For corrupt actors keen to distance themselves from their ill-gotten gains, anonymous companies are the perfect disguise. Through them, property can be purchased, bank accounts opened, and dodgy business deals made, all without anyone ever knowing who ultimately benefits from this activity.
“Anonymous companies allow both criminal and corrupt actors, who often have close political connections, to hide behind chains of companies,” Louise Russell-Prywata, the director of policy and programmes at Open Ownership, a non-profit, explains. “A lack of beneficial ownership information makes it either hard or impossible to trace all these connections to understand who ultimately owns that money.”
A new initiative launched by Open Ownership and the Extractive Industries Transparency Initiative (EITI) – the global standard transparency programme aimed at the resource industry – and supported by the BHP Foundation, hopes to make inroads in tackling the plague of anonymous companies within the resource sectors with a new $7m programme, called Opening Extractives.
A legacy of corruption
The extractive sector has regularly been linked to webs of corruption involving opaque companies, and the scale of these illicit capital flows is eye-popping. This is known to contribute to the prevalence of the ‘resource curse’ or the ‘paradox of plenty’, whereby a country is rich in natural resources but has stunted economic growth, poor development, and less democracy.
One example of the kind of corruption that can be facilitated by such companies is detailed in Financial Times’ journalist Tom Burgis’s book called ‘The Looting Machine: Warlords, Tycoons, Smugglers and the Systematic Theft of Africa’s Wealth’. He notes how the International Monetary Fund had previously uncovered $32bnin missing money from Angola’s state-owned oil company Sonangol, syphoned off in a series of complex financial deals dating between 2007 – 2010.
The United Nations estimates that Africa alone loses around £88.6bn every year to corruption, all while large chunks of its population live below the poverty line or lack access to electricity. A World Bank review of 213 grand cases of corruption that took place between 1980 and 2010 and involved $56bn found more than 70% of them relied on companies whose owners could not be identified.
In response, leading extractive sector companies – BHP, Rio Tinto, Anglo American, Newmont, Glencore and Repsol – have all signed a commitment to support ownership transparency, to disclose information on the beneficial owners of companies and subsidiaries, and assess data on company ownership as they undertake due diligence on partners and suppliers.
Launched in September, Opening Extractives will provide support over five years to countries that want to bring data on company ownership into the public domain. Seven resource-rich countries – Ghana, Indonesia, Mexico, Mongolia, Nigeria, the Philippines and Zambia – are already taking part.
Russell-Prywata says putting the name of directors and legal shareholders in the public domain is an essential first step to transparency. But the ‘beneficial’ owners of companies must all be made public, as they ultimately control the enterprise and its money.
“Critically, it should be a real, live human being, not another company, or even a lawyer or nominee acting on behalf of someone else. This information should then be public for all to see, in a register maintained by the government,” she explains further.
It sounds simple enough, but reform is ‘challenging’, she says. Developed nations have only in recent years started to tackle the issue. The UK was one of the first, bringing in a public register of beneficial ownership in 2016. Followed by the EU’s 5th Anti-Money Laundering Directive, which came into effect in 2020, itrequires all member states to set up a centralised register of the ultimate owners of companies and to make this information available to the public. However, Transparency International found three countries – Hungary, Italy and Lithuania – have not complied.
“It’s challenging because it’s a comparatively new policy area,” says Russell-Prywata. “Many governments are wrestling with foundational questions like ‘how do you define a beneficial owner in law?’ ‘What is the best way to collect this data that’s compliant with the privacy and other data protection legislation?’ ‘How do they verify the data?’” she says.
The Opening Extractives programme will provide both technical, technological – empowering IT staff and relevant agencies – and policy expertise to help governments work through these questions using the expertise of EITI. In addition, it will clearly define the advantages of beneficial ownership and transparency and assist companies to fully comply with the requirements. Throughout the course of the programme, it is expected that participating countries will make progress towards better availability of data, which will be shared with stakeholders. Ultimately, it hopes to catalyse the use of this data by governments, civil society actors, including journalists, and companies to improve governance of natural resources.
Beyond the core group of countries taking part in the initiative, Opening Extractives wants to help other countries, in particular those that are already involved with EITI, through a series of regional and global peer learning events.
Why companies should care
For mining firms, weeding out corruption is a way to avoid reputational damage to help preserve their social licence to operate, which is becoming harder to gain and maintain. Front companies can see miners become embroiled with unscrupulous government officials who have disguised their identity in this relatively straightforward way. Simply not going ahead with a deal that involves working or partnering with a company whose ultimate owners are unknown would mitigate this illicit profiteering.
As Burgis, on the release of his book, previously told MINE Magazine, the problem is this can often get forgotten in the push and excitement of ‘getting the deal done’. He added that although there are a lot of genuine efforts on due diligence, it’s often approached as ‘manufacturing liability.’ A transparent national register of beneficial ownership can reduce these risks and make due diligence less complex, especially for major miners like Rio Tinto, which can have around 7, 000 suppliers.
Russell-Prywata believes the company commitments will see firms use the data more readily when considering suppliers as part of a risk-based approach, as well as help them to understand that big suppliers might have political connections.
“Companies should and at least try and arrive at a better understanding of who their suppliers are based on beneficial ownership information,” she adds. “The more transparency becomes established as a global norm, the smaller the space gets where hiding true beneficiaries is an accepted norm in business. That is really the key to moving beyond good progress in individual jurisdictions towards it being an accepted business norm.”