Africa: Rich in Re­sources and Even Richer in Cor­rup­tion

Trillions - - In this Issue -

In Jan­uary, the Nige­rian Fed­eral High Court seized con­trol of Oil Prospect­ing Li­cence (OPL) 245 for the gov­ern­ment. It was a long-over­due pay­back af­ter two oil gi­ants had al­legedly paid $1.2 bil­lion in bribes to the coun­try’s for­mer petroleum min­is­ter long be­fore.

How­ever col­or­ful this story and its de­tails (to be de­scribed later) are, un­for­tu­nately this is just the tip of an in­cred­i­ble ice­berg of cor­rup­tion through­out the con­ti­nent. It in­volves an es­ti­mated $25 bil­lion+ a year in il­le­gal money flows leav­ing the coun­try, an in­ge­nious con­cept called “trade mis­pric­ing” amount­ing to $38.4 bil­lion a year and easy ac­cess to il­le­gal tax havens as far away as the Bri­tish Vir­gin Is­lands.

The data above come from av­er­ages es­ti­mated be­tween 2008 and 2010 and three re­ports from the OECD, the 2012 Global Fi­nan­cial In­tegrity Il­licit Fi­nan­cial Flows from De­vel­op­ing Coun­tries Re­port 20012010 and the World Global Eco­nomic Prospects Re­port from Jan­uary 2013.

Il­le­gal money flows con­sti­tute ev­ery­thing from il­le­gal kick­backs (of­ten made to in­ter­nal gov­ern­ment of­fi­cials in re­turn for help­ing close an in­ter­na­tional busi­ness deal) that, in turn, head di­rectly out of the coun­try for pro­tec­tion pur­poses to shield them from fu­ture seizure all the way to over­charg­ing and over­pric­ing of ser­vices at ev­ery step of the re­source pro­cess­ing val­ues chains.

“Trade mis­pric­ing” is the fine art of mis­pric­ing some- thing so the ac­tual value is hid­den and the dif­fer­ence is eas­ily pock­eted and then, like other il­le­gal gains, sent off­shore.

With $100 mil­lion worth of le­git­i­mate oil ex­ports flow­ing out of Nige­ria to else­where in the world ev­ery year, plus $70 bil­lion of oil ex­ports shipped from its very suc­cess­ful south­ern neigh­bor An­gola, one can see what could hap­pen just from those op­por­tu­ni­ties alone.

Be­sides oil, the African con­ti­nent is also richly en­dowed with many other much-in-de­mand re­sources, in­clud­ing:

77% of the world’s plat­inum: mostly from South Africa

53% of the world’s cobalt: Demo­cratic Repub­lic of the Congo

46% of the world’s chromite: South Africa

22% of the world’s di­a­monds: Botswana

21% of the world’s in­dus­trial di­a­monds: Demo­cratic Repub­lic of the Congo

21% of the world’s man­ganese: South Africa

16% of the world’s ura­nium: Namibia and Niger

9% of the world’s gold: mostly from Ghana, Tan­za­nia, Mali, Guinea and Burk­ina Faso

8% of the world’s baux­ite: Ghana

Other coun­tries have launched projects in the past few years that, while not as fully up and run­ning as the above har­vest­ing en­ter­prises, also have strong po­ten­tial. Ex­am­ples, in­clud­ing how much money each coun­try earned from those re­sources in 2011, are:

Gas and coal, which earned Mozam­bique $3.5 bil­lion

Gas, gold and nickel, which earned Tan­za­nia $3.5 bil­lion

Iron ore and petroleum, which earned Liberia $1.7 bil­lion

Iron ore, which earned Guinea $1.6 bil­lion

The Ju­bilee Oil Field, which earned Ghana $850 mil­lion

With all of this money at stake – and es­pe­cially money com­ing mostly from raw re­source gath­er­ing en­ter­prises (which are harder to count as pre­cisely, like, for ex­am­ple, autos in pro­duc­tion) – it is no won­der that the funds of­ten go over­seas.

In ad­di­tion, the gov­ern­ments of these na­tions are also rid­dled with cor­rup­tion. It is no co­in­ci­dence that African na­tions’ own fi­nan­cial bud­gets – the place where one could search for funds head­ing in the wrong di­rec­tion – are some of the least trans­par­ent in the en­tire world. With few ex­cep­tions, African na­tions gen­er­ally ap­pear in the bot­tom 25% of all coun­try rank­ings for the open­ness of their bud­gets.

An­other as­pect of the cor­rup­tion in­volves the ini­tial pur­chase of rights to each of the var­i­ous raw ma­te­ri­als of­ten in­volv­ing be­hind-the-scenes trades and bribes that are gen­er­ally vir­tu­ally im­pos­si­ble to trace. Even if the ini­tial prices of the ac­tual raw ma­te­rial ex­plo­ration rights are dis­closed ac­cu­rately, the ne­go­ti­a­tions be­hind the scenes with gov­ern­ment of­fi­cials and bor­der trade rep­re­sen­ta­tives will likely not be. And those num­bers are of­ten stag­ger­ing to be­hold, es­pe­cially as they be­come more vis­i­ble with var­i­ous leaks.

The Siren Song of Off­shore Tax Havens

One of these leaks was the re­cent un­cov­er­ing of the Panama Pa­pers, which showed nu­mer­ous for­eign of­fi­cials with off­shore bank ac­counts. Even if the source of the money that flowed into those ac­counts might not be clear enough to file charges against the of­fi­cials, the amount of money – in the tril­lions of dol­lars world­wide – makes it clear that some­thing in­ap­pro­pri­ate had to be go­ing on.

The top tax havens in the world, per the Panama Pa­pers list, in or­der from high­est to low­est us­age, with the num­ber of tax havens listed be­side each lo­cale, are:

Bri­tish Vir­gin Is­lands: 113,648

Panama: 48,360

Ba­hamas: 15,915

Sey­chelles: 15,182

Niue: 9,611

Samoa: 5,307

An­guilla: 3,253

Nevada: 1,260

Hong Kong: 452

United King­dom: 148

The Bri­tish Vir­gin Is­lands tops the ranks for the num­ber of tax havens, with an es­ti­mate go­ing back to as early as 2000 that some 41% of the world’s off­shore com­pa­nies were formed there. And of the 823,000 com­pa­nies reg­is­tered there as off­shore en­ti­ties as of 2008, over 113,000 were what are gen­er­ally called tax havens.

The rea­son why the Bri­tish Vir­gin Is­lands has be­come such a mag­net for such com­pa­nies is quite ob­vi­ous when one stud­ies the lo­cal tax reg­u­la­tions: It charges zero taxes to off­shore com­pa­nies who do no busi­ness in the re­gion. That in­cludes prof­its, in­ter­est, div­i­dends, cor­po­rate tax, cap­i­tal gains tax, es­tate tax, with­hold­ing tax and in­come taxes. All a com­pany reg­is­tered there with no busi­ness in the re­gion has to do is pay an an­nual fee to the gov­ern­ment.

The off­shore bank ac­counts there are also tax-free, with tight pro­tec­tions on pri­vacy and con­fi­den­tial­ity. Only the ac­count holder’s per­mis­sion or a court or­der can re­veal what is held in those ac­counts.

Other tax havens work in a some­what sim­i­lar man­ner but gen­er­ally with­out the full ben­e­fits pro­vided by the Bri­tish Vir­gin Is­lands en­ti­ties.

The Demo­cratic Repub­lic of the Congo Con­nec­tion

As to the link­age to Africa and to give a sense of how much can be made there il­le­gally, one ex­am­ple that sur­faced re­cently in­volved a de­tailed in­ves­ti­ga­tion in cor­rup­tion in­volv­ing five ma­jor sales of min­ing rights.

The in­ves­ti­ga­tion, con­ducted in 2013 and di­rected by the Africa Progress Panel and chaired by Kofi An­nan and Global Wit­ness, re­vealed sev­eral in­ter­est­ing facts. One was fairly easy to un­cover – that the es­ti­mated gap be­tween the to­tal mar­ket value of all five min­ing rights con­ces­sions and what was paid as of the of­fi­cial records was at least $1.36 bil­lion.

Ac­cord­ing to the re­sults of the re­port, the money was hid­den rel­a­tively eas­ily through the use of off­shore shell cor­po­ra­tions, com­mer­cial se­crecy on the part of the min­ing com­pa­nies them­selves, lim­ited re­quire­ments for re­port­ing by state com­pa­nies and gov­ern­ment agen­cies to the DRC’S leg­is­la­tors and the com­plex in­ter­lock­ing na­ture of the off­shore com­pa­nies where the money was laun­dered.

As the study in­di­cated, the state-owned min­ing com­pa­nies them­selves cre­ated a lot of the prob­lem. They were al­ready poorly man­aged, and most of their in­ter­nal op­er­a­tions were hid­den deeply from view. Gov­ern­ment au­dit­ing pro­ce­dures on the com­pa­nies were also mostly nonex­is­tent; the leg­is­la­ture had al­most no fi­nan­cial over­sight ca­pa­bil­i­ties over such com­pa­nies, and many in­volved ac­tu­ally showed open con­tempt and dis­re­gard for trans­parency and ac­count­abil­ity. That con­tempt and dis­re­gard is not sur­pris­ing con­sid­er­ing the amount of money that was be­ing stolen.

With all of that in place, an­other se­ri­ous is­sue that emerges – but not proven specif­i­cally in this case – is the ease by which po­lit­i­cal lead­ers and pub­lic of­fi­cials can make their own se­cret deals with for­eign in­vestors.

The Nige­rian Mal­abu Oil Scam

The DRC is of course only one of many cor­rup­tion cases like this.

The Nige­rian case that came up in Jan­uary 2017 and was men­tioned at the be­gin­ning of this ar­ti­cle is yet an­other ex­am­ple of where too much se­crecy, lax con­trols, easy ac­cess to places to shel­ter il­le­gal funds and a com­bi­na­tion of cor­po­rate and per­sonal greed are suck­ing the prof­its out of the con­ti­nent.

What hap­pened is that a highly val­ued oil drilling block con­trolled by the Gov­ern­ment of Nige­ria – the one cov­ered by Li­cence 245 – was go­ing out for pub­lic bid­ding for ex­plo­ration and oil rights about six years ago. The two even­tual win­ners of the bid were Royal Dutch Shell and Eni, the petroleum com­pany formerly known as Agip of Italy.

On the books, Nige­ria’s state oil com­pany re­ceived $210 mil­lion from those two com­pa­nies for those very valu­able oil rights.

On the side, and de­cid­edly not a pub­lic part of the trans­ac­tion, Dan Etete, the coun­try’s for­mer petroleum min­is­ter, and his cronies pock­eted a sep­a­rate pay­ment of $1.2 bil­lion from Shell and Eni in re­turn for their help in mak­ing it all pos­si­ble.

It was a bribe of the high­est pro­por­tions. And as a fur­ther in­di­ca­tion of how brazen the whole case is, the oil com­pa­nies paid that $1.2 bil­lion bribe into a Nige­rian gov­ern­ment es­crow ac­count at Jpmor­gan Chase’s Lon­don branch. The funds were then dis­persed cour­tesy of an au­tho­riza­tion from for­mer Nige­rian jus­tice min­is­ter Mo­hammed Bello Adoke.

Nige­ria’s Eco­nomic and Fi­nan­cial Crimes Com­mis­sion, ac­cord­ing to a pe­ti­tion filed with the Nige­rian Fed­eral High Court, is pre­par­ing charges that cover all of this, along with al­le­ga­tions of “con­spir­acy, bribery, of­fi­cial cor­rup­tion and money laun­der­ing” against Shell and Eni. Back in De­cem­ber, the com­mis­sion pre­vi­ously filed charges against the for­mer min­is­ters Etete and Adoke, who co­or­di­nated the deal along with Aliyu Abubakar, a lo­cal busi­ness­man.

Those ear­lier charges lay out an in­tri­cate plot in which Gen­eral Sani Abacha, the for­mer mil­i­tary dic­ta­tor of Nige­ria, and Etete to­gether formed Mal­abu Oil and Gas Ltd. and then – with­out any le­gal ba­sis for it – as­signed OPL 245 to them­selves long ago. Abacha died in 1998 of un­known causes, and fol­low­ing that, the share­hold­ing for Mal­abu Oil and Gas Ltd. ended up creat­ing a sec­ond fraud by di­vest­ing Abacha’s son Mo­hammed from the cor­po­ra­tion.

Though the cur­rent charges in this sit­u­a­tion have been ap­plauded for their bold­ness and ap­par­ent in­tent, those watch­ing the sit­u­a­tion care­fully are re­mind­ing ev­ery­one that Nige­ria at­tempted to take back OPL 245 16 years ago, when it was un­der the lead­er­ship of civil­ian Oluse­gun Obasanjo in 2001. Then, Mal­abu Oil sued and an out-of-court set­tle­ment, likely also fully greased with bribes, re­turned the OPL to its orig­i­nal il­le­gal own­ers.

Most feel that this sit­u­a­tion – like many oth­ers within the cor­rupt cul­ture of the African gov­ern­ments and economies – is far from con­cluded. Other dirty se­crets and pro­tected il­le­gal funds will likely be re­vealed as more be­comes known from all par­ties in­volved.

As for the African con­ti­nent it­self, much more must be done to tighten in­ter­nal con­trols, in­crease over­sight and open the books in all as­pects of pub­lic trans­ac­tions. It may also take task forces like the ones led by the Africa Progress Panel and Global Wit­ness to pen­e­trate the dark veil that pro­tects other such ev­ery­day cor­rupt trans­ac­tions from see­ing the light of day.

Anti-cor­rup­tion Bill­board in Uganda. Photo by Fu­ture­at­

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