Corruption trends in the extractive sector

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The extractive sector is famously prone to corruption especially in resource-rich countries. A recent study by Professor Albert Makochekanwa entitled The impact of corruption on Zimbabwe’s mining sector revealed that corruption in the mining sector is perpetuated by the following people: officials who handle mining issues; mining legal service providers, provincial mining directors in the Ministry of Mines and Mining Development (MMMD); mining geologists, mining  inspectors, mining surveyors and politically exposed people, local government leadership, national government leaders and politicians.

This is exacerbated by the obsolete mining act and manual cadastre system. This article will share a few of the trends that Natural Resource Governance Institute (NRGI),  have observed along the decision chain and the forms that corruption takes especially those linked to government officials, politicians and politically exposed/connected persons.

All the institutions against corruption in the extractive sector must read Twelve Red Flags, an  NRGI publication which speaks about corruption risks in the award of extractive sector licenses and contracts. Yes, corruption occurs all across the extractive sector decision chain, however the allocation of contracts and awarding of exploration and production licenses is most susceptible.

This area attracts corruption in many countries including Zimbabwe (Transparent International Zimbabwe), as companies seek to win favour with government officials/politicians or officials try to steer lucrative deals towards their political allies.

Corruption cases also occur in subcontracting, where oil and mining companies procure the goods and services, they need to operate the oil field or the mine. One big example is the car wash scandal from Brazil where the Brazilian national oil company awarded inflated construction contracts to a few selected construction companies. These companies then skimmed off some of the funds, laundered the money, and used it to pay off various political bigwigs and national oil company executives.

State-owned companies can be hotbeds for corruption because they handle highly valuable transactions, they’re easily politicized, and they sit outside of many of the government’s formal oversight systems. In addition, inspectors can perpetuate corruption, for example in Kentucky in the United States, a mining executive bribed a government inspector not to enforce certain environmental regulations that his companies had violated.

Corruption is also common when the governments spend their oil and mining revenues. For instance, a number of investigations have found that well-connected Russian businesses won inflated construction contracts in the run-up to the 2014 Sochi Winter Olympics, overspending that the government could easily afford given that oil prices topped $100 per barrel at that time.

Some of the common types of corruption related to government officials or politicians include: Bribery as businesses seek preferential access to lucrative oil and mining business opportunities. Sometimes bribery can take a very basic form, for example, it is alleged that in 2010, a Canadian company called Griffiths paid around two million dollars in bribes plus some shares in the company to a government official from Chad as part of their quest to secure rights to several oil blocks in Chad. Griffiths transferred the funds to a company set up in the name of the government officials’ wife.

The bribery was discovered and Griffiths had to pay a ten million dollar fine to The Canadian government, but the company went on to sell their oil blocks in Chad for US$1.2 billion a few years later, so in this case, the bribe still certainly paid off.

More often, bribery occurs through fixers and middlemen which makes it more complicated to uncover. There are many problematic cases of companies employing fixers to engage in suspicious behaviour. It is alleged that Gunvor a major oil trading company based in Switzerland, in trying to increase its business in Africa, around 2010, hired a few individuals who were closely connected to the president of Congo Brazzaville.

Gunvor paid these individuals $30 million to open doors and provide access to top officials. Soon after, the company received big new oil trading deals in Congo. In 2019 Swiss federal prosecutors found oil trader Gunvor Group criminally liable for corruption in the Congo Republic and Ivory Coast, ordering it to pay almost 94 million Swiss francs ($94.8 million).

Other cases of corruption stem from the efforts of government officials to participate in and profit from the extractive sector. This is common in Zimbabwe, there are allegations that some government officials and politicians are into mining.

Research by Mukochekanwa revealed abuse of office by politicians and political corruption.  It further indicated that there seems to lack the political will to deal with such people.

In Angola, a number of investigations revealed how government officials and political elites control companies that are active in the oil sector. One non-government organisation report uncovered how the Swiss oil trader Trafigura held extensive joint business interests with top Angolan officials. In another case, the Angolan government directed an American oil company called Cobalt to partner with a few unknown local companies, one of which turned out to be owned by several sitting government officials. Angola is far from alone here.

In Azerbaijan, investigative journalists uncovered that the government awarded a large gold mining license to a consortium that included a company owned by the president’s daughters.

These cases and many others demonstrate the importance of beneficial ownership disclosure, which reveals who really owns the companies that participate in the extractive sector. This kind of disclosure is spreading through Extractive Industries Transparency Initiative (EITI), of which Zimbabwe now have over a decade showing interest without joining. Beneficial ownership disclosure can help the public know whether politicians and their associates are participating in the sector in ways that create damaging conflicts of interest.

However, with the current breed of corrupt politicians, beneficial ownership disclosure won’t help in all cases. NRGI research revealed many cases where political elites use proxies so that they don’t have to formally touch either the business or the money that it makes. In such cases, the political leader often decides which company should get a lucrative deal, and then they can tell that company and its bosses how to use their money when it’s needed. In Nigeria, for example, the former petroleum minister Diezani Alison-Madueke is alleged to have awarded several huge oil deals to companies headed by her loyal henchmen. These individuals went on to make billions of dollars, some of which they would then use to help the minister out, buying her expensive properties and furniture and doing her political dirty work, as well.

Similar trends were also noted in the Democratic Republic of Congo and in several post-Soviet countries where politically loyal executives win big from the extractive sector thanks to their closeness to the president. This can be legal especially in kleptocracies where corruption takes on truly systemic proportions, the political elites can manipulate the oil/mining sector without fearing any repercussions from law enforcement. After all, they’re the ones who write the rules of the game so they don’t have to worry about breaking them.

NGRI also observed that major corruption cases were possible through the help of various international enablers such as lawyers and accountants, to structure their deals and launder funds. The Panama Papers leak revealed the extensive global network of shell companies and bank accounts that corrupt actors can use to launder their ill-gotten wealth into tax havens like the Cayman Islands and Bermuda.

The extractive sector corruption, especially by the politicians and government officials, will continue to pose corruption risks because there is just too much money to be made in this sector.

Tools needed to tackle these challenges are known and need to be deployed in a much more urgent and comprehensive manner. The main question is Will corrupt officials/elites allow this to happen if they are the major beneficiaries ?

Nyamudzanga is an economist, tax consultant, ZES member, holder of a Master’s in Tax Administration and degree in economics. Email: lnyamudzanga@gmail.com. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of ZES. — kadenge.zes@gmail.com or mobile +263 772 382 852.