Disclosing beneficial ownership is one of the few ways to prevent the loss of natural resource revenues and to mitigate—if not prevent—the resource curse. This article details how digital platforms can help the global effort to reverse the resource curse and plug revenue loss leakages in the mining sector through beneficial ownership disclosures.
As countries rich in natural resources develop their extractive industries through foreign investment and modernization of their regulatory regimes, some invariably have come to face the problem of the resource curse. Identified by social scientists as the phenomenon of poor economic performance and weak governance, the resource curse has confronted countries endowed with natural resources such as oil, gas, and minerals and has kept policymakers, academics, and practitioners busy in attempting to address the source of this phenomenon.
Essentially, the macro causes of the curse, which are all quantifiable, can be narrowed down to certain key drivers, namely: (1) the strong currency of resource rich countries, which creates impediments for other exports; (2) high unemployment and little job creation by the extractive industries in the producing country; (3) unstable growth due to volatile resource prices; and (4) the failure to reinvest in schools, socially beneficial and high-quality infrastructure, and other development projects, and to make investments that are revenue generating. Among all of these factors, it is the latter that is the most insidious. Lack of development investment masks the unquantifiable factors of lack of political will, corruption, and conflicts over natural resource revenue, which give rise to further institutional failures that exacerbate the poor economic performance of certain resource-rich countries. As such, the resource curse becomes a vicious circle.
Revenues from the extractive industry are an essential source of income for many developing countries, without which they cannot help fund their most critical needs, such as schools, hospitals, and infrastructure. As countries and governments lose potential revenue from the exploration and exploitation of natural resources, they lose the capacity to sustainably develop and improve their economy. For instance, the Democratic Republic of Congo (DRC), between the years of 2012 and 2013, lost $1.36 billion in mining revenues, about twice the amount of the annual budget for health and education, because of the sale of undervalued mining assets to offshore companies with questionable ownership structures.
While countries such as the DRC suffer from this loss of revenue, industry also suffers as the country is unable to invest in supporting infrastructure, other non-resource sector industries, and regulatory regimes to make investment attractive and low-risk for prospective investors. Particularly in the mining sector, companies face potential costs when they fail to secure a “level of acceptance or approval by local communities and stakeholders” of companies in which extractive projects operate, that is the social license to operate. This is also the case when there is no competent authority to set or enforce the environmental and social standards to protect the environment and communities in which the companies operate. The resource curse and the loss of natural resources revenue not only affects the public sector, but also has an adverse impact on the private sector, resulting in a vicious cycle.
In the case of mining, loss of revenue that contributes to the phenomenon of the resource curse can be traced to two culprits: corruption and revenue leakages. Revenue leakages include such factors as impunity arising from a lack of beneficial ownership disclosure and inadequate legal instruments and enforcement mechanisms for tax collection that allow for transfer pricing, as well as inexplicable fiscal arrangements for mineral exploration and exploitation.
The assessment of the causes of public revenue loss are non-exhaustive. However, there has been a global effort to focus on beneficial ownership disclosure as a key governance issue, particularly amidst the recent data leak through the infamous Panama Papers, exposing the loss of billions of dollars in natural resource revenue due to questionable ownership of sham mining and oil and gas companies. Given these efforts, the authors of this article have focused on beneficial ownership disclosure as a crucial (sine qua non) means of plugging revenue leakages and stymieing the ensuing resource curse.
The article will address the case for beneficial ownership disclosure and the growing global effort to initiate such disclosures as a mechanism to combat revenue leakages. Further, it will recommend two measures on how to improve this global effort of beneficial ownership disclosure, namely: (1) employing stricter transparency standards for beneficial ownership disclosure, such as requiring all owners of private companies to be disclosed; and (2) using cyber technology, including the Internet and open database technological platforms, to improve the efficacy and transparency of beneficial ownership disclosure. As the authors are advisors on public sector reform in the oil, gas, and mining industries, they have chosen to concentrate on mining as a matter of illustration, even though the pervasive loss of oil and gas revenue experienced by energy-rich countries is also indicative of the resource curse.
The Case for Beneficial Ownership Disclosure
Beneficial owners are all natural persons and legal entities that ultimately control or share in the profits from a company. In particular to the mining sector, the case for disclosing and reporting on beneficial ownership is threefold: to reduce opportunities for loss of mining revenues by a state (either through corruption or otherwise); to hold beneficial owners (which includes parent companies as well as natural persons) liable for, among other things, environmental damage that arises from mining company operations; and to create a fully transparent roadmap of all owners of mining companies, so that regulators can make informed decisions about the reliability, veracity, and capability of the entities, and their controlling owners, to which the mining licenses are granted.
It is imperative to acknowledge that beneficial ownership disclosure by itself is not the complete answer to the corruption and revenue leakages dilemma. Beneficial ownership disclosure is most effective when accompanied by carefully drafted up-to-date criminal, mining, and tax laws; adequately compensated law enforcement; sufficient and up-to-date technology; and sustained political will. Regardless, it does present itself as a key tool, when available, to bringing accountability and recovering lost revenue and assets.
Loss of Revenue
Mining laws and mining contracts usually fail to adequately require the identification of beneficial owners, and when they do, they often provide an unclear definition of ownership interest, and even worse fail to require the beneficial owner to comply with legal and contractual obligations by which governments can hold beneficial owners accountable. Transparency of the operating company and government payments is important for accountability, but reveals little about who in fact owns these companies and who ultimately benefits from the activities of these companies. Often the identity of the real owners—the “beneficial owners”—of these companies is unknown, as they are hidden behind a murky chain of corporate entities.
For example, a mining company in Azerbaijan, partially owned by a UK-based company with an 11 percent stake, in turn was owned by companies that were controlled by daughters of the president of Azerbaijan. To put the convoluted chain of ownership into perspective, about 70 percent of the mine was owned by a company, which in turn was owned by four shell companies, one of which was a UK-based company that was in turn owned by three companies incorporated in Panama and found to be controlled by the president’s daughters. Figure 1 is a pictorial representation of the ownership chain, to illustrate this murky ownership structure.
Without mapping out the ownership of the companies involved in developing this mine, as illustrated in Figure 1, it would not have been possible to trace the money trail of the Azerbaijan mine. The consequence? Local mining communities failed to reap the benefits from this mine that held “reserves of gold and silver estimated to be worth $2.5 billion,” resulting not only in actual “social and economic costs,” but also loss by the affected community of a share in “any windfalls.” As such, the communities endured loss of land and accessibility to water resources and opportunities for local mining jobs.
Opaque corporate ownership structures facilitate mining revenue getting “lost” in a complex scheme of corporate structures. Corporate entities are incorporated in jurisdictions with lax registration and disclosure regulations. The Panama Papers disclosures of 214,000 shell companies that were established in the British Virgin Islands and other tax havens between the 1970s and 2016 by Mossack Fonseca, one of the largest providers of offshore financial services in the offshore center of Panama, is probably the most illustrative of how the pervasive use of shell companies, as part of complex ownership structures, has afforded beneficial owners to hold assets without much regulatory oversight.
In particular to the mining sector, the Panama Papers has helped to confirm the “externalization of billions of dollars” of mining revenue from the DRC, primarily by exposing individuals and the ownership structures involved in the initial sale and the subsequent “flipping” of Congolese mining assets at high margins of profit to offshore entities, all often registered in tax havens, such as the British Virgin Islands. As such, opaque ownership structures have allowed for the unjust enrichment of individuals and entities at the expense of the people of the DRC who have lost out on valuable mining revenues.
The loss of revenue due to the lack of beneficial ownership disclosure is further exacerbated by poorly negotiated fiscal terms in mining contracts that do not adequately address fiscal matters. In the DRC for instance, the concession sale, which prompted the International Monetary Fund’s decision to stop its payment of loans to the country, in fact involved a series of mine sales to offshore companies and major transnational corporations, including Glencore and the Eurasian Natural Resources Corporation working with them. Both of these companies are listed on the London Stock Exchange and strenuously denied charges of impropriety. However, between early 2010 and late 2012, the DRC sold off stakes in at least seven prized mining projects to such offshore companies.
The sales were highly opaque and secretive. The ultimate beneficiaries, that is the beneficial owners, of these offshore companies involved in the deals were unknown. The opaque nature of the dealings, and the tremendous undervaluation of the mines, at about 682 percent for one such mine and resultant profits at 428 percent and 400 percent for the purchasing companies, suggests that nondisclosure of beneficial ownership of the companies involved had a hand to play in such losses for the DRC. Corruption by public officials could only be assumed to be the rationale for such opaque structures.
The examples of Azerbaijan, the DRC, and the exposé of the Panama Papers suggest that mine owners who are hidden in a chain of shell companies use them to reduce their tax liabilities, thus denying tax revenue that would be highly beneficial for a developing country. Further, laws on beneficial ownership allow companies to merely identify direct owners, often lawyers or other nominees, usually one or two levels up in the ownership chain, resulting in a partial and incomplete disclosure of the beneficial owners and providing opportunities to “hide [true] ownership.” Those companies that have murky legal structures can provide points of lost revenue leakages, as illustrated by a joint World Bank and United Nations Office on Drugs and Crime study that found complicated legal structures were used as a means to hide the proceeds of corruption in about 128 of the 150 reviewed cases.
Environmental Damages and Mining Footprint
The mining industry is inherently associated with damaging the environment and creating long-lasting irreversible footprints. The costs and damage arising from adverse impacts of mining activities on the environment and the mining communities can be astronomical. In the United States alone, coal mining has resulted in an estimated $523 billion in environmental, economic, and health costs. In the developing world, mining companies, such as one in the Philippines, have used coercive methods to pressure the government to settle the environmental damage caused by “hundreds of millions of tons of toxic mine waste” dumped in fishing areas and rivers, with the consequence of shifting the burden of rehabilitation to governments.
Further, mining companies at the end of a project’s life and after distributing the profits are unwilling or unable to fund mine closure activities, resulting in abandonment of mines, without proper and accurate rehabilitation and restoration measures in place. Without accountability of beneficial owners, which effectively entails holding beneficial owners legally liable for mine closure activities, governments invariably bear the costs of undertaking rehabilitation and restoration measures or financing mine closure and rehabilitation activities; costs that should have been the responsibility of the mining companies and their beneficial owners, either through appropriate legislation or contracts. In Canada, for instance, taxpayers in the province of Ontario are now bearing the burden of cleanup costs of many active and abandoned mines, for which the financial assurances are inadequate. Similarly, a Bloomberg report notes that the absence of specific obligations on extractive companies has resulted in large-scale problems for the government in South Africa, estimating that the government will have to spend at least $6.6 billion in mine closure and associated cleanup activities for abandoned mines.
Due to lack of resources and knowledge on how to negotiate mining contracts, governments allow these issues to remain unchecked, and the lack of technical capacity of governments further exacerbate adverse impacts when they undertake mine closure activities. Further, taxpayer moneys are diverted from developmental and infrastructure activities. As a consequence, governments seek to assign liability for closure activities. However, complex corporate structures and a lack of transparency of the ownership chain makes it difficult, if not impossible, to identify beneficial owners who can and should be held liable for such closure activities.
It is paramount for mining laws and mining contracts to require the identification of beneficial ownership of an operating mining company to ascertain who ultimately owns and benefits from it and who should guarantee the company’s financial and technical capacity.
Criticisms of proposals for such disclosure, such as the supposed cumbersomeness of disclosure requirements, or arguments that such requirements might encroach on privacy, are not valid in regard to the mining sector. Mining companies apply for a license to explore and exploit publicly owned minerals, which is the norm in most countries. As such, the regulator should know who the mining applicant in fact is, and, accordingly, who all of its beneficial owners are. Of critical importance is whether the applicant is technically and financially capable, and further, whether the parent company and all beneficial owners can provide necessary financial backing. Public disclosure of beneficial ownership can help mining regulators make informed decisions regarding the grant of mining licenses. And disclosed ownership structures can make it possible to trace the money, and allow governments to hold, if necessary, individuals liable for asset recovery purposes.
Further, benefits of public disclosures of hidden ownership structures are not restricted to regulators alone. Openness, fairness, accountability, and transparency help foster competition, reduce cronyism and corruption, and create a reliable investment environment for private sector investors. The private sector is increasingly accepting the idea of beneficial ownership disclosure, as evidenced by the voluntary code of conduct on anti-money laundering principles adopted by financial lenders and global banks, including guidance on how to identify beneficial owners.
Global Efforts to Address Beneficial Ownership Disclosure
While not specific to the extractive industries, in 1990, after the G7 meeting on financial crimes, the Financial Action Task Force (FATF) established recommendations on how to address money laundering, including the suggestion for anti-money laundering systems to include methods to identify beneficial owners on clients. In recent years, there has been a resurgence in the international community to crack down on corruption and money laundering, making beneficial ownership disclosure a hallmark of compliance issue in such matters, particularly in the extractive industries. In November 2014, the G20 adopted the “High Level Principles on Beneficial Ownership Transparency,” declaring “financial transparency, [and] in particular the transparency of beneficial ownership of legal persons and arrangements a ‘high priority.’” The United States, United Kingdom, and European Union have adopted or are initiating beneficial ownership disclosure measures as well. Developing countries such as Namibia also have beneficial ownership disclosure requirements, but they are rarely effective, particularly when the requirements for percentage ownership are not robust enough to capture all beneficial owners.
Regardless, international efforts through such initiatives as the Extractive Industries Transparency Initiative (EITI) seek to promote beneficial ownership disclosures, initially through pilot programs in select countries, and by 2020, through mandatory reporting requirements. These efforts, “to ensure that all oil, gas and mining companies that bid for, operate or invest in extractive projects in their countries disclose their real owners,” identifying the name, nationality, and country of residence of the owners, illustrate that there is growing consensus among countries with active extractive industries to address the issue of beneficial ownership. Further, multinational companies are recognizing that information ascertained from beneficial ownership disclosure does not only serve governments, but also companies, as such information can help the latter identify questionable business partners in the supply and value chain.
However, it is important to note the obvious that lost revenues cannot be recovered if the source and location of the leakage is untraceable due to concealment of beneficial ownership. In order to capture all layers of ownership, the definition of beneficial ownership must be clear in any mining law or mining contract. As Joseph Stiglitz and Mark Pieth note, 25 percent threshold ownership requirements as promoted by such global efforts as the FATF have been met with valid criticism by civil society for being ineffectual in identifying all beneficial owners, as such thresholds would obviously not capture those who have less than 25 percent ownership. It has therefore become increasingly important for the international community to reexamine its efforts to make full and complete beneficial ownership disclosure a true reality in the effort to combat corruption and revenue leakages.
As such, beneficial ownership should be defined as: (1) any corporation or other legal entity and/or natural person(s) that, directly or indirectly, owns or controls any share or equity interest of a private company or shares in the profits in such company; (2) any corporation or other legal entity or natural person(s) that, directly or indirectly, owns or controls 5 percent or more of the issued share capital of the company in question whose shares are listed on a regulated stock exchange/market (that is public companies); and/or (3) each and every corporate or other legal entity or natural person(s) that possesses or exercises the de jure or de facto management of the company in question.
Determining the role of beneficial owners helps explain how much influence and control they have over a company that is party to the mining contract. Further, identifying their influence and political ties is essential to reduce pressure points for corruption. Mining laws and contracts that require continuous due diligence to trace ownership to natural persons or listed companies at various stages of the project, but particularly during the mining license application process, will help regulators determine, among other things, whether companies are owned or are connected to public officials.
But how should governments acquire beneficial ownership information? Digital technologies, primarily the Internet, have a major role to play in providing and disseminating information on beneficial ownership. The electronization of business practices, including the electronization of disclosure systems, has increasingly allowed companies to make disclosures required by regulations at less cost while providing investors with information in a more efficient manner. The Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system in the United States, and the Data Analysis, Retrieval, and Transfer (DART) system in Korea, for instance, are prime examples of the electronization of processes by which companies can make required disclosures, data from which is accessible to the public.
In terms of beneficial ownership disclosures specifically, pursuant to Section 16 of the Securities Exchange Act of 1934, amended as per Section 403 of the Sarbanes-Oxley Act of 2002, information on any “beneficial owner of more than 10% of any class of equity security registered under Section 12 of the Exchange Act” must be disclosed electronically, and “those issuers with corporate websites must post change in beneficial ownership reports on their websites.”
Digital technologies, such as the Internet, have been recognized by development banks, including the World Bank, to be one of the most instrumental modes of promoting development, through engendering efficiency, inclusion, and innovation. As the use of the Internet and its access to those in the developing world increases, resource rich countries and their citizens can help stymie the loss of mining revenue by engendering a policy of transparency that is adhered to, by both the public and the private sectors. The Internet can therefore provide a space and medium through which transparency in the mining sector can be promoted by publishing beneficial ownership disclosures on public registries and Web sites of both the ministry of mines and the mining companies that are the license holders.
The UK, for instance, has set precedence by creating the “world’s first fully open register of beneficial ownership,” albeit only disclosing those beneficial owners that meet the 25 percent ownership threshold. As such, only those owners of UK companies that have at least a 25 percent ownership stake in a company are listed on the registry. Regardless, the initiative illustrates that such public registries are not difficult to create, and can improve efficiency, as they provide much needed information on ownership to not only regulators, but businesses and civil society alike.
Further, such registries provide opportunities for swift and efficient means to exchange data on beneficial ownership registries, as regulators across jurisdictions attempt to use such data for regulatory purposes, including granting project licenses and conducting investigations on tax evasion. International organizations, such as the Organization for Economic Cooperation and Development, advocate for jurisdictions to “develop the appropriate law enforcement infrastructure to enable them to launch investigations into beneficial ownership and control when illicit activity is suspected.” Public registries would prove to be an efficient component of such law enforcement infrastructure for collecting data and evidence both intra and inter jurisdiction in order to launch investigations. In fact, studies on the cost-benefit analysis of a beneficial ownership registry in the UK conducted prior to its launch show that such a register would cost the UK government £11 million per year and the UK private sector £4 million per year, thus also saving the UK government £30 million per year in investigation and enforcement costs. Further, 20 jurisdictions, including Gibraltar, the Isle of Man, Montserrat, the Netherlands, Romania, Sweden, Finland, Slovakia, Latvia, Croatia, Belgium, Ireland, Slovenia, Denmark, Malta, Lithuania, Cyprus, Bulgaria, Portugal, Estonia, Greece, and the Czech Republic, have agreed to take part in a pilot project on exchange of such registry data, thus indicating international support for the use of public beneficial ownership disclosures across jurisdictions.
Companies have effectively acknowledged that they value access to all available data in their investment making. The private sector has recognized the business case for ownership disclosures, as it upholds the principles of competition by creating a fair and transparent process of granting project licenses, encourages transparency in terms of complete and accurate market information for better and informed investments, and helps reduce pressure points for corruption and unsound business relationships with domestic companies and goods and services suppliers that contribute to risk growth.
In a recent study conducted by Ernst and Young, 91 percent of the senior management of global companies surveyed for the study believed that knowledge of ultimate beneficial ownership of corporation and entities, with which their companies did business, was important.l Further, within the mining industry, the International Council on Mining and Minerals, a multi-stakeholder group whose membership includes 23 global mining companies, has publicly promoted and supported the inclusion of beneficial ownership in the EITI standards.
Transparency through beneficial ownership disclosure would provide information on ownership structures that can help other private sector stakeholders involved in extractive industry projects, such as lenders and insurers, make informed decisions in their participation in mining projects. The electronic disclosure of beneficial ownership that is easily accessible and transparent would increase market efficiency as companies seek to improve their investment decisionmaking processes. In fact, TRACE International, a global service provider in commercial transparency and anti-bribery compliance due diligence, has initiated a global registry that will allow companies to voluntarily list their beneficial owners as a means not only to “distance themselves from the reputational stigma of secret companies,” but also to provide “multinational companies with a starting point for due diligence.”
Disclosure of beneficial ownership via public disclosures that are available over the Internet also creates opportunities for the inclusion of communities and facilitates the social license to operate. In addition to acquiring the legal license to operate, companies in the extractive industries are finding it increasingly difficult to sustain their investments and projects without obtaining a social license to operate. Broadly speaking, a social license to operate is the social acceptance and buy in of extractive companies and their operations by local communities and stakeholders. With the increasing demand for companies to acquire and maintain the social license to operate, as pointed out by Ernst and Young, companies are facing communities who demand that they adhere to the highest transparency standards as a means of building trust between each other.liv
Public disclosure of beneficial ownership via registries and Web sites of mining ministries and mining companies can help engender this exercise of building trust as local communities and stakeholders are able to receive information on the actual owners of the mining company and their mining records in other parts of the world. As such, empowering stakeholders and communities alike to make informed and critical decisions on the capability of the mining company and its beneficial owners to undertake the activities in a manner that is optimal to the well-being of the communities. Companies can thus position themselves as responsible mine operators.
In regard to the inclusion of civil society, even in developing countries where access to and knowledge of digital technologies and the Internet is limited, the use of such media can act as an added tool to traditional grassroots activism. In Nigeria for instance, an initiative called Follow the Money has revolutionized citizen activism, as it has allowed grassroots activists to use data journalism and social media to track whether promised aid moneys are reaching local communities, thus providing yet another tool to expose state corruption and misuse of public funds. In regard to mining and communities that are impacted by mining specifically, the use of data journalism by obtaining information on beneficial ownership from public registries and ministry and company Web sites can allow civil society to put pressure on the government to seek relief from beneficial owners for loss of natural resource revenue, environmental damage, and general loss of local share in any windfalls from mining projects. In fact, civil society organizations in Namibia, Malawi, and Tanzania have created a “data model and searchable platform of petroleum exploration licenses” to “power investigative journalism and advocacy for stronger resource governance,” which could be used by all stakeholders. Such platforms could also be used as verifiers for public disclosures as more information is gathered on specific mining projects and the various stakeholders involved.
The use of digital technology in terms of beneficial ownership disclosures can also provide new opportunities for innovation. In Estonia, for instance, individual electronic identification is used as a means to register a new company online, thus providing for a digital footprint on those natural persons associated with the company. If this concept were to be expanded to mandatory beneficial ownership disclosures, new opportunities could arise for the innovation of individual electronic identification technologies that allow for public disclosure of beneficial ownership by natural persons. Such developments would not only improve transparency and accountability, as governments, citizens, and other stakeholders would have access to verifiable information on beneficial owners, but could also be used for efficient and swift information sharing between regulators and authorities of different countries to investigate and prosecute crimes related to tax evasion.
As such, it is imperative that mining laws and regulations require the following:
- Beneficial ownership definitions that:
Account for disclosure of all natural persons who, directly or indirectly, ultimately own or control the privately held mining company (license holder), regardless of percentage of ownership;
Include details on name, nationality, location/address, personal identification number, and other identifying characteristics and information of the beneficial owner;
Carefully consider the concept of “beneficial ownership” in terms of the reporting requirements for shareholding. Currently, debates between 5 percent and 25 percent ownership for privately held companies illustrate the attempt to dilute the definition of ownership. Higher shareholding thresholds fail to capture the very entities and natural persons that beneficial ownership disclosure requirements aim to target and provide the opportunity for some companies to circumvent the disclosure requirement by adopting corporate and legal structures that would keep shareholding below the threshold.
Among other conditions, qualification for mining license/rights should require:
- The full and complete publication of beneficial ownership and audited accounts, regardless of whether the applicant is a singular operator or a member of a consortium or joint venture. All parties to a joint venture or consortium should make their beneficial ownership and audited accounts public and transparent by publishing them via public registries operated by a ministry, and through ministry and company Web sites;
Evidence of technical and financial capability to perform all obligations under a mining contract. In Namibia, for instance, the mining act forbids the minister of mines and energy from granting an application for an exclusive prospecting license unless the minister is satisfied on reasonable grounds that the applicant “concerned has the technical and financial resources to carry on such prospecting operations.” However, such requirements are not necessarily followed in practice. Publication of beneficial ownership of applicants that are readily accessible to all stakeholders, including citizens, can help reduce pressure to grant licenses or rights, especially when applicant companies lack technical or financial capability. As more stakeholders are included in the information sharing process of mining licensing through digital technology platforms, transparency should help reduce such pressures, as well as corruption;
All applicants for mining licenses should publish their entire list of beneficial owners in formats that are available to the public, such as ministry and company Web sites, in order for citizens of natural resource countries, to hold both their governments and the companies involved in the development of their minerals responsible. In Namibia, for instance, while the mining act gives discretion to the minister of mines and energy to require the applicant of a mining license to “publish particulars of the application in relation to - (i) the full names of [the persons applying for the license]; and (ii) the area, the kind of mineral licence and the mineral or group of minerals to which such application relates,” such requirements do not include mandatory publication of beneficial owners. Further publication of application details, particularly in regard to the applicant company’s beneficial owners, should not be at the discretion of a regulator, but rather should be a requirement for all applicants during the application process, in order for the public and concerned stakeholders to track the mining licensing process.
False or incorrect disclosure of beneficial ownership should result in an automatic voidance of the mining contract and the revocation of any mining licenses and mining rights for the simple reason that the such falsity or incorrect disclosure can only be made if there is an intent to deceive, or if the completion of such disclosure was not taken seriously, in which case a hard penalty would incentivize a party to complete it accurately. Further, all applications for mining licenses should require applicants and every beneficial owner of such applicants to represent, warrant, and covenant all statements made in the application, with the effect that any false or omitted statements would be considered a default under the mining contract and might result in loss of those assets associated with the mining project.
Mining regulations must decrease discretionary powers on the part of the regulator in terms of the qualifications to grant a mining license, effectively removing pressure points for corruption. In particular, clear standards should be created for disqualification of mining license applicants based on, among other things, unfavorable beneficial ownership disclosures in order to plug leakages of mining revenues and prevent tax revenues from being shifted to tax havens. Additionally, government discretionary power should be reduced by removing language in laws and contracts that create opportunities for discretion. For instance, when contractual or legislative language use “may” instead of “shall,” opportunities are created for overuse of government discretion—discretion that can be influenced through corrupt business practices, including receipt by public officials or their values of hidden ownership interests in mining companies, resulting in inefficient and inequitable choices that can harm the public interest. Publication of mining contracts and licenses on ministry and company Web sites can make it possible for stakeholders to monitor whether contractual language permitting regulatory discretion has created undue pressure or even corruption.
Critically, it is necessary that avenues are created to recover lost revenues. Assets cannot be recovered if the source and location of the leakage is untraceable due to concealment of beneficial ownership. Countries should put pressure on tax havens to compile information on beneficial ownership for all companies incorporated in those jurisdictions and make them freely available in open file format on publicly available databases online. Further, any transfers of funds to offshore accounts of beneficial owners or of the mining company itself should be limited to internationally recognized banks and to verifiable accounts.
There is a mounting global effort for the public disclosure of extractive industry related payments that makes the case for beneficial ownership disclosure even more formidable. The United States had initially adopted a regulation that was subsequently repealed, which had required extractive companies qualifying as “issuers” in the United States to report on payments made to any government concerning commercial development projects of oil, gas, or minerals made by such companies, their subsidiaries, or any other entities under their control. The government of the UK similarly has passed a law that requires “oil, gas, mining and logging companies to publicly disclose the payments they make to governments for the extraction of natural resources,” specifically to a registrar by “electronic means.” As governments and jurisdictions increasingly require that extractive companies organized in their jurisdiction or listed in a security exchange in their jurisdiction publish payments made to governments for extractive projects publicly through easily accessible electronic registries, they should also expand this requirement to include the disclosure of beneficial owners. In order to easily digest and effectively use the data made public through such registries, government agencies (including anticorruption task forces), asset recovery investigative agencies, and mining regulators that would use beneficial ownership data should also develop their data analytics capabilities by improving administrative and technical resources in-house.
Non-disclosure of beneficial ownership contributes to lost resources that can be applied to the national development of a country. When a nation lacks money for education, healthcare, or infrastructure, its people suffer. Countries develop their natural resources and extractive industries for the purpose of generating revenue for development, and as such need to invest in maximizing their opportunities to generate such revenue. Allowing revenue leakages to continue unchecked perpetuates the endless cycle of lost revenue. The harms resulting, whether lost revenues, corruption, or avoided liability, from hidden ownership is simply too significant and severe to permit this continuous cycle of inaction to continue.
While some countries might not be facing the resource curse, a cycle of lost revenue can push developing countries to its brink. Disclosing beneficial ownership is one of the few but crucial ways to prevent the loss of natural resource revenues and to mitigate, if not prevent, the resource curse.
The role of technology, particularly through publication of beneficial ownership in open source platforms and via the Internet, can readily and easily improve transparency and accountability and permit stakeholders, including citizens and civil society to exercise their rights and monitor the ownership of mining companies and the payments by companies to their governments. Governments can use such technology to improve regulatory efficacy, oversight, and supervision.
Critics argue that public disclosure on registries would invade privacy. And while such criticism regarding privacy might hold some water for the mining sector specifically, it is necessary to note that the companies are applying for a license to use public resources, that is minerals. As such, at the very least, the host governments, if not the public as well, have the right to know who, in fact, is involved in the exploration and exploitation of their minerals. Only with such knowledge can host governments know whom to regulate and hold responsible for environmental and other damage.
Additionally, other companies increasingly want to know with whom they are getting into business. Multinational companies can use such disclosures to conduct their own due diligence of potential partners and contractors. Public disclosure through digital technologies can thus help mitigate such concerns of all stakeholders involved. Advances in technology have provided a medium for transparent and efficient dissemination of information at a low cost. As such, it is only timely that beneficial ownership disclosures be made through such media, thus furthering the global effort to operationalize beneficial ownership disclosure measures by providing an important tool in combatting the resource curse.
New technological platforms that are open and transparent will allow the public, private, and civil society sectors to hold mining companies and their beneficial owners fully accountable, and help address and combat those ills exposed by phenomena like the Panama Papers. The non-disclosure of beneficial ownership is not only justice delayed but justice denied.
Jenik Radon is an adjunct professor at Columbia SIPA and founder of Radon Law Offices
Mahima Achuthan is an associate at Radon Law Offices.