A new report assessing corruption risk in the mining sector explores the underlying causes of corruption and what preventative compliance measures mining companies can take to reduce such risks.
The global report conducted by Transparency International (TI), “Combatting Corruption in Mining Approvals,” is the first in-depth study of its kind to examine corruption in the mining sector approvals regime—the system that governs decision making as to whether, where, and under what conditions to permit exploration or mining activities. The TI report assessed 18 resource-rich countries and identified 140 types of corruption risk.
The report serves as a useful guide for mining companies to assess and enhance the transparency, accountability, and integrity of the mining approvals regime in the countries in which they conduct mining activity. “Natural resources are too often vulnerable to corruption. The goal of this work is to lead to a greater understanding of corruption risks in the mining approvals process so that corruption can be countered at the very start of the process,” TI Chair Delia Ferreira Rubio said in a statement.
To achieve a truly global view of corruption risks in the mining approvals processes, TI drew examples from a range of extractive economies, including major mining economies like Australia, Canada, and South Africa; emerging mining economies like Cambodia and Kenya; and 11 members of the Extractive Industries Transparency Initiative (EITI), whose overall mission is to combat corruption and ensure transparent management of natural resources.
Overall, the results revealed that corruption risks exist in mining approvals regimes in all the countries TI assessed, irrespective of the country’s stage of economic development, political context, geographic region, or the size and maturity of their mining sectors.
Corruption risks were grouped under the following five categories, each with key questions that mining companies can use to identify where and how the approvals regime is vulnerable to corruption:
Political context: To what extent can decision makers personally benefit from mining approval decisions?
Land allocation: How clear and transparent is the process for opening land to mining?
Licensing and contract negotiation: How fair and transparent is the licensing process?
Environmental and social impact assessment: How accountable are companies for their environmental and social impacts?
Community consultations: How meaningful are community consultations?
“Putting in place a robust due diligence system is a crucial element of an internal integrity system,” says Serena Lillywhite, chief executive officer of Transparency International Australia. “Change starts by answering these questions.”
The five categories of the mining approvals regime assessed in the TI study, and their correlating corruption hot spots, include political context; land allocation; mining license application and approval; environmental and social impact assessment; and community consultation.
Political context. Many countries studied by TI lacked the mechanisms necessary to prevent and manage conflicts of interest, leaving the door open for senior officials, politicians, and other politically exposed persons (PEPs) to abuse their position and pursue personal interests. For example, unmanaged conflicts of interest may create an uneven playing field by giving PEPs priority access to minerals or requiring companies to partner with PEP-controlled entities.
“Natural resources are too often vulnerable to corruption. The goal of this work is to lead to a greater understanding of corruption risks in the mining approvals process so that corruption can be countered at the very start of the process.”
Delia Ferreira Rubio, Chair, Transparency International
Corruption is more likely to occur in countries where regulations on political donations and lobbying are weak; owners or beneficiaries of license applicants are not disclosed; and senior public officials don’t declare assets or interests in mining companies.
Seven of the countries assessed—Armenia, Cambodia, Colombia, Indonesia, Mongolia, Zambia, and Zimbabwe—showed a high risk that license applicants will be controlled by undeclared beneficial owners, often through complex corporate vehicles registered in offshore locations.
The good news is that efforts are underway to mitigate this risk: By 2020, EITI member countries must require companies that are active in the extractive sector to fully disclose their beneficial owners, including companies that are applying or bidding for licenses. The EITI standard obliges companies to identify PEPs as part of beneficial ownership disclosure.
Furthermore, several EITI members countries—Colombia, Democratic Republic of Congo, Indonesia, Mongolia, Liberia, Papua New Guinea, Peru, Sierra Leone, and Zambia—have developed beneficial ownership roadmaps showing steps they plan to take to achieve this goal. Many of these countries intend to establish a public register of beneficial owners.
“Mining companies have a critically important role to play in making their expectations of transparency, openness, and good governance clear to hosting governments,” says Jonas Moberg, head of the EITI International Secretariat. “Mining companies can themselves highlight to the government—and make public as part of EITI reporting—any experience of deviations from the licensing requirements,” he says.
Land allocation. If the process for opening land to mining is not clear and transparent, the more likely it is that the decisions of government officials will be influenced by personal interests or favor certain parties in exchange for personal benefit, the TI survey states. Moreover, corruption risk is higher when land rights are poorly protected and not properly registered; and the register of land rights is incomplete or uncoordinated with other land use registers.
Mining license application and approval. In the mining license application and approval context, the TI study noted that corruption is more likely to occur when steps in the licensing process are unclear; information in the license register is missing or not publicly available; the licensing authority is under-resourced; and decision-making criteria are unclear or decisions are vulnerable to ministerial interference.
“Inadequate due diligence on applicants’ financial resources and technical capacity and their past conduct and compliance history was one of the most common sources of risks identified across the countries in this study,” the TI study said. “This risk was identified across all regions and mining economies.”
Examples of countries that presented a high risk for practicing due diligence on applicants’ claims regarding their capacity and financial resources included Cambodia, Indonesia, Kenya, Papua New Guinea, Sierra Leone, and Zimbabwe.
Environmental and social impact assessment. In all the countries assessed, the government, rather than an independent third party, is responsible for verification and approval of the environmental and social impact assessment (ESIA). According to TI, “the risk of no or inadequate verification of the veracity and accuracy of the ESIA is one of the most common and serious risks identified in the countries in this study.”
In the study, several countries showed a high risk of there being no verification of the accuracy or truthfulness of ESIA reports. These countries were Armenia, Guatemala, Kenya, Papua New Guinea, South Africa, and Zimbabwe.
These findings are concerning, given that corruption is more likely to occur when verification of ESIAs is inadequate; criteria for environmental approval decisions are not clear or transparent; ESIA reports are not publicly available; and enforcement of license conditions is weak.
Community consultation. Corruption in the consultation process can occur if community consultations or negotiations are manipulated, done in bad faith, or avoided despite legal duties to consult. According to TI, corruption is more likely to occur in this context when rules for consultation are not clear; consultation only occurs with local elites; information about the project or its potential impacts is not accessible to community members; and community agreements are not publicly available.
A handful of countries showed a high risk that community leaders negotiating with a mining company will not represent community members’ interests and that negotiations for landholder or community agreements can be manipulated. These countries included Cambodia, Kenya, Papua New Guinea, and Sierra Leone.
Compliance practices
“Inadequate governance and practice in the awarding of mining approvals is not an excuse for poor company practice,” Lillywhite says. Where a country’s licensing standards or disclosure requirements are lax, she says, companies themselves can go beyond compliance by:
Ensuring company representatives and their agents don’t engage in undue influence in the design of national laws and approvals decisions, including through political donations and lobbying;
Not paying bribes or facilitation payments;
Addressing poor working conditions (short-term contracts, insecure employment, and low wages), ensuring decent work and a living wage; and
Ensuring adequate compensation for land owners to access their land.
Moreover, governments are not the only ones with the responsibility to improve disclosure practices. Lillywhite says mining companies, too, can play a leading role by:
Being transparent about their operations, including their subsidiaries, joint venture partners and beneficial owners, where they operate, and their track record;
Disclosing land access and contract negotiations;
Publishing license and license details, including license transfers;
Disclosing truthful information about potential social and environmental impacts and adequate mitigation plans; and
Publishing agreements and other outcomes of community engagement.
“Companies must undertake rigorous due diligence into the integrity, character, and track record of their business partners, including agents or third parties who may be engaged to help secure a license,” Lillywhite says. This includes transparency and disclosure of existing or potential conflicts of interest, and the real owners or beneficiaries of joint ventures, subsidiary, and business partnerships, she says.
Mining companies can also improve due diligence practices by better understanding the corruption risks in the countries where they engage in mining activities: Is it a country that is prone to corruption, has weak governance, or has unclear rules and criteria for awarding a license?
To help with compliance and due diligence efforts, numerous best practice standards have been developed. TI’s Corruption Perception Index and Global Corruption Barometer are good starting points, Lillywhite says. Other helpful resources include the “OECD’s Due Diligence Guidance for Meaningful Stakeholder Engagement in the Extractive Sector” and ICMM’s “Good Practice Guidance on Indigenous Peoples and Mining,” which provides guidance to companies on good practice where mining-related activities occur on or near traditional indigenous land and territory.
TI’s “Combatting Corruption in Mining Approvals” study “yet again provides evidence that corruption and mismanagement is more likely when practices are secret,” Moberg of EITI says. “The overwhelming lesson for mining companies is that openness forms part of business strategies mitigating risks.”
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