Luca Maiotti - Policy analyst, OECD centre for responsible business conduct
Luca carries out research on human rights abuses, conflict financing, corruption and money laundering linked to selected mineral supply chains, provides technical policy advice on international legislative and industry-wide developments related to responsible business conduct, and designs capacity building programmes for industry, government and civil society organisations in producing countries.
Corruption in the extractives industry
What is corruption and why does it matter?
Corruption is a common risk in the extractive sector. The extractives sector (mining, quarrying, oil and gas extraction and mining support services activities) has the potential to sustain livelihoods, foster local development through job creation and skills development, bring much needed tax revenue, and increase investment, particularly in conflict-affected and high-risk areas. However, the sector is prone to corruption; according to the OECD Foreign Bribery Report, one in five cases of foreign bribery occurs in extractives. Corruption, defined as “the abuse of entrusted power for private gain” can range from simple acts such as a cash payment to a border guard, or involve complex networks of enablers, corporate entities and sophisticated financial transactions across multiple jurisdictions.
Corruption is an enabler of other crimes. Corruption has a wide range of corrosive effects, depriving countries of revenues, undermining the rule of law and hitting vulnerable populations the hardest. It may have disproportionate gendered impacts in the licensing phase, as women represent a higher share of the world’s poor. Furthermore, specific forms of corruption, such as sexual extortion, mostly affect women. The risk of solicitation of sexual extortion can be high in situations of stark power disparity, such as the ones that often accompany artisanal mining, which engages women for almost half its workforce across digging, washing, and trading functions. Beyond the economic impact, corruption in the mining sector causes harm to people and the environment, often as an enabler of serious human rights abuses and lack of enforcement of environmental and labour obligations.
Where and how does it happen?
Corruption may take different forms. Larger companies may be more exposed to grand corruption risks, involving larger sums of money – and the potential for greater harm – around how mining rights were acquired or negotiated, the role of middlemen and subcontractors. Smaller companies and artisanal small scale miners may be more vulnerable to petty corruption, solicitation, sexual exploitation and extortion by government officials and other companies present at mine sites or transport routes.
According to the US Department of the Treasury’s Office of Foreign Assets Control between 2010 and 2012 alone, the DRC lost over $1.36 billion in revenues from the underpricing of mining assets that were sold to offshore companies linked to sanctioned Israeli businessman Dan Gertler. The Federal Institute for Geosciences and Natural Resources of Germany (BGR) found in a recent study that 40% of artisanal miners of cobalt in the DRC earned less than US$4.20 a day, the country’s minimum wage. Meanwhile, artisanal miners, sometimes working on sites for which Gertler still receives royalties, report they have to pay unofficial fees amounting to up to 20% of the value of the minerals they produce.
Why should I care?
Expectations on responsible business conduct are increasing. Regulatory requirements in responsible supply chains are on the rise, investors’ interest continues to grow, with consumers demanding more. Companies are expected to prevent and mitigate adverse impacts on people and the planet, beyond protecting themselves from reputational risks and lawsuits. The LME has introduced responsible sourcing requirements for all brands listed for good delivery on the LME based on the OECD Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD Guidance), which also covers aspects of bribery and corruption.
As a company, what can I do about it?
Look beyond your Tier-1 supplier. The OECD Guidance expects companies to identify, prevent, mitigate, and report on risks of corruption deeper in the supply chain. This includes risks, potentially outside the scope of criminal liability, but nonetheless directly linked to company operations through their mineral and metal purchasing. All types of business relationships across the supply chain fall under this: sub-contractors, third parties, suppliers’ suppliers… There is still a long way to go, with a Refinitiv survey finding that 43% of third parties are not subject to due diligence checks at onboarding, while 60% of respondents say they are not fully monitoring third parties for ongoing risks.
Don't disengage immediately, but disengage if appropriate. The due diligence approach of the OECD Guidance does not expect immediate disengagement for corruption risks, but encourages companies to drive improvements in the supply chain over time. This flexibility allows companies to tailor their mitigation measures to the complex reality of the ground, but cannot be used as an excuse to avoid taking action, and interrupting the business relationship is expected if there is no significant measurable improvement within six months from the adoption of the risk management plan.
A wealth of resources exist out there to help companies. The OECD Secretariat recently published a Frequently Asked Questions document, which walks users through common challenges that companies face when conducting anti-corruption due diligence in their supply chains. This details:
- definitions and typologies of corruption risks
- policies and processes companies should have to monitor corruption risks along their supply chains
- how companies can prioritise, identify and mitigate corruption risks in their supply chain, and this includes cases of payment requests by traditional or customary institutions, when they are SMEs, or petty corruption
- how to report on, and remediate, corruption risks
The document also contains a series of high-risk scenarios, lists of red flags and links to resources to conduct open source investigation.
Things to take away
- Companies need to prioritise anti-corruption efforts in mineral supply chains to prevent and mitigate the impact both on people and the environment, as well as on companies' own reputation and legal liability.
- Because of the scale, the complexity and the severity of grand corruption risks, specific attention should be paid to large-scale mining in the award of contract and licenses, in the negotiation of compensation and consent of affected communities, and around payment of taxes and fees.
- The OECD Guidance and the related FAQ provide a progressive framework to complement and articulate compliance efforts that recognises the complexity of conditions of mineral production and trade.