This week six large extractive companies have committed to several actions to advance the cause of beneficial ownership transparency. Their joint statement is a welcome endorsement of this important anticorruption measure. Whether the commitments help tackle the tough realities of oil, gas and mining sector corruption will depend on how and by whom they are implemented.
Beneficial ownership transparency enjoys significant momentum, which this new statement and the accompanying programs help to propel. Beneficial ownership refers to the actual people who, directly or indirectly, ultimately own or control a company. One hundred and ten countries have adopted laws that require beneficial ownership reporting of one kind of another, including the Unites States’ passage of the Corporate Transparency Act earlier this year. Many of these efforts (though not in the U.S., notably) will result in publicly available registers of who ultimately controls and benefits from companies, as exist already in the U.K. and elsewhere. In the extractive sector, the Extractive Industries Transparency Initiative (EITI) requires its member countries to publish the identities of the beneficial owners of companies that apply for or hold oil, gas or mining licenses, and countries have made commendable progress in meeting this standard.
Many private sector actors have supported this evolution. Way back in 2012, as the EITI was revising its rules, I remember that it was a mining sector representative who first put the idea of beneficial ownership reporting on the table. At a recent EITI event a BHP executive reminded us of why businesses support beneficial ownership: beneficial ownership transparency makes it harder for problematic actors (firms owned by politicians, for example) to gain unfair access to business opportunities; it makes their due diligence cheaper and easier; and it signals a commitment to openness and integrity to all sector players. Privately, representatives of large companies share stories of government officials pushing them to work with local companies with unknown or problematic owners; beneficial ownership transparency helps diffuse these situations without companies having to pick a fight with their government counterparts.
Support beneficial ownership transparency in public forums and when engaging with other companies
Disclose their own ownership information, and where feasible, that of their joint venture partners
Identify and use beneficial ownership data in their due diligence processes
These actions could help prevent corruption, depending on how they’re implemented. NRGI has analyzed over 100 past cases of extractive sector corruption and, over the past two years, convened extractive companies to discuss their anticorruption practices. Later in 2021, we will publish guidance on how companies can avoid enabling corruption in some of the riskiest areas of their work. Drawing on this work, we offer here three ideas for how the commitments might deliver results.
1. Widen the pool of company supporters
AngloAmerican, BHP, Glencore, Newmont, Repsol and Rio Tinto deserve credit for publishing this statement, as do the EITI, Open Ownership and the B Team for facilitating the process. It contains meaningful commitments for advancing beneficial ownership transparency, and for using ownership information to prevent corruption. Of course, it could have gone further, but it’s a notable step forward.
The commitments are imminently feasible, with many reflecting existing corporate practices and the existing expectations for EITI supporting companies. Beneficial ownership transparency also advances the interests of most ethical companies. For these reasons, it is disappointing that only 6 of the EITI’s 68 supporting companies signed on. The European supermajors BP, Eni, Shell and Total, as well as transparency leaders Equinor and Kosmos are particularly notable absentees. Given recent corruptionscandals, other commodity traders should follow Glencore and sign on too. Their absence and others begs the question: what part of this modest statement do these companies oppose, and why?
Recruiting more signatories will help add meaning to the EITI’s “supporting company” moniker and bring about the collective action dynamics that EITI and its partners are trying to create.
2. Shine light on the highest-risk beneficial owners
As described in U.S. court documents, when employees of the large commodity trader Vitol bribed officials in Brazil, Ecuador and Mexico, they routed the bribes through shell companies that they had hired as service providers. Former employees of Gunvor and Glencore recently pled guilty to helping execute similar schemes in Ecuador and Nigeria, respectively. In other scenarios, large foreign companies partnered with smaller companies in production joint ventures, allocated supply contracts to smaller companies, or bought oil from small intermediaries. Investigations then revealed the owners of the smaller companies included politicians, their proxies or other inappropriate parties.
In such cases, visibility into the ownership of the smaller company—the minority partner, the service provider, the supplier, or the trading intermediary—is what would really help to prevent (or support the investigation of) corruption. Therefore, the practice of beneficial ownership disclosure must extend to these players, not just large multinationals.
To be clear, ownership information about publicly traded multinational companies—especially full information about their subsidiaries and corporate structure—is important for integrity reasons as well as to inform discussions about tax justice, i.e., whether a company is using its structure to lower its tax liabilities in its home or host countries. But when it comes to corruption, it’s smaller anonymous companies that do much of the dirty work.
A few of the new commitments, if executed well, could help prompt this wider pool of extractive sector players to be more transparent about their owners. The companies indicate that they will “encourage other companies, including joint venture partners, contractors and suppliers, to publicly disclose their beneficial owners.” Robust implementation of this measure should produce visible results. The companies could, for instance, begin by encouraging their suppliers in certain high-risk countries to publicly disclose their ownership information, and then gather this information in one place so that it is accessible (and therefore useful).
Another commitment presents an additional starting point. In one of the statement’s strongest parts, the companies indicate that, along with publishing their own ownership information, they will, “where feasible, for any partially owned entities, also publicly disclose the other legal owners of the entities. Where not feasible, disclose the reasons why.” As longstanding, high value partnerships, joint ventures are indeed a sensible place for companies to begin pushing their counterparties to disclose ownership information. Glencore and Rio Tinto, two of the statement’s signatories, have already illustrated the feasibility and value of this effort by publishing ownership information for their JV partners. Other companies could quickly follow suit.
Our research and consultations suggest a third starting point, which does not appear in the statement. Many extractive sector corruption cases feature agents and intermediaries, especially the business development agents that companies use when seeking new contracts or licenses. We generally recommend that companies stop using business development agents, especially when seeking deals from governments and state-owned companies. If companies continue to use agents, publishing their names and beneficial owners is a straightforward way to inject some integrity into relationships that have repeatedly proven vulnerable to corruption.
3. Use beneficial ownership information to avoid enabling corruption
Several commitments pertain to how companies will use beneficial ownership data in their due diligence processes. This is great, as it’s only by actively using this information that corruption will reduce.
Big companies from countries with active anti-bribery regimes, including most EITI supporting companies, already use ownership information when conducting due diligence on third parties. The more crucial question is: what standards does the company apply when reviewing this ownership information and deciding how to act? Some past corruption cases indicate that companies were fully aware of the ethical or corruption risks posed by an entity’s owners, but worked with them anyway. In 2008, U.S. hedge fund Och-Ziff commissioned due diligence on companies owned by mining investor Dan Gertler – a highly controversial figure who is now subject to US anticorruption sanctions. The due diligence reported he was: “a political [sic] exposed person….happy to use his political influence against those with whom he is in dispute;” named on compliance watch lists and UN reports; and that he “keeps what can only be described as unsavory business associates.” Och-Ziff went ahead with the deal, but eventually faced US bribery charges regarding its business with Gertler and paid a USD 213 million criminal fine. Shell knowinglynegotiated with a former oil minister to acquire an oil block that the official had previously awarded to his own company. Isabel dos Santos, daughter of the former president of Angola, enjoyed dozens of high-profile business partners despite thesuspiciousorigins of some of her wealth.
One of the statement’s commitments points to a way forward: companies could set some basic ground rules about who is, and isn’t, acceptable to work with. Such ex ante restrictions help because they reduce the number of discretionary decisions that company personnel make around specific deals, decisions often made in moments when pressure to get the deal done runs high. In their statement, the signatories say they will “publicly commit to avoid partnering or contracting with companies assessed as high corruption risk that decline to identify their beneficial owners unless appropriate mitigation measures are implemented to reduce corruption risk.” This is a useful step toward projecting beneficial ownership reporting across the sector, though the qualifier about mitigation measures creates an unnecessary gray area. Companies could adopt and disclose additional ex ante standards; these might include prohibitions against working with entities whose beneficial owners include officials with influence over the business in question, or with individuals credibly shown to have engaged in corruption where evidence of remediation is not found.
In the anticorruption guidance that NRGI will publish later this year, we will also recommend that companies apply a harm-based screening to the beneficial ownership information they collect. In other words, companies should ask: will partnering with this entity or individual harm citizens of the country where we are working? Could it make corruption worse? These differ from the questions a company would ask about its own legal risks.
My NRGI colleagues and I are pleased to be in dialogue with a number of EITI supporting companies about how to enhance their anticorruption controls, including around beneficial ownership transparency and the use of that information, so as to prevent well-established patterns of corruption from repeating and causing still further harm. The statement issued this week by the six companies marks a step forward in this effort, and its broad and robust implementation could mark further progress still.