Due diligence patience needed in post-war Libya
Libya is a complex country in which to conduct business due to a lack of stability and a mixture of old and new laws. The National Transitional Council (NTC), which succeeded Gaddafi following the Libyan Civil War, slowly reformed legislation as well as the country’s legal system; however, the NTC states that unless a pre-war law directly contradicts a new declaration the old law still stands.
A number of key laws have changed, including the law that a foreign shareholder can only hold up to 49 percent of a Libyan company (instead of 65 percent, as was previously the case). But many laws are yet to change, such as the one that dictates the minimum number of locals that foreign companies must employ.
To fully understand Libya’s current unstable climate, we must consider the country’s past.
Libya is a North African country comprising approximately 1.76 million square kilometres and just over six million people. It was a former Italian colony from 1911 to 1943, after which it fell under the administration of the Allied countries before becoming independent in 1951. Libya was declared a kingdom and remained so until 1969, when Muammar Gaddafi led a military coup against King Idris. Gaddafi remained in power until 2011, when the Libyan people revolted against him. This is when the NTC was formed. In 2012, an elected government took over from the NTC.
The Libyan economy is highly dependent on oil exportation, which generates approximately 65 percent of GDP and 96 percent of government revenue, and represents 95 percent of export earnings. Furthermore, Libya is listed among the highest nominal per capita in Africa because of its huge wealth in petroleum accompanied by its relatively small population.
Despite being an oil-rich country, Libya’s economy and development suffered a great deal due to Gaddafi’s support for terrorist organisations around the globe and being held responsible for terrorist actions during the 1970s and 1980s. This led to United Nations sanctions being imposed on Libya in 1992, which lasted until 2003.
Those sanctions were only lifted after Gaddafi accepted responsibility for his regime’s terrorist activities and duly compensated victims’ families. Gaddafi also agreed to end Libya’s programme to develop weapons of mass destruction, and took major steps in normalising relations with the international community and, in particular, many Western nations.
Following the removal of the sanctions, Libya enjoyed an annual GDP growth rate of around five percent between 2004 and 2010. Regardless, the country remained very dependent on revenues generated from oil exports and the Libyan private sector did not have the chance to grow as it should because most of the economy was controlled by state-owned companies run by close allies of the Gaddafi regime.
Foreign businesses in Gaddafi's Libya
Between 2004 and 2010, foreign companies started to invest and establish a presence in Libya as the country provided an opportunity to tap an underdeveloped market with huge oil revenues. Libya was a country that needed everything – from assistance in developing its oil fields and building the Great Industrial River [Ed note: an exact translation from the official Arabic name] to basic infrastructure such as roads, houses and schools.
Towards the end of Gaddafi’s reign, Libya implemented two pieces of legislation governing foreign investment and business. These laws were:
- the investment law (Law 9 of 2010), that requires foreign investors (except those involved in the oil and gas industries) to meet certain requirements, such as that their employee base must be made up of at least 30 percent Libyan citizens and that developing certain areas of the Libyan economy be of interest to the Libyan Government, before they apply to the Public Board for Encouraging Investment and Privatisation Affairs for investment approval
- the Commercial Code (Law 23 of 2010) governs a whole range of businesses in Libya and, among other things, gives authority to the Ministry of Economy to decide the shareholding percentage that can be held by foreign investors in Libyan companies and permitted industries in which they can invest.
Foreign investment in Gaddafi’s Libya was not an easy ride given that the country lacked a proper judicial system and had outdated laws, and the state controlled all important business activities. Foreign investors were forced to partner with Libyan individuals or companies that were well connected to Gaddafi’s regime and sons. On some occasions foreign companies had to pay bribes directly to Gaddafi’s sons in order to participate in large projects in Libya. Such incidents were uncovered mainly after the revolution in 2011 when government documents were allowed to be reviewed.
Bribery cases involving Gaddafi associates
On 19 February 2015, the Toronto-based newspaper The Globe and Mail reported that SNC-Lavalin Group and two of its subsidiaries were charged with corruption and fraud by the Public Prosecution Service of Canada over alleged criminal acts that occurred in Libya. The corruption involved CA$47.7 million (US$36.3 million) in alleged bribes to public officials in Libya, while a second charge for fraud involved CA$130 million (US$99 million) related to construction of the Great Man-Made River Project in Libya.
Another article published by The Wall Street Journal on 11 December 2014 reported on allegations that Muammar Gaddafi’s son Saadi received various gifts from SNC-Lavalin officials in exchange for construction contracts in Libya valued at US$5 billion. The gifts included approximately US$50 million, a number of junkets, a Toronto condo and a luxury yacht.
Paris-based Société Générale was accused of paying US$58 million in bribes to associates of Muammar Gaddafi. The accusation came from the Libyan Investment Authority (LIA) in a suit that was filed in London’s High Court and demanded US$1.5 billion in compensation.
The LIA accused the French bank of paying US$58 million for advisory services to a Panamanian-registered company called Leinada that was controlled by close Gaddafi family friend Walid Giahmi. The LIA claimed in the suit that the French bank paid the fee to Leinada for services relating to a US$2.1 billion derivatives trade that LIA had entered into with the French bank between 2007 and 2009. The LIA also claimed that Giahmi benefitted personally from the deal.
These allegations led the United States Securities and Exchange Commission and the Department of Justice to investigate whether Société Générale may have violated United States anti-bribery laws by paying individuals or entities to act as intermediaries and help the French bank obtain investment funds from the LIA.
Oslo-based Yara International is among the largest fertiliser firms in the world and is 36.2 percent owned by the Norwegian Government. In January 2014, Yara was fined US$48 million by the Norwegian authorities for paying bribes to foreign officials in Libya and India. The Norwegian authorities revealed that, between 2004 and 2009, the company paid US$12 million in bribes. Yara admitted the allegations, which included bribing an oil minister in the Gaddafi regime.
Business challenges in Post-Gaddafi Libya
Since Gaddafi was overthrown in 2011, Libya has had little time to enjoy peace. Several governments have assumed power but have been preoccupied with maintaining stability in the country. The revolution created several well-equipped military groups that are supported by foreign states wishing to impose their own agenda on Libya and, as a result, there has been continuous fighting ever since between these groups and the Libyan Army.
Until recently, Libya had a united government. But it now has two governments with two parliaments (based in Tripoli and Benghazi), each elected and supported by different parties within Libya or outside Libya.
Therefore, despite the country representing a land of opportunities, foreign investors are facing critical challenges when conducting business in the new Libya.
Absence of a permanent constitution
The NTC gradually changed the country’s legal infrastructure when it governed Libya from October 2011 to August 2012. This was likely due to lessons learned from the experiences of other countries, as well as an effort to prevent the government’s work from collapsing in light of the lack of stability in the country. On 3 August 2011, the NTC issued a constitutional declaration in which it included a special article (Article 35) that clearly stated that all preceding laws remained in effect unless contradictory to the declaration itself. Therefore, laws 9 and 23 of 2010 remained in effect until the Ministry of Economy issued decrees that modified the provisions of Law 23. This means that there will likely be changes in the laws once a permanent constitution is approved and that will cause foreign investors to have to adapt to new regulations and requirements. This was seen when the Ministry of Economy issued decision number 207 on 5 July 2012, reducing the maximum percentage that a foreigner may hold in any Libyan company to 49 percent from the 65 percent that was allowed under Law 443 of 2006.
The absence of a permanent constitution makes the Libyan judicial system less functional and modern, as it depends on old laws and regulations introduced to serve a former regime. Furthermore, Libya’s post-revolutionary legal system continues to be manipulated by government and non-government entities (such as militias), which means that it is not an independent system governed by the rule of law.
Lack of security
Due to continuous fighting between the Libyan Army and other militias and the absence of a proper police force (the current force is mostly former members of some militias that fought during the revolution), the situation in Libya is deemed to be too dangerous for many foreign investors as investments and personnel are not secure.
Although corruption in Libya is not new, it has become more of an issue since the revolution due to the lack of stability. The country is currently ranked extremely low on most reputable corruption indices.
Due to a lack of proper governance in Libya, investors in the country have needed to partner with individuals who are well-connected with members of the government or the militias, risking reputational damage and financial losses (in cases where such partnerships subsequently fall under the spotlight of the international media) if they do not.
Due diligence challenges
Conducting due diligence in Libya is essential for any foreign company that would like to enter the market and find a suitable partner, particularly as many businessmen who supported and benefitted from the Gaddafi regime have since flipped into opposition yet remain active in the market.
However, due diligence is not easy in Libya. The following summarises some of the diligence challenges facing companies in Libya together with some suggested solutions:
Obtaining corporate registry records
Corporate registry records are separated based on the city, with most companies located in the two main cities of Tripoli and Benghazi. The working hours of the corporate registry offices are based on security considerations, and it is therefore common for these offices and other government departments to be closed for a couple of days, or even weeks. To avoid hassle and delay, companies are recommended to request that the Libyan partner provides the most up-to-date copy of the corporate registry records. This can later be verified easily and speedily from the local Companies Register Office.
When conducting litigation checks in Libya a letter of consent signed by the subject company must be registered with the court. The litigation-check process is time consuming and it is therefore recommended to separate the checks from the due diligence report.
Although the internet was one of the tools that helped in the fight against the Gaddafi regime, daily newspapers and respectable news websites do not publish a great deal of negative content in relation to individuals and entities. This means that what is usually a very important part of the due diligence process (i.e. media checks) will be unrewarding. It is common to find negative comments and stories relating to individuals and companies in blogs or social media websites. However, due to the nature of social media and the lack of other reliable sources against which one can cross-check information, it is difficult to verify such negative content. The only way to accurately verify such content when conducting due diligence on a Libyan partner is through on-the-ground investigations, which should include reputational enquiries.
Due to the security situation and division in Libya, it is hard to identify trustworthy sources to be interviewed in order to obtain reliable information about a targeted company or individual. This is especially true if the enquiries are carried out discreetly as many people fear scams, kidnapping or even commenting on someone who has influence in the country. For this reason, most potential interviewees will probably demand anonymity in return for commenting. To overcome this challenge, companies are advised to select a reliable due diligence specialist firm that has reliable sources in different industries in Libya.
As corruption is now widespread in Libya, specialist firms that provide due diligence services in the country might be requested to pay facilitation payments when applying for official documents at government departments so that they do not face delays. Companies therefore need to understand and accommodate the delays that may occur as a result of the due diligence provider behaving ethically. It is recommended that compliance officers be patient and allow greater time for due diligence in Libya than they might in other countries.