As the father of a teenage daughter I am sometimes, reluctantly, forced to admit that upon rare occasions my parents were right about a few things. One was asking for permission first rather than asking for forgiveness after the fact, or in my case as a teenager the untoward event. Another was my mother's admonition that you are judged by the company you keep. I thought about that truism when I read an article in the Financial Times (FT) yesterday, entitled "Steinmetz unit won Guinea mining riches corruptly, inquiry says", by reporter Tom Burgis.
The article relates the long running story of the BSG Resources' (BSGR) winning of the multi-billion mining concession for the Simandou iron-ore mine in the country of Guinea, which was awarded to the company at the end of the reign of the country's former dictator Lansana Conté, before he died in 2008. According to a report prepared by the current government of Guinea, BSGR won the contract by paying bribes to his fourth wife Mamadie Touré in the form of cash and shares "to help ensure those rights were stripped from Anglo-Australian miner Rio-Tinto and granted to BSGR."
Of course there is also the tale of BSGR employee/agent/representative/other Frederic Cilins who contacted Ms. Touré in the US and offered to pay her some $5MM to retrieve the contracts which detailed the payments she was to receive from BSGR. It turned out that there was a Grand Jury investigation going on over BSGR at the time and by now Ms. Touré was a cooperating witness with the Department of Justice (DOJ). Cilins was arrested, charged with and pled guilty to obstruction of justice.
BSGR has denied all of these allegations and says that it received the rights to the mining concession fair and square. Further, it has questioned not only the legitimacy of the report issued by the Guinea government but of the government itself, saying "[current] President Conté has manipulated the process through unconditional technical and financial support from activists line [billionaire transparency advocate] George Soros and NGOs that function as his personal advocacy groups." The Guinea government report notes recommends that BSGR's mining concession be cancelled.
So how does all this imbroglio relate to my mother's admonition? It is because BSGR was in a joint venture (JV) with the Brazilian company Vale for this concession. The FT article reports "After spending $160m on preliminary development of its Guinea assets, BSGR in April 2010 struck its $2.5bn deal with Vale, of which $500m was payable immediately. The balance was to be paid if targets were met but Vale halted payments last year, after the corruption allegations surfaced. The inquiry concluded that, although payments to Ms Touré allegedly continued following the Vale transaction, it was "likely" that the Brazilian group "has not participated in corrupt practices". Nonetheless, it said the Vale-BSGR joint venture - which BSGR says has spent $1bn at Simandou - should be stripped of its rights to that and other prospects."
Vale's response to all of this has been - wait for it - "conducts appropriate due diligence prior to its investments." Vale had no comment on the Guinea government report released yesterday. I wonder what its due diligence on BSGR turned up?
I wrote last week about the life cycle management of the third party relationship. Those series of articles was primarily aimed at agents and other representatives in the sales channel and vendors in the supply chain. While those same concepts apply to JV's, there is another level of management when there is a relationship such as a JV. One JV partner must have transparency into the actions of its partner and there must be as much assurance as can be possible that there is no corruption going on. From the time line presented in the FT article it appears that the JV between BSGR and Vale was created (2010) after the payments were contracted to Ms. Touré and the concession granted to BSGR (2008).
However I am sure that is of little comfort to Vale who is now down its $500MM that it paid to BSGR to enter into the JV relationship. How much has it had to spend to circle the wagons to defend itself? And do you think the DOJ has come knocking on their door during its investigation? (The smart money says yes). To top it all off, last week the company announced it might have to write-off its entire investment in Guinea. While Guinea indicated that Vale would not be banned from rebidding if rights for the mining concessions were reopened, what do you thing Vale's chances would be? (Here the smart money says no).
Did Vale subject itself to Foreign Corrupt Practices Act (FCPA) liability by joining into a JV with BSGR? At this point I have no idea. But you know my Mom was right, in the FCPA world, when it comes to JV's, you are known by the company you keep.
© Thomas R. Fox, 2014