Extractive industries value chain and SAI’s response to facilitate sustainable growth

Risk identification along the value

chainKimuli Anthony - OAGU

Illicit Financial Flows (IFFs) from Developing Countries

10-year period (2004-2013), DCs lost US$7.8 tn

Source: GFI -2015

Top Ten Sources of IFFs

Source: GFI -2015

Growth rate of IFFS Vs GDP

Source: GFI -2015

Other statistics• IFFs have exceeded FDI & ODA—

combined—for 7 of the 10 years of this study.

• for every dollar of ODA that entered the developing world in 2012, ten dollars flowed out illicitly

• of the USD 1.1tn IFFs leaving DCs annually 83.5% is caused by Misinvoicing

(Import Over-Invoicing Export + Under-Invoicing)

EI Value Chain - Risks

• Non Existing Laws & Regulations

• Un-updated and alignment laws,

regulations & contracts (40 yrs)

• Unclear and conflicting roles &

Responsibilities – NOC, SAI, GA,

IOC

Legal Framework

EI Value Chain Risks•Acquisition, processing and storage

of data not controlled by government

•Update of data

•Sale of data not transparent

•EIAs not developed, comprehensive

risks identified, constantly updated

and reported on regularly

•Surveys may not be carried out in an

efficient manner – (cost benefit)

Seismic Surveys &

Data Management

EI Value Chain - Risks• Tenders or contracts awarded through Non

competitive processes, biddable terms not

clear,

• Awarding of license to unsuitable bidder/s

speculation.

• Poorly negotiated agreements- progressive

vs regressive, non transparent regimes,

incentives awarded not fair, unbalanced

contract terms.

• Sale or Transfer of ownership of assets – eg

Congo case, Companies reg. in tax havens?

AWARD OF CONTRACTS & LICENSES

EI Value Chain - Risks

• An open pit at the Tenke Fungurume mine. Freeport-

McMoRan Inc.

• The largest copper mine in the Democratic

Republic of Congo ( Photo by Reuters)

AWARD OF CONTRACTS & LICENSES

EI Value Chain - Risks

AWARD OF CONTRACT

S & LICENSES

Freeport McMoran

TF -Holdings

Tenke FungurumeMine

Govt

70%

80%20%

CMOCUSD2.65bn

EI Value Chain - Risks• Limited capacity of Government to monitor and

enforce compliance, duplication of roles, gaps

• Lack of International Standards of technical

procurement, accounting, environmental mgt

• Inaccurate reporting of production and export

volumes and quantities, valuation of minerals

and hydrocarbons.

• diversion of production volumes

• Health & Safety standards not applied (EIA not

followed)

• Performance bonds & Penalties not enforced

MONITORING OF

OPERATIONS

EI Value chain risks

Source

EI Value Chain - Risks• Export Under-invoicing and or import over-

invoicing. Contributes over 83% of IFF (GFI

Dec 2015)

• Cost oil & transfer pricing related risks,

underlifts/overlifts

• Tax evasion- 10 largest EI cos control over

6000 subsidiaries (Oxfam) and 1/3 were

located in tax havens and or secrecy

jurisdictions, DTA treaties

• Price controls create hoarding & stock outs

• unusual reliance on middlemen (prices differ

from market prices)

COLLECTION OF TAXES & ROYALTIES

EI Value Chain – Risks

• In the past two decades, Switzerland has

become the world’s largest commodity hub

(also secrecy jurisdiction)• Merchanting or Transit trade (receipts x15 in

10ys btn 2001-11

Collection of

Revenues (Taxes

and royalty)

Merchant

Producer BuyerGoods

Source: Estimating Illicit Flows of Capital via Trade Mispricing: A Forensic Analysis of Data on Switzerland Jan 2014

EI Value Chain - Risks

• According to an Audit report by Grant Thorton &

others (2010) a Swiss based trader on its Mopani

mine business in Zambia- doubtful inflated

expenses/costs, doubtful revenues (declared prices

are not consistent with market pricing btn unrelated

parties)

• Zambia’s production grew and the world price of

copper rose with the commodity boom of the

2000s, Switzerland came to account for more than

half of Zambia’s exports (from a base of 0).

COLLECTION OF TAXES & ROYALTIES

EI Value Chain - Risks

COLLECTION OF TAXES

& ROYALTIES

EI Value Chain - Risks• Lack of a separate EI Fund

• Temptation to overspend, or borrow

(mortgage future revenues) in

anticipation, MTEF not followed

• Little transparency on allocation of funds

leading to social and economic

inequalities

• Lack of investment policies

• Low capacity to absorb funds at local

communities

REVENUE MANAGEMENT & ALLOCATION

EI Value Chain - Risks

• Limited diversification of economy

• Local Content not integrated

• Gender (world bank)

• Environmental issues –

Decommissioning costs not provided for,

eg USA 161,000 abandoned mines -

waste & pollution mgt

• Limited use of renewables

Implementation of

Sustainable Developmen

t Policies And

Projects

EI Value chain Risks

San Juan River –Gold King Mine