Being seen to be clean

Diarmid O'Sullivan


Posted in: Governance, Guest Writers, Speaking Out

Being seen to be clean

November 20, 2007

Membership of voluntary initiatives is all well and good as oil and mining companies try to clean up their act but detailed auditing is necessary for real change to happen, says Diarmid O’Sullivan of Global Witness.

The question of how, or whether, companies can make money in developing countries and still contribute to sustainable development is a hot one. This is particularly true in the oil and mining industries, which rank high on the “close ‘em down” lists of many activists. Polluting, land-hungry and often intertwined with the worst kind of corrupt government, they are beginning to address a decades-old respectability deficit.

The issue for this sector that is of interest to Global Witness is corruption. The oil industry in many developing countries has been enveloped since its early days in a pall of injustice, kickbacks, fraud and the violent suppression of local people by governments attempting to “secure” oil areas. No-one disputes the ‘resource curse’ thesis anymore – the idea that countries rich in oil and minerals do not necessarily see the benefits of economic development, but are actually at greater risk of bad government, poverty and civil war than those without these resources. Whether you think this is chiefly the fault of the countries themselves, or the oil companies, or the consumers of oil in the rich world, will depend on where you stand. But it can’t be denied that the biggest household names in the industry have knowingly played along for decades with some of the worst governments on the planet.

In the last five years, there has been a sea-change in the way oil and mining companies talk about corruption and their relationship to it. The bigger companies and their shareholders are increasingly willing to admit, even to actively assert, that corruption is bad for development and jeopardises their licence to operate.

Growing numbers have joined the Extractive Industries Transparency Initiative (EITI), launched by Britain in 2002, which promotes the public disclosure of tax, royalty and other revenue payments to governments by oil and mining companies. The EITI is unusual in bringing together members from governments, industry, investors and civil society. EITI is not something foisted on industry by civil society groups like Global Witness. On the contrary, it has grown to its current global size because the biggest oil and mining companies see value in actively supporting it. But is EITI, in itself, the cure for corruption? Almost certainly not. The initiative is designed to stop legitimate payments by companies, such as tax payments, from being embezzled by corrupt government officials. It does not stop companies from making secret payments, or rigging their subcontracts or their oil sales in such a way as to create kickbacks for these officials. Bribes and kickbacks not only distort the market – they help to cement the same corrupt systems of government in poor countries, which almost guarantee that oil and mining revenues will not be spent on sustainable development.

And here is the sticking point. We would like to believe that the oil and mining industries are becoming less complicit in corruption than they undoubtedly used to be, but we have no way of knowing.
On a trip to Africa last year, sitting under a mango tree and chatting to industry people, I heard two conflicting views. A representative from a European company said, referring to one of the most notoriously corrupt oil-producing countries in Africa: “Of course we had to pay people off to get in, but we don’t pay anymore.” Then an industry lawyer said, by contrast, that it was easy for companies to get away with paying bribes. If a company can route a bribe through enough offshore shell companies, then investigators from agencies like the US Justice Department will struggle to track it down. “Corruption”, says this old Africa hand, “is getting caught.”

So, is it enough for companies to join initiatives like the EITI and present their membership as evidence that they don’t play dirty? It’s great, it’s welcome, but no, it isn’t enough. EITI doesn’t go deep enough into the company accounts, or far enough into the murky world of offshore shell companies. Without a lot more information than the EITI is designed to provide, we don’t know if we are looking at a new way of doing business. Companies in sectors at risk of corruption need to be regularly audited by forensic accountants looking for evidence of suspicious transactions, not simply verifying that the company has internal codes against bribery. When that starts to happen, and is seen to work, oil and mining companies may finally start to reap the reputational dividend of being seen to be clean.

Diarmid is a former financial journalist who worked in the Middle East and South East Asia before turning to political risk analysis and then to campaigning. He currently heads up the oil and transparency campaign at Global Witness.