Extractive industries value chain and SAI’s response to
1. Extractive industries
value chain and
SAI’s response to
facilitate sustainable
growth
Risk identification along
the value chain
Kimuli Anthony - OAGU
2. Illicit Financial Flows (IFFs) from
Developing Countries
10-year period (2004-2013), DCs lost US$7.8 tn
5. Other statistics
• IFFs have exceeded FDI & ODA—
combined—for 7 of the 10 years of this
study.
• for every dollar of ODA that entered the
developing world in 2012, ten dollars
flowed out illicitly
• of the USD 1.1tn IFFs leaving DCs
annually 83.5% is caused by Misinvoicing
(Import Over-Invoicing Export + Under-
Invoicing)
6. EI Value Chain - Risks
• Non Existing Laws & Regulations
• Un-updated and alignment laws,
regulations & contracts (40 yrs)
• Unclear and conflicting roles &
Responsibilities – NOC, SAI, GA,
IOC
Legal
Framework
7. EI Value Chain Risks
•Acquisition, processing and storage
of data not controlled by government
•Update of data
•Sale of data not transparent
•EIAs not developed, comprehensive
risks identified, constantly updated
and reported on regularly
•Surveys may not be carried out in an
efficient manner – (cost benefit)
Seismic
Surveys & Data
Management
8. EI Value Chain - Risks
• Tenders or contracts awarded through Non
competitive processes, biddable terms not
clear,
• Awarding of license to unsuitable bidder/s
speculation.
• Poorly negotiated agreements- progressive
vs regressive, non transparent regimes,
incentives awarded not fair, unbalanced
contract terms.
• Sale or Transfer of ownership of assets – eg
Congo case, Companies reg. in tax havens?
AWARD OF
CONTRACTS
& LICENSES
9. EI Value Chain - Risks
• An open pit at the Tenke Fungurume mine. Freeport-
McMoRan Inc.
• The largest copper mine in the Democratic
Republic of Congo ( Photo by Reuters)
AWARD OF
CONTRACTS
& LICENSES
10. EI Value Chain - Risks
AWARD OF
CONTRACTS
& LICENSES
Freeport McMoran
TF -
Holdings
Tenke Fungurume
Mine
Govt
70%
80%
20%
CMOC
USD2.65bn
11. EI Value Chain - Risks
• Limited capacity of Government to monitor and
enforce compliance, duplication of roles, gaps
• Lack of International Standards of technical
procurement, accounting, environmental mgt
• Inaccurate reporting of production and export
volumes and quantities, valuation of minerals
and hydrocarbons.
• diversion of production volumes
• Health & Safety standards not applied (EIA not
followed)
• Performance bonds & Penalties not enforced
MONITORING
OF
OPERATIONS
13. EI Value Chain - Risks
• Export Under-invoicing and or import over-
invoicing. Contributes over 83% of IFF (GFI
Dec 2015)
• Cost oil & transfer pricing related risks,
underlifts/overlifts
• Tax evasion- 10 largest EI cos control over
6000 subsidiaries (Oxfam) and 1/3 were
located in tax havens and or secrecy
jurisdictions, DTA treaties
• Price controls create hoarding & stock outs
• unusual reliance on middlemen (prices differ
from market prices)
COLLECTION
OF TAXES &
ROYALTIES
14. EI Value Chain – Risks
• In the past two decades, Switzerland has
become the world’s largest commodity hub
(also secrecy jurisdiction)
• Merchanting or Transit trade (receipts x15 in
10ys btn 2001-11
Collection
of
Revenues
(Taxes and
royalty)
Merchant
Producer Buyer
Goods
Source: Estimating Illicit Flows of Capital via Trade
Mispricing: A Forensic Analysis of Data on Switzerland Jan
2014
15. EI Value Chain - Risks
• According to an Audit report by Grant Thorton &
others (2010) a Swiss based trader on its Mopani
mine business in Zambia- doubtful inflated
expenses/costs, doubtful revenues (declared prices
are not consistent with market pricing btn unrelated
parties)
• Zambia’s production grew and the world price of
copper rose with the commodity boom of the
2000s, Switzerland came to account for more than
half of Zambia’s exports (from a base of 0).
COLLECTION
OF TAXES &
ROYALTIES
17. EI Value Chain - Risks
• Lack of a separate EI Fund
• Temptation to overspend, or borrow
(mortgage future revenues) in
anticipation, MTEF not followed
• Little transparency on allocation of funds
leading to social and economic
inequalities
• Lack of investment policies
• Low capacity to absorb funds at local
communities
REVENUE
MANAGEMENT
& ALLOCATION
18. EI Value Chain - Risks
• Limited diversification of economy
• Local Content not integrated
• Gender (world bank)
• Environmental issues –
Decommissioning costs not provided for,
eg USA 161,000 abandoned mines -
waste & pollution mgt
• Limited use of renewables
Implementati
on of
Sustainable
Development
Policies And
Projects
IFFs are illegal movements of money or capital from one country to another. GFI classifies such flows as illicit if the funds crossing borders are illegally earned, transferred, and/or utilized.5 If the flow breaks a law at any point, it is illicit
50 countries out of the 149 (1/3) contribute almost 92% of IFFs -7.22tn. World bank also confirms that more than ½ of IFF leaving Africa between 2000 -2010 came out of oil and minerals
China -4th largest producer
Russia – 2nd largest
Mexico – 10th
Brazil – 9th
India – 20th
Malaysia -
TZ -36, USA 1872 reviewed 1
State company should separate legal from commercial aspects
Income tax laws aligned with petroleum laws
SAI audit
Fair process of licenses for reconnaissance
maintenance of an updated and reliable geological information
infrastructure, including regional assessment of oil and mineral resources, is also
important for (1) managing the access to resources, (2) reducing land use
conflicts, (3) providing a better understanding of the country’s oil and mining
potential, (4) helping define sector policies, and (5) facilitating bidding
Cost benefit – 2D vs 3D, 4D
will assist in establishing future award rounds, setting of taxation rate and prediction of future revenue from petroleum and gas production
It may not be conducive to do competitive but even open tenders should be transaparent
mining industry it is usually 1st come 1st Serve
Biddable terms =Signature bonuses, work program, royalty, profit share.
normally licensing regulations or guidelines define the
minimum capability that companies must demonstrate to be granted these rights
Unfavourable terms – Risk sharing (even Acts of God transferred to Govts) Contractual and fiscal terms should and in most cases do reflect market conditions, government policy, and geological and country risks
An equitable fiscal regime is critical to achieving contract stability and fair rewards
Sharing of revenues
Zambia -2days, Uganda -years
Unexplained extensions
It may not be conducive to do competitive but even open tenders should be transaparent
mining industry it is usually 1st come 1st Serve
Biddable terms =Signature bonuses, work program, royalty, profit share.
normally licensing regulations or guidelines define the
minimum capability that companies must demonstrate to be granted these rights
Unfavourable terms – Risk sharing (even Acts of God transferred to Govts) Contractual and fiscal terms should and in most cases do reflect market conditions, government policy, and geological and country risks
An equitable fiscal regime is critical to achieving contract stability and fair rewards
Sharing of revenues
Zambia -2days, Uganda -years
Unexplained extensions
TF Holdings – Beramuda Holding company
aggressive “national interest” local procurement rhetoric
Lack of conducts of testing and examination of measuring equipment
65% of multinational companies financial flows going out of developing countries is a result of evasion
Subsidiaries
List of countries listed as tax havens
DTA – Netherlands DTA no WHT on Dividends
Panama papers 44/54
Cost oil budgets vs actual, approvals, arms length pricinples for both sales or purchases to related parties, budgets vs actual, cut offs.
Zambia billions of dollars in revenue were lost due to copper being sold on paper to a subsidiary of Glencore registered in the low-tax jurisdiction of Switzerland. May 2016 Kenya has 41 blocks licensed to 35 companies but owned by 27 separate Holding companies but 17 own subsidiary in tax haven.
Having concluded tax treaties with 91 countries, routing money
through a subsidiary in the Netherlands allows companies to minimize
withholding taxes on dividends, interest and royalties.
Under this treaty, if a Dutch company invests in
Mongolia it is entitled to pay dividends back to the Netherlands free of the
normal 20% Mongolian withholding tax.
Estimating Illicit Flows of Capital via Trade Mispricing: A Forensic Analysis of Data
the average prices for commodity exports from developing countries to Switzerland are lower than those to other jurisdictions; and that
(ii) Switzerland declares higher (re-)export prices for those commodities than do other jurisdictions.
This pattern implies a potential capital loss for commodity exporting developing countries, and we provide a range of estimates of that loss – each of which suggests the scale is substantial (the most conservative is around $8 billion a year)
on Switzerland, 2014.
“Transit trade” -‘contracts may be concluded, deliveries scheduled and ships chartered from Swiss offices,
but the actual goods … never touch Swiss soil’ without the goods having been transformed between purchase
and resale.
Today, Swiss companies conduct 35 per cent of
global oil trading, selling, for example, up to 50 per cent of Kazakh oil and 75 per cent of
Russian oil (Berne Declaration, 2011).
65% of multinational companies financial flows going out of developing countries is a result of evasion
Subsidiaries
List of countries listed as tax havens
DTA – Netherlands DTA no WHT on Dividends
Panama papers 44/54
Cost oil budgets vs actual, approvals, arms length pricinples for both sales or purchases to related parties.
Zambia billions of dollars in revenue were lost due to copper being sold on paper to a subsidiary of Glencore registered in the low-tax jurisdiction of Switzerland. May 2016 Kenya has 41 blocks licensed to 35 companies but owned by 27 separate Holding companies but 17 own subsidiary in tax haven.
Having concluded tax treaties with 91 countries, routing money
through a subsidiary in the Netherlands allows companies to minimize
withholding taxes on dividends, interest and royalties.
Under this treaty, if a Dutch company invests in
Mongolia it is entitled to pay dividends back to the Netherlands free of the
normal 20% Mongolian withholding tax.
65% of multinational companies financial flows going out of developing countries is a result of evasion
Subsidiaries
List of countries listed as tax havens
DTA – Netherlands DTA no WHT on Dividends
Panama papers 44/54
Cost oil budgets vs actual, approvals, arms length pricinples for both sales or purchases to related parties.
Zambia billions of dollars in revenue were lost due to copper being sold on paper to a subsidiary of Glencore registered in the low-tax jurisdiction of Switzerland. May 2016 Kenya has 41 blocks licensed to 35 companies but owned by 27 separate Holding companies but 17 own subsidiary in tax haven.
Having concluded tax treaties with 91 countries, routing money
through a subsidiary in the Netherlands allows companies to minimize
withholding taxes on dividends, interest and royalties.
Under this treaty, if a Dutch company invests in
Mongolia it is entitled to pay dividends back to the Netherlands free of the
normal 20% Mongolian withholding tax.
Decisions need to be made on how much revenue should be used for
current and capital spending priorities and debt reduction, and how much is to be
set aside for revenue stabilization, expenditure smoothing, saving for future
generations, or other specific needs.
Benefits of Including Women's Perspectives in Extractive Industries” World bank
