Investors in Africa face hidden sanctions risks

The recent ramping up of US sanctions against the likes of Iran and Venezuela has deterred many businesses from engaging with these so-called American nemeses – yet for investors, arguably the biggest risk concerns tripping up over extensive international measures in Africa, which has experienced a surge in foreign investment as economies that were previously closed and unstable open up.

Across Africa, the last few years have seen the resolution of long-standing conflicts, the removal from power of authoritarian leaders and record numbers of economic reforms. The continent has drawn rising levels of foreign direct investment – $46bn in 2018, up 11% on 2017 – with the recent attempt to liberalise pan-African trade, through the African Continental Free Trade Agreement, having the potential to spur yet more inward financial flows.     

However, while these positive developments have led to some longstanding restrictions being lifted (as in the case of Eritrea, Liberia and Ivory Coast) Alaco’s sanctions guide shows that Africa remains subject to more international sanctions programmes than any other continent, with the EU alone maintaining measures against 13 of the region’s 54 countries. Further complicating matters is that certain sanctions regimes have been eased while Africa’s regional organisations and governments maintain their own measures, which often do not align with international listings.

Focus on figures

Unlike the US, UN and EU sanctions regimes against rogue states such as Venezuela, Iran, North Korea and Russia – which affect both broad swathes of their respective economies as well as persons and entities with regime connections – measures imposed in Africa increasingly target senior political figures, in large part to avoid destabilising what are often fragile states. The focus on high-level officials is borne out by the US Treasury’s Specially Designated National sanctions list. Of the 5000 individuals and entities listed for all jurisdictions, less than 350 are African.

In targeting prominent people, sanctions authorities attempt to make it harder for them to remain in office or get back into power. Nonetheless, many can exert considerable influence over the business environment in their respective countries, even when they are no longer at the helm. They will frequently own or have significant stakes in companies and disguise their involvement, often through a nominee shareholder or, if they hold a government post, by partnering with a private firm and drawing revenue, in the form of retainers or kickbacks.

Investors looking to understand possible links between prospective partners and sanctioned individuals are hamstrung in two ways. The variable quality of African media and high levels of censorship and self-censorship means that questionable and corrupt ties between politics and business are rarely scrutinised. Moreover, few African countries have online corporate registries which provide shareholder lists and financial statements. For the most part, information from these bodies must be sought in person and, even then, the records are usually incomplete or missing.     

The problem is particularly acute for consumer electronics companies, many of whose products require so-called 3TG – tin, tungsten, tantalum and gold – minerals mostly sourced from the war-torn Democratic Republic of Congo. These firms are under growing pressure to ensure the minerals they use are not associated with individuals or entities sanctioned for involvement in the conflict or human right abuses. But ensuring their supply chains are free of such links is challenging, as these minerals are frequently extracted from unregulated mines and smuggled out of the country through complex networks of traders and exporters.

Concerns remain

Just as important as having a clear understanding of the business landscape is grasping the impact of political change on sanctions policy. The removal of autocratic leaders or resolutions of conflicts may lead to sanctions authorities reviewing their measures but not necessarily lifting them as there is always the possibility that a new administration may retain coercive policies or that peace agreements will unravel. 

So, for instance, when the late Robert Mugabe was replaced by Emmerson Mnangagwa in a military coup in 2017, foreign investor interest in Zimbabwe rose appreciably as some economic reforms were subsequently introduced and the new president declared that his country was “open for business”. Yet the US and the EU have maintained sanctions against senior members of the ruling party ZANU-PF and associated entities – the removal of measures conditional upon on significant improvements in the rule of law and human rights. Foreign companies that entered the country in the heady months after Mr Mugabe’s overthrow will have continued to face sanctions risks as many senior military figures took up political appointments.

Similarly, in Sudan, investors may be tempted to enter the market now that a transitional government is in place following the ousting of Omar al-Bashir, but it would be something of a risk if they were counting on foreign finance to underpin any deals. The US removed trade sanctions against Khartoum in 2017 in return for its cooperation in countering terrorism in the Horn of Africa, but among those that remain in place is its designation as a state sponsor of terrorism, which restricts access to financial markets. With the military and civilians sharing power until elections in three years’ time, the US will be looking for signs of real political progress before it considers lifting the latter measures.

Unexpected links

There are also sanctions risks that would be hard to anticipate even for the most alert and diligent investors. African countries do not always comply with measures against their neighbours or some more distant jurisdictions. South Africa, for example, is said to have never to have gone along with western sanctions against Zimbabwe – not least because it feared economic turmoil spilling across the border. And several African countries have been suspected of breaching sanctions on North Korea, with which Africa has some long-standing links. Investors partnering with entities or individuals implicated in such activity may not be aware of it until it is too late.     

With renewed investment interest in Africa, the need to grasp and mitigate often hidden sanctions risks is paramount. While the continent is generally stabilising and indeed prospering in parts, it remains volatile, as attested to by substantial numbers of international and local sanctions programmes. Navigating such restrictions in any emerging or frontier market is hard, but Africa’s democratic deficit combined with its ready recourse to violence make the task so much more challenging. 

Yigal Chazan is the head of content at Alaco, a London-based business intelligence consultancy.