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‘Global Epidemic’ of Financial Scandals for Oil Producers


The world is facing an “epidemic” of financial scandals in the oil and mining industries, says London-based NGO Global Witness, citing the billions of missing dollars from resource-rich countries such as Kazakhstan.
April 01, 2004 [ 12:36 ]
By Clare Nuttall, TCA staff writer, TCA

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The world is facing an “epidemic” of financial scandals in the oil and mining industries, says London-based NGO Global Witness, citing the billions of missing dollars from resource-rich countries such as Kazakhstan. The siphoning off of much-needed revenues could have been prevented by effective transparency laws, but those currently under consideration may not be strong enough to halt this process.

Global Witness’ newly published report examines the disappearance of revenues from oil and other natural resources in five of the worst affected countries: Angola, Congo Brazzaville, Equatorial Guinea, Kazakhstan and the Pacific island-state of Nauru.

In each of these countries, says the ‘Time for Transparency’ report, “secrecy about revenues paid to governments by oil and mining companies has abetted the disappearance of vast sums from the public purse. The result is entrenched poverty and instability, which can lead to failing states and war.”

The link between oil and corruption – creating oil-rich states with a lower standard of living and human development than their less well endowed neighbors – has been noted for some time, and several initiatives have been put forward to force oil companies and governments to disclose their financial dealings. So far, however, these initiatives lack force.

The EITI initiative

“The only serious international effort on revenue transparency, led by the United Kingdom, has been so watered down by intransigent oil companies that it is unlikely to solve this global problem,” says Global Witness in a press statement.

The initiative in question is EITI, the Extractive Industries Transparency Initiative, launched by British Prime Minister Tony Blair at the Johannesburg sustainable development summit in 2002. Inspired by billionaire philanthropist George Soros’s ‘Publish What You Pay’ initiative which aimed to persuade oil and mining companies to be more transparent, EITI approaches the issue from another direction by urging national governments to introduce new transparency laws.

The decision to target governments rather than companies follows assertions from companies that they would be happy to follow rules – provided these existed. Yet without formal rules, companies attempting to up transparency fear they will find themselves at a competitive disadvantage, as UK company BP discovered in Angola.

The EITI initiative attracted support from NGOs, oil companies and the financial industry. However, NGOs such as Global Witness and Transparency International cite two central flaws that they believe will prevent it from having any real effect: the voluntary rather than mandatory approach, and the potential for abuse of the ’sanctity of contracts’ provisions.

While acknowledging that this is a legally sensitive area, Transparency International points out that the extreme secrecy clauses in many resource agreements “could be used to block complete disclosure and lead to both companies and governments claiming to have complied with the principles of the initiative whilst actually disclosing only small proportions of total revenue,” said Transparency International.

Secrecy clauses were an issue that weighed heavy with oil majors attending the EITI Conference in June 2003, and spokespersons for companies such as Chevron Texaco also argued against a mandatory approach.

However, Transparency International believes that without a compulsory approach to governments as well as companies, little will be achieved. “We are concerned that in countries where the diversion of revenues into personal wealth of elites is seen as a perquisite of power, and where there is consequently extreme poverty among the general population, the necessary commitment to openness will simply not materialize,” said TI. “As a consequence we find it difficult to believe that anything other than a mandatory approach can succeed except in a minority of situations, and call for this not to be excluded as a future option.”

With this in mind, Global Witness seeks an alternative solution, calling for “companies to be made to disclose their payments via laws, stock market rules and accounting standards. This would cost little, protect companies’ reputations and create fairer competition.” It also advises that transparency about natural resource revenues should be made a condition for financial aid.

Record of corruption

Meanwhile, the situation continues in many parts of the world. In Kazakhstan, the report details the payments made by oil companies to middleman James Giffen (now indicted in the US’s biggest ever foreign corruption investigation), US $78 million of which were allegedly paid into overseas bank accounts held by Kazakh President Nursultan Nazarbayev. “Another US $1 billion of Kazakh oil money has also been uncovered offshore and out-of-sight under Nazarabyev’s direct control in a secret fund in Switzerland,” says the Global Witness report.

In the four other countries highlighted in the report, Global Witness notes that:

Angola’s President Do Santos holds large sums of money in secret overseas bank accounts. One quarter of Angola’s annual oil revenues are “unaccounted for”.

Scandal has erupted in Equatorial Guinea over payments by oil companies into an account with the US’s Riggs Bank, which also handled the purchase of luxury homes for President Obiang and his brother. Oil revenues are a “state secret” in Equatorial Guinea.

In Congo Brazzaville, Global Witness reports on the activities of the disgraced French state oil company Elf Aquitaine (now Total), which it says “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.” Total has just signed an opaque new oil deal with the Congo Brazzaville government.

Finally, the Pacific island of Nauru has been transformed from the country with the world’s highest per capita income to a “bankrupt wasteland” as phosphate revenues have been squandered.

“These scandals would not have happened if companies had been obliged to publish their payments to governments, and governments to publish their earnings,” said Global Witness campaigner Gavin Haymen in a press statement. “But leading countries and companies are doing nothing, and revenues that should be used to reduce poverty go on being misused and wasted.”

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