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How to stifle corruption in the mining sector

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Johan van der Walt is senior managing director, forensic and litigation at FTI Consulting. Helena Potgieter is managing director, forensic and litigation at FTI Consulting.

The mining industry remains vulnerable to corruption, particularly in Africa where a lack of legal frameworks and government capacity to enforce regulations governing the sector exacerbates the opportunity for rent-seeking by corrupt individuals. But it can be controlled.

“Rent-seeking”, often referred to interchangeably with corruption, is the effort to acquire access to, or control over, opportunities for private gain. In the mining sector in Africa, opportunities for rent-seeking remain rife as officials from government and private companies seek to take advantage of a policy environment with vague or overly restrictive laws, high tax and customs rates, price and foreign exchange controls.

Corruption in the mining sector has negative consequences for communities and the environment, as well as the economic well-being of entire countries. When companies take short cuts and officials turn a blind eye to violations of the law, the effects, particularly in extractive industries such as mining, can be disastrous and far-reaching. 

From the perspective of investors, corruption limits the ability of mining houses to run their operations optimally. For governments, high levels of corruption are associated with lower levels of investment and economic growth, natural resource exploitation and political instability. And for affected communities, rent-extraction prevents access to fair benefits from mining operations and leads to increased health and environmental risks and ultimately social disruption.

Along the mining value chain, it is often where government, company and community officials interact that opportunities for corruption and rent-seeking by individuals arises. It is at these key “touchpoints” that malfeasance should be addressed.

At the outset: mining licences

If the process by which governments award mining rights, contracts, permits and licences lacks transparency and accountability, this creates a situation where there is motivation and opportunity for lower-level officials to extract rents and for companies to participate in corrupt activities, with little fear of recrimination. The concentration of decision-making power in the hands of a few high-ranking officials creates an incentive for corruption and drives a culture of patronage and corruption. 

To root out corrupt activities, the licensing process needs to address internal capacity constraints, and use technology-based accounting and auditing systems to improve technical capabilities at relevant mining authorities. This addresses issues such as the long delays between the application for mining rights and awarding of licences, and improves consultation with affected communities and accountability of senior officials. 

The construction and operational phases

With high volumes of goods and services related to the mining sector moving along domestic transport networks and borders, there is also an opportunity for corruption and rent-seeking as individuals in the mining sector must interact with government officials across departments such as customs, immigration and infrastructure development. Companies and governments must implement systems that flag potential instances of corruption, allow for forensic investigation and initiate formal prosecution of those responsible for corrupt activities.

The complex company structure of multinationals can impose a burden on poorly resourced administrative and revenue authorities in developing countries. Transfer pricing arrangements, as an example, are used to legitimately account for the related-party provision of goods and services. However, they have also been identified as a tool used by companies to maximise value extraction for shareholders and minimise tax, eroding the tax bases of some African countries. These complex arrangements also make it difficult for authorities to determine the value on which to base mining royalty payments. 

Better equipping government institutions to deal with the complex administration associated with complex mineral commodity transactions is one way to prevent revenue leakage and optimise fair returns for governments, while protecting companies from the risk of government officials extracting additional revenues and penalties for spurious reasons.

Mining royalties

While well-intended to drive investment in mining-affected communities, the system of requiring payment of mining royalties in exchange for mining approvals is open to widespread abuse, misappropriation and maladministration. Information asymmetry, where communities lack access to information and subsequently lack negotiating power, exacerbates the ability of officials to take advantage of gaps in the process for personal benefit.  

Proper governance structures to improve monitoring and compliance of mining companies and subsequent appropriate investment would better hold those responsible for the disbursement of royalty payments, such as company and government officials, community leaders and traditional authorities, to account and minimise political interference.

Closure and rehabilitation

Regulations in some countries stipulate mandatory financial provision for closure and rehabilitation of mines, including capital guarantees often structured in the form of trusts. However, poor company disclosure and lack of accountability have opened the mining sector to mismanagement and corruption, resulting in severe long-term environmental impacts.

Strengthening the system of checks and balances to ensure compliance, improve governance and support communities to hold individuals in government, community governance structures and companies to account, means funds intended for the rehabilitation of mines would be used more effectively instead of for nefarious purposes.

Addressing the opportunity for corruption at these touchpoints recognises that capital-intensive industries operating in resource-rich, but capital-poor African countries face a myriad of challenges in running efficient businesses, protecting their assets over the longer term and generating returns for their shareholders in high-risk environments. But it also acknowledges that governments too seek to extract fair value for the resources they possess to drive development and economic growth. Both parties can contribute to reducing corruption by implementing governance structures, focusing forensic capabilities at key touchpoints where company and government officials interact and adopting a zero-tolerance approach when it comes to holding corrupt individuals to account. BM

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