Since the passage of the Economic Inclusion Act (the Act) on 1 September 2021 which came into operation on 20 April 2022, many foreign owned businesses have been concerned that they will be shut out of tendering for Government contracts. The prime purpose of the Act is to increase the participation of targeted citizens in the growth and development of the economy of Botswana. A targeted citizen is defined in the Act to be a citizen whose access to economic resources has been constrained due to various factors. The Minister of Investment, Trade and Industry has yet to prescribe the criteria for identifying a targeted citizen, but it is understood that gender, educational background, economic status, disability, and age, will be determining factors.
The act places obligations on private sector organisations that are not owned by a citizen of Botswana or by a targeted citizen to have a role to play in empowering all targeted citizens in society and communities to participate in economic development of the country. But of apparent concern to some enterprises in Botswana that are not owned by a citizen of Botswana or by a targeted citizen is the intention, as outlined in the second reading of the legislation, is for preferential treatment of government procurement enterprises owned by targeted citizens. This has the potential to deny foreign owned enterprises from bidding for Government contracts.
To counter the economic impact of the Act on foreign owned firms that tender for Government work, some of those firms are considering (or have already done so) starting up a new company to tender for Government procurement work, but using citizens of Botswana as nominees. The business would carry on as normal with foreigners pulling the strings in the background and enjoying all of the profits. But on paper, the company winning Government procurement contracts would appear to be one hundred per cent locally owned and controlled.
The use of nominees to hide the beneficial owner is not a new technique. It has been around for over 2,000 years. Roman citizens were not allowed to operate a business, so to circumvent the law, they employed slaves as frontmen in their businesses. Nominees are commonly used in tax evasion and money laundering schemes. And also legally in asset protection schemes for High Net Wealth Individuals. It is beyond the scope of this paper to explain how to control a nominee director and shareholder. But non-citizens of Botswana considering using local people as nominee directors and shareholders in Botswana registered companies or a nominee trustee of a trust to secure government work will need to be very careful. They should clearly understand the risks involved. And those risks are substantial.
In the eyes of the world, a person who is recorded as the owner of an asset is the lawful owner of it. If a local citizen is recorded as the only shareholder of a local company and as the sole director, then they own and control the company. Now if they are a nominee in a scheme whereby the company was set up to secure procurement work set aside for targeted citizens, but is actually controlled by foreigners, there is nothing stopping that local people from asserting control over any assets the company might own, any contract and the funds derived from it. The foreign citizen/s operating behind the scenes as beneficial owners could not institute legal proceedings against the local person involved because they are not recorded as the owner of the shares or as the director. And as the arrangement was put in place to defeat the provisions and intention of the Economic Inclusion Act, it would not be enforceable because it was illegal. Illegal contracts or unlawful arrangements are unenforceable in a court.
Another issue that should be considered by those intending to use local nominees to secure government contracts are the anti-money laundering and counter-financing frameworks implemented by specified parties in Botswana, particularly by financial institutions such as banks. They are required by the Financial Intelligence Act 2022 to know the beneficial owner behind any legal structure, asset (e.g., an account) or transaction. They cannot ignore it otherwise they will face substantial fines by a regulator for non-compliance and managers face a potential criminal charge for failing to implement an effective AML/CFT compliance and monitoring programme. A financial institution that has a company as a customer that engages in government procurement work, would already be alert to the potential that such firms were high risk of corruption. With the passage of the Economic Inclusion Act an alert financial institution would be on the lookout for arrangements designed to defeat its provisions. They would (or should) be closely examining all transactions through accounts they hold for the company to identify if any previously undisclosed beneficial owners are controlling the company or receiving funds that they would otherwise not be entitled to. If any suspicious activity was detected then a financial institution is legally bound to report it to the Financial Intelligence Agency. And it would be irresponsible and illegal for any financial institution to deliberately open and provide any financial services to a company claiming to be owned by a targeted citizen, knowing that it has been set up by a non-citizen to circumvent the Act.
The Act contains an offence, but it only applies to any person who fails to comply with the legislation. The offence does not apply to other criminal activity associated with implementing a scheme to defeat the Economic Inclusion Act. Filing company documentation claiming that a nominee is a true shareholder and director of a company when they are not, is a false pretense or a false statement committed by any person involved. And any person involved in advising on any scheme to defeat the Act and/or preparation of company documentation knowing it to be false, for lodging with the Companies and Intellectual Property Authority, would commit a conspiracy offence or an offence of aiding and abetting an offence. In addition, if a company, with nominee local shareholders and directors but controlled by a foreign person, tenders for government work, whether the company wins the contract or not, a fraud offence, most likely false pretenses has been committed. These offences are serious and in addition to the severe penalties that could be applied would trigger the forfeiture provisions of the Proceeds and Instruments of Crime Act, resulting in the potential forfeiture of all profits earned from the arrangement to defeat the Act.
Local citizens should also consider the risks involved by allowing themselves to be nominees for foreign citizens in any arrangement to defeat the provisions of the Act. If any company in which a local citizen is a director trades while insolvent, then they could be held liable for the debts of the company. This could have a detrimental impact on their life and on their own personal credit rating. Any adverse activity involving the company also reflects on the nominee directors. And of course, their involvement in a scheme to defeat the Act could also amount to a serious criminal offence. A local citizen of Botswana would therefore be wise not to get involved. The Act has been passed to help the people of Botswana and no loyal citizen should volunteer their name to conceal a foreign person. All citizens should realise that if a foreign person is prepared to cheat the Government of Botswana then it would be prepared to cheat them.
Any local person who is considering taking advantage of the Act to start a new business or adjust an existing business to tender for government work should consult with a law firm or consulting firm that supports small to medium businesses in Botswana and is committed to ensuring that the Act is implemented not only legally but in the spirit it was intended.
|Chris Douglas is the owner of Malkara Consulting a financial crime consulting firm that operates in Australia, Asia, Botswana, and Nigeria. He is a former Australian police officer who served for 31 years with the Australian Federal Police. He has extensive experience in the use of individuals, companies, trusts and offshore jurisdictions to conceal the identity of a beneficial owner in money laundering and tax evasion schemes.|