Are you faced with an ethical dilemma? Are you witnessing corruption but don’t know what to do about it? Ask the team of Corruption Watch experts what to do by writing to: firstname.lastname@example.org and mark your letter ‘Dear Corruption Watch’. Dear Corruption Watch We are a company engaging in short-term oil trades. Our West African counterpart has suggested that we set up a Special-Purpose Vehicle (SPV) company in the British Virgin Islands to execute a single trade. We suspect the ultimate beneficiary may be the Presidential family and we’ve asked for disclosure in case we have to report it under the new Extractive Industries Transparency Initiative, which has not been forthcoming. The trade will be extremely beneficial to our company, and we are loathe to spoil a good relationship. Does an SA-based trading firm need to penetrate this offshore company to be acting within the law? – Suspicious Dear Suspicious, You are quite right to be suspicious. Off-shore ‘shell’ companies continue to pose a serious threat to the global fight against corruption. These companies act as conduits for economic activity, and provide a cloak for corruption by concealing the ultimate beneficiaries of the profits. Civil society and international institutions (like the World Bank and the OECD) are leading initiatives to set global corporate transparency standards, and to encourage states to introduce new laws and other mechanisms to enforce these standards. One such initiative is the Extractive Industries Transparency Initiative (EITI), launched in 2003. As its name suggests, the EITI is directed at promoting transparency of company payments and government revenue in the extractive industries – oil, gas and mining. The EITI is unusual in that it allows the implementing country to design its own measures for monitoring and auditing, but these measures must meet certain requirements and must be validated by the international EITI Board. If a country does not meet all the EITI requirements, it may be publically shamed by having its EITI status revoked by the Board. By the end of 2011, 35 countries had committed to implementing the EITI, and 14 countries had achieved ‘EITI Complaint status’. Sixty of the world’s largest oil, gas and mining companies had also committed themselves to participating in the EITI process. South Africa, however, has not yet signed up to the EITI process. The government maintains that its current laws and regulatory measures ensure adequate transparency. But a consideration of your situation shows that this is not the case. There is currently no law that requires a South African trading firm to penetrate an off-shore company that it suspects has been set up to facilitate corruption. The Financial Intelligence Centre Act, 2001 (FICA), which imposes demanding disclosure and reporting requirements to prevent money laundering and the financing of illegal activities, does not apply. It extends only to financial institutions, such as banks or financiers. The Companies Act, 2008 ameliorates the problem to a limited extent. Section 17 requires the registration in South Africa of a “foreign company,” which would entail the disclosure of its directors and financial records if the company is “conducting business” in South Africa. This requirement is broadly defined to include the company entering into contracts of employment in South Africa, or acquiring an interest in any property in South Africa. It seems unlikely that this applies to your case. Nor is the Prevention and Combating of Corrupt Activities Act, 2008 (PACCA) particularly helpful. POCA obliges company directors to report suspicions of corruption – including if the corruption occurs outside the country but is committed by a South African citizen or resident, or if the corruption affects a public body, business or person in South Africa. But POCA does not itself contain the disclosure requirements that may be necessary to establish reasonable grounds for suspicion. In the meantime, we would suggest you err on the side of caution. Take a stand and report an incident of corruption. This article originally appeared in the Sunday Times Business Times on 19 August 2012. Excerpt We are a company engaging in short-term oil trades. Our West African counterpart has suggested that we set up a Special-Purpose Vehicle (SPV) company in the British Virgin Islands to execute a single trade. We suspect the ultimate beneficiary may be the Presidential family and we’ve asked for disclosure in case we have to report it under the new Extractive Industries Transparency Initiative, which has not been forthcoming.