Transparency initiative debates way forward

Published by MAC on 2015-10-22
Source: Economist, statement

A fight for light

Efforts to rid extractive industries of corruption inch forward

A global initiative to bring more transparency to oil, gas and mining is at a turning-point

The Economist

21 October 2015

WHETHER the awarding of a licence, the sale of state production quotas or some other transaction, dealings in oil, gas and mining are notoriously prone to corruption. This is a problem in developing countries that have poor institutions and rely heavily on extractive industries. Sub-Saharan Africa is particularly at risk: its ten largest oil-producing states derived 56% of their public revenues from oil exports in 2011-13.

Light is the best disinfectant, say anti-corruption campaigners—and many think the best hope for greater transparency lies with an emerging global standard known as the Extractive Industries Transparency Initiative (EITI), which has grown to include 48 members (either compliant or candidate countries) since it was formed 12 years ago. But the EITI has reached a crossroads: it must now choose either to push ahead with bold disclosure requirements first floated in 2013, or back away under pressure from those who argue that revealing the true (“beneficial”) owners of companies involved in extractive deals with the state is not as straightforward as it seems. This is to be discussed at a gathering of the EITI’s “multi-stakeholder” board—including representatives from NGOs, companies and governments—which is due to finish on October 22nd.

Tracking beneficial ownership is important because opaque shell companies are the vehicle of choice for those seeking to divert public oil wealth into private pockets. In a ground-breaking move two years ago EITI members agreed that from 2016 private firms bidding for, operating or investing in extractives should be required to disclose their ownership. (Disclosure is already mandatory for state-owned companies.) This put the EITI at the front of a global push to reveal more about who is behind shady firms. As part of this, Britain and other countries are moving to set up public registers of ownership.

After testing this requirement in 11 countries, the EITI must now decide whether to extend it to all members. Everyone agrees the pilot was only a partial success, but not on why. Transparency campaigners say information was often not gathered because disclosure was, in practice, more encouraged than required. Governments retort that getting to the bottom of who really controlled firms whose registered owner was another obscure company or a three-year-old child could be “incredibly difficult”, says Clare Short, who chairs the EITI board.

Whatever the reason, pro-transparency groups say the EITI urgently needs to make public disclosure of beneficial ownership a condition of membership, with the threat of suspension for countries that drag their feet. The campaigners fear that if the 2016 deadline is allowed to drift, transparency will become less of a priority for years to come. The EITI faces a “credibility test”, says Brendan O’Donnell of Global Witness, one of the campaigning groups.

Another worry is that backpedalling will encourage countries to use the EITI as a figleaf. A new report by Global Witness details how in recent years $4 billion was siphoned off to opaque companies, some of them linked to current or former officials, in just a handful of deals in four African countries: Nigeria, Angola, the Democratic Republic of Congo and Congo-Brazzaville. Three of the four are full members of the EITI, technically compliant with all its requirements.

Congo-Brazzaville hosted the last EITI board meeting, in April. Yet secrecy continues to surround the beneficiaries of companies profiting from its oil wealth. Some fear that the situation has not improved much since 2005, when a British court ruled that AOGC, a firm that had bought cargoes at below-market rates from the national oil company, SNPC, was owned and controlled by the then director-general of the SNPC, Denis Gokana. This arrangement was ostensibly to disguise the state’s interest and avoid claims by sovereign debt holders. AOGC was later shown to have paid money to two Anguilla-based companies owned on trust for, among others, SNPC’s former legal chief. (Mr Gokana told Global Witness that the payments related to technical services agreements in place in 2003-04 between the companies.)

Mystery continues to surround firms involved in key deals, including three joint-ventures between SNPC and the 88 Queensway Group, a Hong Kong-based outfit that has brokered many Chinese-backed energy deals in Africa (and whose presumed head, Sam Pa, was detained recently in Beijing as part of an anti-corruption investigation). The firms were reportedly set up to sell Congolese oil in Asia. Investigators for Global Witness have discovered that their directors include Mr Gokana and Denis Christel Sassou Nguesso, a son of the president who has held senior positions in the national oil industry. Though the opacity of these arrangements raises questions, there is no evidence of wrongdoing.

Ownership is just one of several thorny issues with which the EITI is having to wrestle. It must also decide whether to encourage or force commodity traders, such as Trafigura, Glencore and Vitol, to disclose more about their purchases from state entities. Trading firms have been mostly outside the EITI tent, but pressure to bring them in has grown along with scrutiny of their activities (Trafigura has gone further than others in opening up). The government of Switzerland, where many of the trading firms are based, has acknowledged concerns about their reputation. But it is ideologically disinclined to smother them in regulations or disclosure requirements.

A third concern is the link to human rights. Azerbaijan’s status was recently downgraded from “compliant” to “candidate” because of its harsh treatment of civil-society campaigners, who see the EITI as a platform that helps them speak out about corruption. Some think the country should have been kicked out. Others argue that it was enough to give it a deadline of next April to put things right.

Lastly, there will be fierce debate in the coming months over a proposal to change the way in which countries gain membership of EITI. Today candidates face a straight pass/fail depending on whether it meets all the main requirements. Some governments and corporate members argue that as reporting grows more detailed so some nuance is needed; one suggestion is to give countries a mark out of ten. NGOs think that would be a cop-out.

Ms Short says the EITI has taken remarkable strides in just a decade, greatly increasing the flow of information about payments to and by governments. But she acknowledges that progress can be painfully slow at times, with the risk of setbacks. The broad composition of EITI’s board ensures that “conflict is entrenched in the very model”, she sighs. The fight to shine more light on oily deals goes on.

---

Democratic Republic of Congo plans to water down laws against mining corruption

Global Witness

15 October 2015

Global Witness today warns that Democratic Republic of Congo is planning to remove crucial regulations banning politicians and senior army figures from owning mining rights, as business leaders and government officials gather in Kinshasa to discuss the mining industry.

The removal of vital terms on conflict of interest has so far passed almost unnoticed, but coupled with extremely loose transparency provisions, could leave Congo’s mining sector open to corrupt deals and cost the country billions of dollars. The proposed change is included in amendments to Congo’s 2002 mining law submitted by the Congolese government to parliament in March, and published by Global Witness.

For too long Congo’s mining sector has been vulnerable to exploitation by corrupt politicians and businessmen. Attempts to remove conflict of interest provisions will make it easier to strike dodgy deals that deny the Congolese treasury billions of dollars. Congo cannot afford to miss this chance to tighten up its regulations so that its people benefit from the country’s mineral wealth. - Nathaniel Dyer, Congo team leader at Global Witness.

The revision of the mining law has dragged on for over three years, mired in dispute between government, private sector and civil society interests. While the delays to the review are concerning, worse still are the weaknesses that remain in – or have been introduced to – the suggested new legislation. According to Global Witness’s analysis:

Conflict of interest safeguards have been removed:

• There is no specific provision for the publication of contracts;
• There is insufficient transparency and scrutiny in the tender process, with too much discretion left to the Mines Minister;
• State-owned enterprises have been left largely unregulated;
• Clear and rigorous beneficial ownership disclosure requirements are needed;
• There are no articles dealing specifically with the prevention of conflict financing and army involvement in the minerals trade.

The revision of the law, which is yet to be tabled, is a rare opportunity to close crucial loopholes in the existing legislation. Secret mining deals in recent years are estimated to have cost Congo at least $1.36 billion dollars – equivalent to twice the country’s annual health and education spending combined. Failures of governance and transparency in the sector have increased the potential for corrupt political elites to benefit personally from their country’s assets, while brutal armed groups and members of the Congolese army in the east have been able to finance their activities on the back of the artisanal mining sector.

Global Witness is calling for the new legislation to shed more light on the industrial mining sector, prevent politically-exposed persons from profiting from mining, expose the identities of the ultimate owners of mining rights, and put an end to the transport, smuggling and sale of minerals by armed men, members of the army and provincial officials.

“This week Kinshasa is hosting the IPAD mining and infrastructure conference, which invites delegates to ‘tap into [Congo’s] $24 trillion mineral reserves.’ Mining wealth should not be lining the pockets of elite businesspeople, companies and politicians, but should rather be paying for much-needed schools, hospitals and roads in Congo,” added Dyer.

Run properly, the mining sector in Congo could help drag the country out of poverty. Though the country comes second bottom of the UN development index, Congo became Africa’s largest copper producer in 2014 and mining contributed over $1.3 billion to Congo’s treasury in 2013, according to the Extractive Industries Transparency Initiative.