Oakville Engineering Company Braces for African Bribery Verdict

Catherine Porter, TORONTO STAR
Monday, September 16, 2002

A tale of Swiss bank accounts and battered reputations unfolds in a courtroom in faraway Lesotho

In a large brick courthouse in uptown Maseru, Lesotho, a gavel will pound down on a judge’s desk tomorrow.

Its measured thud will go unnoticed by Basotho shepherds herding their ponies over nearby passes or the local women hawking their wares in the market. But thousands of kilometres away in the outskirts of Oakville, its reverberations will rattle the foundations of a venerable Canadian company.

If the verdict is guilty, Acres International Ltd. will become the first international company to be convicted of bribery by a foreign country, according to Probe International executive director Patricia Adams.

If acquitted, the engineering firm will start mending its reputation and bank books – both bruised by the three–year ordeal – heave a sigh of relief and close this chapter on its work in the small African country.

Many watchers say the outcome of the trial could change the pattern of international business in an increasingly globalized world. "The case is huge," said Adams, whose Toronto–based organization monitors Canada’s aid and trade. "It has extraordinary implications for international foreign aid, export credit agencies and for future large international projects."

The story that has played out over four months inside the air–conditioned quarters of the High Court of Lesotho has all the elements of a Hollywood mystery: Millions of dollars surreptitiously slipped between Swiss bank accounts; reputations built and broken; a criminal sentence and a death.

At the root are a tangle of unanswered questions. But there are a few uncontested facts.

The Lesotho Highlands Water Project is Africa’s biggest water project in one if its poorest nations.

Acres, a Canadian company with a niche in dam work, won many prized contracts to work on the project. It hired a local engineer, Zalisiwonga Bam, to represent it in Lesotho. Bam received payments in his Swiss account, much of which he transferred directly into the Swiss account of Masupha Ephraim Sole, a Canadian–trained engineer at the helm of the project. And it was Sole who, in the end, approved Acres contracts and elevated several of its employees to key positions in running the project.

At the heart of the matter, then, is whether Acres sanctioned Bam’s actions.

"The whole case revolves around whether they intended Bam to pay Sole, or foresaw that he would," said Guido Penzhorn, the prosecutor who flew in to take the case from South Africa, which shares the same common law as Lesotho. "In either case, they would be guilty of committing bribery."

What’s needed, though, is solid proof, countered lawyer Milos Barutciski, who successfully represented Acres before the World Bank’s oversight committee for fraud and corruption when it investigated the case.

"The law, whether in Canada or Lesotho, requires to make the principal responsible for the conduct of the middleman, you have to show the principal knew or should have known his actions. There is no evidence of that."

There are two people who can say with certainty the source of Bam’s arrangement with Sole. But neither is speaking. Bam died suddenly of a heart attack at the age of 51 in 1999, the same year charges were laid. And Sole has refused to speak, whether at his own trial or at others.

To many watching the case, the Kingdom of Lesotho seems an unlikely stage for such a trial.

The country is the size of Belgium, floating like a small shard in the palm of South Africa. Its political climate since gaining independence from Britain in 1966 has been hair–raising. There have been a handful of coups d'�tat, civil and military fighting has flared and the government – a constitutional monarchy – has formed and dissolved like a wedding cake in a temperamental fridge.

Today, the United Nations puts Lesotho between Kenya and Myanmar on its Human Development Index rankings – at 131 on its list of 174 countries. According to its own government, half of Lesotho’s 2 million people live beneath the poverty line, and more than 65 per cent live on less than $2 (U.S.) a day. Many work as temporary labourers in the mines of South Africa.

The Lesotho Highlands Water Project was billed as the country’s fountain of youth.

By quenching South Africa’s thirsts, the mountain rivers of Lesotho would bring it prosperity.

In 1986, the Lesotho and South African governments signed a $6 billion plan to build five massive dams and dig hundreds of kilometres of tunnels that together would funnel one swimming pool of water every second from Lesotho’s Orange River down to Johannesburg. At the same time, they would supply all of Lesotho with electricity by building a 72–megawatt hydro station on one of the tunnels. (Less than a third of the country’s households now have electricity, according to George van der Merwe, a South African spokesperson for the project.)

The World Bank was called on board and it agreed to commit $106 million to the project.

To oversee the project, the Lesotho Highlands Development Authority was formed. Sole, a local engineer who earned a degree from Ottawa’s Carleton University, was appointed its chief executive.

Sixteen years later, two of the dams have been completed. The first, the Katse, is the tallest in Africa, soaring 52 storeys. The project feeds a big chunk of the country’s economy – in 1998, it accounted for 13.6 per cent of the gross domestic product.

Acres is a medium–sized engineering firm founded by Dr. Henry Acres more than 75 years ago. The company cut its teeth developing the Niagara Falls generating station. Since then, it has built its reputation on water management, gaining recognition through projects like Churchill Falls in Canada and establishing a foothold outside the country.

The company now is owned by its 1,000 employees and has 19 offices in North America. It does one–third of its business off the continent, consulting in places like Iran, Nepal and China, where it worked on the Three Gorges Dam.

Acres’ work had brought it to Lesotho before. In 1981, its employees consulted on construction of the airport in Maseru, the capital.

So when the highlands authority tendered contracts, it submitted a bid.

It was hired in 1986 to provide technical assistance to the authority – essentially helping the organization get its footing and training locals to take over. Over the next 13 years, it gained another four contracts, earning the company a total of $21.2 million (Canadian). Two Acres employees were assigned the position of assistant chief executive of the highlands authority.

The project hit a snag in the mid–1990s. An audit revealed irregularities in the highland authority’s accounts. The Lesotho government started asking questions. It launched an internal investigation that uncovered a Swiss bank account in Sole’s name. The account revealed payments from a number of agents representing international companies. Bam was among them.

With prompting from the World Bank, Lesotho Attorney–General Fine Maema decided not only to pursue Sole on bribe allegations, but the companies suspected of giving them.

"It takes two to tango," he said in a telephone interview with The Star. "As much as it is a crime to take bribe money, you also must go after those who give them. This is a matter of principle. We want to show the whole world that we will not tolerate any corruption in Lesotho."

After a year–long trial, 54–year–old Sole was convicted of 11 counts of bribery and two of fraud. In his 234–page judgment, Judge Brendan Cullinan said Sole had accepted more than $1.6 million from intermediaries representing 12 international companies. Of that, Sole accepted around $320,000 from Bam. In June, he was sentenced to 18 years in prison. He is appealing the case.

Twelve international companies, including Germany’s Lahmeyer International and the French companies Spie Batignolles and Dumez International, have also been charged. This spring, Acres was the first to go to trial.

The judgment comes down tomorrow.

The sticking point in the Acres trial comes down to two words: representative agreement.

Acres hired Bam as its local agent in Lesotho.

He had an impressive record – the former honorary consul for Canada, he had earned an engineering degree in Berkeley, Calif. And he had worked with Acres on the airport project.

"By all accounts, he was one of the pre–eminent engineers in the country," said Acres lawyer Barutciski, a partner at Toronto firm Davies Ward Phillips & Vineberg. "He was an excellent choice."

They signed a representation agreement that awarded Bam 3.6 per cent of all contracts he secured for Acres.

The prosecution holds the agreement was a smokescreen. It was set up to mask money Acres paid to Sole in return for coveted contracts, Penzhorn alleged.

"It is analogous to a criminal carefully setting up his alibi before committing his crime so that he is able to fall back on it should the need arise," he wrote in his court summation.

The company had been in the country long enough to represent itself, he argued. The use of a secretive account in Switzerland "points to a corrupt motive," he said.

In the wood–panelled courtroom, Penzhorn held up one bank statement after another before the judge, depicting a pattern whereby Bam transferred big chunks of his regular payments from Acres to Sole’s account. Penzhorn said Bam’s monthly payment, ranging as high as $18,000, was "fantastic" – nearly double what Sole himself was earning. That’s proof, Penzhorn continued, of an unspoken agreement – much of the money wasn't intended for Bam."Representative agreements are standard practice in the business," Barutciski countered.

They are recommended by the World Bank, the Canadian International Development Agency and other development agencies as ways for international companies to gain a secure foothold in unknown and unstable countries. Local agents act like guides – giving advice on business deals, assisting in securing visas and office space and alerting the company to local circumstances.

In Lesotho, that was doubly important.

"Put it this way. It ain't Mississauga," Barutciski said from his Bay Street office. Acres evacuated its employees a number of times – when factions of the Lesotho army traded gunshots on the streets and later when Botswana troops invaded.

"It’s a very unstable country by any stretch, and Acres did what any company would do – retain a local person in the area who knows the area and can give you a heads–up should the proverbial hit the fan."

Given the country’s instability, paying Bam in a stable Swiss account made good business sense, Acres lawyers argued in their written submissions. And while his first payments were large, by the end of his 12–year service for Acres Bam had earned $855,000 – an average of $5,500 per month after his expenses were deducted.

The payments, for an elite member of Lesotho society, "are certainly not huge by any standard," Acres stated in its written defence submitted to the court. Long before the World Bank turned its guns on corruption, Acres had established a code of conduct, requiring "honest and moral" behaviour.

The 14–point document, which every company manager has been required to sign annually since 1978, forbids the "making of an illegal payment" and giving gifts or presents to government officials in positions of trust. It demands adherence to Canadian law regardless of the country in which Acres is doing business.

"In its 78 years, Acres has never once ever before been involved or accused of any wrongdoing in its domestic or international business and it’s worked in somewhere north of 110 countries," said George Soteroff, a public–relations specialist hired by Acres.

Like all of Acres’ other representative agreements, its lawyers hold, the one signed with Bam was legitimate and the money paid to him was meant for him alone.

Why Bam would have forked over so much of his paycheque to Sole is anyone’s guess, Barutciski said.

"We have no choice but to speculate."

In their client’s defence, Acres lawyers put forward many possibilities. Since he was earning a commission, Bam might have paid Sole to ensure Acres held on to its contracts. Conversely, Sole might have extorted the payments from Bam

"Corruption works in both directions. What the prosecution’s theory doesn't contemplate is that the whole scheme might have been initiated from the other end," Barutciski said. "In fact, history shows that is usually the case."

Acres has already been put through the wringer for its dealings with Bam.

According to Barutciski, it has "spent several million dollars defending its case on multiple fronts over three years with several legal teams."

First, it did an internal forensic audit that revealed no wrongdoing, Soteroff said. Then, after a two–year investigation, the World Bank fraud and corruption committee concluded there was insufficient evidence to justify barring it from receiving World Bank funding. (The bank implemented fraud and corruption guidelines in 1996 and has since put 61 people and companies on its restricted list.)

"But the committee clearly said if further evidence is forthcoming from the trials in Lesotho, it reserves the right to re–examine the case," said Andrew Macoun, the bank’s team leader on the Lesotho Highlands Water Project who will be among the crowd watching from the courtroom’s gallery tomorrow.

And the Canadian International Development Agency, which funded a $160,000 training program run by Acres in 1993, launched a forensic audit tracing its money. It found no evidence of misappropriated funds.

According to Acres, all that adds up to exoneration.

"No new information has come out of the Lesotho trial. They've worked with exactly the same information provided to them by the World Bank," Soteroff said.

"This is a criminal trial, so it would have a higher standard of proof put against it. So we're now moving past the balance of probabilities into reasonable doubt. If the evidence is the same, one would be astonished if the decision was anything different."

But many activists think otherwise.

"The World Bank sanctions committee is not a court of law," Adams said.

The real threat, though, isn't a guilty verdict in the High Court of Lesotho, which Penzhorn said would likely lead to a hefty fine. It’s a World Bank ban that could follow such a verdict.

"They will probably face a more significant penalty just in loss of contracts for Acres. Their reputation as a clean company is really in jeopardy," said Ryan Hoover of International Rivers Network. Since the World Bank sets the standard, it would likely pressure other development banks to follow suit, he added.

"If Acres is found guilty, it will be a real challenge in Canada because it is such a well–respected corporation with substantial international business," said Wesley Cragg, professor of business ethics at York University’s Schulich School of Business. As chairman of the corruption–fighting group Transparency International Canada, he is anxiously awaiting the verdict.

"A guilty verdict would be something of a shock to the Canadian government."

Toronto Star Sep. 12, 2002.