SEC Probe of Gold Fields May Spawn More Corruption Investigations
By Gavin du Venage, South African Editor

A U.S. anti-graft investigation into a South African gold producer may be the first of many, as the country’s complex localization deals invite scrutiny.

In September, the U.S. Securities and Exchange Commission (SEC) said it was to investigate South African producer Gold Fields Ltd. over a deal that saw connected members of the country’s ruling elite being brought in as shareholders, an arrangement that would ensure Gold Fields retained its local mineral rights. The company is listed in Johannesburg, but its shares also trade in New York, putting it firmly under the SEC’s microscope.

South African law requires firms operating in the country to have a portion of “black empowerment” shareholders—that is, drawn from communities that had previously been excluded from access to the country’s mineral wealth.

These arrangements are becoming increasingly common not just in South Africa but throughout the continent as a whole. Invariably they involve politically connected businessmen and a certain amount of backroom maneuvering. However, they have also allowed African governments—and mines—a mechanism to demonstrate that they are indeed working to spread the benefits of mineral extraction as far and wide as possible.

Now the SEC’s investigation into Gold Fields, one of the world’s top 10 gold producers, has tossed a very large cat amongst a flock of sleeping pigeons.

“We can expect a lot more of these investigations,” said a Johannesburg attorney with a global law practice, who asked not to be named as the firm does work for Gold Fields, and several other companies mentioned in this article.

“These kinds of arrangements have become a lot more common. Often they involve politically connected people—and that’s not entirely bad; these are the right people in the right place at the right time.”

Localization, indigenization, call it what they will, the process is here to stay, and not just in South Africa. Other countries are watching the process with keen interest and are likely to introduce variations of it as they go along. Zimbabwe, for instance, is demanding a 51% stake in mines, without compensation. Emerging mining destinations such as Kenya, Ethiopia and Mozambique are also looking at the issue.

South Africa, though, is unique in having a mining charter that lays out local ownership, social and labor obligations for which miners have to qualify in order to retain their mineral licenses. The minimum indigenous ownership level is 26% by 2014, although unlike Zimbabwe, black shareholders are not expected to be given a free ride.

The system, known under the tortuous name of Broad-Based Black Economic Empowerment, or BEE for short, is now part of every mining transaction in the country.

New black shareholders are expected to pay fair market value, but because most lack the capital to do so, companies must come up with complex share financing schemes to help the sale move along. Often, this involves offsetting dividend and other distributed income against the stock issued to black shareholders.

Until fairly recently, Gold Fields was doing well in the localization stakes. It had political heavyweight Tokyo Sexwale’s Mvelaphanda Holdings (Mvela) as its partner, and seemed good to go. Gold Fields had sold a stake to Mvela in 2003. The deal appeared to secure Gold Field’s mineral rights from that point on.

“We are particularly pleased that the transaction, which was based on fair value at a firm market price, has proven to be economically sensible and sustainable for existing Gold Fields shareholders, while creating significant real value for Mvela Resources shareholders, thus advancing Black Economic Empowerment in South Africa," Nic Holland, Gold Fields CEO, said at the time.

The deal was one of the flagship mining empowerment deals at the time, but it was not to last. Mvela also had to raise debt to pay for its shareholding, and as Gold Field’s capital value increased, and Mvela’s stake moved into profit, it made sense to begin selling to pay back the loan. Within a few years Mvela began to wind down its shareholding.

By 2010, Mvela had exited entirely, with a tidy profit in its bank account. Initially, Gold Fields assumed that because it had complied with the law and had an empowerment shareholder, it was now in the clear. The assumption was wrong. The Department of Mineral Resources informed the company that the principle of “once-empowered, always empowered” did not apply.

This left Gold Fields without a chair, with the music beginning to fade at a time when it needed to secure a new-order license for its developing South Deep mine. A new black partner had to be found, desperately.

What happened next was a clumsily executed scramble that descended into farce. With time running out, Gold Fields, through an advisor, was put in touch with Gayton Mckenzie, a convicted bank-robber turned businessman and political fixer. McKenzie eventually presented a list that had the blessing of the country’s minerals ministry, which included names that were, it was said, “non-negotiable.”

One of the beneficiaries of the transaction was Baleka Mbete, the national chairperson of the country’s ruling African National Congress. By the time the deal was finalized, Mbete had herself a 25 million rand (US$2.5m) share block within the transaction.

According to South Africa’s Mail & Guardian, international law firm Paul Weiss, appointed by Gold Fields to due diligence audit the deal, found that the transaction involved a “corrupt payoff” to several high-profile officials, and that Gold Fields management was guilty of “willfully ignoring” evidence of corruption.

Paul Weiss also advised that Gold Fields self-report what it had found. Instead, the firm chose to bury it. Late last year, it was leaked to the South African media, and soon afterward, the SEC said it would investigate.

Since the revelations last year, and the news of the investigations, Gold Fields has scrambled to control the damage, and has said little about the investigation. “Gold Fields Ltd. has been informed that it is the subject of a regulatory investigation in the United States by the U.S. Securities and Exchange Commission relating to the Black Economic Empowerment transaction associated with the granting of the mining license for its South Deep operation,” the company said in a statement. “Given the early stage of this investigation, it is not possible to estimate reliably what effect the outcome this investigation, any regulatory findings and any related developments may have on the company.”

BEE has now become standard for mines operating in South Africa. BEE deals are also regular front-page fodder for corruption obsessed local media. It’s hard not to feel that Gold Fields is just the first. The wider implication of the issue, however, is that other companies too, may find themselves in a similar position.

The latest company to come under the spotlight is COAL of Africa (CoAL), a fledgling company starting six coal mines in the Soutpansberg. The area is rich in coal but severe water shortages have made obtaining operating licenses complicated. CoAL has struggled to get the country’s water ministry to sign off on its planned operations. Now, it seems to have found a politically connected black partner to push its projects through, according to the Sunday Times newspaper in Johannesburg. The Timessuggests that up to 60 BEE deals involving the Soutpansberg are under way.

Corruption in Africa is not new, of course. What has changed, however, is that previously it was ignored or brushed aside as the cost of doing business. Even if there were signs of graft, U.S. based regulators viewed it as being out of their jurisdiction. This is no longer the case.

Over the past few years the SEC, along with the investigative attack dogs of other financial jurisdictions such as the Serious Fraud Office in London, has begun to show its anti-corruption teeth. In 1977, Congress passed the Foreign Corrupt Practices Act (FCPA). It was rarely used until several years ago, when it was dusted off and applied vigorously against transgressors.

“Over the last four years, the U.S. has recovered $2.8 billion from companies and executives. It’s been a bumper crop,” Patrick Ache, senior associate for African mining and energy projects at Webber Wenztel attorneys in Johannesburg, told a symposium on corporate risk.

The laws were also broad in how they defined bribery. “There’s no safe port of call promotion and marketing expenses,” Ache noted. “These used to be a good way to hide questionable expenses but now unless a company has full documentation to show how the money was spent, it, and its executives, risk triggering a corruption investigation.”

What truly has many mining operators worried is just how open the terms of an investigation are. Even if a company has no direct connection with the U.S., it could still find itself being investigated simply because it has a relationship with a stateside contractor who has committed an act of corruption.

Graft busters globally are now viewing any connection within their primary jurisdiction—however tenuous—as a reason to trigger an investigation.

“A U.K. company with an office in New York, that uses an agent in Vietnam who happens to bribe someone in China, could find itself investigated,” said Ache.

The implication is clear—the old way of doing business in Africa is changing.

U.S. officials are coordinating an international investigation into BSG Resources, the mining company controlled by Israel’s richest person, Beny Steinmetz, into whether bribes were paid to win two licenses covering the Simandou deposit in Guinea.

The SEC may also join in the investigation opened in April by the U.K.’s Serious Fraud Office into allegations that London-based Eurasian Natural Resources paid bribes to win business in Kazakhstan and Africa.

The effects are already being felt. “We were told that unless we pay a ‘transaction fee’ our visas for expat staff would not be processed,” said a contractor at an Australian mine operating in southern Africa, who spoke on the condition of not being named. “So we are basically hanging around now. We were told under no conditions at all were we to comply with the request. If anyone does, we’d be fired and criminal charges laid against us back home.”

Clearly, the message is hitting home. What happens in Africa, no longer stays in Africa.

As featured in Womp 2013 Vol 11 -