African Adventure: the Lesotho Water Highlands Project - September 2, 2003

Canadian Business Journal


COVER DATE: Sept. 2, 2003

Many Canadians cannot point to Lesotho on a map. Some have never heard of it. In the cruel calculus of world politics, business, trade and finance, it is almost completely irrelevant. And yet, this tiny nation landlocked by South Africa must loom large on the minds of executives at Acres International Ltd., an engineering consulting firm based in Oakville, Ont. Its legal representatives are now in the capital, Maseru, for what could be the endgame of the most important battle in the company's 79-year history.

Things did not go well last time Acres was there. It was the first of 11 multinationals to stand trial on bribery charges relating to a corruption scandal. Last fall, Lesotho's High Court found Acres guilty and fined it US$2.2 million. The company, which did not grant an interview to Canadian Business, maintains its innocence. It is now appealing the verdict.

Multinational corporations have often viewed bribery as a distasteful but necessary part of doing business in certain countries-particularly underdeveloped ones. Money under the table can help win contracts, cut through red tape and reduce taxes and other expenses. In the past, various nations, among them France, Germany, Switzerland and Japan, have even allowed companies to deduct bribes to foreign public officials as legitimate expenses. (Japan classified them as "entertainment and social expenses.") As near as anyone can figure, bribery is widespread: between 1994 and 2001, "the US government learned of significant allegations of bribery by foreign firms in over 400 competitions for international contracts valued at US$200 billion," claims the US Department of Justice.

"The practice is global in scope, with firms from over 50 countries implicated in offering bribes for contracts in over 100 buyer countries during the seven-year period." In all likelihood, far more goes undetected.

As trade becomes increasingly global, however, multinationals, international financial organizations and Western governments are starting to address the problem. And Lesotho raised eyebrows by aggressively pursuing this corruption case in court. Companies both in Canada and other Western countries have been put on notice: the world has changed.

Acres isn't a household name-unless you happen to work in the engineering and construction business. The privately held parent company-with 1,100 employees and offices across Canada, in the US, Iran and elsewhere-is a significant player. Since Henry Acres started the firm in 1924, it has worked on power stations, water treatment facilities, steam plants and airports in more than 100 countries. Last year, it posted revenue of $132.5 million.

Acres' global ambitions brought it to Lesotho in the early 1980s to work on the Moshoeshoe Airport in Maseru. It was therefore well-positioned to participate in the immense Lesotho Highlands Water Project, one of the world's largest dam constructions. In 1986, Lesotho and neighboring South Africa agreed to divert Lesotho's Orange River for their mutual benefit.

The idea was to deliver water to Johannesburg and generate electricity and income for Lesotho.

The Lesotho Highlands Development Authority (LHDA) was formed to oversee the Lesotho component; Masupha Sole, a veteran civil servant, was appointed as its chief executive. Technically, Sole answered to an oversight board. According to critics, however, he acted with considerable autonomy, particularly when awarding contracts. That alleged behavior eventually touched off a series of legal battles. Canadian Business used court documents, supplemented with interviews and news reports, to assemble the following account of what happened.

Acres set its sights on providing employees for key technical jobs within the LHDA, under the so-called Contract 19. To help win the deal, Acres hired a local agent, Zaliswonga Mini Bam, to keep it apprised of the political situation and developments in Lesotho and to introduce Acres to local officials. Bam, a civil engineer, had previously worked alongside Acres on the airport contract; he and his wife were close friends of Sole.

Acres won Contract 19 in the spring of 1987. In early 1989, Sole visited Acres' management in Canada and invited the firm to submit another proposal, for a $22-million assignment dubbed Contract 65. Again, Acres contacted Bam and signed him to a representative agreement. And again, Acres emerged victorious, winning Contract 65 in 1990.

Prosecutors would later claim that there were irregularities in Bam's relationship with Acres, however. Bam appears to have issued no invoices, and the representative agreement itself was between Acres and an unregistered firm whose address corresponded to a banker in Geneva. In retrospect, prosecutors claimed, Bam was ill-positioned to carry out his duties for Contract 65: he took a job in Botswana in late 1988 and made only brief visits to Lesotho until his return in February 1991. Still, Bam was to be paid 3.6% of Contract 65's net value-about US$700,000.

At the same time, with Acres employees occupying key positions within the LHDA, alleged conflicts of interest were emerging. For example, one senior Acres employee signed invoices on the company's behalf and then authorized payment of those same invoices for the LHDA as its assistant chief executive. Also, Acres received advance payments before Sole's board had formally approved Contract 65.

Still, those alleged irregularities went largely unchallenged-and things might have remained that way, had Sole not fallen out with the governing board. It had become increasingly dissatisfied with his autocratic management style and was concerned he was misusing his travel budget. Eventually, there was an audit; Sole was suspended in late 1994 and fired a year later.

When Sole launched a wrongful dismissal suit against the LHDA, he was required to disclose his foreign bank accounts. He denied having any. His Maseru accounts told another story, however, uncovering a trail to South Africa that in turn revealed his Swiss accounts. In 1999, Swiss authorities-who in recent years have become more co-operative with transborder investigations-turned over 14 boxes of records.

They were revealing. From 1991 to 1997, Bam's Swiss accounts received dozens of payments, totaling $493,000, from Acres. Of that, he transferred $320,000 to Sole's Swiss accounts. A forensic accountant with PricewaterhouseCoopers saw a pattern: Bam forwarded roughly 60% of Acres' payments to Sole and kept the rest. In May 1997-around the same time Sole's legal machinations to regain his position at LHDA collapsed-Acres' payments to Bam decreased to about 40% of the original amount. Almost simultaneously, Bam ceased money transfers to Sole.

Bam, it turned out, had also forwarded to Sole portions of payments he received from other multinational clients: Zurich-based giant Asea Brown Bovari (ABB), Germany's Lahmeyer and Nigeria's Dumez. Two other local representatives also made payments to Sole, under the employ of seven other contractors. All told, between 1988 and 1997, Sole received millions of dollars. Each of the 11 companies-including Acres-won one or more contracts on the Lesotho Highlands Water Project.

Lesotho declared war on bribery with its Prevention of Corruption and Economic Offenses Act, enacted in 1999. Sole was first to go down. Facing 18 counts of bribery before the High Court, he at first denied any responsibility; later, he deemed the bribery insignificant and expressed little remorse. But acting judge B.P. Cullinan determined that Sole and the contractors "entered into a corrupt agreement" in which Sole agreed to further their interests in return for money. Accordingly, he convicted Sole of 13 counts and sentenced him to 18 years in prison last summer.

To understand the uproar Sole's conviction touched off, one must first understand the changes in international bribery laws and the shifting attitudes behind them. Until recently, only American companies and other firms listed on US stock exchanges had reason to be cautious when paying graft: the US Foreign Corrupt Practices Act, introduced in 1977, threatens serious sanctions to companies caught bribing foreign officials. US businesses complained that the act undermined their competitiveness against bribe-paying rivals on international projects because other developed countries lacked similar legislation.

Under US pressure, the Organization for Economic Cooperation and Development introduced an anti-bribery convention in late 1997, since ratified by 35 signatories. Those countries promised to adopt national legislation making it a crime to bribe foreign officials. In 1999, Canada introduced the Corruption of Foreign Public Officials Act, under which persons found guilty of bribing such officials can be imprisoned for up to five years.

As a result, certain government bodies, including Export Development Canada, have introduced rigorous anti-bribery policies, according to corporate governance lawyer P.K. Pal, with Flavell Kubrick LLP in Ottawa. (It's too early to say how well such policies are enforced, he notes.) Internationally, further efforts are afoot: member states of the United Nations, for example, are negotiating the terms of its Convention Against Corruption, which is scheduled to be signed in December.

In spite of the mounting risks, bribery allegations continue to surface. The US government is investigating Mobil Oil in connection with an alleged scheme to bribe leaders of Kazakhstan in return for rights to develop oil reserves. In May, oil services firm Halliburton admitted that one of its subsidiaries had paid US$2.4 million in bribes during 2001 and 2002 to obtain favorable tax treatment in Nigeria. That same month, Zambia's president accused DiamondWorks (a South African mining firm listed on the TSX) of bribery to extend an oil contract; DiamondWorks denies the allegation.

Many Canadian firms are unaware of the altered climate for bribery, says Pal. He's a board member of the Canadian chapter of Transparency International, which compiles annual data on how corrupt nations are perceived to be and how frequently their companies are perceived to pay bribes. Canada ranks well, and Pal worries that this has led to complacency. "Our concern is that, sooner or later, some major company will be found lacking, and there will be an enormous scandal across Canada-that some CEO will get two to five years behind bars," says Pal.

The allegations in the Lesotho bribery scandal predate 1999, the year of Canada's anti-corruption act. Were similar allegations to arise today, the accused could wind up in a Canadian courtroom-closer to shareholders, customers and the media. "A criminal conviction under the new Canadian law would be a calamity of unthinkable proportions for any company," says Pal. Nevertheless, the Acres case speaks volumes about the progress of international anti-corruption efforts. "Five or 10 years ago," Pal observes, "the Acres matter wouldn't have gone this far."

The World Bank-which contributed about US$100 million to the Lesotho water project-was the first to take a crack at the Acres case. It convened a tribunal in 2000 to determine whether Acres should be debarred from future Bank contracts.

Adam Shayne, senior counsel with the Bank's legal department, headed the investigation. He'd seen similar allegations before: of the 18 cases in which the Bank has debarred companies or individuals, roughly one-third have involved representatives, or agents. While agents have perfectly legitimate uses, they can also serve as a conduit for bribes, because they allow the payer to deny knowledge of an agent's illegal actions.

The tribunal ruled in February 2002 that there was insufficient evidence to debar Acres. The Bank's sanctions committee refuses to reveal its reasoning, but it likely came down to a failure to demonstrate that Acres knew Bam paid Sole. "In most jurisdictions, if you're accusing a company of bribery, you have to show that they intended to bribe a public official," Shayne says. "The fact that they paid an agent $100,000 or $1 million doesn't necessarily mean that they knew or had suspicion."

Undeterred, Lesotho pursued the case. Guido Penzhorn, a Durban-based lawyer, represented the Crown against Acres on two counts of bribery before High Court judge Mahapela Lehohla. Once again, the key question was whether Acres knew about Bam's illicit payments. Penzhorn's case relied entirely on circumstantial evidence. The representative agreement, he argued, was a smoke screen. "By 1990, Acres had been involved in Lesotho for some eight years," he pointed out in court. "The services of a representative would clearly not have been necessary." Had Bam been Acres' legitimate agent in Lesotho, he said, key people within the LHDA would have known-but witnesses testified that they didn't. Most compellingly, Penzhorn contended, in 1997 Acres decreased its payments to Bam by approximately the same amount Bam had been paying Sole, suggesting that Acres knew all along.

Acres' lawyers claimed Bam's representative agreement, role and salary were within industry norms and legitimate. One Acres vice-president said he received continuous reports by phone from Bam, and the company was satisfied with his services. As Acres earlier explained to the World Bank, there was little paperwork detailing Bam's services because "this intelligence function, clearly a sensitive task, was carried out largely without documentation." Also, Acres argued that the contract with Bam was a sort of insurance policy-his services might have become indispensable in "crises, such as political turmoil and civil unrest necessitating for instance the evacuation of personnel." Acres said it reduced Bam's pay in 1997 because he'd been overpaid.

In his judgment last October, Justice Lehohla wrote off most of Acres' witnesses-including several executives-as "deliberately untruthful," evasive and illogical. The evidence, he concluded, pointed overwhelmingly to Acres' guilt. "Bam was paid huge amounts of money for not doing any of the things stipulated in the contract," wrote Lehohla. Remarkably, he even speculated that in 28 unrelated cases where Acres had hired agents, it probably did so to pay bribes. "It seems that wrongdoing is a way of life with Acres," Lehohla wrote. "These highly qualified people, for all their intelligence even, lacked the eternal jewel of basic humanity: namely integrity." The $2.2-million fine levied against Acres was its estimated profit from Contract 65; the fine has been suspended pending appeal.

Acres issued statements saying it was "disturbed and dismayed" with the "unjustified decision," which the company said "means that Canadian and other developed country firms can be found guilty of crimes without any clear evidence." Acres spokesman George Soteroff claimed the High Court had insufficient experience to deal with a case of this complexity, and pointed to the decision by the World Bank tribunal (which he says considered identical evidence) as an exoneration. At the Bank, however, investigator Shayne says the Lesotho court had far more evidence before it-some of which he found compelling. "Mr. Bam segregated all his bank accounts," he says. "You could see very clearly how the money moved from one account to the next and in what percentage. It was rather revealing and, I think, particularly damning."

Lesotho's Court of Appeal is an imposing sandstone building that sits on a hill adjacent to the High Court on the outskirts of Maseru. It overlooks the Caledon River valley that forms the boundary between Lesotho and South Africa. Inside one of the court's oak-paneled rooms, Acres recently presented its arguments as to why the conviction should be overturned.

According to our correspondent in Lesotho, the arguments centred on highly technical interpretations of law rather than the burden of evidence presented earlier. The verdict is expected within weeks.

The stakes are high. Organizations such as the World Bank and the Canadian International Development Agency (CIDA) say they are watching the case with interest, and non-governmental organizations will likely press them to debar Acres should it lose its appeal. Tough medicine, considering Acres has worked on 15 World Bank contracts worth US$13.5 million since 1995, and another 31 contracts since 1982 for CIDA, totaling $14.2 million. Strictly speaking, however, neither organization is obliged to take any action. And they may be reluctant to take harsh action against a large contractor with an otherwise clean record.

Meanwhile, accused agents and multinationals continue to appear before Lesotho's High Court on bribery charges. Bam never stood trial-he died of a heart attack in 1999. Another agent, South African consultant Jacobus Michiel du Plooy, pleaded guilty in June. (According to the indictment, he bribed Sole on behalf of Italian construction company Impregilo SpA; Impregilo denies knowledge of the bribes.) Germany's Lahmeyer was convicted on seven counts of bribery (and acquitted on five) the same month. France's Spie Batignolles is reportedly next in line for trial.

As contractors battle in court, the Lesotho Highlands Water Project nears completion. The Katse dam and South African pipeline network are now operational; the rest of the project's first phase is scheduled to enter service later this year. Further dams, pumping plants and tunnels are on the drawing board, but negotiations to build them are at an impasse.