BSRG in Guinea: Part 3 – The Vale JV

Thomas Fox

Compliance Evangelist

This week I have been exploring and reviewing the Beny Steinmetz guilty verdict in a Swiss court over the weekend for bribery and corruption in the obtaining of mining rights in Guinea.  As reported by the BBC, the corruption was engaged in by the Beny Steinmetz Group (BSRG) which paid $2m to Mamadie Touré, wife of the then Guinean President, Lansana Conté, to help it secure rights to mineral deposits back in 2007. The corruption was memorialized in contracts which specified the agreements for BSRG to make payments and transfer shares in the mine to Mamadie Touré. As the quid pro quo for these commission payments, Mamadie Touré would take all necessary steps to have BSRG awarded the rights to the Simandou deposit, which had been previously awarded to Rio Tinto. Additionally, a further $2m would be dispersed among other people to facilitate the acquisition of the rights.

The mining rights were valued at over $100 billion, if the concession was fully developed. Interestingly, BSRG never bothered to develop the property but instead quickly sold a 51% interest in the concession to the Brazilian mining giant Vale SA with whom it then entered into a joint venture (JV) to develop the concession.

I thought about that truism when I read an article in the Financial Times (FT) reporter Tom Burgis wrote detailing this in a piece entitled “Steinmetz unit won Guinea mining riches corruptly, inquiry says”. The FT article reported, “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, [2013] 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.”

According to Seeking Alpha, in March 2014, a technical committee recommended the Guinean government strip BSGR, and its partner Vale, of the rights to exploit an iron ore deposit in northern part of Simandou mountains. This recommendation was made on the basis that BSGR obtained the project through corrupt practices in 2008. Vale had originally sought to purchase the BSRG interest because the iron ore found in the mine was of such high quality.

Vale filed an international arbitration claim against BSRG. A tribunal in London awarded Vale over $2 billion in compensation. According to another FT article, entitled Steinmetz fails to overturn $1.25bn arbitration award,       “BSG Resources, the mining group owned by the family of Israeli diamond trader Beny Steinmetz, has failed in its attempt to overturn an arbitration award on the grounds of apparent bias.”

All of this litigation may have been forestalled if Vale had engaged in adequate due diligence when it originally entered it JV with BSRG. What did Vale say at the time? Vale’s response was that it “conducts appropriate due diligence prior to its investments.”?

The matter points up for the need for robust due diligence in the investigation of all business relationships. While the life cycle of a third-party relationship is a good starting point and 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.

Did Vale subject itself to Foreign Corrupt Practices Act (FCPA) liability by joining into a JV with BSGR? It certainly is an interesting question because in the FCPA world, when it comes to JV’s, you are known by the company you keep.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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