an entity which entered into a joint venture with AAR Corp. (a U.S. based aviation services company) in connection with a five year aircraft component support contract with South African Airways (“the state-owned flag carrier of South Africa.”)
As explained by the DOJ in the Statement of Offense:
“On or about January 18, 2016, [AAR], through its wholly-owned U.S. subsidiary [AAR Subsidiary], entered into a joint venture agreement with [JM Aviation South Africa] (the JV Agreement) for purposes of preparing a joint bid for the SAAT [South African Airways Technical] Contract. Under the JV Agreement, [AAR Subsidiary] held a 95% interest in the joint venture and [JM Aviation South Africa] held 5%. [JM Aviation South Africa] acted as [AAR Subsidiary’s] Broad-Based Black Economic Empowerment (B-BBEE) partner for the SAAT Contract bid …”.
Elsewhere, the Statement of Offense states that JM Aviation South Africa “facilitated [AAR’s] business with SAAT …”.
The Aires enforcement action is the latest example of several FCPA enforcement actions involving South Africa to mention B-BBEE.
In 2023, Gartner Inc. (a technological research and consulting company) resolved an FCPA enforcement action concerning conduct in South Africa. The SEC’s administrative order stated:
“This matter concerns Gartner’s violations of the anti-bribery, books and records, and internal accounting control provisions of the FCPA, as a result of a scheme to obtain and retain business from a South African government entity, the South Africa Revenue Service (“SARS”).
At the direction of SARS senior officials, a manager of Gartner’s consulting segment (the “Gartner Consulting Manager” – described as an individual responsible for Gartner Consulting’s public sector business covering Europe, the Middle East, and Africa, including oversight of the SARS engagement) authorized Gartner to enter into sub-contracts with a South African information technology consulting company (the “Private Company” – described as a private South African information technology consulting company formed in 2009 whose Executive Director was a close friend of a SARS senior official.).
[…]
The purported justification for hiring the Private Company offered by the Gartner Consulting Manager was that (1) Gartner needed to sub-contract with the Private Company in order to meet the requirements of South Africa’s Broad-Based Black Economic Empowerment legislation (“B-BBEE”) and (2) neither Gartner nor its local sub-agents qualified under the applicable law.”
In 2022, ABB resolved an FCPA enforcement action concerning conduct in South Africa – specifically ABB’s relationship with Eskom Holdings Limited (a South African state-owned and state-controlled energy company that operated to generate and transmit electricity in South Africa). As described by the DOJ, pursuant to South Africa’s Broad-Based Black Economic Empowerment Act of 2003 and the South African government policies implementing it, and other subsequently promulgated policies, including the Supplier Development & Localization Plan (collectively the BEE Program), ABB’s ability to obtain contracts with Eskom depended, in part, on the engagement of certain local South African subcontractors.
In 2015, Hitachi resolved an FCPA enforcement action concerning conduct in South Africa.
As stated by the SEC:
“In April 2005, HPE [a Hitachi entity] held meetings in South Africa with senior Hitachi executives to discuss the business opportunities in that country. Hitachi decided to form a subsidiary in South Africa- the entity that would become known as HPA – for the purpose of establishing a local presence to help Hitachi pursue contracts with public and private entities in South Africa, including the Eskom power station contracts.
The attendees of the April 2005 meetings also agreed that, in establishing a local presence in South Africa, Hitachi would seek to identify a local black-owned entity or entities with whom HPA could partner in connection with its submission of bids, or “tenders,” for government business. By partnering with a local black-owned entity, HPA would seek to qualify under the requirements of South Africa’s Black Economic Empowerment Act of 2003 (“BEE”), which promoted participation in the South African economy by companies that were at least 25% owned by black South Africans or black-owned South African entities. In general, companies that qualified under the terms of the BEE enjoyed preferential status in government procurements.
In seeking local BEE partners, HPE prioritized a prospective partner’s ability to exert political influence over engineering or operational capacity. Consistent with this criterion, Hitachi identified Chancellor [a South African investment firm created by the African National Congress as a funding vehicle] as a potential partner. Hitachi understood, and it was commonly known, that both Chancellor and its parent organization, Chancellor House Trust, had extensive political connections within the Government of South Africa, with the ANC, and with Eskom.
