Rule #1: Don’t Lose Money Rule #2: Don’t Forget Rule No #1
I think the no 1 reason for small scale investments in Africa made by people living outside Africa to fail, isn’t poor infrastructure, political risks or red tape, but dishonesty on the side of the person managing things locally in Africa.
I’ve heard many stories of people getting ripped off by their partner in Africa. And it isn’t primarily a story of Africans fooling naive European investors. Most people that I know that invest like me in Africa, are Africans living in Europe, and most of them let family members manage their investments, but even then things can, and do go wrong. When talking business with Africans in the diaspora, how to avoid your local partner taking your investment for his own benefit is always a major topic, and everybody seem to have stories of (extended) family members being dishonest with them.
I actually tried to tackle the issue of how this problem can be so prevalent in one of my first posts called The Issue of Trust.
Some specific advice
Regarding how to avoid fraud, here are a few ideas:
- Don’t entrust all your investments to a single person. It’s not only about not having all eggs in the same basket. With a smaller size of the investment the risk/reward equation for dishonesty gets better.
- Go to Africa often and check on your investments. Many Africans living abroad don’t go back for decades – and that makes the risk of behaving badly diminish for the local partner.
- Minimize envy – this is what Africans in the diaspora have told me about handling family members – don’t let them know about all your investments, only the ones they manage, and pay them decently. Seeing that your half-brother living in Europe is very successful while you are not, and handling his money, makes for a dangerous combination.
- Divide up the investment in small amounts. One big amount increases the temptation for dishonesty.
- Require the local partner to transfer profits to you frequently. I have an Ivorian bank account where those that manage my investments can deposit cash, and I can check on the account through online banking.
- Work with a law firm that can act directly on the ground if there is a problem. A big part of the fraud problem are weak legal systems across Africa combined with norms that include some toleration of white collar crime. With the new government in the Ivory Coast my trust in the Ivorian legal system has improved, and think there is a similar effect on ordinary Ivorians. People know that laws matter more than before, and if you are dealing with someone who has a law firm working for them, being dishonest is taking a great risk.
- Have contracts and keep things in the formal sector. Otherwise the benefits of there being a reasonably functioning legal system aren’t very big. That’s given that there is a reasonably functioning legal system of course – in some places one might be better off in the informal sector.
- Conduct very careful selection of partners where honesty and integrity is a key criteria. Having known someone for a long time so a track record is built up is the best way I know to judge a man’s (or woman’s) integrity. Apparently there are some studies showing that the width of a man’s face matters for trustworthiness, which is interesting but I’m not sure if it’s very useful.
- Choose partners that already have an income or some wealth. Incentives to be fraudulent for someone who has nothing are much stronger than for other people.
- As Ronald Reagan said: “Trust but verify”. I have someone who independently checks – in a friendly way – on the work of those who manages the investments.
Yes, it has happened to me
Since I started investing in the Ivory Coast I have been the victim of fraud twice, in both cases due to dishonest workers on the Cocody house. One builder that stole building material, and this year a carpenter that took an advance but didn’t do any work. Fortunately none of it had any major impact on investments, but it’s two good reminders to be careful.