Due Diligence Can Save Time, Money, and Your Reputation

Due Diligence Can Save Time, Money, and Your Reputation

The decade-long Beny Steinmetz scandal involves many moving parts and parties. Vale, the Brazilian mining company and largest producer of iron ore and nickel in the world, is one party. The company lost over $1 billion when Steinmetz was accused of acquiring the mining rights to Simandou, Guinea through bribery. Until today, Vale has not been able to recoup that loss.

Read on to find out what happened in Simandou and how Vale could have saved 10+ years of hassle and more than $1 billion if it had performed due diligence.

The Simandou Mining Rights Fiasco

Between 2008 and 2010, Beny Steinmetz’s company, BSGR, was granted the mining rights for Simandou, Guinea, one of the world’s most sought-after fields of iron ore. In 2010, the company sold 51% of the rights to Vale for a huge profit. Fast-forward a few years — the Guinean president who granted rights to BSGR died, and the opposition leader, Alpha Conde, took over. He claimed BSGR acquired the rights through bribery and stripped them from the company.

Though both BSGR and Vale lost the rights, Vale suffered a much bigger blow since it had paid much more than BSGR. Vale proceeded to sue BSGR, claiming that they (Vale) had entered into the partnership in good faith and were duped. Vale sued BSGR for $1.25 billion, plus interest and expenses, which amounts to about $2 billion.

The two companies went to arbitration, and Steinmetz was ordered to pay the $2 billion to Vale. Steinmetz, however, did not accept the ruling and filed a complaint with Rio de Janeiro’s state prosecutor alleging that Vale had suspicions of foul play (though there was not any) and concealed the risks of entering a deal with BSGR from its shareholders. Rio police are currently investigating Vale, which has so far seen not one penny from the $2 billion that Steinmetz was to pay. 

What Could Vale Have Done Differently?

Vale entered into a partnership with BSGR when it purchased 51% of the Simandou mining rights from the company. Since BSGR and Beny Steinmetz had good names (prior to the scandal), on the surface there was no reason not to do business. However, if Vale had performed due diligence, it would have discovered that entering a joint venture with BSGR in Guinea was risky. 

With Guinea’s reputation as one of the world’s most corrupt countries, there was certainly reason to be cautious before a deal involving the country’s largest deposit of iron ore. There was also reason to suspect BSGR of foul play since it won the mining rights only after they had been stripped from another company. In short, performing due diligence could have saved Vale billions of dollars.

Nothing Is Black and White

Unfortunately, this is not Vale’s only set of troubles. The company is currently being investigated by police for another incident; the Brumadinho dam collapse in January 2019 which killed over 250 people. Vale has been accused of knowing that sensors monitoring the dam’s structural integrity were problematic.

The picture being painted of the Brazilian mining giant is one of either gross negligence or a pattern of criminal activity. In the case of BSGR, either Vale failed to perform due diligence (negligence) or it investigated BSGR’s acquisition of the mining rights and suspected that bribery was involved – and knowingly went ahead with the deal.

Why Due Diligence is Crucial

Both scenarios described above illustrate the importance of due diligence: Vale could have avoided a $2 billion loss and BSGR may have discovered that Vale was involved in prior criminal investigations and was not a great business partner. Either way, due diligence could have saved both companies years of uncertainty, financial loss, and their good names.

Interfor specializes in enhanced due diligence investigations for clients needing comprehensive background information about new investments, business relationships, and prospective partners. We have extensive sources in Europe, South America, the Middle East, Asia, Eastern Europe, and Africa. All inquiries are conducted with complete discretion and confidentiality by our field investigators.

Do not become the next international scandal without due diligence before entering into a business partnership with anyone, no matter how sterling the reputation. What might cost a little in the short-run can save a significant amount in the long-run, in addition to stress, hassle, and heartache.