Global Witness Limited (London)
25 March 2004
document
Revenue Transparency: A Priority for Good Governance and Energy Security
Across the globe, revenues from oil, gas and mining that should be funding sustainable economic development have been misappropriated and mismanaged. This Global Witness report considers five major examples of this problem: Kazakhstan, Congo Brazzaville, Angola, Equatorial Guinea and Nauru.
In these countries, governments do not provide even basic information about their revenues from natural resources. Nor do oil, mining and gas companies publish any information about payments made to governments. Huge amounts of money are therefore not subject to any oversight and crooked elites can extract all sorts of 'facilitation payments’ from firms that would probably prefer not to pay bribes. Investigations also reveal that some companies have played a willing role in facilitating off-the-books payments, misappropriation of state assets, and other nefarious activities such as arms shipments, as part of an anti-competitive, under-the-table method of winning business with unaccountable regimes. Ordinary citizens, who often own a country’s resources under its constitution, are thus left without the information to call their governments to account over the management of their revenues. The end result is a litany of corruption, social decay, increased poverty, reinforcement of authoritarian government and political unrest, which can ultimately lead to state failure and the spread of instability across regions.
In Kazakhstan, the largest-ever foreign corruption investigation in US legal history has uncovered a major international corruption scandal that 'defrauded the Government of Kazakhstan of funds to which it was entitled from oil transactions and defrauded the people of Kazakhstan of the right to the honest services of their elected and appointed officials’. The scheme was based around Kazakh President Nursultan Nazarbayev and Oil Minister Nurlan Balgimbayev demanding that international oil companies such as Chevron (now Chevron-Texaco) and Mobil (now ExxonMobil) pay a series of unusual fees to middleman James Giffen on behalf of the Republic of Kazakhstan. This arrangement, the indictment alleges, helped Giffen to skim money from the deals and send some US$78 million in kickbacks to President Nazarbayev and others through dozens of overseas bank accounts in Switzerland, Liechtenstein and the British Virgin Islands. Only Giffen is charged in this indictment. Another US$1 billion of Kazakh oil money has also been uncovered offshore and out-of-sight under Nazarbayev’s direct control in a secret fund in Switzerland. Ironically, the only reason that such information has emerged is because President Nazarbayev inadvertently revealed the true state of affairs whilst trying to discredit a presidential rival.
Congo Brazzaville is one of the petro-states most closely associated with the legacy of influence peddling and dirty deals in Africa by the now-notorious French state oil company Elf Aquitaine (now Total). Elf treated Congo as its colony, buying off the ruling elite and helping it to mortgage the country’s future oil income in exchange for expensive loans. The company even financed both sides of the civil war, as it also did in Angola.
Although former senior Elf officials have been jailed in France for 'misuse of company assets’, their legacy of opacity and hair-raising accounting endures. Despite huge existing debts and a supposed programme of cooperation with the international community to restructure Congo’s finances, the government has entered into ever more arcane and tortuous deals to avoid financial scrutiny from the international community and its own citizens. Indeed, the national oil company Société Nationale des Pétroles du Congo makes a multi-million dollar profit but, according to the IMF, does not pay a single penny of this money into the government’s coffers.
In Angola, new evidence from IMF documents and elsewhere confirm previous allegations made by Global Witness that over US$1 billion per year of the country’s oil revenues - about a quarter of the state’s yearly income - has gone unaccounted for since 1996. Meanwhile, one in four of Angola’s children die before the age of five and one million internally-displaced people remain dependent on international food aid. This report highlights the latest revelations from the 'Angolagate’ scandal, in which political and business elites in France, Angola and elsewhere exploited the country’s civil war to siphon off oil revenues. Most recently, evidence has emerged in a Swiss investigation of millions of dollars being paid to President Dos Santos himself. The government continues to seek oil-backed loans at high rates of interest which are financed through opaque and unaccountable offshore structures. A major concern exists that Angola’s elite will now simply switch from wartime looting of state assets to profiteering from its reconstruction.
In Equatorial Guinea, oil companies appear keen to do business with the brutal regime of President Obiang Nguema. The country’s government has been tarnished by allegations of corruption, political violence, human rights abuses, and narcotics trafficking. Although the country’s oil boom has resulted in a dramatic increase in GDP, its living standards remain among the worst in Africa. This may be because much of the country’s oil money stays abroad: journalists have recently uncovered evidence that major US oil companies are paying revenues directly into an account under the president’s control at Riggs Bank in downtown Washington DC.
Riggs Bank has also managed the purchase of million-dollar mansions for Obiang and his family. The line between state revenues and the president’s personal finances seems unclear. The government maintains that it is completely open and transparent about its oil revenues but, so far, the only way that any information has entered the public domain is when it has been dragged there by the international media.
Finally, the opaque and unaccountable management of phosphate reserves has transformed tiny Nauru from the richest nation in the world (per capita) to a bankrupt wasteland. Phosphate mining took place in a country synonymous with secret banking and money-laundering, where over US$80 billion was laundered during Russia’s economic transition in the 1990s. In this tax-free, reporting-free environment, the island’s phosphate revenues were squandered by irresponsible officials, frivolous speculation, and in the words of one observer, 'a steady stream of carpetbaggers and outright crooks’. The money has now dried up. Bankrupt, in social and political turmoil, and facing possible extinction from rising seawaters, Nauru is a sinking ship.
The major finding of this report is that none of the revenue embezzlement scandals discussed herein could have happened if multinational companies had been required to disclose publicly their basic payments for resources to the state.
More generally, transparency in the management of revenues from natural resources is fundamental for successful development and poverty reduction. Oil, mining and gas are critically important economic sectors in about 60 developing or transition countries. Amongst the 3.5 billion people in those countries, some 1.5 billion live on less than US$2 per day and constitute over two-thirds of the world’s poorest people. Twelve of the world’s 25 most mineral-dependent states and six of the world’s most oil-dependent states are classified by the World Bank as Highly Indebted Poor Countries with amongst the world’s worst Human Development Indicators.
The status quo in the resource extraction business is a lose-lose situation for all parties:
- Businesses see their legitimate revenues paid to governments being misappropriated and squandered, which leads to social divisiveness and an unstable business environment. Investors managing some US$6.9 trillion of funds recently highlighted the significant business risk represented by lack of transparency, stating that: 'legitimate, but undisclosed, payments to governments may be accused of contributing to the conditions under which corruption can thrive’. Failing to disclose net payments not only lays companies open to 'accusations of complicity in corrupt behaviour’; it also undermines their social 'license to operate’, making them 'vulnerable to local conflict, and insecurity, and possibly compromising their long-term commercial prospects in these markets’. A recent example of these problems is the continuing unrest in Nigeria’s oil region which has led to significant interruptions in oil output.
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