On the anniversary of the Panama Papers, human rights campaigner Global Witness put out a press release linking one of the largest privatisations in history—the sale of almost 20 percent of Russian oil giant Rosneft to a consortium led by FTSE 100 company Glencore—with allegations of Russian tampering in the 2016 U.S. election, Cayman Island shell companies, and the fact that Glencore companies have been reported to appear over 660 times in the Panama Papers themselves. That 660 is probably not a record, but an indication that the company—in common with so many others—uses shell companies to conduct its transactions. The fact that something is common practice and legal, however, does not make it best practice.

So, let’s start with the Rosneft transaction. A source with knowledge of the deal said that Glencore had disclosed as much about the deal as was possible, given the involvement of a number of Russian banks in the financing. That disclosure was, however, incomplete because the Russian banks did not want their involvement made public. But even the disclosures made do not begin to hint at the complexity of the structures used to complete the deal, and it would be impossible even to summarise them here. Put simply, the acquisition was made through a nesting, like a Russian doll, of Singapore-registered shell companies, all named QHG [something] LLP, into which funds were placed by the primary investors—Glencore, the Qatar Investment Authority, incidentally Glencore’s largest shareholder, and Italian bank Intesa, among others—then the Rosneft shares were purchased via those vehicles and held by them.

“It has become standard practice for companies to create shell companies for acquisitions and other transactions, it’s bread and butter for thousands of companies around the world, big and small. It’s not illegal.”
Anonymous source familiar with Rosneft deal


As disclosed in a Reuters report, included somewhere in the deal was a shell company registered in the Cayman Islands,a jurisdiction that does not require the disclosure of ownership, beneficial or otherwise. This was one company among hundreds of other similar structures, according to the source, that were used in the transaction, and it was not an attempt to hide anything, the source continued, but simply because the partner with the international law firm (Walkers) who had expertise in structuring such deals had an office in the Caymans. “If he’d had an office in Frankfurt, that’s where the company would have been registered,” the source said. “The deal was very good for Glencore,” continued the source, “which obtained rights to a lot of crude for a minimal equity stake. There was full compliance with all sanctions—you can’t lend to Russian companies but you can buy stakes in them; BP has an even larger stake in Rosneft. Glencore has major investors who look very closely at these deals and would not countenance any non-compliance.”

Glencore’s website is brimming with codes of conduct, Business Ethics Committee statements, compliance policies, policies on bribery and corruption,. and so on. But, as we have seen, having a code of conduct is not the same as complying with it. Hedge fund Och-Ziff also has a Code of Business Conduct and Ethics but it did not prevent it from being investigated for Foreign Corrupt Practices Act violations by the U.S. Securities and Exchange Commission and the U.S. Department of Justice, as Compliance Week reported last year, for bribery in the Democratic Republic of Congo (DRC). While none of the recipients of bribes were disclosed, it is widely believed that they were DRC President Joseph Kabila, his now deceased right-hand man, and an “infamous Israeli businessman” commonly identified as Daniel Gertler.

ENRC (Eurasian Natural Resources Corporation), which was delisted from the London Stock Exchange after the launch of an ongoing investigation by the Serious Fraud Office in 2013, probably also had a code of conduct at the time. While the details of the SFO investigation have not been made public, Bloomberg obtained a copy of a letter the SFO had sent to the Congolese government in September last year which said that it was investigating four senior ENRC executives and Daniel Gertler over transactions relating to five DRC mining projects that may have violated the 2010 U.K. Bribery Act and the 2006 Fraud Act.

The DRC/Gertler link between investigations into Och-Ziff and into ENRC leads back to Glencore, which also had dealings with Gertler in its DRC mining acquisitions. While Glencore bought Gertler out of all its DRC mining operations in February this year, the company had been closely involved with him through a number of joint ventures over a decade. Peter Jones, Global Witness senior campaigner for DRC, said it was a working assumption that shell companies controlled by Gertler used his friendship and influence with Joseph Kabila and his circle to get access to DRC mining sites at knockdown prices. “There was a spate of this activity around 2011, and it seems to be picking up again,” said Jones. “Most of these mining sites are acquired at 5 percent of market value, then Gertler asset flips the site to a major mining company at full price. At that point, the DRC Ministry of Mines gets its share out.”

According to Global Witness’ report, Out of Africa: “The evidence indicated that Gertler’s close friendship with Kabila enabled him to act as a ‘gatekeeper’ for mining asset sales in Congo. In other words, if these companies wanted to do business they had to work with—and indeed enrich—Gertler in the process. Global Witness contends that ENRC and Glencore, in spite of the fact that they ought to have known the corruption risk inherent in doing business with Gertler in those circumstances, entered into the deals and acted to protect his shareholdings in joint ventures in ways that do not make objective commercial sense.” Added Jones, “Just as Glencore did, Och-Ziff loaned money to Gertler to do business in the DRC. They clearly did not do their due diligence on this guy.”

Last year, Global Witness obtained a contract outlining a tripartite deal dated 2015, which ceded a large number of royalties from mining deals to Gertler, which it then published.  The Extractive Industries Transparency Initiative (EITI), a global multi-stakeholder initiative that promotes transparency in oil, gas, and mining sectors, attempted to reconcile payments made and payments received under these royalty arrangements but was unable to. According to Jones, royalty payments from Glencore’s Katanga mining project in Congo should, under the terms of the original contract, have been transferred to the Congolese state mining company, Gécamines. Instead, as Glencore later admitted, the money was redirected to Gertler’s Africa Horizons company, which is registered in the Cayman Islands.

Disclosures made by Glencore in Congo’s EITI reports, said a Global Witness report played a critical role in revealing that the payments were being redirected. Said Jones: “Glencore-owned KCC was paying Gécamines, according to disclosures of the Katanga mining company which is listed on the Toronto exchange, but then they suddenly stopped naming Gécamines. Royalties and signature bonuses continued to be paid from 2013, but the recipient was not named. Between 2013 and 2016, mining giant Glencore paid over $75 million to Gertler.”

In a press release at the time, Jones said: “It’s outrageous that Glencore has been making payments to a friend of the Congolese president who has been accused of bribery and corruption, and then not telling its shareholders or the public that it’s done so.”

Not only does the EITI publish mining, oil, and gas company payments to states and state-owned companies—a requirement the Trump administration overturned for U.S. companies after just one month in the White House—it has also been running a pilot project on beneficial ownership.  “The initiative sought the divulgation of the beneficial owners of oil, gas, and mining companies in a handful of countries, including DRC. DRC performed well, although levels of disclosure were still low," Jones said. “That pilot has been adopted as a requirement for other EITI countries in the future.”

Clearly it is difficult to track who owns what and whom has paid whom in the extractive industry, but the use of shell companies registered in lax jurisdictions does not help shareholders understand the risks that might be associated with the use of their capital. “If you want to see what damage it does to a company, look at Och-Ziff’s stock price,” said Jones. The stock price has fallen by half since the investigation and investors have pulled more than $13 billion from the fund. “It’s all about disclosures,” added Jones. “For example, Katanga should’ve disclosed to shareholders who it was paying the royalties to, because it’s material information.”

“What we see as the problem with offshore companies and offshore jurisdictions and laws is that they allow people to incorporate companies where the owners are anonymous. They are the 'getaway vehicles' for criminal money since being able to hide the owner, and the source of money, is vital in money-laundering. And it is impossible to tell who is profiting from these activities.”
Peter Jones, Global Witness Senior Campaigner, DRC

“This is not a unique situation,” continued Jones. “Tax havens are not just about low tax, they are also secrecy providers. Companies registered in the British Virgin Islands and the Cayman Islands, for example, allow companies to hide their owners so that they can gain control of major mining assets without anybody knowing who the real owners are. What we see as the problem with offshore companies and offshore jurisdictions and laws is that they allow people to incorporate companies where the owners are anonymous. They are the ‘getaway vehicles’ for criminal money, since being able to hide the owner and the source of money is vital in money-laundering. And it is impossible to tell who is profiting from these activities. We’ve done years of painstaking research into this, and there are companies out there profiting from very suspect deals in mining that just don’t make any commercial sense for the DRC.”

Returning full circle to Rosneft, the source familiar with the deal said: “It has become standard practice for companies to create shell companies for acquisitions and other transactions; it’s bread and butter for thousands of companies around the world, big and small. It’s not illegal.”

But is it best practice? Surely there are simpler ways of doing deals that would be less of a compliance nightmare. Owners are owners; if everything is legitimate, why would they need to remain anonymous? British dependencies like Gibraltar and the British Virgin Islands, while not alone, are among the very laxest jurisdictions in the world. With its reputation for high standards of corporate governance, the United Kingdom could have remedied these circumstances and, yet, it has not.