The Global Economy paper assignment

The Global Economy paper assignment

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Econ13 essay
1. Describe in your own words what the “natural resource curse” is. Then, provide some possible explanations of why some countries avoid it while others do not. You are encouraged to read (and cite) articles other than the one above, including other articles in the same book.
2. Any language used by other authors should be inside quotes (with the citation of the work and page number in which the quote appears).

Natural
Resources
and Violent
Conflict
Options and Actions
Ian Bannon and Paul Collier
EDITORS
Natural Resources and Violent Conflict Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Natural Resources and
Violent Conflict

Natural Resources
and Violent
Conflict
options and actions
Ian Bannon
Paul Collier
editors
THE WORLD BANK
Washington, D.C.
© 2003 The International Bank for Reconstruction and Development /
The World Bank
1818 H Street, NW
Washington, DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
E-mail: [email protected]
All rights reserved.
1 2 3 4 06 05 04 03
The findings, interpretations, and conclusions expressed herein are those of the
author(s) and do not necessarily reflect the views of the Board of Executive Directors
of theWorld Bank or the governments they represent.
The World Bank does not guarantee the accuracy of the data included in this
work. The boundaries, colors, denominations, and other information shown on any
map in this work do not imply any judgment on the part of the World Bank
concerning the legal status of any territory or the endorsement or acceptance of such
boundaries.
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ISBN 0-8213-5503-1
Cover photos: Inset—© Peter Turnley/CORBIS
Background—© Adalberto Rios Szalay/Sexto Sol
Library of Congress Cataloging-in-Publication Data has been applied for.
Contents
Preface ix
Contributors xiii
Acronyms and Abbreviations xvii
1. Natural Resources and Conflict: What We Can Do 1
Ian Bannon and Paul Collier
2. The Natural Resource Curse: How Wealth Can
Make You Poor 17
Michael Ross
3. Who Gets the Money? Reporting Resource Revenues 43
Philip Swanson, Mai Oldgard, and Leiv Lunde
4. Where Did It Come From? Commodity
Tracking Systems 97
Corene Crossin, Gavin Hayman, and Simon Taylor
5. Follow the Money: The Finance of Illicit
Resource Extraction 161
Jonathan M. Winer and Trifin J. Roule
6. Getting It Done: Instruments of Enforcement 215
Philippe Le Billon
v
7. Attracting Reputable Companies to Risky Environments:
Petroleum and Mining Companies 287
John Bray
8. Dampening Price Shocks 353
Patrick Guillaumont and Sylviane
Guillaumont Jeanneney
boxes
3.1 The Azerbaijan ROSC 61
3.2 Highlights of the East Asia FLEG Ministerial
Declaration 63
3.3 MMSD Suggestions Relevant to
Revenue Transparency 74
3.4 Recommendations of Global Witness 77
3.5 Constitutional Basis for the Role of the Auditor
General in Botswana 83
3.6 Control and Monitoring Institutions in Chad 89
4.1 Independent Validation of Legal Timber 116
6.1 Defining Conflict Resources 216
6.2 NEPAD and the G-8 Africa Action Plan 252
6.3 Mandatory Conflict Impact Assessment and Code of
Conduct 259
figures
1.1 Natural Resources and Conflict Risk in Low-Income
Countries 3
1.2 Risks from Natural Resources 5
3.1 Lines of Accountability in the State Oil Fund of
Azerbaijan 85
4.1 Measures to Build Bridges between Related Tracking
Systems 109
4.2 Common Elements of Effective Certification Tracking
Systems 113
4.3 Forest Stewardship Council Chain-of-Custody
Certification 115
vi contents
4.4 Coltan Extraction Chain from Eastern Democratic
Republic of Congo 135
6.1 Economic Supervision Scheme during Peace Processes 253
tables
2.1 Civil Wars Linked to Resource Wealth, 1990–2002 18
2.2 Armed Conflicts in Africa and the Rest of the World,
1989–2001 18
2.3 Civil Violence in Africa by Decade, 1970–99 19
2.4 Resource Dependency: Nonfuel Mineral–Dependent
States and Oil-Dependent States 21
2.5 Mean OECD Tariffs on Processed and Unprocessed
Extractive Products 23
2.6 Mineral Resources and Secessionist Movements,
1949–Present 27
4.1 Major Commodity Tracking Regimes 99
4.2 Forest Product Monitoring Technologies 120
6.1 Overview of International Instruments of Enforcement 225
6.2 UN Security Council Sanctions against Natural
Resource Exports 232
7.1 Companies Deterred from an Otherwise Attractive
Investment by a Country’s Reputation for Corruption,
by Sector 295
7.2 Companies Deterred from an Otherwise Attractive
Investment by a Country’s Reputation for a Poor
Human Rights Record, by Sector 296
7.3 Standards of Compliance among Companies from
Top-10 OECD Exporters, 1999 and 2002 308
7.4 Standards of Compliance among Companies from
Select Non-OECD Countries, 1999 and 2002 309
7.5 How Often Do International Companies Use Political
Pressure from Their Home Governments to Gain
Business Advantage? 319
7.6 How Often Do International Companies Use Tied Aid
to Gain Business Advantage? 320
contents vii

Preface
RECENT RESEARCH UNDERTAKEN BY THEWorld Bank and others suggests
that developing countries face substantially higher risks of violent conflict
and poor governance if they are highly dependent on primary
commodities. Revenues from the legal or illegal exploitation of natural
resources have financed devastating conflicts in a large number of countries
across regions. When a conflict erupts, it not only sweeps away
decades of painstaking development efforts but also creates costs and
consequences—economic, social, political, regional—that live on for
decades. The outbreak of violent domestic conflict amounts to a spectacular
failure of development—in essence, development in reverse.
Even where countries initially manage to avoid violent conflict, large
rents from natural resources can weaken state structures and make
governments less accountable, often leading to the emergence of secessionist
rebellions and all-out civil war.
Natural resources are never the sole source of conflict, and they do
not make conflict inevitable. But the presence of abundant primary commodities,
especially in low-income countries, exacerbates the risks of
conflict and, if conflict does break out, tends to prolong it and makes it
harder to resolve.
Reflecting a growing interest in the links between natural resources
and conflict and the World Bank’s evolving conflict agenda—which is
placing greater emphasis on preventing conflicts—in 2002, the World
Bank’s Conflict Prevention and Reconstruction Unit and the Development
Research Group began to define a research project to address this
link. As the Governance of Natural Resources Project took shape, the
discussion moved toward practical approaches and policies that could
be adopted by the international community. While there is much that
ix
individual developing countries can do to reduce the risk of conflict—by
addressing genuine grievances in their societies, adopting economic and
social policies that are more inclusive, and improving transparency and
accountability—there is also a need to articulate a convincing and practical
agenda for global action. As members of the international community
working to build a world that is safer and free of poverty, we share
a global responsibility in assisting developing countries to ensure that
revenues from the exploitation of natural resources do not exacerbate
the risk of conflict.
This book presents the papers commissioned under the Governance
of Natural Resources Project. When we commissioned this work, we
asked the researchers to focus on the practical aspects from a global
governance perspective—to focus on “what we can do collectively.”
The papers offer a rich array of approaches and suggestions that are
feeding into the international policy debate and that we hope will lead
over time to concerted international action to help developing countries
better manage their resource wealth and turn this wealth into a driver
of development rather than of conflict.
The Governance of Natural Resources Project and the publication of
this book have been made possible through the generous support of
the government of Norway, which is funding the project through the
Norwegian Trust Fund for Environmentally and Socially Sustainable
Development.We are very grateful for this support and encouragement.
We also wish to thank the Agence Française de Développement (AFD),
especially Pierre Jacquet (AFD executive director and chief economist),
Serge Perrin, and the rest of the staff of AFD, not only for hosting the
workshop that launched the project in Paris in December 2002 but also
for their continued interest, support, and encouragement.
The project has received strong support and valuable inputs from a
wide range of stakeholders. We especially want to thank the participants
of the launch workshop for their valuable contributions and
interest in this work. In addition, we are grateful to many others who
sent us comments and suggestions. We also wish to thank our colleagues
at the International Monetary Fund, especially Masood Ahmed,
Martin Fetherstone, Nancy Happe, and Anton Op de Beke, who took
an early interest in the project and have offered valuable suggestions
along the way.
Within the Bank, the project has been a collaborative effort between
the Conflict Prevention and Reconstruction Unit and the Development
Research Group, with valuable and continuous support from the Oil
and Gas Group, especially from Charles McPherson. We have also
benefited from advice and guidance from many staff in the Bank,
x preface
especially Nicholas Stern, Robert Bacon, Kerstin Canby, and Havard
Hagre. A big thanks also to the authors of the research papers, who
produced excellent chapters, despite having to work under very tight
deadlines. Finally, a special thanks to Kazuhide Kuroda, not only for
his conceptual and substantive contributions to the project but also
for his tireless efforts to put it all together.
Ian Bannon
preface xi

Contributors
Ian Bannon is manager of the Conflict Prevention and Reconstruction
Unit, in the Social Development Department of the World Bank.
John Bray is a political risk specialist with Control Risks Group, the international
consultancy. He has extensive experience in working with
companies across the Asia/Pacific region, South Asia and East Africa.
His professional interests include the politics of business and human
rights, and anticorruption strategies for both the public and the private
sectors. His recent publications include Facing Up to Corruption: A
Practical Business Guide (London: Control Risks, 2002).
Paul Collier was director of the World Bank’s Development Research
Group until March 2003. He is currently director of the Centre for the
Study of African Economies, University of Oxford, and senior adviser
to the Vice President of the Africa Region in the World Bank.
Corene Crossin is the campaigns researcher at Global Witness (a nongovernmental
organization that highlights the connection between
natural resources exploitation and human rights abuses) and works on
the governance of natural resources and transparency. She has recently
worked on a World Bank initiative on “conflict timber” and the relationship
between forests and violent conflict in Sub-Saharan Africa.
Patrick Guillaumont is founder and president of the Centre d’Etudes et
de Recherches sur le Développement International (CERDI), a professor
at the Université d’Auvergne, and a member of the Committee for Development
Policy at the United Nations. He has written about 20 books
and numerous papers on development economics, several of them
focused on the consequences of export instability and on the policies
implemented in response to this instability.
xiii
Sylviane Guillaumont Jeanneney is with CERDI, is a professor at the
Université d’Auvergne, and is also a member of the Conseil de Surveillance
of Agence Française de Développement. She has contributed numerous
papers to journals and written several books on development
issues, especially monetary policy and exchange.
Gavin Hayman is the lead campaigner and investigator for Global
Witness and has been working on oil revenue misappropriation and
corporate malfeasance since 2001. He is also an associate fellow of the
Sustainable Development Programme at the Royal Institute of International
Affairs, where he has written extensively on various environmental
crime and commodity tracking issues.
Philippe Le Billon is an assistant professor at the Liu Institute for
Global Issues, University of British Columbia, Canada. He has worked
with the Overseas Development Institute and the International Institute
for Strategic Studies (IISS) on war economies and the regulation of extractive
industries in conflict areas. He recently authored Fuelling War:
Natural Resources and Armed Conflicts (IISS/Oxford University Press).
He can be contacted at [email protected]
Leiv Lunde is a partner and senior policy analyst with ECON Centre
for Economic Analysis (www.econ.no), based in Oslo. Lunde is a
political scientist with broad experience in research and policy analysis
in areas such as environmental policy, development cooperation,
humanitarian policy and conflict prevention, and corporate social
responsibility. From 1997 to 2000, Lunde served as state secretary for
international development and human rights in the Norwegian Ministry
of Foreign Affairs.
Mai Oldgard holds an M.Sc. from Copenhagen Business School, where
she specialized in corporate social responsibility (CSR) and corporate
governance. At ECON Centre for Economic Analysis, she specializes
in issues such as CSR challenges to the oil and insurance industries,
and has coordinated a major scenario project on the future of the
Norwegian energy industry.
Michael Ross is an assistant professor of political science at the
University of California, Los Angeles (UCLA). He received his Ph.D.
from Princeton University and has been a Visiting Scholar at the World
Bank. He has an ongoing project on “the resource curse” and has
most recently written the paper “How Does Natural Resource Wealth
Influence Civil Wars?” Most of his publications and working papers
are available at www.polisci.ucla.edu/faculty/ross.
xiv contributors
contributors xv
Trifin J. Roule is an assistant editor of the Journal of Money Laundering
Control and consults on government and nongovernmental projects
on money laundering, terrorist finance, and illicit resource extraction.
Philip Swanson is a senior economist in the Paris office of Oslo-based
ECON Centre for Economic Analysis. He specializes in development
issues, with a focus on energy, health, and corporate social responsibility.
He has written papers exploring the links between natural resource
revenues and governance.
Simon Taylor is cofounder of GlobalWitness (www.globalwitness.org),
a nongovernmental organization whose work is to highlight the links
between the exploitation of natural resources and human rights
abuses. Most recently, he colaunched with George Soros the “Publish
What You Pay” campaign.
Jonathan M. Winer is an attorney at the firm of Alston & Bird in
Washington, D.C., where he practices international financial services
regulatory law. He is a former U.S. deputy assistant secretary of state
for international law enforcement. In that position, he worked on
such cross-border illicit commodities as diamonds, firearms, money
(for laundering), narcotics, and stolen cars. He can be reached at
[email protected]

Acronyms and Abbreviations
AUC United Self-Defense Forces of Colombia
CCAMLR Convention on the Conservation of Antarctic
Marine Living Resources
CFF Compensatory Financing Facility
CCSRP Committee for the Control and Supervision of Oil
Resources
CFC Chlorofluorocarbon
CITES Convention on International Trade in Endangered
Species of Fauna and Flora
COTCO Cameroon Oil Transportation Company
CPIA Country Policy and Institutional Assessment
CTR Commodity-specific tracking regime
ECGD Export Credit Guarantee Department (United
Kingdom)
ECOMOG ECOWAS Monitoring Group
ECOWAS Economic Community of West African States
ELN National Liberation Army, Colombia
EU European Union
FAO Food and Agriculture Organization of the United
Nations
FARC Revolutionary Armed Forces of Colombia
FATF Financial Action Task Force on Money Laundering
FLEG Forest Law Enforcement and Governance
FLEGT Forest Law Enforcement, Governance, and Trade
FLN National Liberation Front, Algeria
FSAP Financial Sector Assessment Program
FSC Forest Stewardship Council
GAM Gerakan Aceh Merdeka
xvii
GBIF Global Biodiversity Information Facility
GDP Gross domestic product
GeSI Global e-Sustainability Initiative
HIPC Highly Indebted Poor Countries
IFC International Finance Corporation
IMF International Monetary Fund
INTOSAI International Organization of Supreme Audit
Institutions
ITTO International Tropical Timber Organization
LDC Least developed country (United Nations grouping)
MIGA Multilateral Investment Guarantee Agency
MMSD Mining, Minerals, and Sustainable Development
MPLA Popular Movement for the Liberation of Angola
MSC Marine Stewardship Council
NEPAD New Partnership for Africa’s Development
NGO Nongovernmental organization
NPFL National Patriotic Front of Liberia
OECD Organisation for Economic Co-operation and
Development
PEFC Pan European Forest Certification Council
RCD Congolese Assembly for Democracy
ROSC Reports on the Observance of Standards and Codes
RUF Revolutionary United Front, Sierra Leone
SLORC State Law and Order Restoration Council
SOFAR State Oil Fund for the Azerbaijan Republic
SPLA Sudan People’s Liberation Army
TOTCO T’Chad Oil Transportation Company
UN United Nations
UNDP United Nations Development Programme
UNEP United Nations Environment Programme
UNITA National Union for the Total Independence of
Angola
WTO World Trade Organization
xviii acronyms and abbreviations
chapter 1
Natural Resources and
Conflict: What We Can Do
Ian Bannon and Paul Collier
CIVIL WARS BESTOW MOST OF THE suffering on noncombatants, who tend
to have little say in whether the conflict is initiated or if and when it is
settled. As the conflict rages, incomes tend to plummet, mortality rises,
and diseases spread. A generation’s worth of education can be lost as
education systems collapse for all but the privileged few. Civil wars are
not temporary glitches in an otherwise smooth development path—the
direct and indirect costs during the conflict are typically so high that
even when post-conflict progress is dramatic and sustained, it will take
countries a generation or more just to return to prewar conditions.
This is because many of the costs of the war continue to accrue long
after the fighting has stopped: the peace dividend proves elusive as the
government finds it difficult to cut military spending; violent crime
tends to explode, affecting people and the investment climate; capital
flight continues and private investors, local and foreign, remain skittish;
the prevalence of epidemics and disease remains higher than
before the war; and human and social capital, destroyed or frayed during
the war, can take decades to recover. Although there may be a few
cases where a successful rebellion has ushered in social progress or led
to the downfall of an oppressive and predatory regime, the majority
of civil wars produce a spectacular failure of development. For the
affected country, civil war represents development in reverse.
The costs of conflict, however, do not stop at the borders of the unlucky
country. Civil wars also affect the country’s neighbors and the
global community. The costs suffered by other countries in the region
may be as large as those suffered within the country, as the effects of
the war spill across borders. The most obvious impact is through the
1
creation of large numbers of refugees, who impose a heavy economic
burden on the host country and, because of their conditions on arrival
and the crowded and unsanitary conditions in camps, exacerbate
the risks of infectious diseases such as malaria, tuberculosis, and
HIV/AIDS. A civil war in the neighborhood also leads countries to raise
their defense spending, often generating a regional arms race. Conflict
also disrupts regional trade and discourages foreign investors, who tend
to regard the whole region as risky, even after the war has ended.
Civil war is also bad for the global community, especially in terms
of three “global bads”: drugs, AIDS, and terrorism. The cultivation of
hard drugs requires territory outside the effective control of government.
One consequence of conflict is that large rural areas tend to fall
outside government control, making it difficult, if not impossible, to
mount effective eradication measures. Conflict is an important vector
of HIV/AIDS. Prevalence rates tend to be higher in conflict countries
due to the more risky sexual behavior of combatants, coupled with
their living conditions, mobility, age, and isolation from family and
communities (Elbe 2002). The large and often massive movements of
population induced by conflict favor the spread of AIDS, complicating
the efforts of the international community to control the pandemic. By
creating territory outside the control of a recognized government, conflict
also provides terrorist organizations the safe haven they need to
flourish and mount their attacks.
Understanding the Drivers of Conflict
Although, like Tolstoy’s unhappy families, every conflict is unique in its
own way, conflicts appear to embody recurring factors, which are often
surprisingly strong. If reducing the risk of conflict is both necessary and
possible, before we can propose measures to reduce the incidence of
conflict we need to understand what makes countries vulnerable. Many
models attempt to explore the factors that affect the risk of conflict (see,
for example, Elbadawi and Sambanis 2002; Hegre and others 2001). In
this chapter we review the results of the Collier-Hoeffler model and their
findings on the links between natural resources and conflict (Collier and
Hoeffler 2003). After testing for a number of factors, Collier and
Hoeffler find that three are significant—the level of income per capita,
rate of economic growth, and structure of the economy, namely, dependence
on primary commodity exports. Doubling per capita income
roughly halves the risk of a civil war. Each additional percentage point
of growth reduces the risk by about 1 percentage point. The effect of
primary commodity dependence is nonlinear, peaking with exports at
around 30 percent of gross domestic product (GDP). A country that is
2 bannon and collier
otherwise typical but has primary commodity exports around 25 percent
of GDP has a 33 percent risk of conflict, but when such exports are
only 10 percent of GDP, the risk drops to 11 percent (figure 1.1) Ethnic
and religious composition also matters. Societies in which the largest ethnic
group accounts for 45 to 90 percent of the population—which Collier
and Hoeffler term “ethnic dominance”—have a risk of conflict about
one-third higher. Other than in the case of ethnic dominance, ethnic and
religious diversity actually reduces the risk of rebellion. Once a country
has had a civil war, its risk of renewed conflict rises sharply, although
this risk fades gradually over time at about 1 percentage point a year.
The tools of war need to be financed, making civil war an expensive
proposition. Governments have established defense sectors and
funding sources that support them, but to assemble, equip, and maintain
a fighting force, the rebel group must find a regular source of
income. Before the end of the cold war, rebel groups typically were financed
by one of the superpowers or by proxy regional powers. With
the end of the cold war, rebel groups have had to look for alternative
funding sources. So irrespective of the motivation of the rebellion, the
rebel group must also become a business organization. Its main and
pressing challenge is to secure funds in order to wage war. If it cannot
overcome this financing problem, the rebel group will wither
away or be capable of only limited and low-level violence—more of
natural resources and conflict 3
Figure 1.1 Natural Resources and Conflict Risk in
Low-Income Countries
0
10
5 10 15
Primary commodity exports as a
share of GDP
Risk of civil war (percent)
20 25
6%
11%
17%
24%
30%
20
30
Source: Based on Collier and others (2003).
an irritant than a serious threat to an established government. Much
of the economic analysis of rebellions tends to look for economic
objectives, whereas much of the political literature generally ignores
finance as a constraint. Yet finance is critical.
Natural Resources and Conflict: What Is the Link?
Unless a successful rebel organization is bankrolled by another country
or an extensive and willing diaspora, it must generate income by
operating some business activity alongside its military operations. The
question then becomes the type of business activity in which a rebel
group is likely to be competitive. Unfortunately, the obvious answer is
that the rebel groups’ only competitive advantage is their large capacity
for organized violence and mayhem. Since, for military reasons,
rebel groups tend to be based in rural areas, they turn to business
activities such as various forms of extortion and the exploitation
and trade of primary commodities.
Where rural areas produce primary commodities with high economic
rents, generally for export, it is a relatively simple matter for
rebel groups to run an extortion racket, levying protection charges on
producers or carrying out some of the trade themselves. The bestknown
examples are the conflict diamonds of Angola and Sierra Leone.
Alluvial diamonds are particularly well suited as a business line for
rebels because the technology is so simple that the group can directly
enter the extraction process and diamonds are a small, high-value commodity
that is easy to hide and transport and has a readily accessible international
market.As Michael Ross discusses in chapter 2, a number of
other commodities such as coltan, drugs, gold, and timber have, at various
times, been linked with civil wars in developing countries. In the
case of high-value agricultural exports, the rebel group is not directly involved
in production but levies informal taxes on producers and traders.
The most spectacular example is that of illegal drugs, which, because of
their illegality, are very high value. But even lower-value export crops
are sometimes the target of rebel extortion—the Revolutionary United
Front in Sierra Leone started by levying informal taxes on coffee and
only shifted its activities to diamonds once it was well established.
Some extractive industries require sophisticated technology, generally
supplied by a multinational company. This, too, provides opportunities
for extortion. Rebel groups can target foreign companies and
threaten expensive infrastructure, such as an oil or natural gas
pipeline. As pointed out in chapter 2, a particularly remarkable recent
development is for rebel groups to raise finance by selling the advance
4 bannon and collier
rights to the extraction of minerals that they do not control, but that they
intend to control. This method of financing the tools of war through the
sale of extraction rights is what Ross terms “booty futures.”
Violent secessionist movements are statistically much more likely if
the country has valuable natural resources, with oil being especially
dangerous. Examples include Aceh (Indonesia), Biafra (Nigeria),
Cabinda (Angola), Katanga (ex-Congo), and West Papua (Indonesia).
There is some evidence that rebel leaders greatly exaggerate the likely
gains from controlling the resources. This exaggeration is in part
strategic, as secessionist leaders simply seize on the resource issue to
build support for their movement. For example, leaders of the GAM
(Gerakan Aceh Merdeka) rebellion in Aceh propagated the notion that
secession would turn the province into another Brunei. Ross (2002)
estimates that this was more than a tenfold exaggeration. But leaders
themselves may also succumb to the glamour of the riches to be had
from natural resources and overestimate the likely windfalls.
The discovery of a new natural resource or a higher endowment of a
known resource greatly increases the risk of conflict in low-income
countries, especially if the resource is oil (figure 1.2). In many such
instances, ethnic cleavages can appear to cause the rebellion. In most
societies, wherever a valuable resource is discovered, some particular
natural resources and conflict 5
0
Risk of an
ideological
war
Risk of a
secessionist
war
3%
8%
2
4
6
8
10
Risk of civil war (percent)
Figure 1.2 Risks from Natural Resources
Additional Risk of Civil War When
the Natural Resource Endowment
Is Double the Average
Effect of Oil on the Type of War:
Risk that the War Is Secessionist
0
Without oil With oil
68%
100%
20
40
60
80
100
Percent
Source: Based on Collier and others (2003).
ethnic group is living on top of it and has an incentive to assert its rights
to secede. All ethnically differentiated societies have a few romantics
who dream of creating an ethnically “pure” political entity, but the discovery
of resources has the potential to transform such movements from
the romantic fringe into an effective and violent secessionist movement.
Although this type of secessionist movement appears ethnically based
and cloaks its justification in the rhetoric of ethnic grievances, it would
seem a mistake to consider ethnicity or religion as the driver of conflict.
Poor governance and corruption can also exacerbate secessionist
tendencies, especially if the secessionist group has a fighting chance of
wresting control of a valuable natural resource. Where a region sees
what it considers its resources stolen by a corrupt national elite comfortably
ensconced in the capital, the prospect of gaining control over
the natural resource revenues and using them for the benefit of the local
ethnic majority can be a powerful driver for a secessionist movement.
Kidnapping for ransom targeted at foreign extractive companies
also can be a profitable business. In the 1990s kidnapping became the
third largest source of financing for Colombia’s two rebel groups
(National Liberation Army and Revolutionary Armed Forces of
Colombia), after drugs and extortion. Kidnapping netted the Colombian
guerrillas an estimated $1.5 billion during 1991–99, and these
revenues have been rising. In 1999 the two groups are estimated to
have received a combined $560 million from extortion and kidnapping
(Pax Christi Netherlands 2001, pp. 33–34). A large number of kidnap
victims are employees of foreign extractive industries. Oil companies
are especially frequent kidnap targets, and in some regions kidnapping
has become a regular routine for them. Rebel groups may also target
foreign tourists for kidnapping, as has happened in the Philippines.
Following each successful kidnapping, rebel recruitment soars, presumably
because young men anticipate large payoffs. In Colombia
rebel groups have combined with urban-based criminals to create a
market in kidnapped people. Criminals undertake the kidnapping, selling
the victim to the rebel group, which then demands ransom.
Just as markets have emerged in some developing countries to trade
kidnap victims, markets have emerged in developed countries to supply
ransom insurance. Kidnap insurance, although understandable from a
personal or business sense, has the perverse effect of reducing the incentive
to protect workers from kidnapping, increasing the size of ransom
payments, and lowering the transaction costs for the rebel group.
In Colombia rebels are reputed to have, at times, gained access to insurance
company data and thus been able to determine whether the actual
or intended victim has kidnap insurance (Pax Christi Netherlands
2001, p. 30).
6 bannon and collier
Wars also appear to have been lasting longer. The expected duration
of conflict is now more than double that of conflicts that started prior
to 1980 (Collier, Hoeffler, and Söderbom 2001).We do not know why
this is the case, but one possible explanation is that it is now easier
to sustain a conflict than it used to be. Even without support from a
superpower or from a neighboring government, it is possible to find
alternative sources of revenue with which to equip and sustain rebel
movements.
Once conflict breaks out, it tends to make matters worse through its
effect on the structure of the economy. Many natural resource exports
are relatively unaffected by conflict because they have high rents or operate
in enclave-type settings, with minimal backward or forward linkages
with the rest of the economy. Contrast this with manufacturing or
service activities such as tourism, which tend to have low margins and
are easily disrupted by conflict. Moreover, economic policies and institutions,
which are key to economic diversification, deteriorate markedly
during the conflict and take a very long time to recover. As a result,
countries are likely to find themselves even more dependent on natural
resources than before the conflict started. This makes conflict much
harder to resolve and, when resolved, raises the risk of a return to war.
A Call for Global Action
More than a billion people live in low-income countries that have been
unable to put in place and sustain policies and institutions that would
allow them to join the group of more developed middle-income nations.
These countries have generally been mired in economic decline
and dependent on primary commodities. This group faces a high risk
of civil war, which, if it materializes, sets them on a path of reverse
development. Close to 50 armed conflicts active in 2001 had a strong
link to natural resource exploitation, in which either licit or illicit exploitation
helped to trigger, intensify, or sustain a violent conflict. In
other countries with low-intensity conflict or collapsed states, corrupt
officials and their opponents, often involved with organized crime and
terrorist networks, siphoned off revenues from natural resources. In
addition to sustaining conflict and undermining governance, resource
exploitation has contributed to famines, the spread of diseases, population
displacement, and serious environmental damage. Abundant
natural resources, which should be a blessing for a low-income country,
in most cases make poor people poorer.
The adverse effects of natural resource endowments flow through a
variety of channels, but most of these are amenable to policies and
natural resources and conflict 7
concerted global action. Some of the actions needed to avoid civil wars
must come from the governments of developing countries themselves—
for example, by making greater efforts to adopt economic policies and
institutions that can stimulate growth and reduce poverty, improve
governance and transparency, and redress reasonable grievances. Some
measures, however, require concerted global action.
Building a more peaceful world is not just a matter of encouraging
tolerance and consensus. It should involve a practical agenda for economic
development and the effective global governance of the markets
that have come to facilitate rebellion and corrupt governance. In the
remainder of this chapter, we consider measures that can be regarded
as part of a global development agenda and measures that are more
appropriately viewed as part of the global governance of natural
resources and its link to conflict.
The Development Agenda
Successful development is the best protection against civil war. In particular,
raising and sustaining economic growth, diversifying the economy,
and assisting countries to cope more effectively with commodity
price shocks can all help to reduce the risk of conflict in low-income
countries.
Raising Economic Growth. Faster economic growth would reduce
the risk of conflict by raising the level of income and, indirectly over
time, assisting diversification. The key issue is how to raise growth.
There is a broad consensus that three instruments—domestic policies,
international aid, and access to global markets—are all effective in raising
growth.1 The precise way in which they operate is subject to debate,
but there is no significant disagreement on the merits of market access.
Some analysts argue that aid and policies complement each other, with
aid becoming more effective as policies get better and, conversely, policy
reform being more effective as inflows of aid become larger. Other analysts
argue that the beneficial effects of aid and policy are independent.
The common ground is that, where policies are reasonable, aid is effective
and that, where policies are not reasonable, policy improvement
will enhance growth. The intention is not to enter into these arguments
here but merely to assert that the old dictum of “good policies supported
by generous aid and access to markets” remains an effective longer-term
strategy for preventing conflicts.
Diversifying out of Trouble. One obvious way to reduce countries’
dependence on natural resources is to help them to diversify their
economies. Countries with a more diverse base of exports are better
8 bannon and collier
protected from the adverse effects of price fluctuations and less prone
to the resource curse. On average, developing-country exports are no
longer predominantly primary commodities. But this average masks a
skewed pattern—at one extreme, the successful developers that have
achieved astonishingly rapid diversification and, at the other, a group
of low-income countries that have been left behind by development and
marginalized from world markets. The fact that the former group has
succeeded shows that it is possible for the marginalized to do the same;
however, diversification may not always be a realistic or even a desirable
option—Botswana is a landlocked desert with few options other
than diamonds. For such countries, the priority should be to make
natural resource endowments work effectively for development, as
Botswana has managed to do. But for many countries, diversification is
surely a viable option.
Three factors significantly reduce a country’s dependence on primary
commodities: growth, aid, and policy. On average, growth diversifies
an economy, which reduces the risk of conflict in addition to the direct
contribution of growth to risk reduction. This does not imply that all
policies that promote growth promote diversification, but there is some
presumption that the inducement of growth will normally assist diversification.
Aid significantly reduces primary commodity dependence.
This may be partly a result of “Dutch disease,” which, by increasing
the availability of foreign exchange, leads to appreciation of the exchange
rate and thus reduces export incentives. Aid may also improve
infrastructure—transport, power, telecommunications—which can help
to lower business costs and improve the international competitiveness
of activities that do not rely on high location-specific rents for their profitability.
Good economic policy also significantly promotes diversification.
Collier and Hoeffler (2003) measure this using the World Bank’s
Country Policy and Institutional Assessment (CPIA) ratings. On average,
an improvement of 1 point in the CPIA—roughly equivalent to the
difference between African and South Asian policies—would reduce primary
commodity dependence from 15.2 percent ofGDPto 13.8 percent.
As pointed out in chapter 2, OECD (Organisation for Economic
Co-operation and Development) countries can also help natural
resource–dependent, low-income countries to diversify by removing
tariff and nontariff barriers on value added goods. OECD countries
place no tariffs on imports of unprocessed oil and minerals, but
exporters quickly run into tariffs and nontariff barriers if they wish
to add value to these raw materials.
Reducing Exposure to Price Shocks. Many of the problems caused
by resource dependence come from the volatility of international prices.
natural resources and conflict 9
Primary commodity prices are highly volatile so that countries that are
heavily dependent on primary commodities periodically suffer from
crashes in export prices. Studies show that commodity price shocks
tend to promote corruption, weaken state institutions, and create a
host of budget and management problems (see chapter 2). This is, in
part, because shocks produce a multiplier contraction in output and severe
fiscal pressures that do not disappear when prices recover. Recent
research finds that when these shocks are large, they severely damage
medium-run growth—each dollar of export income lost generates a
further two dollars of output contraction (Collier and Dehn 2001).
There is also some evidence that much of this lost growth is never
recovered. Hence, negative price shocks may induce episodes of rapid
and persistent economic decline that increase the risk of conflict.
Governments of low-income, shock-prone countries face macroeconomic
management problems on a scale that developed countries
have not seen since the 1930s. Yet their plight has received scant attention
from donors. Shocks caused by natural disasters—earthquakes,
hurricanes, floods, droughts—typically produce a massive and generous
donor response, often overcompensating for the shock itself. Price
shocks, such as the one being experienced by coffee producers today,
although often much more devastating, have historically triggered
no significant donor response. Until recently, the international community
had two instruments to address the problem: the Compensatory
Financing Facility (CFF) of the International Monetary Fund (IMF)
and the Stabex Facility of the European Union (EU). For different reasons,
neither of these worked well, and they are both dormant. The
CFF was a nonconcessional borrowing facility, yet it is usually unwise
for a country to borrow commercially at the onset of a severe negative
shock. Stabex disbursements were so slow that they tended to be procyclical,
arriving during the following price upturn.
Even the governments of developed countries, with sophisticated
teams of experts, would find the management of such large shocks extremely
difficult. Developing-country governments usually lack the
expertise and political leeway to implement contractionary policies
effectively. There is therefore a case for global action to cushion such
shocks and assist countries to improve their risk management or transfer
some of this risk. International financial institutions, especially the
IMF and World Bank, could consider redesigning existing tools or
developing new mechanisms to reduce the impact of price shocks.
Beyond cushioning price shocks, there is also reason to reduce them
where possible. Attempts to control commodity prices have failed
repeatedly, and there seems to be little reason to propose them once
10 bannon and collier
again. However, the trade policies of countries in the OECD (Organisation
for Economic Co-operation and Development) can exacerbate
volatility for other countries. When OECD governments increase their
subsidy to domestic producers in order to cushion them from a fall in
the world price of an agricultural commodity, the effect is to amplify
price shocks for the rest of the world. The cushioning that such subsidies
provide to domestic OECD producers comes at the cost of
increasing the price volatility for producers in low-income countries—
precisely those that can ill-afford negative shocks and have few ways
of softening the fall in prices.
The Governance of Natural Resources
Many low-income countries depend on primary commodities for their
export and fiscal revenues. On average, such dependence is associated
with increased risk of conflict, weak governance, and poor economic
performance. However, the average conceals extremely wide variation.
In 1970 Botswana and Sierra Leone were both low-income countries
with substantial diamond resources. Over the next 30 years diamonds
were central to the economic and social collapse of Sierra Leone—its
per capita income is now much lower than it was in 1970, and the
country has sunk to the bottom of the Human Development Index.
By contrast, diamond resources were critical to Botswana’s success in
becoming the fastest-growing economy in the world and a middleincome
country. Hence, although on average primary commodities
have been a bane on development, they can also drive successful development.
The natural resource curse is not destiny. The challenge, at
both the national and international levels, is to adopt policies that
better harness this potential.
The vast majority of resources that sustain and fuel civil wars depend
on access to the global economy—to its markets, its financial intermediaries,
its brokers, its investors, and the foreign companies that
often extract a developing country’s riches. This is not to decry the
impact of globalization and add to the litany of negative effects ascribed
to it. On the contrary, while globalization provides rebels with
new opportunities, it also makes them more vulnerable to international
pressure—more than would have been possible when rebellions
were proxy wars of the superpowers—provided the international
community is willing to exert it. The remainder of this chapter
sketches out broad areas where global action would be effective,
while the other chapters in this book explore each area in greater
depth.
natural resources and conflict 11
Who Gets the Money? Increasing Transparency of Natural Resource
Revenues. Although these proposals for global action are directed
primarily at the international community, governments of low-income,
resource-rich countries should also have a strong interest. They are
often under threat from rebel groups financed by natural resource
revenues and would obviously benefit if these funding sources were
choked off. But these governments need to show that their natural resource
revenues are well used. As discussed, rebel movements, particularly
those seeking to secede on the back of natural resources, are
greatly bolstered by the presence of a corrupt elite that siphons off the
revenues rather than a government that uses them transparently to
raise living standards across the board. The government’s best defense
is likely to be credible scrutiny of the revenues that it receives, how they
enter the budget, and how they are spent. There are two serious obstacles,
however, even when governments aim to be accountable. First are
the sheer magnitude of resource revenues and the scale of the rents relative
to the size of the country’s economy. Governments in low-income
countries, with poor institutional capacity and little tradition of accountability
and public scrutiny, face enormous problems in absorbing
and effectively tracking large revenue flows. This is not to exempt or
excuse corruption in resource-abundant countries but merely to indicate
the scale of the pressures and hence temptations involved. Second,
in many instances it is not enough for resources to be accounted for
and relatively well used—the government is not fully trusted and so
will need to convince doubters by establishing a credible independent
process of verification. These two factors suggest that even countries
wanting to do the right thing need help, which, if successful, may exert
pressure on those governments that do not manage their resource
wealth effectively.
One possible way to address these issues in an integrated way is to
develop an international template for the acceptable governance of
natural resource revenues to which a resource-rich government could
choose to subscribe. Such a template would have five elements. First,
the host government would require international companies in the
extractive industries to report payments so as to allow appropriate
scrutiny and international comparability. Such reporting could either
be to the general public, as envisaged in the Publish What You Pay campaign
discussed by Philip Swanson, Mai Oldgard, and Leiv Lunde in
chapter 3, or to an independent entity such as the international financial
institutions. Second, the government itself would require national
resource extraction companies, whether private or government owned,
to report on the same basis. Third, the government would undertake
to report its receipts from all of the above sources and ensure that they
12 bannon and collier
are easily tracked as they pass through the budget. Fourth, an independent
entity, such as the international financial institutions, would
collate the reported information, attempt to reconcile payments and
receipts, integrate the figure for net government revenues with standard
budget information on revenues and expenditures, and publish
the results on an annual basis. A natural division of labor would be
for the World Bank to collate, reconcile, and aggregate the data from
companies and for the International Monetary Fund to integrate the
net revenues into the budget data it already scrutinizes under its
arrangements or Article IV consultations. Fifth, the government would
designate and, if necessary, establish credible domestic institutions of
scrutiny—such as parliamentary committees or ad hoc entities, including
civil society organizations, as in Chad—to which the international
financial institutions could report the information in a form that
would be readily intelligible.
Where Does It Come from and Who Buys It? Shutting Rebel
Organizations out of Markets. The Kimberley Certification Process
Scheme is designed to make it increasingly difficult for rebel organizations
to sell rough diamonds in global markets. The process, which
took only two years to establish (a comparatively short time for a
global initiative), is an important first step. As Corene Crossin, Gavin
Hayman, and Simon Taylor discuss in chapter 4 and appendix 4.1,
significant technical and operational issues remain to be addressed,
and it is too early to judge whether the Kimberley process will be successful
and sustained. However, it is an encouraging sign that this type
of global action is indeed possible.
If the Kimberley process proves ineffective, the present private voluntary
agreement will need to be reinforced by intergovernmental legislation
and probably provide for enforceable sanctions. However, the
existence of the private agreement shows that all parties have recognized
the need for effective action and deserve the opportunity to
demonstrate success. Moreover, if the Kimberley process is successful,
it could form the model for the governance of other commodities for
which there is significant inadvertent funding of conflict.
Realistically, the effect of better regulation of commodity markets is
not to shut rebel organizations out of markets altogether. Efforts such
as the Kimberley process for rough diamonds, chain-of-custody tracking
arrangements for illegal logging, and other schemes discussed in
chapter 4 can be effective even if rebels are still able to sell the commodities
they extort from local producers, as long as they can sell
these illegal commodities only at a deep price discount. In this respect,
a key global action is to monitor and evaluate the Kimberley process,
natural resources and conflict 13
while developing and implementing certification and tracking schemes
for other commodities.
Going after the Money: The Finance of Illicit Commodities. Apractice
that financed several rebel organizations in the 1990s is the sale
of booty futures, whereby a rebel organization receives finance in advance
in return for an entitlement to natural resource extraction in the
future should the rebellion succeed. Reputable companies rightly view
this practice as unacceptable; nevertheless, it happens on the fringes of
the corporate world. As Philippe Le Billon discusses in chapter 6, there
is a strong case for making such transactions criminal in the company’s
home country, analogous to the OECD agreement to criminalize international
bribery.
Extortion and kidnapping have also become an important source of
financing for rebel movements, and, as discussed earlier, the financial
flows involved can be considerable. Although companies should be discouraged
from operating in such conditions, the insurance industry has
developed products offering ransom insurance. The overall effect of
this is evidently to increase ransom payments, and there is a good case
for banning ransom insurance. OECD governments could also undertake
and live up to a commitment that public money will not be used to
pay ransom to rebel movements and, correspondingly, that extortion
payments will not be treated as tax-deductible business expenses.
There is also a strong case for OECD countries to consider antidrug
policies that reduce financial flows to rebel groups.
Tightening Scrutiny on Illicit Payments. The proposed template is
intended to ensure that legitimate payments from companies to governments
are properly accounted for and used. Illicit payments by natural
resource extraction companies to bribe people of influence are a different
problem. The OECD agreement to criminalize such payments is a
start, but bribes to officials can be disguised as “facilitation payments”
to companies controlled by their relatives, and so complementary
efforts are required. Some resource extraction companies, in line with
OECD Guidelines for Multinational Enterprises, have now undertaken
not to make facilitation payments. It would be desirable to make greater
efforts to encourage adoption by non-OECD countries (chapter 6) but
also to encourage the industry to determine precisely what is the boundary
between legitimate and illegitimate payments and to embed this in
corporate rules of behavior.
There is also an important role for the international banking system.
The family of President Abacha was able to deposit in reputable
international banks sums vastly in excess of his presidential salary,
evidently illegally siphoned off from Nigerian oil revenues. Banks now
have somewhat greater responsibility to know their clients and to
14 bannon and collier
report suspect receipts. There is also increasingly greater cooperation
in securing the repatriation of corrupt money. However, there is scope
for much tighter reinforcement of antibribery legislation on the part of
the international banking system. As Jonathan Winer and Trifin Roule
propose in chapter 5, the Financial Action Task Force should consider
extending its recommendations to the exploitation of drugs or any
other form of trade in illicit natural resources.
In some cases, even the best scrutiny and information on the dealings
of corrupt officials and politicians will have no effect. Leaders and politicians
may be impervious to moral pressure or wield sufficient power to
place them above their own national law. In such cases the international
community has some responsibility to impose penalties that target the
guilty party and his or her associates without inflicting suffering on the
society. The United Nations has been developing smart sanctions that
offer some scope for such a targeted approach to penalties. These types
of sanctions should be strengthened and internationally supported.
Attracting Reputable Companies to Risky Environments. At present,
some low-income countries face severe difficulties in attracting
reputable resource extraction companies to exploit their resources.
When reputable resource extraction companies withdraw from difficult
environments as a result of greater international public scrutiny,
they may well be replaced by companies that are less reputable or
less vulnerable to international pressure or shareholder concerns.
In this case, global efforts would be counterproductive. As John Bray
discusses in chapter 7, survey evidence suggests that the two main impediments
deterring good companies from entering very risky environments
are the risk to their reputations and the political risk of
unreasonable treatment. The template described in this chapter has
the potential to address both of these risks.
One advantage of the Chad-Cameroon pipeline model of improved
governance of natural resource revenues is that it provides international
companies with a degree of reputational protection. The international
financial institutions in effect certify a governance structure as acceptable.
The introduction of a more standardized template for appropriate
governance, and its adoption by governments interested in attracting reputable
companies, would provide a much higher degree of reputational
cover. Such a template also has the potential to address political risk. At
present, the insurance entities that supply cover for political risks, such as
the World Bank Group’s Multilateral Investment Guarantee Agency
(MIGA), have to assess each governance situation entirely on an ad hoc
basis. Where governments subscribe to the good governance template,
this would be pertinent information for MIGA and other insurers and
could considerably facilitate their willingness to provide cover.
natural resources and conflict 15
Note
1. An additional issue, not discussed here, is whether the way of raising
growth inadvertently increases the risk of conflict. Collier and Hoeffler (2003)
find that policies that raise growth rates do not directly increase the risk of
conflict.
References
The word “processed” describes informally produced works that may
not be commonly available through libraries.
Collier, Paul, and Jan Dehn. 2001. “Aid, Shocks, and Growth.”Working Paper
2688. World Bank, Development Research Group, Washington, D.C.,
October. Available at www-wds.worldbank.org/servlet/WDSContentServer/
WDSP/IB/2001/11/06//000094946_01102304052049/Rendered/PDF/
multi0page.pdf. Processed.
Collier, Paul, and Anke Hoeffler. 2003. “Aid, Policy, and Peace.” Forthcoming
in Defense and Peace Economics.
Collier, Paul, Anke Hoeffler, and Mans Söderbom. 2001. “On the Duration of
CivilWar.” Policy ResearchWorking Paper 2681.World Bank, Development
Research Group,Washington, D.C. Available at www.econ.worldbank.org/
resource/php. Processed.
Collier, Paul, V. L. Elliott, Håvard Hegre, Anke Hoeffler, Marta Reynal-Querol,
and Nicholas Sambanis. 2003. Breaking the Conflict Trap: Civil War and
Development Policy. Washington, D.C.: World Bank.
Elbadawi, Ibrahim, and Nicholas Sambanis. 2002. “How Much Civil War
Will We See? Explaining the Prevalence of Civil War.” Journal of Conflict
Resolution 46(June):307–34.
Elbe, Stefan. 2002. “HIV/AIDS and the Changing Landscape of War in
Africa.” International Security 27(2):159–77.
Hegre, Håvard, Tanya Ellingsen, Scott Gates, and Niles Petter Gleditsch. 2001.
“Toward a Democratic Civil Peace? Democracy, Political Change, and Civil
War, 1816–1992.” American Political Science Review 95(1, March):33–48.
Pax Christi Netherlands. 2001. The Kidnap Industry in Colombia: Our Business?
Utrecht. Available at www.paxchristi.nl/kidnappingincolombia.pdf.
Ross, Michael L. 2002. “Resources and Rebellion in Aceh, Indonesia.” Paper
prepared for the Yale–World Bank project on the economics of political
violence. University of California Los Angeles, Department of Political
Science, November 7. Available at www.polisci.ucla.edu/faculty/ross/
ResourcesRebellion.pdf. Processed.
16 bannon and collier
chapter 2
The Natural Resource Curse:
How Wealth Can Make You Poor
Michael Ross
SINCE THE MID-1990S THERE HAS BEEN a growing body of research on the
causes of civil wars. One of the most surprising and important findings
is that natural resources play a key role in triggering, prolonging, and
financing these conflicts. This report summarizes the main findings of
recent scholarship on the role of natural resources in civil wars and
discusses some policy options.
The natural resources that cause these problems are largely oil
and hard-rock minerals, including coltan, diamonds, gold, and other
gemstones. Sometimes other types of resources are also at fault—
notably timber. And if drugs are considered a natural resource, they
too have played an important role in several conflicts. Table 2.1 lists
17 recent conflicts that are linked to natural resources. In eight of
these, gemstones are one of the resources; in six, the resource is oil
or natural gas; in five, it is some type of illicit drug; and in three
cases, it is timber. In most of the conflicts, multiple resources play
a role.
Resource-related conflicts may pose special problems for the states
of Africa. Of the 17 resource-related conflicts in table 2.1, nine are in
Africa. Moreover, conflicts in Africa, of all the world’s regions, show the
most worrisome trends. Between 1992 and 2001 the number of armed
conflicts outside of Africa dropped by half, yet the number of conflicts
in Africa stayed roughly the same (table 2.2). Moreover, within Africa,
armed conflicts have grown more severe. During the 1970s and 1980s,
half of all intrastate conflicts in Africa could be classified as civil
wars—that is, they generated at least 1,000 battle-related deaths each
year. In the 1990s two-thirds of Africa’s intrastate conflicts were civil
17
18 michael ross
Table 2.1 Civil Wars Linked to Resource Wealth, 1990–2002
Country Duration Resources
Afghanistan 1978–2001 Gems, opium
Angola 1975–2002? Oil, diamonds
Angola (Cabinda) 1975– Oil
Cambodia 1978–97 Timber, gems
Colombia 1984– Oil, gold, coca
Congo, Rep. of 1997 Oil
Congo, Dem. Rep. of 1996–97, 1998– Copper, coltan, diamonds,
gold, cobalt
Indonesia (Aceh) 1975– Natural gas
Indonesia (West Papua) 1969– Copper, gold
Liberia 1989–96 Timber, diamonds, iron,
palm oil, cocoa, coffee,
marijuana, rubber, gold
Morocco 1975– Phosphates, oil
Myanmar 1949– Timber, tin, gems, opium
Papua New Guinea 1988– Copper, gold
Peru 1980–95 Coca
Sierra Leone 1991–2000 Diamonds
Sudan 1983– Oil
Note: Separatist conflicts are listed in italics.
Table 2.2 Armed Conflicts in Africa and the Rest of the World,
1989–2001
Year Africa Rest of world
1989 14 33
1990 17 32
1991 17 34
1992 15 40
1993 11 35
1994 13 29
1995 9 26
1996 14 22
1997 14 20
1998 15 22
1999 16 21
2000 15 19
2001 14 20
Source: Adapted from Wallensteen and Sollenberg (2000).
the natural resource curse 19
Table 2.3 Civil Violence in Africa by Decade, 1970–99
Period Minor conflicta Intermediate conflictb Civil warc
1970–79 5 2 7
1980–89 8 0 8
1990–99 6 1 14
a. A minor conflict produces at least 25 battle-related deaths per year and fewer than
1,000 battle-related deaths over the course of the conflict.
b. An intermediate conflict produces at least 25 battle-related deaths per year and an
accumulated total of at least 1,000 deaths, but fewer than 1,000 in any given year.
c. A civil war produces at least 1,000 battle-related deaths per year.
Source: Data are taken from Gleditsch and others (2001).
wars. Africa had seven civil wars in the 1970s, eight in the 1980s, and
14 in the 1990s (table 2.3).
Before proceeding, it is useful to clarify two facts. First, natural resources
are never the only source of a conflict. Any given conflict is
brought about by a complex set of events; often poverty, ethnic or religious
grievances, and unstable governments also play major roles.
But even after these factors have been taken into account, studies consistently
find that natural resources heighten the danger that a civil war
will break out and, once it breaks out, that the conflict will be more
difficult to resolve. Second, natural resource dependence never makes
conflict inevitable. Resource wealth raises the danger of civil war, but
for every resource-rich country that has suffered from violent conflict,
two or three have avoided it. Better policies may help to reduce the
likelihood that resources will generate conflict and to direct resource
wealth instead to education, health, and poverty reduction.
This chapter presents an overview of what recent scholarship can
tell us about the role that natural resources play in civil wars. It suggests
four main pathways through which resources lead to armed
conflict: their effects on economies, their effects on governments, their
effects on people living in resource-rich regions, and their effects on
rebel movements. It offers some examples of each dynamic and discusses
ways in which the international policy community could intervene
to counteract these effects.1
Resource Dependence and Economic Performance
Resource dependence tends to make countries more susceptible to civil
war through two economic effects: a reduction in growth and an increase
in poverty.
20 michael ross
Economic Growth
It may seem paradoxical that a “gift” from nature of abundant gemstones,
gold, or oil tends to cause economic distress. Yet study after
study has found that resource-dependent economies grow more slowly
than resource-poor economies.2 A recent report by the World Bank,
for example, looks at the economic performance in the 1990s of countries
that have large mining sectors (World Bank 2002).3 It finds that
in countries with medium-size mining sectors (between 6 and 15 percent
of all exports), gross domestic product (GDP) per capita fell at an
average rate of 0.7 percent a year over the course of the decade. In
countries with large mining sectors (between 15 and 50 percent of exports),
GDP per capita dropped an average of 1.1 percent a year, while
in countries with very large mining sectors (over 50 percent of exports)
GDP per capita dropped a remarkable 2.3 percent a year. Collectively
these mining states saw their GDP per capita fall 1.15 percent a year—
a drop over the course of the decade of almost 11 percent (World Bank
2002; see also Ross 2002c).
This is a catastrophic record on economic grounds alone. But it also
has implications for the susceptibility of these states to civil war: recent
scholarship shows that when a country’s growth rate turns negative,
a civil war is more likely to break out (Collier and Hoeffler 2001;
Hegre 2002). In the three years leading up to the war in the Democratic
Republic of Congo, for example, GDP growth averaged –5.56 percent;
in the three years before the Congo Republic’s civil war, growth
was –1.94 percent; on the eve of Liberia’s civil war, growth averaged
–1.34 percent (figures are from World Bank 2001).
Poverty
A country’s reliance on nonfuel mineral exports—and possibly oil
exports as well—also tends to create atypically high poverty rates.
One reason for this pattern is that resource-rich governments do an
unusually poor job of providing education and health care for their
citizens. Ross (2001b) finds a strong correlation between greater dependence
on oil and mineral exports and higher child mortality rates:
for each increase in minerals dependence of five points, the mortality
rate for children under the age of five rose 12.7 per 1,000; for each
five-point increase in oil dependence, the under-five mortality rate rose
3.8 per 1,000.4
Again, this pattern is intrinsically worrisome, but it also has consequences
for a state’s susceptibility to violent conflict. The greater a
country’s poverty, the more likely it is to face a civil war (Collier and
Hoeffler 2001; Elbadawi and Sambanis 2002; Fearon and Laitin 2002).
the natural resource curse 21
It is not surprising that people are more likely to rise up against their
government when their economic predicament is bad and getting
worse. Rebel groups find it easier to recruit new members when poverty
and unemployment are widespread, since the prospect of combat and
looting seems more attractive by comparison.
A glance at the world’s most oil-dependent states, and most mineraldependent
states, illustrates these patterns. Table 2.4 lists the world’s 20
most mineral-dependent states. Remarkably, the World Bank classifies
Table 2.4 Resource Dependency: Nonfuel Mineral–Dependent
States and Oil-Dependent States
Minerals Oil
Rank State Dependence State Dependence
1 Botswana 35.1 Angolaa 68.5
2 Sierra Leonea 28.9 Kuwait 49.1
3 Zambiaa 26.1 United Arab 46.3
Emirates
4 United Arab 18.2 Yemena 46.2
Emirates
5 Mauritaniaa 18.4 Bahrain 45.7
6 Bahrain 16.4 Congo, Rep. of 40.9
(Brazzaville)a
7 Papua New 14.1 Nigeria 39.9
Guinea
8 Liberiaa 12.5 Oman 39.5
9 Nigera 12.2 Gabon 36.1
10 Chile 11.9 Saudi Arabia 34.3
11 Guineaa 11.8 Qatar 33.9
12 Congo, Dem. 7.0 Algeria 23.5
Rep. ofa
13 Jordan 6.3 Papua New Guinea 21.9
14 Boliviaa 5.8 Libya 19.8
15 Togoa 5.1 Iraq 19.4
16 Central African 4.8 Venezuela 18.3
Republica
17 Peru 4.7 Norway 13.5
18 Ghanaa 4.6 Syria 13.5
19 Bulgaria 4.0 Ecuador 8.6
20 Angolaa 3.6 Bhutan 6.8
Note: Bold signifies a civil war since 1990. Mineral dependence is the ratio of nonfuel
mineral exports to GDP. Oil dependence is the ratio of oil, gas, and coal exports to
GDP. Figures are for 1995.
a. Defined by the World Bank as a highly indebted poor country.
22 michael ross
12 of the 20 as “highly indebted poor countries”—the most troubled
category of states—even though they earn large sums of foreign exchange
from the sale of their resources. Since 1990, five of them have
had civil wars. Table 2.4 also lists the world’s 20 most oil-dependent
states. Here, too, the record is grim. Three of the top six states are
classified as highly indebted poor countries, and, once again, five of the
20 suffered from civil wars in the 1990s.5
What Can Be Done?
The international community could take two types of measures that
would help resource-rich economies. These suggestions and the others
in this chapter are preliminary ideas only, designed to stimulate further
analysis and discussion.
Promote Diversification through Trade Liberalization. One way to
reduce the dependence of governments on resource revenues is to help
them to diversify economically. States with more diverse exports are
better protected against international market fluctuations and are less
prone to the resource curse. For oil and mineral exporters, one obvious
route to diversification is to develop downstream industries, which
can process and add value to raw materials. Many downstream enterprises
use large numbers of low-wage workers and, hence, offer special
opportunities to the poor.
Yet downstream industries in oil- and mineral-dependent states
rarely succeed. One reason is that the advanced industrial states
place higher tariffs on processed goods than on raw materials to
protect their own manufacturing firms against competition. The states
in the Organisation for Economic Co-operation and Development
(OECD) place no tariffs at all on the import of much unprocessed oil
and many minerals, including aluminum, copper, crude oil, lead, nickel,
tin, and zinc. Yet if oil- and mineral-rich countries wish to add value
to these raw materials and export them in refined or processed
form—such as aluminum kitchenware, copper wire, or plastic resins—
they quickly run into OECD tariffs and nontariff barriers (table 2.5).
By removing the tariffs and nontariff barriers to value added
goods, the OECD states could help the resource-dependent states to
diversify.
Find Better Ways to Reduce Revenue Volatility. Many of the
problems caused by resource dependence come from the volatility of
resource revenues. For the last century, the international prices for
primary commodities—including oil and minerals—have been more
the natural resource curse 23
Table 2.5 Mean OECD Tariffs on Processed and Unprocessed
Extractive Products
Product and description Tariff
Copper
Copper ores and concentrates 0.00
Wire of refined copper, if maximum cross-sectional dimension 4.06
exceeds 6 millimeters
Tubes and pipes of refined copper 4.12
Cooking or heating apparatus used for domestic purposes 3.98
Aluminum
Aluminum ores and concentrates 0.00
Unwrought aluminum (not alloyed) 4.10
Wire of aluminum, if maximum cross section exceeds 7 millimeters 6.13
Table or kitchenware of aluminum 5.83
Lead
Lead ores and concentrates 0.00
Refined lead 1.88
Lead tubes, pipes, and fittings 3.90
Nickel
Nickel ores and concentrates 0.00
Nickel bars, rods, and profiles (not alloyed) 0.33
Tubes and pipes of nickel (not alloyed) 0.31
Cloth, grill, and netting of nickel wire 0.77
Tin
Tin ores and concentrates 0.00
Tin rods, bars, profiles, and wire 0.36
Tin tubes, pipes, and fittings 0.40
Zinc
Zinc ores and concentrates 0.00
Refined zinc (containing by weight 99.99 percent or more of zinc) 1.80
Zinc bars, rods, profiles, and wire 3.84
Zinc tubes, pipes, and pipe fittings 3.92
Petroleum
Petroleum oils, crude oil 0.00
Petroleum resins, coumarone, indene, or coumarone-indene 7.00
resins, and polyterpenes
Woven fabrics made from high-tenacity yarn of nylon or other 8.47
polyamides or of polyesters
Polyethylene (used for grocery bags, shampoo bottles, children’s toys) 6.87
Polymers of vinyl chloride (PVC plastic) 7.52
Polycarbonates (used for light fittings, kitchenware, and compact disks) 7.84
Source: UNCTAD-TRAINS database (United Nations Conference on Trade and
Development Trade Analysis and Information System); available at www.unctad.org/
trains/index.htm [consulted June 1, 2001].
24 michael ross
volatile than the prices for manufactured goods (Grilli and Yang 1988).
Since 1970 this volatility has grown worse (Reinhart and Wickham
1994). This means that when countries become more dependent on
oil and mineral exports they also become more vulnerable to economic
shocks.6 Studies show that revenue shocks tend to promote
corruption, weaken state institutions, and create a host of budget and
management problems. In theory, governments should be able to
buffer their economies against these market shocks by setting up stabilization
funds and, perhaps, savings funds. Yet in practice these
funds are often poorly managed and wind up doing more harm than
good (Ascher 1999; Davis and others 2001). Policymakers should
consider better ways for governments to smooth their revenue flows—
not, perhaps, through stabilization funds but through other devices,
such as long-term contracts and insurance mechanisms. This is a critical
area for additional research and policy innovation.
Resource Dependence and Governance
Natural resource dependence also has an impact on governments. A
strong and effective government should be able to offset some of the
economic and social problems caused by resource dependence. But resource
dependence tends to influence governments themselves, making
them less able to resolve conflicts and more likely to exacerbate them.
This occurs through three mechanisms: corruption, state weakness,
and reduced accountability.
Corruption
The first mechanism is government corruption. There is strong evidence
that, when a government gets more of its revenue from oil,
minerals, and timber, it is more likely to be corrupt. Part of this problem
is due to the sheer volume of resource revenues: governments can
absorb, and effectively track, only limited amounts of money. Resource
wealth often floods governments with more revenue than they
can manage effectively. Another part of the problem comes from the
volatility of resource revenues: sudden ebbs and flows of revenues tend
to overwhelm normal budgeting procedures and can weaken state
institutions.7
There are, unfortunately, many examples of resource-linked corruption.
In the case of a major oil-exporting African country, almost
$1 billion reportedly disappeared from the government’s accounts in
2001 due to corruption. Fiscal discrepancies over the previous several
the natural resource curse 25
years represented between 2 and 23 percent of the country’s GDP.Most
of these losses were linked to the country’s dependence on oil. Large
fractions of the signing bonuses for oil contracts disappeared, and the
state oil company was criticized for managing the country’s oil receipts
through “a web of opaque offshore accounts,” even though local law
requires that the funds be handled by the central bank (Cauvin 2002;
also see GlobalWitness 2002).
Weak Government
Natural resource wealth, ironically, can weaken governments—making
them less capable of resolving social conflicts and providing public
goods like health care and education. This can happen in two ways.
One is by weakening the state’s territorial control. If a country has a
resource that is highly valuable and can be mined with little training
or investment—such as alluvial gemstones and minerals like coltan
and tanzanite—it will be difficult for the government to provide law
and order in the extractive region. This opens the door for criminal
gangs, warlords, and rogue military officers, who may eventually grow
strong enough to challenge the government (see Reno 1995, 1998;
Ross 2002b).
A second way this occurs is by weakening a state’s bureaucracy.
Some scholars have found that, when governments raise their revenues
from oil instead of taxes, they fail to develop the type of bureaucracy
that can intervene effectively in social conflicts. The result may be a
heightened danger of civil war (Beblawi 1987; Fearon and Laitin
2002; Karl 1997; Mahdavy 1970).
Unaccountable Government
The third effect is reduced government accountability. Governments
that get their income from natural resources become less democratic—
and hence less accountable—than countries that rely on other sources
of revenue, such as taxation. One reason for this pattern is that when
governments have an abundance of revenues they tend to use them
to quell dissent—both by dispensing patronage and by building up
their domestic security forces. Indeed, oil- and mineral-rich governments
generally spend unusually large sums on their military forces
(Ross 2001a).
A second reason is corruption: instead of serving all citizens equally,
corrupt governments tend to favor the wealthy, since the poor cannot
afford to pay the necessary bribes. A third way is through the involvement
of the military. In some states, resource industries are controlled
26 michael ross
by the military, giving the military more independence from, and
greater influence over, the civilian government. In Indonesia, for example,
the military has a large stake in many forest concessions and
collects fees from oil, gas, and mineral companies. Since this money
goes directly to the military, it does not pass through the central government’s
normal budgeting procedures, and the legislature has no influence
over how it is spent. The result is that certain resource sales
make the military less accountable to the legislature, undermining
Indonesia’s fragile democracy.
Once again, the harm that resource dependence does to democracy
is intrinsically deplorable, but it also can make states more vulnerable
to civil war. Several studies find a link between a government’s accountability
and the likelihood that it will suffer from a civil war.8
Governments that are less than fully democratic are less able to resolve
the grievances of their citizens and hence may be more prone to outbreaks
of violent conflict.
It is easy to see how the effects of resource dependence on economies
and governments can reinforce one another, creating a trap. Economic
stagnation tends to destabilize governments. When governments are
unstable, corruption can flourish. Corrupt governments cannot manage
their economies well or properly counteract economic stagnation.
Many countries have fallen into these kinds of traps; sometimes the
outcome is a downward spiral that eventually leads to civil war—for
example, in Algeria, the Democratic Republic of Congo, Liberia, and
Sierra Leone.
What Can Be Done?
Perhaps the most important international response is to promote
revenue transparency, both at the international and domestic levels.
Make Payments fromTransnational CompaniesTransparent. Governments
misuse the revenues they get from natural resources in part
because the quantities are so large, and the government collects them
in ways that are difficult for their citizens to track. Many of these
funds wind up in off-budget accounts or the pockets of government officials
and are never heard of again. The Publish What You Pay campaign
has called attention to this problem and developed a strategy to
persuade companies to disclose fully all payments they make to host
governments. Chapter 3 offers a careful and comprehensive assessment
of this issue.
Full disclosure of all resource revenues would be a major step toward
curtailing corruption in the resource sector. But it is critical that
a disclosure regime be comprehensive and mandatory. A partial regime
the natural resource curse 27
may be worse than none at all: imagine, for example, that responsible
companies decide to disclose all payments they make to host governments
and, as a result, they are no longer able to work in countries
with high levels of corruption. If the responsible companies are then
replaced by other firms, which do not comply, the outcome is even
worse: irresponsible firms are free to work with unscrupulous governments,
and responsible firms are driven out of high-risk countries
altogether.
Increase Domestic Financial Transparency. Even if all foreign firms
comply with a full disclosure rule, it would not be sufficient to sever the
connection between resources and conflict. Determined governments
will find ways to circumvent disclosure requirements, for example, by replacing
royalty contracts with production-sharing contracts, where disclosures
might mean little, or by working with domestic intermediaries
instead of foreign companies.
Full domestic transparency—an independently audited account of
all government revenues, including resource revenues—would place
greater pressure on governments to reduce corruption and spend their
funds accountably. The World Bank, International Monetary Fund,
and World Trade Organization, export credit agencies, and the major
bilateral donors may be able to bring about progress in this area,
particularly if they work collectively.
Resource Abundance and Secessionist Movements
Resource wealth tends to promote civil wars through a third mechanism,
by giving people who live in resource-rich areas an economic incentive
to form a separate state.9 Table 2.6 lists nine secessionist civil
Table 2.6 Mineral Resources and Secessionist Movements,
1949–Present
Country Region Duration Resources
Angola Cabinda 1975– Oil
Congo, Dem. Rep. of Katanga/Shaba 1960–65 Copper
Indonesia West Papua 1969– Copper, gold
Indonesia Aceh 1975– Natural gas
Morocco West Sahara 1975–88 Phosphates, oil
Myanmar Hill tribes 1949– Tin, gems
Nigeria Biafra 1967–70 Oil
Papua New Guinea Bougainville 1988– Copper, gold
Sudan South 1983– Oil
28 michael ross
wars in regions that have abundant mineral resources.10 These resourceinspired
insurrections have several common elements. One is that,
before the resource was exploited, people in these regions had a distinct
identity—whether ethnic, linguistic, or religious—that set them
apart from the majority population.
Another is the widespread belief that the central government was
unfairly appropriating the wealth that belonged to them and that they
would be richer if they were a separate state. Finally, in most cases,
local people bore many of the costs of the extraction process itself—
due to land expropriation, environmental damage, and the immigration
of labor from other parts of the country.
The case of Aceh, Indonesia, offers a good illustration.11 In many
ways, Aceh—a province on the northern tip of the island of Sumatra—
was an unlikely place for a separatist rebellion. Aceh played an important
role in throwing off Dutch colonial rule in the 1940s and
establishing the Indonesian republic. Although the Acehnese consider
themselves ethnically distinct from the rest of Indonesia’s population,
they adhere to the same religion (Islam) and generally speak the national
language (Bahasa Indonesia). Aceh had one of the highest rates
of economic growth of any province in Indonesia in the 1970s and
1980s; by the late 1990s Aceh was at or above the national average in
per capita income and in most welfare categories.
Yet a secessionist movement was formed in Aceh in 1976, just as a
large natural gas facility was beginning its operations. The facility generated
local resentments in at least four ways: the site’s construction
displaced hundreds of families and several entire villages; the area’s development
created a wave of immigration and subsequently an antiimmigrant
backlash; the discharge of chemicals, plus periodic gas leaks,
caused health problems among locals; and the influx of revenues, and
the large police and military presence, led to exceptionally high levels of
corruption. But the most important source of discontent was the belief
that the jobs and the revenues from the natural gas plant were not being
adequately shared with the people of Aceh. The separatist movement,
popularly known as GAM (Gerakan Aceh Merdeka), seized on this
issue. GAM propaganda suggested that, if independent, the Acehnese
would become wealthy like the citizens of Brunei, the tiny oil-rich sultanate
on the island of Borneo. Although small at first, GAM eventually
won widespread support among the population, partly due to the brutality
and ineptitude of the government’s anti-insurgency campaign.
These essential features—an ethnically distinct population that
bears too many of the costs of resource extraction and enjoys too few
of the benefits—are repeated in most of the other cases and set the preconditions
for a long and bitter civil war.
the natural resource curse 29
What Can Be Done?
Resource-inspired insurgencies are never inevitable. Often the underlying
grievance—that resource revenues are not being shared equally—
has merit, and addressing it through negotiations can avert conflict.
Better transparency may also help.
Preventive Diplomacy. If a conflict can be anticipated, it can be
prevented—at least part of the time—with preventive diplomacy. We
know enough about resource-inspired secessionist movements to forecast
where they are likely to occur. We also know that once they begin
they are exceptionally difficult to stop.12 Preventive diplomacy could
make a real difference.
The civil war in Sudan, for example, might have been averted
through wise diplomacy at a critical moment. The war began in 1983
when Sudanese President Numeiry took a series of measures that upset
the delicate balance between the predominantly Muslim north and the
heavily Christian and Animist south. Among these measures was his
decision to place newly discovered oil in the country’s south under the
jurisdiction of the north and to build an oil refinery in the north instead
of the south. The Sudan People’s Liberation Army (SPLA) subsequently
complained that the north was stealing the resources of the
south, including oil; demanded that work cease on a pipeline to take
oil from the south to the refinery in the north; and, in February 1984,
attacked an oil exploration base, killing three foreign workers and
bringing the project to a halt (Anderson 1999; O’Ballance 2000). Instead
of responding to the SPLA’s demands, however, the government
waged a campaign of astonishing brutality. To date, the conflict has
killed an estimated 2 million people.
Private resource firms can also help to prevent conflict in high-risk
regions. A good example is the strategy that BP has adopted in the
Indonesian province of West Papua, a resource-rich region with a
long-running—and highly popular—separatist movement. BP is now
in the midst of exploiting a vast natural gas field off the Papuan coast
and building a $2 billion onshore facility. This is precisely the kind of
project that is likely to produce new grievances and add fuel to the separatist
movement. BP has made an admirable effort, however, to
anticipate this danger by engaging in widespread community consultations
to minimize the costs placed on local peoples, by promoting
community-based programs to help distribute the benefits of development
in sensible ways, and by not allowing the Indonesian military to
station troops at the facility, so as to avoid the provocations and
human rights abuses carried out by the military at some of Indonesia’s
other major extraction sites.
30 michael ross
Increase Transparency. Better transparency in resource revenues
might also help to avert these conflicts. Citizens typically have little
idea how much money resource projects generate; this makes them susceptible
to exaggerated claims that their resources are being “stolen”
by the central government.
In Aceh, Indonesia, the separatist movement frequently made fanciful
claims about the income that was generated by the natural gas facility—
for example, that an independent Aceh would have the same per capita
income as Brunei.13 These fabrications werewidely believed because the
Indonesian government had long concealed and misused resource revenues,
making the Acehnese justifiably suspicious of the government’s
assurances. Greater domestic transparency might have prevented the
propaganda of a small separatist group from gaining credibility and,
ultimately, from triggering a conflict that is now in its third decade.
Rebel Financing
There are hundreds, perhaps thousands, of rebel organizations around
the world at any given time. Yet only a handful grow large enough to
challenge the armed forces of a sovereign government. Why are these
groups successful, while most other groups fail?
There is good evidence that rebel financing is a large part of the
answer. To assemble and sustain a fighting force of hundreds or thousands
of soldiers, a rebel group needs a regular source of income.14
Before the end of the cold war, successful rebel groups in the developing
world typically were financed by one of the great powers. Since the
cold war ended, insurgent groups have been forced to find other ways
to bankroll themselves; many have turned to the natural resource sector
(Keen 1998).
In Angola, for example, UNITA (National Union for the Total
Independence of Angola) was backed by South Africa and the United
States for most of the 1970s and 1980s. But the end of the cold
war, and the end of apartheid in South Africa, left UNITA with no
outside sponsors. As a consequence, it began to rely much more heavily
on diamond revenue to support itself (Le Billon 2001). Similarly,
in Cambodia the Khmer Rouge had long been financed by the Chinese
government. But at the end of the 1980s the Chinese government curtailed
its support, which led the Khmer Rouge to adopt a strategy of
selling timber and gemstones to gain funding (Le Billon 2000; Thayer
1991).
Why natural resources? There are probably two reasons: the extraction
of natural resources can produce unusually large profits (that
the natural resource curse 31
is, rents), and their production is tied to a specific location and cannot
be easily moved. These characteristics make natural resource firms—
particularly mineral firms—unusually susceptible to looting, or extortion,
on a sustained basis. If rebels instead try to loot or extort money
from manufacturing firms, the firms either move to a safer area or are
forced out of business. But mining firms cannot move, and they often
earn enough money to pay off rebel groups and still earn a profit.
These characteristics—plus the location of most resource industries in
rural areas, remote from government centers—make resources an ideal
source of income for rebel groups.
Rebels raise money from resources in three main ways: through the
direct looting and sale of resources, through the sale of resource
futures, and through extortion and kidnapping.
Direct Resource Looting
Many rebel groups have financed themselves by selling natural
resources. In general, these are resources that can be easily exploited by
small numbers of workers with little training and little or no investment,
such as coltan, gemstones, or timber. Since the late 1980s, there have
been seven prominent examples:
• Angola’s UNITA over the course of the 1990s sold hundreds of
millions—perhaps even several billion—dollars worth of diamonds
(Le Billon 1999).
• Afghanistan’s Northern Alliance in the 1990s financed itself
through the sale of $40 million to $60 million of lapis lazuli annually
(Rubin 2000).
• A variety of groups in Myanmar, associated with the Kachin,
Shan, and Wa peoples, sustained their armies in the 1970s and 1980s
by selling jadeite, opium, rubies, sapphires, and timber (Lintner 1999;
Smith 1999).
• Cambodia’s Khmer Rouge at its peak in the early 1990s earned
between $120 million and $240 million a year from the sale of rubies
and timber (Brown and Zasloff 1998; Le Billon 2000).
• A range of armies in the Democratic Republic of Congo—both
foreign forces and domestic militias—have systematically looted the
country from the beginning of the current conflict, in 1998, to the present;
among the looted goods have been coffee, coltan, diamonds, gold,
and timber (see UN Panel of Experts 2001).
• In the early 1990s in Liberia, Charles Taylor’s National Patriotic
Front of Liberia was thought to be earning some $75 million a year
from taxing the sale of cannabis, diamonds, iron ore, rubber, and
timber (Ellis 1999).
32 michael ross
• InSierra Leone in the mid-to-late 1990s the Revolutionary United
Front (RUF) sustained itself largely by producing between $25 million
and $125 million in diamonds a year (UN Panel of Experts 2000).
Sale of Future Rights to War Booty
A less common—but possibly more dangerous—type of resource transaction
is the sale of future exploitation rights to the spoils of war. The
seven examples in the previous subsection cover the sale of resources
already captured by the rebels. However, sometimes combatants sell
exploitation rights to natural resources that they do not yet control,
but that they hope to capture in battle. Since these transactions are for
the sale of future exploitation rights, they might be called “booty
futures.” They are similar to other types of commodity futures. But
while normal markets for commodity futures—like the Chicago Board
of Trade—are formal, regulated, centralized at a single location, and
have many buyers and sellers, the wartime market for booty futures is
informal and often covert, has no fixed location, and includes a relatively
small number of actors. It operates only in Africa, at least so far.
The booty futures market can help to solve the financing problems
that prospective rebel movements often face, provided they wish to do
battle in a resource-rich country. If an aspiring rebel group has no
money, but stands a chance of capturing valuable resources in combat,
it can sell off the future right to exploit the resources it hopes to capture,
either to a foreign firm or to a neighboring government. The
rebels can then use this money to pay soldiers and buy arms and thus
gain the capacity to capture the promised resource.15
The market for booty futures is in some ways more dangerous than
the standard market for conflict diamonds and other wartime commodities,
since the booty futures market tends to benefit the weakest
combatants. When combatants in a civil war sell natural resources
that are under their control, this indicates that they are in a relatively
strong military position, since they control a valuable piece of territory.
But if they must sell resource futures, this implies that they are in
a weak position, since they have not yet captured the resource whose
value they hope to exploit.
The sale of booty futures is a tool of the weak against the strong: it
helps to fund groups that are too poor or too feeble to capture territory
on their own and might otherwise be forced to surrender. It hence
tends to fund the initiation of civil wars that might otherwise never
begin or to lengthen wars that are on the verge of ending. The sale of
booty futures is also dangerous because it has self-fulfilling properties.
If the rebel group is unable to sell the future right to exploit the
the natural resource curse 33
resource, it might not have the funds it needs to capture the resource
itself. Selling the future right to the resource makes its seizure possible.
Without the futures market, the rebel offensive—and perhaps the
conflict itself—would be less likely.
Not only can the trade in booty futures help to initiate conflicts, it also
can lengthen preexisting conflicts. If either side in a civil war is near defeat,
and is fighting for control of resource-rich territory, it can try to sell
off the future right to exploit the resources it hopes to capture or retain
on the battlefield. Again, the sale of booty futures can have self-fulfilling
properties: the sale of future rights enables the army to capture or hold
the resource itself. Instead of being defeated or forced to the negotiating
table, the army is able to continue fighting—thus lengthening the war.16
In the 1997 civil war in Congo-Brazzaville, the private militia of
former president Denis Sassou-Nguesso was funded, in part, by the
sale of future exploitation rights to the Congo’s extensive oil reserves.
On the eve of the conflict, Sassou received substantial assistance from
a European oil company. Some reports suggest that he received
$150 million in cash; others state that the company helped him to purchase
arms (see “Angola Aids Congo” 1997; Galloy and Gruénai
1997). These funds enabled him to defeat the incumbent president,
Pascal Lissouba, following a four-month war that destroyed much of
Brazzaville and cost 10,000 lives. These booty future swaps—and similar
trades in Angola, the Democratic Republic of Congo, Liberia, and
Sierra Leone—in each case have helped to initiate a war or prolong
one that appeared to be ending (see Ross 2002a).
Extortion and Kidnapping
Under certain circumstances, rebels can earn large sums by extorting
money from, and kidnapping the workers of, resource firms. Although
extortion and kidnapping are endemic in conflict zones, a major resource
industry can make these activities more profitable.17 Extortion
and kidnapping have been important features of the Colombian civil
war, and they also played smaller roles in the wars in Aceh, Indonesia,
and in Sudan. In Colombia and Sudan, the targeted resource was oil—
or, rather, a long oil pipeline that ran through contested territory.
In Aceh, it was a natural gas facility. In Colombia, oil must be transported
to the coast from the unstable interior through pipelines that are
hundreds of miles long. In 2000 the pipelines were bombed 98 times.
Colombia’s rebel groups have used these attacks to extort an estimated
$140 million annually; this windfall has enabled one group, the
National Liberation Army (ELN), to grow from fewer than 40 members
to at least 3,000 (Dunning and Wirpsa 2002). Colombia’s rebel
34 michael ross
groups have also turned kidnapping into a major industry. According
to a government study, between 1991 and 1999 they earned a remarkable
$1.5 billion from kidnap ransoms; many victims were associated
with the oil industry (Pax Christi Netherlands 2001).
What Can Be Done?
Three initiatives could help to curtail the use of resources to finance
rebel armies: a regime to control the flow of conflict commodities, a
ban on resource futures, and restrictions on ransom payments.
Control Illicit Resource Flows. A major effort to restrict the trade
in “conflict diamonds” was launched in May 2000, at a conference in
Kimberley, South Africa. The Kimberley Certification Process Scheme
entails an agreement by the diamond industry to trade only diamonds
that can be certified as originating from legitimate sources.18 It is too
early to know how well this process will work.
Even if it works as planned, the Kimberley process addresses only one
of several conflict commodities. Other types of precious stones—jadeite,
lapis lazuli, rubies, and sapphires—have also been used to finance recent
conflicts. So have coltan and timber. All of these resources are highly
“lootable”—that is, they can be extracted by unskilled workers and
have high value-to-weight ratios. A comprehensive regime to ban the
trade of all conflict commodities would have to address these goods as
well. Although the trade in conflict commodities may never be eliminated,
their price can be reduced considerably—thereby reducing the
flow of funds to rebel groups.
An alternative strategy would target the financial flows generated
by the trade in conflict commodities, instead of the commodities themselves.
As Winer and Roule suggest in chapter 5, enforcing restrictions
on money transfers in some ways may be easier than enforcing restrictions
on the resources themselves.
Ban Booty Futures. The United Nations Security Council has
taken measures against the sale of natural resources by rebel forces in
Angola, the Democratic Republic of Congo, Liberia, and Sierra Leone.
But the booty futures market creates problems that cannot be solved by
ad hoc, country-specific sanctions. Sometimes the sanctions come too
late: the sale of booty futures can help to initiate a civil war, while the
Security Council typically intervenes only after wars have been going
on for months or years. The sanctions may also be directed against the
wrong party: they typically apply to rebel groups, not governments—
but in Angola, Republic of Congo, the Democratic Republic of Congo,
the natural resource curse 35
and Sierra Leone, the government at least attempted to tap the booty
futures market when rebels were approaching victory. A blanket prohibition
on the sale of future rights to war booty—and strict sanctions
against any commodity sold through such a contract—would be far
more effective.
Restrict Ransom Payments. Anytime a ransom is paid to a kidnapper,
it produces obvious short-term benefits but much larger, hidden,
long-term costs. The obvious benefit is the release of the kidnap
victim; the hidden cost is the encouragement it gives to all organizations
that specialize in kidnapping, now and in the future. Kidnapping
is like any other type of business: if it is sufficiently profitable, old kidnapping
organizations will expand and new kidnapping organizations
will arise. In some countries, such as Colombia and the Philippines, the
kidnapping industry has grown to an alarming size. To take away the
incentive that groups have to kidnap workers in the resource industry,
there should be international restrictions on ransom payments. These
should include prohibitions on the sale of insurance against kidnapping,
which tends to make ransom payments swifter and easier and may
reduce the incentives for potential victims to take precautions.
Conclusion
This chapter reviews what scholars have learned about the role that
resources play in conflict. It suggests that resource dependence can
promote civil war through four types of effects: by harming a country’s
economic performance; by making its government weaker, more
corrupt, and less accountable; by giving people who live in resourcerich
regions an incentive to form an independent state; and by helping
to finance rebel movements.
It also discusses a series of measures that could help to stop these
patterns—measures that include removing OECD trade restrictions,
reducing the volatility of resource revenues, increasing the transparency
of resource payments to governments, undertaking preventive
diplomacy, restricting the trade of conflict commodities, banning the
sale of future rights to war booty, and restricting the payment of ransom
to kidnappers. These measures are discussed in a preliminary
manner to stimulate further debate and study.
Many of the countries suffering from resource-based conflicts are
stuck in low-level development traps. In these countries—most of them
in Africa—poverty, weak and corrupt government, and violent conflict
reinforce one another. Left to their own devices, these countries will
36 michael ross
generate extraordinary hardships for their own citizens and, ultimately,
for the international community. Strong measures, like the ones discussed
here, can help them to break out of this trap.
Many of the policies discussed here can work only if they are enacted
at a global level. Issues such as trade barriers, transparency, and
the monitoring of conflict commodities can be addressed only through
comprehensive, multilateral agreements. In some cases, partial or voluntary
measures may do no good at all or even make things worse. For
example, if some oil companies publish what they pay and others do
not, we may find the most transparent and responsible companies driven
out of corrupt, high-risk environments and less responsible firms
moving in. If some firms try to behave ethically by refusing to pay kidnap
ransoms, while others continue to pay them, employees of the
ethical firms will be penalized, and the net effect on the kidnapping
rate will probably be negligible. In both examples, ethical behavior
is penalized and the underlying problems remain unsolved.
As difficult as stopping civil wars may be, it has grown easier in the
last 10 years. The funding that natural resources provide to governments
and rebels locked in combat can be stopped; the funding that
the great powers once provided to combatants could not. A decade
ago, before there was much of an Internet, financial transparency was
a weak tool; now it is a strong one. The international policy community
has a unique opportunity—and hence, a unique responsibility—to
take action.
Notes
1. Important studies that touch on the role of natural resources in civil
wars include Buhaug and Gates (2002); Collier and Hoeffler (1998, 2001);
De Soysa (2002); Doyle and Sambanis (2000); Elbadawi and Sambanis
(2002); Fearon (2002); Fearon and Laitin (2002); Hegre (2002); Keen (1998);
Reynal-Querol (2002); Ross (2002a, 2002b).
2. See Gylfason (2001); Leite and Weidemann (1999); Manzano and
Rigobon (2001); Sachs and Warner (2001). Ross (1999) offers a review of this
literature.
3. This study looks only at nonfuel minerals—that is, not oil or natural gas.
4. Minerals and oil dependence was measured as the ratio of exports to GDP.
5. Resource dependence may also produce “Dutch disease” effects, but it is
not evident that these make states more susceptible to civil war.
6. The nationalization of foreign oil and minerals firms in the 1950s, 1960s,
and 1970s has also made states more vulnerable to economic shocks. Before
nationalization, foreign corporations often captured and repatriated a large
the natural resource curse 37
fraction of any resource rents, including those created by resource shocks. This
drain of wealth was much resented by developing-state governments. Yet,
ironically, the repatriation of resource windfalls provided these governments
with the unintended benefit of insulating state institutions from the volatility
of international commodity markets. By expropriating foreign corporations—
at a time when resource prices were growing even more variable—resourceexporting
governments unwittingly exposed themselves to large market shocks.
7. Gelb and Associates (1988), for example, find that the oil booms of the
1970s generally were associated with a sharp drop in the efficiency of public
investments, which indicates that corruption levels were rising. Similarly,
Collier and Gunning (1999) find that commodity booms in developing states,
for a wide range of products, were associated with a subsequent fall in
investment efficiency. Ross’s (2001c) study of the Indonesian, Malaysian, and
Philippine timber sectors reports that rising timber prices led to heightened
levels of corruption and the dismantling of institutions that had earlier
protected the forest sector from misuse. Marshall (2001) reports evidence of
unusually high rates of corruption in the minerals sector of many countries.
Several statistical studies find the same pattern. Sachs and Warner (1999) find
a strong correlation between resource dependence and a widely used measure
of corruption; Gylfason (2001) and Leite and Weidmann (1999) produce
similar results.
8. See Hegre (2002) for a careful discussion of this issue.
9. Important analyses of this problem include Collier and Hoeffler (2002);
Fearon (2002); Le Billon (2001).
10. Since any region might be perceived as having some type of resource,
I have limited this list to regions with significant oil or mineral industries
in operation, or under development, at or near the time when the civil war
began. Examples can also be found in wealthy states: Collier and Hoeffler
(2002) describe the case of Scotland, where a peaceful independence movement
emerged in the early 1970s following a sharp rise in the value of North
Sea oil.
11. This account is based on Ross (2002d).
12. According to Fearon (2002), separatist insurgencies over natural
resources tend to last longer than any other type of civil war.
13. This claim was exaggerated by more than an order of magnitude, even
under the most generous assumptions; see Ross (2002d).
14. This argument is developed by Collier and Hoeffler (2001).
15. On the growing importance of private military firms, see Singer (2001).
16. The sale of booty futures is not an entirely new phenomenon. In 1960
the Katanga rebellion in the Democratic Republic of Congo, led by Moïse
Tshombe, was bankrolled by a European mining firm; in exchange, the firm
apparently sought future mineral rights. See Gibbs (1991). During Algeria’s
war of independence, a European oil company reportedly supplied money
38 michael ross
and arms to the National Liberation Front (FLN) in exchange for future
“considerations.” See Le Billon (2002).
17. Kidnappings are often carried out by other types of criminal organizations
as well, including paramilitary groups and rogue police units.
18. For an excellent account of the Kimberley process, see chapter 6.
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chapter 3
Who Gets the Money?
Reporting Resource Revenues
Philip Swanson, Mai Oldgard,
and Leiv Lunde
THIS CHAPTER LOOKS AT THE REPORTING of resource revenues that host
governments receive. Reporting as used here includes formal reporting
of revenues to a particular body, audits and reconciliation procedures,
as well as requirements to make information on such revenues publicly
available (although information reported to a government body or
other party is not always made public). Almost by definition, reporting
concerns commodities that are legally traded. Here we focus on the
oil and minerals sectors, while diamonds, timber, and several other
commodities are covered to a lesser extent.
Reporting is a means to achieve transparency, which itself is a precondition
for curbing corruption, mismanagement, and diversion of
funds. The assumption is that strong reporting practices should increase
transparency and oversight of financial flows, which in turn
should reduce the possibilities and temptations for misappropriation.
It is also assumed that strong reporting practices and transparency
could provide host-country publics with an important part of the
information they need to monitor the way their government uses the
revenues it accrues. However, public knowledge of the full amount of
revenue available to the government (or its elites) will not, on its own,
pressure a government to make better spending choices; information
on spending and probably a minimum of organized political opposition
must also be available for this to happen. Nevertheless, public
knowledge of potential income should make it more difficult for elites
to divert large amounts of such revenue from the central budget,
43
44 swanson, oldgard, and lunde
meaning that, in theory, more could be available across-the-board for
public programs such as health and education.
A major problem is that host governments often have incentives
not to reveal the extent of their resource revenues. Moreover, the
leverage of the international community in this regard is probably limited.
This is because large resource revenues usually give host governments
the ability to reject assistance attached to conditions they do
not like. If the host government is not providing information about
the resource-related revenues available to it, an important indirect
way of viewing these flows is to look at the payments that resource
extraction companies make to the government. For this reason, nongovernmental
organizations and others focus primarily on company
reporting.
The first section explores what is known about the reporting systems
of governments in developing countries. The second section briefly
covers what is known about how oil companies report the payments
they make to host governments. It draws primarily on work by Global
Witness and the Publish What You Pay campaign. The third section
reviews several additional issues related to host-government reporting:
in particular, whether states tend to report resource revenues more
accurately when they are treated as general revenues or when they are
placed in a separate fund; whether some particular government functions
are associated with poor reporting (with a focus on the role of
resource parastatals); whether the quality of revenue reporting is influenced
by revenue volatility; whether the quality of reporting varies
by type of resource; and the effect of having a country’s military forces
directly accrue resource revenues. The fourth section looks at recent
international initiatives that could be relevant for increasing the transparency
of resource revenue flows. The initiatives covered are divided
between those relevant primarily for host-government reporting and
those relevant primarily for company reporting, although there could
be overlap in some cases. The last section offers policy recommendations
for global action.
Reporting Resource Revenues
This section examines what is known about how the flows of natural
resource revenues are reported. It focuses on reporting by host
governments. However, it also looks at reporting by extraction companies
as an indirect way of estimating revenues received by host
governments.
who gets the money? 45
Reporting by Host Governments
Host countries receive revenue from resource extraction and exports in
a number of ways. The most important of these usually are payments
by private extraction companies, including taxes, royalties, and one-off
or periodic payments, such as licensing or concession fees, signature
bonuses, and other bonuses related to a particular stage in a project.
The following are examples of payments that international companies
make to host governments in the oil and gas sectors:
• Payments to central and federal governments, such as ministries
of finance, the revenue authority, and the central bank, including
taxes, royalties, dividends, signature bonuses, and profit share
• Payments to regional and local governments, including development
funds and regional taxes
• Payments to other government agencies, including customs duties,
fines (for example, to environmental agencies for spills and emissions),
costs for studies (payable to government institutes or laboratories), and
port fees
• Payments to state companies, including tariffs to pipeline monopolies;
payments to utilities, railway, and air transport state monopolies;
and drilling contracts
• Payments in kind (barrels of oil equivalent) for royalty, profit,
and equity share
• Payments for the acquisition of shares in state companies, for example,
through government privatization, including the purchase of
bonds issued by state companies
• Payments related to joint ventures with state oil companies, including
profit and dividend payments to the state company (including
money remitted from ventures executed in other countries) and contributions
for capital expenditures.
Other revenue flows can be provided via state-owned resource extraction
companies, which may be partners in joint ventures with foreign
firms, especially in the oil and mining sectors. Joint venture projects can
imply income for the government that is not derived from payments by
private or foreign companies.
Reporting Procedures in OECD Countries. Revenue reporting
procedures are generally well documented and transparent in countries
of the Organisation for Economic Co-operation and Development
(OECD). For example, a recent, publicly available review by the United
Kingdom’sNational AuditOffice notes, “There are clear reporting lines
through which the U.K. Oil Taxation Office provides Inland Revenue
senior management with regular accounts of progress against targets”
46 swanson, oldgard, and lunde
(U.K. National Audit Office 2000, p. 4). In turn, Inland Revenue has procedures
by which it must report to Parliament and publish information
related to all revenue collected. Safeguards within the Inland Revenue
system include separation of assessment and collection responsibilities
between different offices within the tax authority. Such an arrangement
“minimizes the risk of collusion between the taxpayer and the Inland
Revenue and the risk of misappropriation of tax receipts by those
responsible for making assessments” (U.K. National Audit Office 2000,
p. 17). U.S. and Norwegian procedures are similarly well documented
and transparent.
The OECD notes that, in its member countries, “the fiscal practices
that promote integrity and accountability have been the subject of considerable
discussion in recent years and there has been much progress
in defining appropriate practices.” Examples include the OECD’s Best
Practices for Budget Transparency and the IMF’s (International Monetary
Fund’s) Code of Good Practice on Fiscal Transparency. However,
theOECDnotes, “In troubled countries, fiscal frameworksmaynot
incorporate even the most rudimentary principles for effective public
management for both revenues and expenditures”(OECD2002b, p. 15).
Reporting Procedures in Developing Countries. In general, little
public information is available about the way in which developingcountry
host governments report revenue from their extraction and
export of resources. Furthermore, the collection and reporting of resource
revenue in such countries are poorly covered in the academic
literature. Based on what has been written, however, reporting procedures,
where they exist, often are rudimentary, perhaps deliberately so.
In some cases, this may be due to lack of knowledge about best practice,
but in others it may be part of a general tactic to avoid accountability.
The observations of Ascher (1999) for the logging sector also
probably apply to revenue reporting in most high-rent natural resource
sectors in developing countries: “Apparently weak enforcement
‘capacity’ is as much a choice as a ‘given,’ and lack of enforcement capacity
is often part of the strategy of resource maneuvers.” Moreover,
governments have reduced the public awareness of such maneuvers
“by suppressing information, as in the minimal reporting requirements
for timber companies in Indonesia, or by making financial transactions
and accounting so opaque that monitoring becomes virtually impossible,
as in the case of the Nigerian and Mexican oil companies” (Ascher
1999, p. 259).
Unfortunately, Ascher and other authors we have reviewed do not
provide specific examples of these minimal procedures, where they
exist. Nor does the literature covering resource exploitation and revenue
who gets the money? 47
flows describe the procedures for reporting. Most research in this area
focuses on the macroeconomic and corruption effects that large rents
can have on the developing-country host government and, related to
this, on how revenues are spent. The literature on logging, for example,
focuses on the failures of forestry policy that have led to illegal logging
or allowed logging concessions to be underpriced. The literature on
diamonds focuses on the trade in conflict diamonds, which usually are
diamonds that have been mined and traded outside host-government
official control.
Other sources of information also have limitations. For example,
international oil and mining companies presumably are in a better
position than most to know about the internal reporting procedures of
host governments. However, discussions with a number of company
representatives shed little light on the issue and left us with the impression
that companies have little incentive to find out—or admit to
knowing about—the internal procedures followed by host governments
once companies have made their payments.1
Information obtained via cooperation between developing-country
host governments and international financial institutions probably has
been limited by the fact that large resource revenues usually have
given countries the ability to avoid cooperation that could impose difficult
conditions, for example, examination of their revenue-reporting
procedures.
Public expenditures reviews and other economic and sector work
carried out by the World Bank provide overviews of controls in some
developing countries. However, such work generally has not been
performed in resource-rich countries. According to the IMF and
World Bank websites, within the last five years such reviews were
rarely conducted for countries that Global Witness lists as having
resource-related governance problems. Nevertheless, there are notable
exceptions, such as the public expenditures review for Kazakhstan,
completed in 2000–01; assistance given to Azerbaijan’s Oil Fund; and
involvement in creating procedures for reporting oil revenue for Chad
as part of the Chad-Cameroon Petroleum Development and Pipeline
Project.2
A handful of other public and private studies and international development
projects have provided glimpses into the reporting structures
of a number of other countries, although this has not been an important
focus of such studies. Such glimpses reveal procedures that often are
rudimentary.
Most of the systems about which we have significant knowledge are
those that have been imposed relatively recently by the international
community on governments still in the early or expectant stages of
48 swanson, oldgard, and lunde
resource revenue wealth—that is, on governments not yet in a position
to refuse aid conditionality. Such procedures have not yet been adequately
tested in practice.
Reporting by Companies
If the host government does not provide information about its resource
revenues, an indirect way of viewing these flows is to look at the payments
that resource extraction companies make to the government. In
theory, disaggregated records of payments by companies to individual
governments could be reaggregated to provide an overview of the
amount of money being made available. In practice, this is difficult for
several reasons.
The existence of collective action problems among companies
means that, in practice, host governments can put a great deal of pressure
on companies (especially in the oil industry) not to reveal such
information, often citing “commercial confidentiality” agreements. In
the face of host-government opposition, companies are not inclined to
reveal information that may cause them to lose government favor and
thus their comparative advantage with respect to rival firms.
In addition, as many international oil companies have pointed out,
transparency of payments by international companies would provide
only part of the picture. It would not necessarily cover the oftensignificant
revenue flows through government-owned extraction companies.
This is especially the case with joint ventures where the
government-owned extraction company is not paid directly by the foreign
company but receives a share of the resources or revenue of the
joint venture. In practice, most companies report only what is required
by regulators in their host and home countries.
Confidentiality Provisions in Contracts. Many companies in the
oil sector have signed contracts with developing-country host governments
or state oil company partners that have confidentiality clauses.
Such clauses often include requirements not to reveal tax and other
payments that have been made to the host government.
A survey of four OECD jurisdictions (Alaska, Alberta, Norway,
and the United Kingdom) and three non-OECD jurisdictions (Angola,
Myanmar, and Nigeria) finds that OECD countries do not prohibit the
disclosure of payments to the host government; this occurs only in
non-OECD countries. According to OECD (2002b, p. 18), “This suggests
that there are ways of protecting the legitimate interests of both
business and governments while not compromising revenue transparency
and accountability.”
who gets the money? 49
Global Witness has urged companies to form a common approach
to ensure that confidentiality clauses address legitimate commercial
concerns only and do not cover basic payments to the state. The elimination
of nondisclosure clauses would make it more difficult for
companies to justify not publishing the amounts they pay to host governments.
However, it may not be enough to counter the apparently
strong incentives some host governments have for keeping payments
secret and for putting pressure on companies to do so. BP reportedly
came under very strong pressure from the Angolan government even
though the information on payments it released in early 2001 apparently
did not fall under its confidentiality clauses.3
Confidentiality clauses also exist in the mining sector, although this
industry appears to be making relatively more progress than the oil
sector in dealing with the issue. For example, mining groups under the
Mining, Minerals, and Sustainable Development (MMSD) Project
have worked with Transparency International to increase the transparency
of agreements between mining companies and governments,
and MMSD has discussed creating an international database of members’
payments (MMSD 2001).4
Reporting to Host Governments. Companies in most extractive
industries usually are required to report some information to the host
government in order to allow it to calculate taxes due. Although the information
required varies by industry and country, it generally includes
information on production, sales, costs, and profits. However, host
governments in developing countries rarely make such information
publicly available.
There are a number of commercially available sources of information
on fiscal arrangements in the oil, gas, and mining sectors of various
countries, including developing countries, where much of the world’s
resource extraction activity takes place.5 Such sources often specify the
basis on which tax and other payments are calculated, but not the reports
that must be filed. Moreover, they rarely provide information on
the negotiated terms of a particular production-sharing agreement.
Nevertheless, information on supposedly secret contracts often can be
obtained through private consultancies.
Government websites in OECD countries, such as the website of
the U.S. Mineral Revenue Management Service, often list reporting requirements
for companies, including downloadable versions of forms
that must be filed.6 Examples of this practice are rare in developing
countries.
Some countries (mostly in the OECD) require companies to file
financial information on a regular basis with an official government
50 swanson, oldgard, and lunde
information register, for example, the Registrar of Companies in the
United Kingdom or the Brønnøysund Register Centre in Norway. Such
information is used by government bodies and is often accessible by
the public.
The Registrar of Companies website contains links to more than 50
similar registers worldwide.7 Although most are in OECD countries,
several are in developing countries, including a few countries identified
as having difficulty tracking resource revenues. Moreover, although reporting
requirements for many OECD countries include company annual
returns and tax payments, public reporting procedures in most
non-OECD registers are limited to company contact details and other
basic, nonfinancial information.
Reporting to Home Governments. In its report All the Presidents’
Men, Global Witness provides a brief overview of reporting requirements
in the United Kingdom and United States for the overseas operations
of companies registered in those countries (Global Witness
2002). The United Kingdom only requires each company to provide
the total amount of “overseas taxation” paid, which is not broken
down by country. In cases where the company has set up subsidiary oil
companies for operations in a particular country, payments to that
country can be calculated as long as all subsidiaries for the particular
country are accounted for. However, not all companies operating in
the same country will necessarily operate via separately listed subsidiaries.
In Norway requirements are similar to those in the United
Kingdom. In the United States, the Securities and Exchange Commission
requires its listed companies to keep track of payments by foreign
companies for its internal records and for inspection by U.S. regulators
but does not require such records to be published or otherwise made
publicly available.
The main initiative in the area of company reporting of revenue
payments is the Publish What You Pay campaign, which is spearheaded
by the nongovernmental organization Global Witness and by
George Soros. In recognition of the collective action problems faced by
the oil companies, the Publish What You Pay campaign is calling on
home-country governments to require “their” companies to reveal
payments. The suggested mechanism is for developed-country governments
to require their stock exchanges to demand regular issuance of
such information as a condition for listing.
According to Global Witness, the Publish What You Pay campaign
has focused on the vehicle of stock market listings because many confidentiality
agreements reportedly have an opt-out clause if information
is required by regulators. For example, according to Publish What
who gets the money? 51
You Pay, Article 33(2) of the Standard Deep Water Production-
Sharing Agreement in Angola states, “Either party may, without such
approval, disclose such information to the extent required by any
applicable law, regulation, or rule (including, without limitation, any
regulation or rule of any regulatory agency, securities commission, or
securities exchange on which the securities of such Party or any of
such Party’s affiliates are listed).”8
As long as all major stock exchanges were involved, it would be difficult
for companies to change jurisdictions; otherwise, there would be
a risk of transferring the collective action problem from companies to
stock markets. However, switching stock exchanges to avoid reporting
conceivably could reflect badly on companies worried about their
image of corporate social responsibility.
The main criticism of the stock market tactic is that it may not
affect the handful of relatively technically advanced state-owned companies
operating internationally but headquartered in developing
countries. At a minimum, however, it could hinder their ability to raise
capital in important Western markets. Global Witness argues that the
problem of firms without public listings is likely to be minor and could
be addressed as it arises.
The Publish What You Pay campaign appears to be gaining momentum.
Although not everyone has endorsed the stock market regulation
approach, support is at least growing for the general idea of
more transparent company reporting, and such momentum could
stimulate other creative tactical options.
Additional Issues Related to Government Reporting
This section examines a number of potentially important issues and
their possible impact on the quality of government reporting of natural
resource revenue flows, including general revenues versus off-budget
funds; particular government functions, including the impact of resource
parastatals; revenue volatility; and variation in reporting quality
by resource type.
General Funds Versus Off-Budget Accounts
Off-budget accounting is fairly common in developing countries, but
“what distinguishes economies with high resource endowments from
those not having such wealth is the large volume of fiscal flows that are
sent through these channels” (OECD 2002b, p. 18). Logically, controls
52 swanson, oldgard, and lunde
on off-budget accounts are likely to be weaker than controls on central
budgets simply because it is easier to keep track of one account than
many. Moreover, as case studies in the forestry sector indicate, resource
revenue “maneuvers” often are carried out off-budget precisely to decrease
the chance of detection (Ascher 1999).
Available evidence also indicates that off-budget flows lack transparency.
For example, several African case studies performed by the
International Budget Project conclude that off-budget revenue flows in
Nigeria are significant but that, due to inadequate accountability for
such funds, no systematic information is available on their magnitude
or on their intended or actual use.9 Moreover, many off-budget funds
cannot be audited because they fall outside the mandate of the Auditor
General. According to Fölscher (2001), no known rules govern deposits
into and withdrawals from various accounts and funds. Similarly, more
than two-thirds of expenditures in Angola take place outside the formal
budgetary system, making their composition difficult to determine
(IMF 1997).
At the same time, the regular budgets in many resource-rich developing
countries also lack transparency. For example, the International
Budget Project report finds no law specifying the format of Nigeria’s
central budget, the documents that need to accompany the budget, or
how and when budget information is to be disseminated. Moreover,
the legal framework does not provide for public participation in the
budget process and does not support transparency and accountability
(Fölscher 2001).
Ascher, who compiled a number of case studies on natural resource
policy failures covering a wide variety of resources and countries, concludes
that revenue flows through the central budget are likely to be
more transparent than off-budget flows. He points out that, while we
have “no way of knowing, a priori, whether the scoundrels who wish
to manipulate off-budget slush funds are better or worse than the
scoundrels who wish to manipulate the central budget for objectionable
ends . . . the latter type of scoundrel is more likely to be taken to
task for his or her sins” (Ascher 1999, p. 255).
Resource revenues can enter off-budget accounts via state-owned
extraction companies as well as through private firms. However, foreign
resource extraction firms cannot always be sure that the accounts
into which they pay their taxes flow to the general budget or remain
outside the budget. For example, a mining company in Central Asia,
following instructions from the Minister of Finance, reportedly paid
funds into a particular bank account only to discover that this was a
private account owned by the country’s president (MMSD 2001).
who gets the money? 53
Large and nontransparent off-budget flows are tempting targets for
embezzlement. Given the high correlation between resource wealth and
internal violence (chapter 1), it is not surprising that another major destination
of off-budget resource flows is the military. Moreover, offbudget
funds may be used to finance developmental or prestige projects
of questionable economic or social value that may not be expected to
stand up to the relatively greater scrutiny of the central budget process.
Trust Funds. Foreign banks sometimes set up off-budget trust
funds to help repay loans using future oil or other commodity revenues
as collateral. Reportedly, a significant portion of the money from oil
sales by the Angolan state oil company, Sonangol, goes directly into
these trusts without passing through the central budget. The banks,
understandably, have demanded such arrangements as security for
their loans. However, the government provides little public information
about the flows through such funds. Since such a large portion of
Angola’s annual income apparently passes through them, Global Witness
has called on banks to publish details so that there can be some
outside scrutiny of the amounts involved (Global Witness 2002).
Resource Stabilization and Savings Funds. A number of resourcerich
countries have created special funds to receive a portion of natural
resource windfalls. Such funds usually are intended to promote macroeconomic
stability or to save part of the windfall for the future. Most
funds have been set up for oil, but at least one has been related to
minerals—Chile’s copper fund—and a number of relatively minor funds
have been related to agriculture, such as Colombia’s coffee fund.
In general, resource funds have received mixed reviews on macroeconomic
grounds and in terms of promoting transparency. For example,
according to Davis and others (2001a),
Governance, transparency, and accountability may well be undermined
by an oil fund. By their very nature, oil funds are usually outside existing
budget systems and are often accountable to only a few political
appointees. This makes such funds especially susceptible to abuse and political
interference. Reporting and auditing requirements for the funds are
often loose, and their lack of integration with the budget makes it more
difficult for both Parliament and the public to monitor the use of public
resources as a whole.
Many funds claim to take the Norwegian State Petroleum Fund as
an example, while ignoring the important fact that the fund functions
as a government account under the control of the Ministry of Finance.
Davis and others (2001a) attribute the success of the State Petroleum
54 swanson, oldgard, and lunde
Fund to Norway’s implementation of sound and transparent macroeconomic
policies.
A study of resource funds in Alaska, Chile, Kuwait, Norway,
Oman, and Venezuela agrees that a resource fund “cannot be a substitute
for sound fiscal management and that its success or failure can be
attributed as much to fiscal discipline as to the fund’s management”
(Fasano 2000, p. 19). Stabilization funds have been more successful in
countries with a strong commitment to fiscal discipline and sound
macroeconomic management. Thus both the studies by Davis and
others (2001a) and by Fasano (2000) emphasize the importance of
concentrating on fiscal discipline and avoiding the “distraction” of
potentially problematic funds.
Caspian Revenue Watch takes a slightly different approach; it assumes
that, in some countries at least, it probably will be easier for
civil society watchdogs and others to monitor revenue flowing into a
specific fund than to monitor revenue going into the general budget.
Government Functions
A number of different actors can be involved in the control and reporting
of revenues derived from natural resource extraction. The main
ones usually are the Ministry of Finance, the relevant sector ministry,
and often a parastatal extraction company. Others include the Office of
the President or other powerful politicians or committees that have
control over revenue flows.
Typically, the larger the rents involved in the resource, the more the
various government actors may try to gain control of their collection
and distribution. Rent seeking on the part of individuals or companies
wishing to acquire logging concessions, for example, usually leads
to what Ross (2001) calls “rent seizing” on the part of officials—that
is, attempts to appropriate the right to allocate the economic rents to
various private and public interest groups in return for political or
other favors. In this way, politicians try to maximize the value of their
allocation rights by making them as direct, exclusive, and discretionary
as possible. The organization that distributes the extraction rights may
not always be the one through which the resulting resource revenues
flow.
Available evidence is probably not sufficient to allow generalizations
about whether particular state actors are better at reporting resource
revenues than others, although reporting is likely to be worse
the farther one gets from the Ministry of Finance. Many of Ascher’s
case studies in minerals, oil, and timber involve efforts by the technocratic
experts of the Ministry of Finance to rein in the resource flows
who gets the money? 55
of line ministries and parastatals that, in turn, try to obscure such
flows for their own organizational or personal ends. Such off-budget
organizations often depend on the protection of powerful politicians,
who also may benefit from the resource revenues. For example, former
Indonesian president Suharto reportedly used off-budget funds generated
by the state oil company, Pertamina, and later by the Forestry
Ministry’s reforestation tax to fund questionable prestige and development
projects.10 The Finance Ministry was able to rein in Pertamina
and redirect its revenue flows through the treasury only after 1979,
following Pertamina’s bankruptcy due to uncontrolled overborrowing
on international markets (Ascher 1999).
The use of state enterprises in the extractive sectors appears to pose
particular problems for the transparency of natural resource revenues.
With respect to the oil sector in OECD countries, state-owned enterprises
enlarge the scope for nontransparency of public accounts
(OECD 2002b). In non-OECD countries, where overall fiscal controls
generally are less transparent, the potential for opacity of revenue
transfers is likely to be greater.
A potential problem is that parastatal companies typically are not
integrated into the government in the same way as a line ministry and
thus are not likely to come under the same general reporting procedures
and controls. An additional problem is that extractive parastatals are
likely to operate in remote areas, which poses difficulties for auditing
and control. Related to this, at least for mining and oil and gas operations,
the technical nature of parastatal activities can make it difficult
for government auditors to calculate real costs and profits accurately.
For example, after the Pinochet government regained control of the
copper industry in Chile, it took the government several years to understand
the industry and its accounts well enough to reestablish significant
revenue flows through the central budget (Ascher 1999). The
government eventually put severe limits on the copper company’s
activities, including its ability to invest, in order to “keep the scope of
Codelco operations within the capacity of the government to monitor
and control.” Noting other examples, such as the oil industries of
Mexico, Peru, and Venezuela, Ascher (1999) comments that it is common
for state enterprises to be transformed from accomplices in offbudget
financing to undercapitalized victims of the efforts of budget
authorities to tax and control.
One reason it may be difficult for central budget authorities to keep
adequate control over the finances of state-owned oil companies is
that the market does not require these companies to provide transparent
information. For this reason, state enterprises operate more transparently
when they are involved in joint ventures with international
56 swanson, oldgard, and lunde
companies than when they operate alone, largely because such relationships
require more rigorous accounting procedures (Ascher 1999).
Revenue Volatility
Whereas high rents can provide incentives to take a long-term, sustainable
approach to natural resource management, rent volatility may
create incentives to waste. This is because resource rents can be expected
to fall again in the future, and politicians and other parties may
wish to take as much advantage as possible from a temporary windfall.
Moreover, as Ross (2001) points out, the security in office of politicians
overseeing the distribution of resource rents may have an important
impact, with less secure officeholders having a greater incentive
to divert more revenues to themselves while they remain in power,
because they may not be around for the next windfall.
Ross bases his observations on the timber industry, particularly in
the Philippines, the Malaysian states of Sabah and Sarawak, and
Indonesia. Although volatility of commodity prices and revenue is
similar in the mining, oil, and timber sectors, the same forces may not
be at work. Given the scale of the initial investments involved, the
mining and oil sectors are forced to take a longer-term approach than
the timber sector.
Nevertheless, because of the exceedingly high rents involved, oil
and mineral commodity booms may create incentives for governments
to decrease the transparency of revenue flows. However, it is not clear
in the case of minerals and oil that the problem is volatility as much
as it is simply high rents. In general, mineral- and oil-dependent countries
go through a cycle of increased incentives against transparency
in times of commodity boom, followed by a period of efforts to rein in
spending and control over revenues when commodity prices fall (Karl
1997). In the case of diamonds, the stabilizing role De Beers traditionally
plays as the buyer of last resort may make revenue volatility less
of an issue.
Another aspect of this problem relates to the so-called “Dutch
disease.” A number of countries have set up stabilization funds to deal
with the volatile nature of revenue from particular natural resources.
However, the use of stabilization funds can add to a country’s fiscal
management problems if not accompanied by sound fiscal practice.
Variation in Quality of Reporting by Type of Resource
Although there have been studies on the impacts of different commodities
on issues such as the incidence of civil war,11 there does not
seem to have been a study yet comparing the quality of reporting in the
who gets the money? 57
various resource sectors. Yet the issues surrounding reporting may be
somewhat different in different sectors.
In the forestry sector, tax rates often are set too low, not enforced,
or not collected due to illegal logging. The diamond sector has experienced
similar problems, with small, private sector operators not reporting
their revenues. Moreover, in both sectors extraction often
takes place in remote regions where government authorities have limited
control, further compounding the lack of transparency. In both
sectors, leakage of revenues before the money reaches a state agent
may be a bigger problem than leakage after it has been collected. Also,
because these industries tend to be dominated by the private sector,
often by small operators, they tend to be less likely than the oil and
gas sectors to face the reporting problems related to state-owned
companies.
Because it is more difficult to engage in illegal or unmonitored
extraction in the technically more complex metals mining and oil sectors,
there is generally less scope for revenue leakage before reaching
the state. However, the monitoring abilities of state auditors can be
an issue. Moreover, these industries are more likely to have to deal
with the potential reporting difficulties involved with state-owned
companies.
Accrual of Resource Revenues by the Military
There are a number of cases in which a host country’s military has
directly accrued resource revenues outside the central budget process.
This has involved the mining and oil sectors in Chile and Indonesia
as well as timber concessions in a number of Southeast Asian
countries.
The military has played a strong role in Indonesia’s petroleum sector.
The first head of Pertamina, General Ibnu Sutowo, also controlled
one of its predecessor companies. According to Ascher (1999, p. 61),
“The heritage of Pertamina was a set of practices dedicated to augmenting
the revenues of the armed forces and an instinct to keep the
operations and financing secret.” A key political challenge for President
Suharto was to maintain support by the military, which had been
instrumental in the downfall of Sukarno, his predecessor. Since
Indonesia was trying to court donors, “an openly defense-heavy national
budget would have looked very bad; international borrowing
beyond agreed limits would have looked even worse . . . . Thus, as a
way to finance the armed forces without the visibility of central government
spending, a huge but unknown portion of Pertamina revenues
went to the military” (Ascher 1999, p. 61).
58 swanson, oldgard, and lunde
Similarly, some 10 percent of Chilean Codelco’s copper export revenues
apparently continue to go directly to the Chilean armed forces.
This arrangement, which was established by the Frei government of
the late 1960s, may have accounted for about one-third of Codelco’s
“tax” obligations during the 1980s. The arrangement “reflected a
political convenience for the president, congress, and the armed forces
to have an automatic appropriation rather than having to debate and
justify the full military budget each year . . . . Executives and legislators
were no longer held accountable for this component of military
spending” (Ascher 1999, p. 165).
In general, there is a wide body of research on the negative implications
of earmarked funds for good governance. Essentially, earmarking
means that society is not able to evaluate the marginal social benefits
of all programs and rearrange spending as priorities change. Giving
programs their own source of revenue makes them less accountable to
society as represented by Parliament and central budget authorities.
Lack of accountability by the military to the civilian authorities is
particularly worrisome in this regard.
A related problem is the use of natural resources to fund rebel movements
(and in some cases governments), usually involving resources
that are technically relatively easy to extract, such as alluvial diamonds
and timber. There is a growing body of research on the influence of
such resources on the length and nature of civil conflicts in various
developing countries and how they should be addressed.12
Initiatives That May Improve Transparency
of Resource Revenues
This section describes important international public and private
instruments and initiatives that could have a positive impact on the
transparency of resource revenue flows.13 The initiatives fall into two
basic groups: initiatives primarily relevant for host-government reporting
and initiatives primarily relevant for company reporting. There is
some degree of overlap for several of the initiatives. Some also contain
a role for companies’ home governments, which in principle could be
encouraged to influence companies based in their jurisdictions.
Initiatives Relevant for Host-Government Reporting
In this section, we consider three groups of initiatives aimed at promoting
host-government reporting of the resource revenues they receive:
several initiatives of the International Monetary Fund, the Forest Law
who gets the money? 59
Enforcement and Governance ministerial process, and the efforts of
the Caspian RevenueWatch.
IMF Initiatives. Several IMF initiatives could be used to promote
transparency of host governments’ revenue flows from natural resource
extraction and export. Most notable is the Code of Good Practices on
Fiscal Transparency. Related to this are reports on the observance of
standards and codes (known as ROSCs).14
The IMF’s fiscal transparency code represents the first coherent attempt
to set a framework of international standards for the conduct of
fiscal policy (Petrie 1999). The IMF adopted the original fiscal transparency
code in 1998, while the latest version (as of October 2002)
dates from March 2001.15 The fiscal transparency code can be used to
evaluate a country’s fiscal transparency. It includes a supporting manual,
which provides guidelines for implementation, a questionnaire,
and a summary self-evaluation report, all of which can be found on
the IMF fiscal transparency website.16
The code defines fiscal transparency as “being open to the public
about the structure and functions of government” (IMF 2001c). It
provides a set of practices for making fiscal management transparent.
Public availability is a key element. The code is based on the assumption
that, over time, fiscal transparency will result in good governance,
which leads to more equitable and efficient fiscal policies, which in
turn are important for achieving macroeconomic stability and growth.
The objectives of the fiscal transparency code are as follows (IMF
2001c):
• Clarity of roles and responsibilities is concerned with specifying
the structure and functions of government, responsibilities within
government, and relations between government and the rest of the
economy.
• Public availability of information emphasizes the importance of
publishing comprehensive fiscal information at clearly specified times.
• Open budget preparation, execution, and reporting cover the
type of information that is made available about the budget process.
• Assurances of integrity deal with the quality of fiscal data and
the need for independent scrutiny of fiscal information.
Each main principle embraces a number of specific principles and
good practices.
Implementation of the code is voluntary. Although the IMF is encouraging
its 184 member countries to improve fiscal transparency by
meeting the requirements of the code, member countries are under no
formal obligation to adhere to it.
60 swanson, oldgard, and lunde
The fiscal transparency code can be used as one step in the fiscal
module of a ROSC. The ROSC is a joint effort by the IMF and World
Bank to summarize the extent to which a country observes certain internationally
recognized standards and codes. The IMF has identified
11 areas and associated standards, based in large part on the fiscal
transparency code and on the Code of Good Practices on Transparency
in Monetary and Financial Policies.
ROSCs are prepared and published at the request of a World Bank
or an IMF member country, and countries are not under a formal
obligation to request them. ROSCs can be used in policy discussions
with national authorities and by the private sector (including rating
agencies) for risk assessment. The information in a ROSC is extensive
but varies by country.17
The fiscal transparency code makes specific recommendations on
the publication of fiscal information. The following recommended
practices are relevant to resource revenue transparency (IMF 2001c):
• The public should be provided with full information on the past,
current, and projected fiscal activity of government.
• The budget documentation, final accounts, and other fiscal reports
for the public should cover all budgetary and extrabudgetary activities
of the central government, and the consolidated fiscal position
of the central government should be published.
• The central government should publish full information on the
level and composition of its debt and financial assets.
• A commitment should be made to the timely publication of fiscal
information.
• The publication of fiscal information should be a legal obligation
of government.
• Procedures for the execution and monitoring of approved expenditure
and for the collection of revenue should be clearly specified.
Although the fiscal transparency code and fiscal ROSC do not
specifically address resource revenue, they emphasize good practice
related to all significant sources of revenue. Therefore, the more significant
resource revenues are in a country’s overall revenue picture,
the more the ROSC is likely to focus on these revenues. For example,
if revenues accrue to an extrabudgetary fund, a ROSC would highlight
the need to make the operation of this fund transparent. In addition,
the IMF’s Government Finance Statistics Manual, which the fiscal transparency
code recommends using, suggests how data on revenues from
natural resources should be reported (IMF 2001b). Among other
countries, Azerbaijan has prepared a ROSC, including the element of
fiscal transparency. Box 3.1 shows some findings from the Azerbaijan
who gets the money? 61
Box 3.1 The Azerbaijan ROSC
The ROSC refers to problems of tax administration and tax arrears of
many large state enterprises, including SOCAR, the state oil company.
The report from 2000 admits that transparency could be improved:
“Although information is not secret, there does not seem to be a
strong commitment to regularly publish fiscal data of a comprehensive
nature.”
According to IMF staff commentary, some of the top priorities for
Azerbaijan are to “develop a medium-term budget framework to take
into account future income from oil resources and to set development
priorities [and] ensure that the operations of the Oil Fund will be
transparent.”
Source: IMF (2000).
ROSC that are relevant to the issue of transparency of natural resource
revenues.
The impact of the fiscal transparency code and ROSC depends on
the participation of member countries. In some cases, the IMF has put
pressure on governments with an IMF program to undertake a ROSC,
and in others it has placed some conditionality on ROSC recommendations.
The problem is that countries with large resource revenues
are, by definition, less likely to have an economic incentive to participate
in IMF programs.
Even if a country undertakes a ROSC, publication is voluntary. As
of April 2002, ROSCs had been completed for 76 countries (not necessarily
including all modules). Of these, reports for 59 countries were
published. The IMF notes that the bulk of ROSC modules completed
since January 1, 2002, have been for transition, developing, and
emerging market countries (IMF 2002). However, among the countries
that published the module on fiscal transparency, the list of developing
countries with significant natural resources is short. The IMF
argues that publishing ROSCs should remain voluntary to increase
cooperation and country ownership in the process.
As long as ROSCs are published, there should be opportunities for
the public to use the information. According to the IMF website,
ROSCs are “used to help sharpen the institutions’ policy discussions
with national authorities, and in the private sector (including by rating
agencies) for risk assessment.”18 There is at least one confirmed example
of the fiscal transparency code being used by nongovernmental
62 swanson, oldgard, and lunde
organizations (the Institute for Democracy in South Africa and the
Center on Budget and Policy Priorities in Washington, D.C., according
to Fölscher, Krafchik, and Shapiro 2000). However, this was not related
to transparency of resource revenues.
In theory, civil society can pressure governments to undergo a ROSC
and to improve standards and procedures by using the outputs of a
ROSC. However, even in cases where a government has decided to publish
the report, the operations of civil society could be hampered if freedom
of the press is inadequate. Since publication of the fiscal ROSCs
clearly shows how well a country’s practices are aligned with the fiscal
transparency code, it theoretically provides an incentive to improve.
Countries are encouraged to publish short updates every few years,
although this is voluntary. A task force on implementation of standards
has suggested using World Bank and IMF policy dialogue with countries
to improve their standards as a more proactive approach (IMF
2001a). Again, this assumes that the country has an incentive to work
with the IMF in the first place.
Important steps forward could be to increase the number of countries
completing a fiscal ROSC, improve the ratio of published
reports, and increase the number of recommendations implemented.
Another would be to address resource revenues explicitly in the fiscal
transparency code, as the importance of this issue is gaining
recognition.
To sum up, the fiscal transparency code has both potential strengths
and weaknesses:
• The code offers a practical and fairly detailed standard for fiscal
transparency.
• The IMF may offer assistance to help countries to achieve
transparency.
• Vesting these initiatives with the IMF makes sense because of its
strong position both globally and at the country level.
• However, ROSCs are voluntary, and only a small number of
resource-rich developing countries have undertaken them.
• Even after undertaking a ROSC, publication is not mandatory.
The Forest Law Enforcement and Governance Ministerial Process.
In 1998 the G-8 launched an Action Program on Forests, which, together
with the World Bank’s Forest Governance Program, led to the
East Asia FLEG (Forest Law Enforcement and Governance) ministerial
conference in September 2001. An important goal of the FLEG
process is to increase the amount of forest-related rent that accrues to
the government and to prevent the illegal appropriation of such rent,
including via illegal logging.
who gets the money? 63
Box 3.2 Highlights of the East Asia FLEG
Ministerial Declaration
• Improve forest-related governance in order to enforce forest law,
improve the enforcement of property rights, and promote the independence
of the judiciary
• Involve stakeholders, including local communities, in decisionmaking
in the forestry sector, thereby promoting transparency, reducing
the potential for corruption, ensuring greater equity, and minimizing the
undue influence of privileged groups
• Review existing domestic frameworks for forest policy and institute
appropriate reforms, including those relating to granting and monitoring
concessions, subsidies, and excess processing capacity, to prevent
illegal practices.
The following is an indicative list of actions for implementation of
the declaration:
• Institute systems that encourage responsible behavior and deter
criminal and corrupt behavior (for example, salaries, codes of conduct)
• Provide consistent, accurate, and timely information to monitoring
organizations
• Develop and implement a transparent and participatory approach
to the allocation of concessions.
Source: FLEG (2001).
The ministerial conference included participants from 20 countries,
representing governments, international organizations, nongovernmental
organizations, and the private sector. It produced a statement expressing
political commitment for action in the area of forest law
enforcement and governance at the national and regional levels (see
box 3.2 for highlights of the declaration).
More recently, ministers from several African countries have expressed
interest in a similar initiative. The World Bank (with sponsorship
from France, the United Kingdom, and the United States) has been
asked to convene an African FLEG ministerial process in 2003. Both
the East Asia FLEG and the Africa FLEG are continuing processes with
dedicated websites.19
Some of the commitments made in the East Asia FLEG declaration
are relevant to the issue of resource revenues—for example, the calls
for ensuring transparency and for reducing the incentives for corruption.
Furthermore, the declaration covers numerous aspects that are
interlinked, such as property rights.
64 swanson, oldgard, and lunde
There appear to be no control mechanisms for enforcement or
follow-up of the principles endorsed by East Asia FLEG. The website
states that the ministerial declaration commits participating countries
to “intensify national efforts and strengthen bilateral, regional, and
multilateral collaboration to address violations of forest law and forest
crime and create a regional task force on forest law enforcement
and governance to advance the declaration’s objectives.”20 A task
force met in May 2002 and is due to meet again in 2003. It is unclear
whether the declaration will be adopted. The impact of the Africa
FLEG initiative is difficult to evaluate at this relatively early stage. It is
noteworthy, however, that the FLEG process has expanded to include
other geographic regions.
Therefore, the initiative’s strong and weak points are as follows:
• It is the only initiative that requires host-country endorsement.
• It includes possibilities for civil society influence.
• It is still in the early stages, so its impact in practice is still unclear.
• It includes no mechanisms for monitoring implementation.
• The issue of revenue disclosure is not specifically addressed.
Caspian Revenue Watch. The Caspian Revenue Watch policy
program is a relatively new initiative of the Open Society Institute,
which in turn is a part of the Soros Foundation.21 It was established to
explore how revenues are being invested and disbursed and how
governments and extraction companies are responding to civic demands
for accountability in the region. It also contains a strong advocacy
component, aiming to ensure that “existing and future revenue
funds in the region be invested and expended for the benefit of the
public, such as poverty reduction, education, and public health—
through the promotion of transparency, civic involvement, and government
accountability.”22
Although the ultimate focus is on how revenues generated by natural
resources can benefit development within the Caspian region,
transparency of these revenues is very much highlighted. Moreover,
transparency and accountability of resource revenues are specific
objectives of Caspian Revenue Watch.
The Eurasia Policy Forum notes that the report that eventually will
be issued will offer “in-depth analysis and policy recommendations
useful to donors, national governments, nongovernmental organizations,
and the media.”23 However, since neither the report nor the
expected recommendations have been published yet, it is difficult to
evaluate the impact of the program.
Caspian Revenue Watch focuses almost exclusively on flows going
to natural resource funds rather than on flows moving through the
who gets the money? 65
central budget. On the one hand, a fund in a nontransparent system
could facilitate the plundering of resource revenues. On the other hand,
the spotlight provided by Caspian Revenue Watch could make it more
difficult for this to take place. In general, however, it probably will be
difficult to create an island of transparency in a system that lacks transparency
overall. For this reason, Caspian Revenue Watch may wish to
consider expanding its agenda to include the transparency of resource
revenues in general, particularly through the central budget.
To sum up, the potential strong and weak points of Caspian Revenue
Watch are as follows:
• The advocacy approach may help to raise awareness of transparency
issues.
• A strong civil society “spotlight” on the funds could make them
more difficult to plunder.
• If the existence of funds in nontransparent systems can actually
increase transparency problems, Caspian Revenue Watch’s advocacy of
such funds may be problematic.
• Caspian Revenue Watch focuses on funds rather than the national
budget.
Initiatives Relevant for Company Reporting
In this section, we consider initiatives and instruments aimed at promoting
company disclosure of the payments they make to host countries.
OECD Guidelines for Multinational Enterprises. The OECD
Guidelines for Multinational Enterprises are nonbinding recommendations
that governments address to all companies based or operating
in their jurisdictions. The guidelines form part of the OECD Declaration
on International Investment and Multinational Enterprises, which
has been agreed to by 33 OECD governments and several non-OECD
governments (Argentina, Brazil, Chile, and Slovakia). Since their introduction
in 1976, the guidelines have been updated several times,
most recently in 2000 (OECD 2000). They take the form of recommendations
divided into the following topics: disclosure, employment
and industrial relations, environment, efforts to combat bribery, consumer
interests, science and technology, competition, and taxation.
The consultation process used to develop and revise the guidelines has
been relatively open and includes input from several permanent advisory
bodies that coordinate the positions of interested business and
civil society groups.
What differentiates the OECD guidelines from other recent initiatives
is that they have been adopted by governments, not just
66 swanson, oldgard, and lunde
nongovernmental organizations and companies. Although companies
do not endorse the guidelines, and observance is voluntary and not
legally enforceable, signatory governments commit to encouraging
compliance by “their” companies. Each adhering government is obligated
to set up a national contact point, responsible for promoting the
guidelines, handling inquiries about their application, and resolving
disputes.
The OECD guidelines from 2000 recognize the importance of
transparency and disclosure, but they do not specifically focus on
disclosure of payments. The most relevant parts are as follows
(OECD 2000):
• Enterprises should ensure that timely, regular, reliable, and
relevant information is disclosed regarding their activities, structure,
financial situation, and performance. This information should be disclosed
for the enterprise as a whole and, where appropriate, along
business lines or geographic areas. Disclosure policies of enterprises
should be tailored to the nature, size, and location of the enterprise,
with due regard paid to costs, business confidentiality, and other competitive
concerns.
• Enterprises should apply high-quality standards for disclosure,
accounting, and audit. Enterprises are also encouraged to apply highquality
standards for nonfinancial information including environmental
and social reporting, where they exist. The standards or policies
under which both financial and nonfinancial information are compiled
and published should be reported.
Information should be disclosed along business lines or geographic
areas, which could be highly relevant for reporting payments by a specific
host country (although the term geographic area is somewhat
vague and could be interpreted more broadly, for example, as a continent
rather than a country).
The OECD guidelines potentially benefit from OECD’s credibility
and intergovernmental status. However, they are not as well known
internationally as other global instruments (OECD 2001b, p. 4).
The OECD guidelines are unique among aspirational voluntary
codes in having a mechanism to address breaches. National contact
points are key actors in the mechanism to resolve disputes—for example,
allegations brought by one party against another for failing to observe
the guidelines. If a company proves uncooperative, the national
contact point can resort to the scheme’s greatest sanction, essentially
“naming and shaming.” In principle, this could be an important deterrent
for companies. In practice, however, the scheme suffers from a lack
of will on the part of most home governments to address the breaches
who gets the money? 67
of “their” corporations. The guidelines do not specifically mention payments
to host governments, which means that most home governments
will not act against companies that fail to publish such information.
The guidelines are not legally binding on companies, in contrast to,
for example, the Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions, which, according to
Mack (2002, p. 8), is “an example of how regulation can enhance the
interests of the private sector as a whole by helping create a level playing
field.” Although governments may still be committed to encouraging
observance, the real strength of mechanisms for adherence is
questionable.
As is the case for a number of initiatives, the OECD provides a
dynamic framework for developing and revising the guidelines. Moreover,
their authority and credibility are potentially enhanced by the
transparent and inclusive way in which they have been developed.
This ongoing process could be used to facilitate further refinement and
even strengthening of the guidelines.
Possible improvements to the existing framework could include
offering more specific recommendations on company disclosure as
well as specifying individual countries, instead of geographic location,
as the unit of reporting.
Making the guidelines legally binding for companies does not
appear to be a realistic option. Nevertheless, if the political will exists,
one option is to negotiate a more selective version in which national
governments commit themselves to enact relevant national laws, similar
to the model of the OECD antibribery convention. At a minimum,
individual home governments can draw on the guidelines in creating
relevant national laws.
To sum up, the potential strong and weak points of the guidelines
are as follows:
• They include the critical feature of (home) government
commitment.
• They feature a mechanism for dealing with breaches.
• They may not be specific enough on the disclosure of payments.
• Many adhering governments may lack the political will to enforce
them.
UN Global Compact. The UN Global Compact is a voluntary
code of conduct first proposed by UN Secretary General Kofi Annan in
a speech to the Davos economic forum in 1999.24 Essentially, the secretary
general warned that business leaders needed to take more substantial
voluntary actions in the areas of human rights, labor standards, and
environmental practices in order to counter the “enormous pressure
68 swanson, oldgard, and lunde
from various interest groups” to include mandatory standards in these
areas in international trade regime and investment agreements. The
compact was subsequently fleshed out during a series of meetings
between representatives of the United Nations, business, and labor. Its
operational phase began in 2000.
The nine principles of the Global Compact cover the areas of
human rights, labor, and the environment, areas in which universal
values have already been defined by international agreements, notably
the United Nations Universal Declaration of Human Rights, the International
Labour Organisation Fundamental Principles on Rights at
Work, and the (UN) RioPrinciples on Environment and Development.
Each of the nine principles is explained and expanded on in a document
available on the Global Compact website.25
The main requirement for participation is that companies provide a
brief report once a year on concrete actions they have taken that have
been inspired by one or more of the nine principles as well as any
lessons they have learned from doing so. The main purpose of this reporting
is to share lessons with other participants, including measures
that work and those that do not. These postings are to be incorporated
into an online database or “learning bank.” Participating companies
are strongly encouraged, but not required, to take part in various partnership
projects organized by the Global Compact. In January 2002
the Global Compact Advisory Council was formed to strengthen the
governance and integrity of the initiative.
A July 2002 progress report emphasizes four main areas of activity:
global and national initiatives, policy dialogues, the learning forum,
and public-private partnership projects (UN Global Compact 2002b,
p. 4). These areas do not address transparency directly, but they do
have implicit relevance for resource revenues. Policy dialogues may
have some relevance for resource revenue, given that the first of these
concerned the role of business in zones of conflict; moreover, the
Transparency Working Group, which was convened as part of this
dialogue, recommended that home governments “enable relevant regulatory
agencies, if necessary through appropriate legislation, to require
local and international companies to disclose taxes, royalties,
and other payments or transactions made in host countries”; that businesses
“enhance transparency through public disclosure of information
not subject to confidentiality clauses (financial statements,
principal transaction, etc.)”; and that businesses “work with host governments
and stakeholders to reduce opacity in current confidential
contracts to enable greater transparency and where appropriate monitoring
arrangements, help lines, etc.” Moreover, the Transparency
Working Group noted that “most of the multiyear payments made
who gets the money? 69
directly to governments by foreign companies take place in the extractive
industries” (UN Global Compact 2002a, p. 1). Another working
group within the dialogue on zones of conflict is dedicated to
revenue-sharing regimes, which deal with “negotiated agreements
among companies, governments, and local communities to more equitably
distribute the benefits from natural resource extraction” (UN
Global Compact 2002b, p. 15).
The Global Compact attempts to improve company behavior
through moral persuasion and engagement, providing the incentive of
association with a prestigious institution. On the one hand, the Global
Compact’s association with the United Nations is an advantage, because
its “convening power at the highest possible levels provides an
unparalleled opportunity for dialogue and for identifying and implementing
high-profile and high-impact activities.” On the other hand,
the UN association may carry a number of potential drawbacks, such
as perceived bureaucracy and inefficiency. Although many UN bodies
are involved,26 the status of the compact within the United Nations is
unclear. It neither was created by nor reports to the General Assembly,
reporting instead directly to the Office of the Secretary General,
apparently relying on his patronage for much of its authority.
The requirements to join the compact are not very strict. On the one
hand, the opportunity to participate without a substantial commitment
might encourage more companies to engage. On the other hand,
it is relatively easy for companies to benefit from association with the
Global Compact without complying with its recommendations. Nevertheless,
after reviewing the governance of the Global Compact, the
Advisory Council concluded, “The procedures for joining and participating
in the Global Compact should remain un-bureaucratic and
encourage the entry of new companies and civil society organisations”
(UN Global Compact 2002b, p. 8).
The inclusive nature of the compact is reflected in the vagueness of
the specific recommendations on transparency “if necessary through
appropriate legislation.” The impact of the constituent working
groups thus depends on the priorities of the stakeholders involved.
The Global Compact and the Transparency Working Group within
the zones of conflict dialogue appear to be ongoing processes that have
the potential to focus more on revenue transparency issues in the
future. The most recent meeting notes from the Transparency Working
Group (from April 2002, posted on its website) state that it will
“continue to explore ways and means to support the ongoing process
for increased transparency at the sectoral levels such as efforts in the
mining and petroleum-industry sectors, multilateral development
bank efforts on good governance, and the World Bank’s review of the
70 swanson, oldgard, and lunde
natural-resource industry.”27 One possibility for having a greater
impact on revenue transparency could be to expand the nine principles
of the Global Compact (as opposed to those of the Transparency
Working Group) to include points related to transparency.
To sum up, the UN Global Compact has potential strong and weak
points:
• The Transparency Working Group provides specific recommendations
on resource revenue transparency.
• The process is both inclusive and evolving.
• However, the actions proposed by the Transparency Working
Group are not part of the principles that companies must endorse.
• Association with the Global Compact does not require much effort
on the part of companies and is not actively vetted; nonetheless,
this fact may encourage more companies to participate.
Global Reporting Initiative. The Global Reporting Initiative provides
guidelines for companies (and other entities) to report their economic,
environmental, and social performance. The initiative was
launched in 1997 by the Coalition for Environmentally Responsible
Economies, responding to growing demands by stakeholders for
“sustainability” information and to the ad hoc response of companies
to such demands, making information difficult to compare across
companies or over time. The Global Reporting Initiative “seeks to make
sustainability reporting as routine and credible as financial reporting
in terms of comparability, rigour, and verifiability.”28
The Global Reporting Initiative developed its reporting guidelines
after a consultative process involving different types of firms and
stakeholders from around the world. This process is intended to be
continuous. The latest version of the guidelines was issued in 2002.29
In addition, the Global Reporting Initiative is involved in developing
sector-specific supplements through initiatives such as the Mining,
Minerals, and Sustainable Development Project.30
Use of the guidelines is optional and does not involve notifying the
initiative. The Global Reporting Initiative recognizes that companies
with little experience in reporting sustainability information may find
it easier to introduce the standards gradually. Hence the guidelines
include an annex on their incremental application. In addition, organizations
are encouraged to add information beyond what is requested
in the guidelines. Although the Global Reporting Initiative promotes
independent verification and auditing—and provides an annex on
verification—they are not a requirement. Neither does it audit organizations
or accredit others to do so.
who gets the money? 71
The guidelines emphasize that “the principles of transparency and inclusiveness
represent the starting point for the reporting process and are
woven into the fabric of all the other principles.” The Global Reporting
Initiative encourages transparency by promoting reporting. More specifically,
it provides standards and identifies indicators that could help to
clarify the flow of resource revenues (Global Reporting Initiative 2002):
• EC8 breaks down the total sum of taxes of all types paid by
country.
• EC10 breaks down donations to community, civil society, and
other groups in terms of cash and in-kind donations per type of group.
• EC12 includes the total spent on the development of noncore
business infrastructure, which is infrastructure built outside the main
business activities of the reporting entity, such as a school or a hospital
for employees and their families.
The guidelines are widespread and gaining increasing acceptance;
they appear to be setting the standard for all social and environmental
auditing schemes. Greater focus on reporting in general may eventually
benefit the reporting of payments specifically related to natural resources.
Companies are encouraged to prepare sustainability reports
that are as complete as possible, which means not picking and choosing
the parts of the guidelines to include. However, the Global Reporting
Initiative does provide scope for gradual introduction, with the understanding
that the company eventually will produce a “complete” report.
Annex 3 of the 2002 guidelines provides advice on incremental
application (Global Reporting Initiative 2002). However, no clear
guidance is given about the delay allowed in reporting on particular
indicators, such as EC8.
Many international companies today are motivated to publicize
their positive economic impact on host countries. Far from fearing
comparability, many now welcome the chance to demonstrate their
advanced performance. However, the willingness to report may depend
on the subject. For example, paying a large signature bonus may
not be perceived as positively as building a hospital.
Resource companies may be discouraged from reporting payments
when this is not a legal requirement, and some companies note that
nondisclosure clauses in their contracts with host governments prohibit
them from publishing information. Nevertheless, the ability to
introduce the Global Reporting Initiative gradually and the voluntary
nature of standards may make it possible for more companies to participate.
The challenge is to ensure that EC8 is used. The impact of the
Global Reporting Initiative on the transparency of resource revenue
72 swanson, oldgard, and lunde
flows thus may be determined by the level of pressure on companies to
publish a complete sustainability report.
EC8, the indicator related most directly to revenue transparency, concerns
the total sum of taxes of all types paid broken down by country.
The term “taxes” could include all payments made to governments,
including facilitation payments, signature bonuses, and royalties. However,
companies could interpret it differently as long as indirect taxes or
payments are not specified.
The consultation process is intended to be continuous, and for the
foreseeable future each revision is likely to increase the amount and
detail of information required from reporting companies. Developments
in the Global Reporting Initiative guidelines will be important
for other forums as well.
One suggestion that could increase the impact of the Global Reporting
Initiative on transparency of resource revenues is to define
taxes and specifically note that disclosure should include all payments,
including signature bonuses. Another suggestion is to tighten
up the recommendations for implementation, for example, by setting
a recommended time frame for inclusion of all relevant indicators,
which would include EC8 in the case of natural resource extraction
companies.
In summary, the Global Reporting Initiative has potential strong
and weak points:
• It continues to set the standard for sustainability reporting.
• It mentions taxes specifically by country.
• Guidelines for gradual introduction of “full” Global Reporting
Initiative reporting may give companies too much discretion, perhaps
allowing them to avoid using EC8 indefinitely.
• EC8 refers simply to taxes, allowing companies to decide whether
to report signature bonuses and other relevant payments.
Minerals, Mining, and Sustainable Development. Mining, Minerals,
and Sustainable Development was a two-year process that ended in
May 2002 with a final report (MMSD 2002). Nine of the world’s largest
mining companies initiated the project through the World Business
Council for Sustainable Development. The International Institute for
Environment and Development managed MMSD, in collaboration with
the Global Mining Initiative. The MMSD Project focused on research,
a process of stakeholder engagement, and a program of information
exchange.
The sustainable development principles that came out of the process
cover economic, social, environmental, and governance issues. However,
the project essentially produced a review of current issues and
who gets the money? 73
practices and did not propose guidelines that companies must endorse
or implement. Because of time limits, the website notes thatMMSDdid
not seek to “solve or even to address all of the issues that will ever be
faced by the mining and minerals industries. At best, it provided a starting
point for identifying different concerns.”31 One of its concrete
activities was to lay the basis for the future development of amining sector
supplement to the Global Reporting Initiative guidelines. The report
and other relevant material are available on theMMSDwebsite, but the
project’s office is now closed and will distribute no further material.
The sustainable development principles state the need to ensure
transparency by providing all stakeholders with access to relevant and
accurate information. Box 3.3 presents some of the recommendations
relating to resource revenue transparency.
The recommendations in the final report are more numerous and
detailed and similarly call for the disclosure of payments from companies
as well as transparency of revenues by host governments. The
MMSD initiative featured a working group focused on understanding
“the obstacles which have prevented some developing countries from
using mineral revenues as an effective catalyst to economic and social
development, the so-called resource trap.”32 Several working papers
were distributed, and a workshop was conducted in 2001.
MMSD is distinctive in its commercial angle and its initiation by
industry. This is evident in its focus on market mechanisms and enterprise
issues such as corporate governance and corporate culture. This
is likely to enhance its credibility among private sector stakeholders.
Although the recommendations are relevant and quite specific, they
are not a set of codes or principles that have been endorsed. Finally,
the MMSD initiative was limited in time, although the Global Reporting
Initiative website states that “we anticipate this work will continue
beyond the release of the MMSD final report in April 2002.”33
In summary, MMSD has potential strong and weak points:
• It addresses resource revenue transparency specifically.
• It was initiated by the mining industry itself, which probably
gives it credibility in the sector as well as in the private sector in general.
The key role of industry may set an important precedent.
• The framework does not commit firms to any actions.
• The initiative is no longer operational.
Global e-Sustainability Initiative. The Global e-Sustainability
Initiative (GeSI) is a joint initiative of the International Telecommunications
Union and the United Nations Environment Programme
(UNEP). The GeSI website states that the initiative aims to create a
forum for the information and communications technology sector that
74 swanson, oldgard, and lunde
Box 3.3 MMSD Suggestions Relevant to
Revenue Transparency
Attracting investment:
• All parties should encourage a clear public debate on a definition
of principles that balance fair protection for investors with a fair return
to host governments, including calculations of all revenue and indirect
payments.
Transparency in the management of mineral wealth:
• Governments and companies should more widely adopt the practice
of open publication of the basic information about how much
wealth is generated, the amounts of revenue received by all government
departments, and how that money is spent.
• Industry organizations should consider, possibly in partnership
with an international organization such as the World Bank Group, taking
the initiative to establish an international and public register of all
payments by mining companies to governments at all levels.
• Nongovernmental “watchdog” organizations could bring pressure
to ensure that open publication regarding mineral wealth is realized.
Access to information:
• Corporations should work with the Global Reporting Initiative
or other international bodies to harmonize public reporting.
• The private finance community should take a stronger role in encouraging
best practice in public disclosure.
• Establishment (through a body such as the Global Reporting Initiative)
of criteria for a harmonized public reporting system would
include verification, which is agreed to by amultiple-stakeholder process.
Although such a system would of necessity be voluntary, as no international
legal mechanisms exist to enforce it, more research could be conducted
to explore whether and how an appropriate regulatory regime
might work or be established.
Source: Excerpts from MMSD (2002).
will “promote and support greater awareness, accountability, and
transparency.”34 The initiative is still in its startup phase, and little
material is available on its website.
Although the information and communications technology sector
does not include extractive companies, it uses some extractive resources
who gets the money? 75
in the production of electronic devices. Coltan, for example, is an important
component of mobile phones and computers. Coltan trade has
attracted attention due to its link with the second Congolese war in the
Democratic Republic of Congo. The United Nations Security Council
published two reports in 2001 on this issue, while a UN panel of experts
concluded, “The role of the private sector in the exploitation of
natural resources and the continuation of the war [in the Democratic
Republic of Congo] has been vital” (UN 2001, § 215). The final report
from 2002 listed 85 companies that the panel of experts considered had
violated the OECD Guidelines for Multinational Enterprises in their
involvement in such activities in the Democratic Republic of Congo
(UN 2002). A report by Fauna and Flora International and GeSI considers
the issue of transparency of the coltan trade in the Congolese
economy. GeSI members propose regulation of the coltan industry in
order to promote sustainable development (Hayes 2002). Another relevant
aspect of the GeSI is the forthcoming initiative to develop a
telecommunications supplement within the Global Reporting Initiative,
due in 2003.
Both GeSI and its initiatives concerning coltan and the Global
Reporting Initiative telecommunications supplement are new, and their
impact remains unclear.
In sum, the GeSI has potential strengths and weaknesses:
• The focus on major consumers of coltan rather than on mining
companies could prove to be an important way of addressing the
problem, providing lessons for other commodities.
• The initiative has not specifically addressed the issue of revenue
transparency.
• Although telecommunications companies are consumers of
coltan, they are not directly involved in coltan mining or processing or
in transferring mining revenues to host governments. Thus they may
have limited influence in this regard.
Publish What You Pay. In June 2002 the nongovernmental organization
Global Witness, together with George Soros and some 60 other
partners, launched the Publish What You Pay campaign. The initiative
follows from the oil campaign of Global Witness, which calls on oil
companies to publish what they pay to host governments.35 The various
resource campaigns of GlobalWitness have documented the diversion of
revenues from the extractive industries in a number of countries, including
Angola, Cambodia, the Democratic Republic of Congo, and Liberia.
Global Witness argues that the voluntary approach has “proved
problematic.”36 For example, companies unilaterally publishing their
76 swanson, oldgard, and lunde
payments face reprisals, making it difficult for a company to act unless
competitors are under the same obligation. Global Witness and the
Publish What You Pay campaign argue that the way forward is for
home-country regulators to require companies to report their payments.
Specifically, Publish What You Pay is calling on home governments
to require their securities regulators (for example, the Securities
and Exchange Commission in the United States) to demand a disaggregated
reporting of payments by the host country as a condition for
stock market listing. According to Publish What You Pay, mandatory
regulation would eliminate concerns about contractual confidentiality
clauses preventing companies’ disclosure of payment data, noting that
some contracts (especially in Angola) specifically allow companies to
opt out of secrecy obligations if they are required to report payments
by regulators in other countries.
The campaign argues that regulation also would eliminate “double
standards” of the way in which the same company reports about its
operations in the developed world and in the developing world: “We
are not calling on companies to disclose commercially confidential information,
but rather to publish the same basic data on net payments
made to government and other public authorities which they are required
to disclose in many developed countries.”37 Examples of specific
recommendations that Global Witness has made to oil companies
and home governments are provided in box 3.4.
The Publish What You Pay campaign is the international initiative
targeted most directly at the issue of transparency of resource revenue
flows in the extractive industries, although its focus is on the payment
(company) side of transactions. It advocates the use of a particular
instrument—that is, mandatory requirements by securities regulators
in home countries. The campaign appears to be gaining momentum.
U.K. Prime Minister Tony Blair has publicly supported the concept
on several occasions, and the head of the International Finance
Corporation, Peter Woicke, endorsed the idea in a speech in September
2002.
A possible weakness of placing regulation in the hands of stock
market authorities is that this could miss the important handful of
technologically competent and internationally active companies based
in developing countries (notably China and Malaysia) that do not
have significant public listings. Such companies, which generally do
not face the same “corporate social responsibility” pressures that
many Western-based companies do from their customers and shareholders,
conceivably could take business away from OECD-based
companies in some cases.
who gets the money? 77
Box 3.4 Recommendations of Global Witness
Recommendations for oil companies:
• Render summary figures of taxes and other payments made to
national governments publicly available for all countries of operation
• Provide data locally in the national language of each country of
operation as well as in the home language of the company
• Publish the names and locations of registration of all subsidiary
companies operating in each country
• Embrace a unified stand on full transparency of payments to
national governments
• Adopt a policy of independent, transparent auditing of social
programs.
Recommendations for national (home) governments:
• Ensure that national oil companies adopt full transparency criteria
on overseas operations
• Insist that financial regulators of international stock exchanges
legally oblige companies filing reports with them to disclose payments
to all national governments in consolidated and subsidiary accounts
• Insist that their export financing agencies practice full transparency
as a condition for setting up credit agreements.
In summary, the Publish What You Pay campaign has both potential
strong and weak points:
• It is one of the most directly focused initiatives in terms of resource
revenue transparency.
• Its campaign approach has succeeded in raising public awareness
of the issue.
• The focus apparently would miss nonlisted companies, which
disgruntled host governments could increasingly reward for their continued
lack of disclosure. According to its supporters, however, this
is likely to be a relatively minor problem that could be addressed as
it arises.
• It would capture only part of the picture, that is, payments by
foreign companies, leaving out significant revenue flows via host
government–owned oil companies, including, for example, joint ventures
with foreign firms.
78 swanson, oldgard, and lunde
Policy Recommendations
Reporting of natural resource revenues is a means to achieve transparency,
which itself is a precondition for improving governance by
curbing opportunities for corruption, mismanagement, and diversion
of funds. Reporting also provides civil society with an important part
of the information it needs to hold government to account. Other important
information includes how government revenues are spent—
for instance, how spending on health and education corresponds to
increases in oil revenues.
Ultimately, the host government should have the ultimate responsibility
for providing its citizens with details of the revenues it receives
from resource extraction and export. Unfortunately, there are often
strong incentives for resource-rich host governments or elites in developing
countries not to disclose information, and the international community
often has limited leverage to force them to do so. For example,
the threat of sanctions and conditionality is problematic, since natural
resources provide host governments with an independent and comparatively
large source of funds from a legally traded commodity. This is
why it may be necessary also to look at the company side of payments
to host governments. Nevertheless, the ultimate focus must continue to
be on the (perhaps long-term) goal of host-country transparency.
Technical Assistance to Host Governments
At a minimum, the international community should step up efforts to
provide host governments with technical assistance on reporting and
tracking revenues. This will at least cover the cases where the main
barrier is technical. It is also important to remember that most governments
are not monolithic and that technical assistance in reporting
and tracking revenue could strengthen the hand of individuals who are
concerned with good governance.
Ample opportunities exist for such assistance and cooperation
along both bilateral and multilateral avenues. Many donor countries
already support capacity-building schemes—for instance, in national
petroleum administrations—and such schemes could be modified to
incorporate reporting and transparency aspects. UN organizations and
multilateral development banks also run comprehensive public sector
reform programs, many of which relate to natural resource sectors and
ministries. International umbrella organizations such as the International
Organization of Supreme Audit Institutions already manage
capacity-building programs in relevant areas across developing and
transitional economies. However, like World Bank–sponsored public
who gets the money? 79
expenditure reviews, such programs focus mainly on the expenditure
and not the revenue side of public financial management.
Making Government Transparency a Condition
for Receiving Certain Benefits
It is recommended that technical assistance include diagnostic use of
the IMF’s fiscal transparency code and reports on the observance of
standards and codes. Although opportunities to apply pressure to use
the fiscal transparency code are likely to be limited, developed countries
could make publication of a ROSC a condition for receiving certain
types of aid or export credits.
Since many resource-rich governments often borrow on commercial
markets (presumably to avoid conditionalities associated with less
expensive loans from multilateral development banks), encouraging
international banks to make publication of a ROSC a condition for
lending could be useful. This could be encouraged, for example, by the
use of a voluntary “white list” of banks, as suggested in chapter 5.
Other more general conditionality approaches (beyond ROSC) may
also be considered in bilateral (for example, the U.S. Foreign Appropriations
Act, as proposed by GlobalWitness) or multilateral contexts,
taking into account the incentive problems noted and the generally
mixed experience with conditionality as a policy tool.
Coordinating Home-Country Reporting Rules
for International Oil Companies
Due to the (at least short-term) barriers to improving reporting procedures
of host governments, an alternative approach to bring more
transparency to natural resource–related revenue flows is to focus on
reporting at other points in the flow. For example, many of the financial
inflows to governments can be revealed by looking at the financial
outflows from the international oil and mining companies.38
Many host governments do not want companies to reveal how
much they pay and may be in a position to penalize companies that
do. This creates collective action problems, especially for voluntary
regimes or campaigns to pressure individual companies to be good
corporate citizens. This could even lead to responsible companies leaving
a difficult country and being replaced by less transparent firms over
which the international community has little influence. For this reason,
Global Witness and a number of others have concluded that the voluntary
approach to revealing payments probably will not work.
The Publish WhatYou Pay campaign is calling for governments in developed
countries to require stock exchanges to demand full disclosure
80 swanson, oldgard, and lunde
of payments as a condition for company listings. A related approach is
to amend existing reporting requirements in oil companies’ home governments.
Many home governments already require companies to make
an aggregated statement of payments to foreign governments; the
change would require them to disaggregate that reporting by country.
If mandatory reporting is attempted in an uncoordinated fashion,
one could effectively transfer the collective action problem from companies
to stock markets or home governments. This is why, whatever the
tactical approach taken (for example, stock market listing requirements
or other company filings), there should be a coordinated approach
among home governments. The U.K. government’s efforts to catalyze
global action in the context of the Extractive Industries Transparency
Initiative are an important step in this direction.
Such coordination could be attempted in more formal ways
through the OECD or multilateral bodies like the United Nations or
the World Bank. A model could be the antibribery convention and
other similar OECD agreements that have obligated each member
government to introduce certain common domestic legislation, thus
leveling the playing field. Home governments could use the OECD as
a forum to negotiate an agreement to introduce common legislation to
level the playing field for company reporting. This would make changing
home-country jurisdictions less tempting. Such an agreement
would have to specify a clear and consistent approach regarding the
nature and level of aggregation of payments to be disclosed.
A possible problem with mandatory company reporting is that it is
unlikely to include companies from developing countries that could
provide credible and less demanding alternatives to OECD-based companies.
However, the OECD antibribery convention could provide
a precedent, since several non-OECD countries participated in its
negotiation.
Unfortunately, multilateral negotiations often are very timeconsuming.
Attaching a company reporting agreement to an existing
instrument could allow it to take advantage of existing infrastructure
and protocols, which potentially could speed the process of negotiation.
Nevertheless, success ultimately will depend on the political will
of the negotiators.
It is sometimes easier to get an agreement among a smaller group of
key countries. Thus another interesting vehicle could be the G-8, which
encompasses the home governments of almost all major OECD oil companies,
in addition to Russia. Agreement within the G-8 probably could
go much of the way toward solving the collective action problem or at
least could provide political momentum to fast track an agreement
among a larger group of countries, for example, through the OECD.
who gets the money? 81
Whatever approach is taken, consulting and engaging companies are
crucial. Such consultation already is occurring in several forums, not
only in the context of initiatives mentioned here but also within the
World Bank’s extractive industries review. In addition, industry-internal
processes on this issue are under way, including in the oil company umbrella
organization, the International Petroleum Industry Environmental
Conservation Association. Such initiatives should be encouraged.
Issuing Credible and Publicly Available Estimates
of Host-Country Revenues
To be useful as a deterrent against mismanagement of funds, reported
information should be made publicly available. Thus information provided
to home governments by international oil companies ultimately
must be aggregated and made available to host-country citizens. This
could be done by a reputable nongovernmental organization or an international
organization, perhaps via the Internet. Ideally, this would
include summary tables allowing countries to be compared. Such
information should also be made available in languages used by the
citizens of key host countries.
While waiting for detailed information to be provided through
company or host-country reporting, it may be possible to provide
some independent revenue estimates for many host governments, for
example, based on known production, average market prices, and
some simple, conservative assumptions on the percentage of production
that accrues to the government. In order to ensure credibility, the
assumptions behind the calculations should be explained in detail and
backed up by robust research. This does not mean that the method of
calculation would have to differ by country; in fact, a simple, common
approach may even be more effective.
The approach should be conservative, designed to ensure that, in
most cases, actual revenues likely are higher than the estimates. The
point is to show populations in nontransparent host countries the
order of magnitude of their governments’ income from the extraction
and export of natural resources.
If a host government disagrees with the estimate, it must provide its
own figures. But if a government claims that it did not receive as much
as the estimate, the host-country public can legitimately ask why the
government did not obtain at least the “minimum international standard
rent” from exploitation of its resources.
Further useful information for host-country publics could be
provided by including estimates of government health and education
spending calculated by reputable international organizations such as
82 swanson, oldgard, and lunde
the United Nations Development Programme or the World Bank. This
would help to put revenues into perspective, allowing comparisons
with domestic expenditures and with other countries.
Because of its credibility in collecting data on oil production and
making the information publicly available, the International Energy
Agency may be in a good position to play a key role, possibly in cooperation
with other global organizations such as the World Bank.
Appendix: Four Case Studies
Botswana
Botswana is generally considered to be a rare success story among
developing countries because of the way in which it has handled its
natural resource revenues, which come principally from diamonds.
(Diamonds currently contribute about a third of gross domestic product
and about three-quarters of export revenues.) It is also one of the
few developing countries for which procedures for collecting and
reporting resource revenues appear to be publicly available.
Botswana has been a model from the standpoint of both economic
policy—for example, the design of economic policies for avoiding the
worst effects of “Dutch disease”—and public policy—the development
of a relatively open approach to government and to the collection and
reporting of natural resource revenues in particular.
According to the Botswana Ministry of Finance (n.d.), procedures
for the collection and recording of resource revenues are available
from the Government Printing Office.39
Revenue collection is decentralized in Botswana, with the various
line ministries responsible for collection in their respective sectors. The
Ministry of Minerals, Energy, and Water Affairs collects revenue in the
diamond sector, including royalties and taxes on company profits,
although the procedures are essentially the same for each sector:40
• Line ministries make periodic projections of the revenues they
expect to collect on a monthly basis and submit these to the Accountant
General in the Ministry of Finance.
• Line ministries deposit all revenue they collect into a single government
treasury account in the Central Bank of Botswana. This is
usually done on a monthly basis, although diamond revenues are collected
quarterly.
• The line ministry sends the receipt of the central bank deposit to
the office of the Accountant General at the Ministry of Finance, along
with required documentation showing how this revenue was calculated.
who gets the money? 83
• The Accountant General reviews and records this information
and sends it to the Auditor General (see box 3.5).
• The Auditor General audits the information, noting discrepancies
between amounts originally estimated, actual amounts to be
received, and amounts collected.
• The Auditor General submits regular reports to the Parliamentary
Public Accounts Committee, which has ultimate oversight of
government revenues.
• The Public Accounts Committee holds regular hearings, at which
those responsible for estimating and collecting revenue in the various
line ministries may be questioned regarding any discrepancies found.
• The Public Accounts Committee publishes regular reports on
government accounts and the results of hearings.
Botswana is a rare case of a resource-rich developing country with
reporting procedures that are publicly available. However, like most
Box 3.5 Constitutional Basis for the Role of the
Auditor General in Botswana
In discharging his duties under Section 124(2) and (3) of the constitution,
the Auditor General shall satisfy himself that:
• All reasonable precautions have been taken to safeguard the collection
and custody of public moneys and that the laws, instructions,
and directions relating thereto have been duly observed.
• The disbursement of public moneys has taken place under proper
authority and for the purposes intended by such authority.
• All reasonable precautions have been taken to safeguard the receipt,
custody, issue, and proper use of public stores and that the instructions
and directions relating thereto have been duly observed.
• Adequate instructions or directions exist for the guidance of officers
responsible for the collection, custody, issue, and disbursement of public
moneys or the receipt, custody, and issue disbursement of public stores.
Where he considers it necessary or desirable, he will examine the economy,
efficiency, or effectiveness with which any officer, authority, or institution
of government falling within the scope of his audit has, in the
discharge of his or its official functions, applied or utilized the public
moneys or public supplies at his or its disposal, and shall forward a report
of his findings thereon to the minister.
Source: See the Auditor General’s website: www.gov.bw/government/
office_of_auditor_general.html.
84 swanson, oldgard, and lunde
government documents in Botswana and other developing (and
developed) countries, the procedures are not available over the Internet.
Moreover, foreigners probably would require permission from the
Office of the President in order to obtain a paper copy from the Government
Printing Office. Given that Botswana appears to be relatively
advanced in terms of transparency and availability of information, this
provides some indication of the difficulty that probably would be
involved in compiling a comprehensive list of government reporting
procedures in developing countries, even where such procedures are
publicly available.
Azerbaijan
The State Oil Fund for the Azerbaijan Republic (SOFAR) was established
in August 2000 and is designed to receive most of the government’s
oil revenues. Information on the working of SOFAR is relatively
readily available. Caspian Revenue Watch, an initiative of the Soros
Foundation, has investigated the fund extensively and plans to publish
a book on both the Azeri and Kazakh funds in the near future.41 (Econ
was able to review advanced copies of some of the chapters.) In addition,
the fund has a reasonably informative website.42 Finally, the
World Bank and International Monetary Fund (IMF) worked closely
with the Azeri government in setting up the fund, and have made
several presentations about the fund, including to the recent Petroleum
Revenue Management workshop hosted by the World Bank in
October 2002.
Impetus for the creation of SOFAR apparently came from the
desire of the government to protect its new oil-related income from
political pressures to spend too quickly and to avoid “Dutch disease”
(Wakeman-Linn, Mathieu, and van Selm 2002). The emphasis of the
fund appears to be more on savings than on macroeconomic stability,
since the inflow and outflow rules theoretically prevent it from being
used to make up budget shortfalls.
SOFAR is supposed to receive all revenue related to the new, post-
Soviet fields—that is, those currently being developed by international
oil companies. This leaves revenue from fields originally developed
during Soviet times for the state budget. The fund therefore receives
proceeds from less than half of Azeri production, which in 2002 stood
at about 300,000 barrels per day. However, the proportion received by
the fund is likely to increase substantially after 2004, when production
by international consortiums is expected to take off. It is perhaps for
this reason that most international attention has been on SOFAR
rather than on the central budget.
who gets the money? 85
SOFAR has an executive director and a supervisory board (see
figure 3.1). However, the president has virtually unfettered power to
appoint and dismiss both. Thus, in practice, “the ultimate authority
over all aspects of the Oil Fund’s activities rests with the President,
who is empowered to liquidate and re-establish the Fund, approve the
Fund’s regulations, identify its management structure, etc.” (Petersen
and Budina 2002).
Caspian Revenue Watch similarly notes that SOFAR is “subordinated
directly to the President and lacks sufficient mechanisms for
oversight.” It points out that a major weakness in the governance
structure is the fact that SOFAR has been established on the basis of a
presidential decree, which in practice will probably limit Parliament’s
ability to play any political oversight role (Tsalik 2003).
Note: SOFAR  State Oil Fund for the Azerbaijan Republic.
Source: Tsalik (2003).
• Can establish and dissolve the Oil Fund
• Issues decrees approving all rules of the Oil Fund
• Appoints and can dismiss the Oil Fund’s executive director
• Chooses or approves the Oil Fund’s auditor
• Decides how to spend the Oil Fund
• Appoints members to the Supervisory Council
• Defines the rules for compilation of reports on the use
of SOFAR’s assets
• Reviews and comments on SOFAR’s annual report,
auditor’s report, and proposed budgets
• Supposedly meets quarterly but has met once
• Is to be composed of representatives of government and
community-based organizations, but no communitybased
organizations are currently represented
• Can hold off-schedule meetings at the request of one-half
of the members or SOFAR’s executive director
• Exercises operational management, hires staff, and
develops annual investment strategy
• Responsible for investment and management of
SOFAR’s assets
• Together with Ministry of Economic Development,
prepares the program for expenditures from the Oil Fund
• Submits quarterly and annual reports, and estimates
operational expenses to the president
• Cooperates with the auditor selected by the president
and publishes the results of the audit and annual report
Figure 3.1 Lines of Accountability in the State Oil Fund of
Azerbaijan
Executive director
of SOFAR
Supervisory
Council
President
86 swanson, oldgard, and lunde
Nevertheless, some financial oversight is provided by a requirement
for the fund to be audited on an annual basis by a reputable international
firm. The first audit was performed by Ernst and Young in 2001.
The Azeri Chamber of Auditors also has the right to audit the fund.
Despite low marks for oversight, most observers generally have given
SOFAR high marks for transparency. SOFAR’s annual report, which
it publishes on its website, provides financial information that is
“thorough, and includes breakdowns of all proceeds from each revenue
channel.” However, the fund has not lived up to its own rules for publishing
quarterly reports (Tsalik 2003). Caspian RevenuesWatch notes,
“Adherence to SOFAR’s regulations and disclosure requirements is one
of the criteria for receipt of $200 million in loans through the IMF’s
Poverty Reduction Growth Facility” (Tsalik 2003).
Another major criticism has been the laxity of SOFAR’s expenditure
rules and the almost complete discretion this effectively gives the president
to decide how the money should be spent. In general, Caspian
RevenuesWatch concludes that the fund’s “lax rules leave too much to
wise governance. While the current leadership may demonstrate a commitment
to good spending, what guarantee is there that future presidents
will do the same? The current rules, with their absence of checks
and balances, leave too much to chance” (Tsalik 2003).
Angola
According to the Publish What You Pay campaign, the IMF’s Angolan
“oil diagnostic,” which is being carried out under the Staff Monitoring
Agreement signed between the Angolan government and the IMF, provides
one of the few glimpses of Angola’s internal reporting procedures.
However, due to the conditions of confidentiality under which
that project is being carried out, details of the procedures cannot yet be
made available.
Despite Angola’s oil wealth, its government borrowed heavily during
the last decade, as a result of the long-running civil war, economic mismanagement,
and low oil prices. Moreover, it borrowed at a premium
on international markets, presumably to avoid possible conditions
attached to IMF financing. A significant amount of future oil revenue
reportedly has been used as collateral. However, this growing debt burden
gave the Angolan government an incentive to call on the World
Bank and IMF.
In April 2000 the IMF and Angolan government signed a Staff Monitoring
Agreement, which would help it eventually to qualify for loans
under the Enhanced Structural Adjustment Facility. The agreement
included an “oil diagnostic” program to monitor the government’s oil
who gets the money? 87
revenues between July and December 2000, by comparing export, tax,
and other earnings from oil activities with deposits into the Central
Bank of Angola. The program’s limited scope meant that it could not
investigate discrepancies found nor monitor how the income was
spent. The program had to rely on the information that the Angolan
government and the international oil companies were willing to supply.
The oil diagnostic included a review of the government’s internal
reporting procedures for its petroleum income. AUPEC, a natural resource
tax consultancy connected to the University of Aberdeen, was
hired to conduct this review. According to the project terms of reference
(provided by AUPEC), project components include the following:
• Design, develop, and install a monitoring system that will give
the government an ongoing accurate view of the revenues received
• Recommend institutional and regulatory improvements as well
as other measures necessary to support sound management of oil
revenues.
However, AUPEC notes that its findings on the project so far remain
confidential, in accordance with the wishes of the Angolan government.
In practice, this means that it has not been able to reveal what
reporting procedures may be in place nor its recommendations to
improve them.
At a workshop on Petroleum Revenue Management held at the
World Bank on October 23–24, 2002, a member of the audience
asked the Angolan ambassador to the United States when the Angolan
government planned to publish the findings of the oil diagnostic. The
ambassador replied that the government was still reviewing the documents.
She further noted that the government planned to meet with
KPMG, the main consultant on the project, in November 2002, after
which the government “probably has plans to publish the report.” As
far as she understood, there were “no missing funds, [and] the main
problem was with the reconciliation procedures.”
According to the BBC, an internal report by the International Monetary
Fund viewed by the news organization indicated that more than
$900 million disappeared from Angolan government finances in 2001
(“IMF: ‘Angola’s Missing Millions’” 2002). According to the BBC,
“There has been little progress in the areas of governance and fiscal
transparency in Angola [and] lack of useful data made the monitoring
of Angola’s fiscal situation difficult.” The document reportedly stated
that the state-owned oil company, Sonangol, “assumed some time ago
complete control of foreign currency receipts from the oil sector and
stopped channeling them through the central bank as mandated by
law.” According to the BBC, some diplomats have allowed that “at
88 swanson, oldgard, and lunde
least some of the discrepancy identified by the IMF may be due to bad
accounting practices on the side of the government [but] . . . certain
individuals may have taken advantage of the smokescreen provided
by slack financial management in order to divert funds into their own
bank accounts.”
Chad
Most reporting requirements for host governments are likely to be
imposed internally, for example, by the country’s own parliament. In
theory, reporting conditions may be imposed by outside parties, for example,
as a condition for assistance. However, countries with significant
natural resource–related revenue flows generally will be in a position to
avoid such conditions because they have less need for the sort of loans
required by other developing countries. As Ross (2001, p. 201) points
out, “Conditionality works best when the recipient state is small, and
its government relies heavily on international donors; or when a larger
government is in crisis and has little choice but to accept the donor’s
demands. In most other cases, governments find ways to evade or counteract
the conditions they dislike.”
The Chad-Cameroon Petroleum Development and Pipeline Project
may be one of the few examples of conditionality on a natural resource
development project. The IMF and World Bank have placed oversight
conditions on resource revenue flows in exchange for their assistance
in financing the government’s portion of this project, which seeks to
develop oil fields in southern Chad for export via a new pipeline to
Cameroon’s Atlantic Coast.
A number of companies reportedly had been looking at Chad’s oil
potential for several decades, but had been put off by the severe, longterm
political difficulties and economic mismanagement in the country.
ExxonMobil finally agreed to invest on the condition that the
Chad government sign an agreement with the World Bank and IMF
arranging for a large portion of the government’s oil revenues to go to
priority development projects.
According to the World Bank, the Law on the Management of Oil
Revenue, developed with World Bank assistance and passed by the
Chadian Parliament in 1998, establishes “clear guidelines for the allocation,
control, and oversight” of oil revenue (World Bank 1999). This
law requires 10 percent of revenue to go to a future generations fund,
while 80 percent of the remainder must be invested in health, education,
and vital infrastructure. These flows are to be monitored by
Parliament, as well as an oversight committee that includes representatives
of civil society (see box 3.6).
who gets the money? 89
The money covered by the monitoring arrangements includes both
the Chadian government’s share of oil production and taxes paid by the
foreign oil companies on their shares. However, bonuses paid by the
international companies were not originally included. This exception
caused some difficulties for the project’s image when it was revealed
that the government used some $4.5 million of its $25 million signing
bonus to purchase weapons. This event reportedly led to an acceleration
of the establishment of the oversight committee, which originally
had not expected to be in operation until 2004—the year in which
the first royalties and taxes were expected to begin accruing to the
government.43
It is probably too early to tell whether the arrangements put in
place in Chad will be successful in maintaining the transparency of expected
revenue flows. Moreover, it is unclear that the Chad model
would work beyond cases where the expected economic benefits for
companies are outweighed by an extremely difficult local political
situation. In most countries, oil resources of this size (estimated at
1 billion barrels) probably would be enough to compensate an international
oil company for most political difficulties. In such cases, the
host government would be likely to have several potential company
partners to choose from, placing it in a position to reject “difficult”
Box 3.6 Control and Monitoring Institutions in Chad
• The control of the mobilization and use of oil revenues will be
carried out jointly or separately by the Financial Controller of Finance
and Economy, the Committee for the Control and Supervision of Oil
Resources (CCSRP), the General Accounting Office of the Supreme
Court, and Parliament (Article 14).
• The CCSRP will include a representative of local nongovernmental
organizations (Article 16).
• Adecree will define the organizational modalities and the conditions
of control and supervision implemented by the CCSRP (Article 19).
• The monitoring of the mobilization, allocation, and use of the
oil revenues is ensured by periodic audits and reports submitted to the
government, especially (a) annual audits of special accounts and savings
accounts for future generations, (b) periodic management reports
of savings accounts, (c) periodic reports of the CCSRP, and (d) reports
on and audits of primary banks insuring the management of special
accounts.
Source: Excerpts from Chad (1999).
90 swanson, oldgard, and lunde
conditions, such as cooperation with the IMF and World Bank. Nevertheless,
Chad offers an important test case and learning experience,
on which resource revenue management assistance programs with
other governments might be built.
Notes
1. Interviews conducted with various oil companies on behalf of Econ by
John Bray of Control Risks Group, October 2002.
2. The Publish What You Pay campaign website notes that recent governance
problems related to resource revenue have been cited in Algeria, Angola,
Azerbaijan, Cambodia, Chad, Republic of Congo, Democratic Republic of
Congo, Equatorial Guinea, Gabon, Kazakhstan, Myanmar, Nigeria, Sudan,
and Venezuela; seewww.publishwhatyoupay.org/faq.shtml. On the Kazakhstan
public expenditures review, see World Bank (2000b); on the pipeline project,
see World Bank (1999, 2002).
3. The OECD notes that BP “had to work around the nondisclosure agreements
they had signed with the Angolan government” (OECD 2002b, p. 21).
According to Publish What You Pay, BP’s announcement “brought threats of
concession termination from the Angolan oil company Sonangol.”
4. See Transparency International, the on-line research and information
system on corruption: www.transparency.org/coris/.
5. See, for example, Barrows (various years); Institute for Global Resources
Policy and Management (1997); Johnston (1994); Otto (1995).
6. See www.mrm.mms.gov.
7. See www.companies-house.gov.uk/. A list of links to other registers is
available at ws6.companies-house.gov.uk/ias/world_sites_-_english.html.
8. See the PublishWhatYou Pay campaign website:www.publishwhatyoupay.
org/faq.shtml.
9. See the International Budget Project website: www.internationalbudget.
org/.
10. The amount offered by the fund to those interested in reforestation was
set too low to make it worthwhile to claim, so that, in principle, the funds
could be used for other purposes.
11. For example, see Ross (2002).
12. For example, the World Bank’s Economics of Civil Wars, Crime, and
Violence Project (www.worldbank.org/research/conflict), Fafo Institute’s
Economies of Conflict Project (Swanson 2002), the London School of Economics’
Oil and Conflict Project (www.lse.ac.uk/Depts/global/OtherProjects.
htm), and the International Peace Academy’s Economic Agendas in Civil Wars
Project (Ross 2002).
who gets the money? 91
13. More initiatives may deserve scrutiny in further stages of this project,
including the International Organization of Supreme Audit Institutions
(INTOSAI), currently hosted by Norway. INTOSAI is involved in capacitybuilding
programs that support improvements in public sector financial surveillance
across a wide range of developing countries. A present constraint
similar to those pertaining to the World Bank’s public expenditure reviews is
that INTOSAI activities, reflecting supreme audit institutions, mainly target
the expenditure side of domestic financial governance.
14. Two other IMF initiatives have some relevance to natural resource
flows. The Guidelines for Public Debt Management include guidelines on
transparency and accountability; however, these are based largely on the
financial transparency code and the monetary and financial policies code. The
Financial Sector Assessment Program (FSAP) is a joint effort of the IMF and
the World Bank introduced in 1999 to “increase effectiveness of efforts to promote
the soundness of financial systems in member countries.” The aim is to
assess the strengths and vulnerabilities of a country’s financial system. This includes
determining how key sources of risk are being managed, ascertaining
the sector’s developmental and technical assistance needs, and helping to prioritize
policy responses. A ROSC is a key component of the FSAP. See the
FSAP website: www.imf.org/external/np/fsap/fsap.asp.
15. The OECD has produced a similar and complementary document,
“OECD Best Practices for Budget Transparency,” issued in May 2001 (OECD
2001a). According to the OECD, the document could serve as a reference for
both OECD and non-OECD governments.
16. See www.imf.org/external/np/fad/trans/index.htm.
17. Some ROSCs are published on the IMF’s ROSC website: www.imf.org/
external/np/rosc/rosc.asp.
18. See the ROSC website: www.imf.org/external/np/rosc/rosc.asp.
19. For East Asia FLEG, see lnweb18.worldbank.org/ESSD/essdext.nsf/
14DocByUnid/962B305C44866A7985256BF700556307? Opendocument;
For AFLEG, see lnweb18.worldbank.org/ESSD/essdext.nsf/14DocByUnid/
56BBBD15FF947FE385256BF700553EF8?Opendocument.
20. See lnweb18.worldbank.org/ESSD/essdext.nsf/14DocByUnid/
962B305C44866A7985256BF700556307?Opendocument.
21. The advisory group held its first meeting in February 2002.
22. See www.eurasianet.org/policy_forum/abeinthehouse.shtml.
23. See www.eurasianet.org/policy_forum/abeinthehouse.shtml.
24. See the UN Global Compact website: www.unglobalcompact.org.
25. See www.unglobalcompact.org.
26. Notably the Office of the High Commissioner for Human Rights, the International
Labour Organisation, the United Nations Environment Programme,
the United Nations Development Programme, and the United Nations Fund for
International Partnership.
92 swanson, oldgard, and lunde
27. See www.unglobalcompact.org.
28. See the Global Reporting Initiative (GRI) website: www.globalreporting.
org.
29. See the GRI website on sector supplements: www.globalreporting.org/
GRIGuidelines/Sector/index.htm.
30. See also the website on the Mining, Minerals, and Sustainable Development
initiative: www.globalreporting.org/GRIGuidelines/Sector/Mining/
index.htm.
31. See the website under the International Institute for Environment and
Development: www.iied.org/mmsd/.
32. See the website on the Mining, Minerals, and Sustainable Development
initiative: www.globalreporting.org/GRIGuidelines/Sector/Mining/index.htm.
33. See the website on the Mining, Minerals, and Sustainable Development
initiative: www.globalreporting.org/GRIGuidelines/Sector/Mining/index.htm.
34. See www.gesi.org.
35. The Global Witness oil campaign includes the groundbreaking reports,
ACrude Awakening and All the Presidents’ Men (GlobalWitness 1999, 2002).
36. For information on the oil campaign, see www.globalwitness.org/
campaigns/oil/regulation.html.
37. See www.publishwhatyoupay.org/faq.shtml.
38. However, international company payments will not cover all resourcerelated
revenues to host governments—for example, they will not cover income
from joint ventures to state-owned oil companies of the host government.
39. Econ did not have the opportunity to review the documents but received
a briefing on their contents from the Accountant General (telephone
conversation with Mr. Namogang, October 3, 2002).
40. There is one main mining company in Botswana: Debswana, a 50-50
joint venture set up in 1975 between De Beers and the Botswana government.
41. See the website of Caspian RevenueWatch, under Eurasia Policy Forum
of the Central Eurasia Project, Open Society Institute: www.eurasianet.org/
policy_forum/abeinthehouse.shtml.
42. Available at www.minfin-az.com.
43. See www.worldbank.org/afr/ccproj/project/pro_document.htm.
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chapter 4
Where Did It Come From?
Commodity Tracking Systems
Corene Crossin, Gavin Hayman,
and Simon Taylor
THIS CHAPTER PROVIDES A BASIC UNDERSTANDING of the main elements
of a generic commodity control system. It also seeks to compare and
contrast the key features of existing international commodity-specific
tracking regimes (CTRs) to allow for more effective controls in the future.
The specific international CTRs examined cover diverse areas of
regulation of trade in endangered and threatened species; governance
of renewable resources like timber and fish; control of environmentally
damaging chemicals, including hazardous chemicals, persistent organic
pollutants, pesticides, and ozone-depleting substances; security-related
commodities such as small arms and light weapons, diamonds, and radioactive
material; consumable commodities regulated for health reasons,
including meat and genetically modified organisms; and “ethical”
sector products, including products manufactured in accordance with
international labor laws preventing the use of prison labor and so
forth. Although most of these commodities are not generally associated
with conflict or poor governance, the development of CTRs provides
useful lessons that can be applied in addressing the link between natural
resources and civil wars.
There is no one-size-fits-all specification for a successful commodity
control regime—details will vary depending on the nature of the commodity
and the nature and status of the international legal instruments
used to impose controls. Nevertheless, there are common elements in
successful control regimes, such as transparency, accountability, and
coordinated and timely flow through well-designed, shared formats.
97
98 crossin, hayman, and taylor
There are also clear contextual issues to be taken into account when
designing any commodity tracking system, such as how the agreed
controls interact with multilateral trade agreements under the World
Trade Organization (WTO).
Table 4.1 sets out the major international agreements imposing
commodity control regimes and their associated administrative bodies.
Drawing lessons from these regimes, we propose five basic elements
of a sound generic tracking system alongside five contextual
considerations.
The five necessary elements are common definitions and reporting
requirements, efficient reporting structure and effective information
exchange, commodity labeling and audited chain-of-custody arrangements,
effective compliance and enforcement measures, and capacity
building. The following list details each.
• Common definitions and reporting requirements: (a) Agreement
on common definitions, standards, and reporting requirements
is essential for coordinated action. (b) Clear goals and targets for regulation
must be identified. (c) Involvement of national, international,
and interregional stakeholders, including the private sector, civil
society, and relevant nongovernmental organizations, is necessary
to promote the legitimacy of control measures. (d) Agreement should
be international in scope and intent; that said, national and regional
measures might be a good stepping-stone to wider international
cooperation.
• Efficient reporting structure and effective information exchange:
(a) Coordinated information exchange, such as harmonized and
accessible databases and intelligence-sharing agreements, must exist.
(b) Data sharing should be facilitated by cooperative arrangements
with relevant national and international parties and international standards
bodies. (c) Clear national and international management structures
are needed to ensure that everybody knows what they should be
doing. (d) Clear national contact points should also exist so that everyone
can check that everybody else knows what they are doing.
• Commodity labeling and audited chain-of-custody arrangements:
(a) Chain-of-custody and labeling arrangements are the core of any
tracking regime. Commodities must be accompanied by information
that allows them to be clearly distinguished and identified in the international
marketplace. (b) Labeling requirements, if not strictly executed,
simply serve to launder illicit material; credible audit procedures
or third-party certification provide confidence that only compliant
products gain access to restricted markets and that internal procedures
can be trusted.
where did it come from? 99
Table 4.1 Major Commodity Tracking Regimes
Major tracking
Commodity regime regulations Governing institution(s)
Diamonds
(rough)
Endangered
species
Fish
Genetically
modified
organisms
Hazardous
waste
Kimberley Certification
Process Scheme
1973 UN Convention on
International Trade in
Endangered Species of
Fauna and Flora (CITES)
Numerous regional
management agreements
including the 1980
Convention on the
Conservation of Antarctic
Marine Living Resources
(CCAMLR)
2000 Cartagena Protocol on
Biosafety to the 1993
Convention on Biological
Diversity, supplemented by
the European Community
Regulation 258/97
(Regulation of Novel
Foods and Novel Food
Agreements, 2001/18/EC)
1989 Basel Convention
on the Control of
Transboundary Movements
of Hazardous Waste and
Their Disposal
Kimberley process
secretariat, with
voluntary chain of
warrantees by the World
Diamond Council
CITES secretariat, with
trade monitoring
assistance from the
World Conservation
Monitoring Centre
Specific fisheries
commissions govern
regional management.
The Marine Stewardship
Council runs an
independent certification
system to promote
sustainable fisheries. The
Food and Agriculture
Organization has
negotiated several codes
of conduct, including the
2001 International Plan
of Action to Prevent,
Deter, and Eliminate
Illegal, Unreported, and
Unregulated Fishing
Convention on Biological
Diversity secretariat
Basel convention
secretariat
(Table continues on the following page.)
100 crossin, hayman, and taylor
Hazardous
chemicals
Livestock
(meat)
Ozonedepleting
substances
Persistent
organic
pollutants
Small arms
and light
weapons
Timber
1998 Rotterdam Convention
on the Prior Informed
Consent Procedures for
Certain Hazardous
Chemicals and Pesticides
in International Trade
Various regional agreements,
most notably the EC
Regulation 820/97
establishing a system for
registering bovine animals
and labeling meat products
1987 Montreal Protocol on
Substances That Deplete the
Ozone Layer to the 1985
Vienna Convention for the
Protection of the Ozone Layer
2001 Stockholm Convention on
Persistent Organic Pollutants
Various regional agreements
and a forthcoming UN
Firearms Protocol
No international convention
establishing a global tracking
system for timber, although
CITES covers the products
of a limited number of
threatened tree species. A first
attempt at tracking shipments
between producer and
consumer countries has been
negotiated between the
United Kingdom and
Indonesia.
Rotterdam convention
secretariat (although
agreement not yet
in force)
Specific informationgathering
bodies like the
European Commission
Animal Movement
System
Montreal protocol
secretariat
Stockholm convention
secretariat (although
agreement not yet in
force)
No central international
body to monitor flows in
small arms and light
weapons
The Food and Agriculture
Organization, the UN
Forum on Forests, and
the International
Tropical Timber
Organization all publish
statistics on various
aspects of the timber
business, and numerous
independent certification
bodies exist, most
importantly the Forest
Stewardship Council
Table 4.1 (continued)
Major tracking
Commodity regime regulations Governing institution(s)
Note: This table does not include other stakeholder institutions such as national
enforcement bodies, civil society organizations, nongovernmental organizations, and
international organizations relevant to the operation of many tracking systems, such as
the World Customs Organization.
where did it come from? 101
• Effective compliance and enforcement measures:1 (a) Clear compliance
measures at the international level, such as conditional market
access and trade measures, are necessary to eliminate free-riding
states. (b) Dispute resolution procedures are needed to prevent unilateral
actions. (c) Appropriate enforcement measures at the national
level are necessary to deter evasion of national controls that implement
the CTR. (d) Ideally, a CTR should generate incentives to comply
and incentives for industry to monitor its own behavior, especially
through conditional market access.
• Capacity building: (a) Any effective scheme should acknowledge
differences in ability to comply with and enforce provisions, equity
issues in compliance, and ability to take steps to build the capacity of
national authorities, especially given the idea of shared but differentiated
responsibility of producer and consumer states. (b) Conditionality
on development assistance can be used as a lever to improve compliance,
especially where noncompliance jeopardizes economic stability and
poverty reduction targets.
In addition, there are five contextual considerations: detailed understanding
of the commodity chain, dynamics of market supply,
dynamics of demand, political and institutional context, and harmonization
with existing international law. The following list details each
in turn.
• Detailed understanding of the commodity chain: (a) Control systems
should be tailored to the specific way in which a commodity is
accessed, processed, transported, and sold. (b) Enforcement and compliance
processes need to understand the complex relationship between
licit and illicit markets and between suppliers of raw material
and producers of final products as well as the role of ancillary specialist
services.
• Dynamics of market supply: (a) Information such as property
and access rights in producer countries is an important element of
market supply. (b) The economics of legitimate and illegitimate access,
including harvesting and capital costs, is another.
• Dynamics of demand: (a) Demand is related to the nature of the
consumer market, including the degree of fragmentation of end users
and the elasticity of demand for specific final products. (b) Public education
has a role in promoting appropriate consumption policies.
• Political and institutional context: (a) Understanding is needed of
the political, economic, and social circumstances of producing, processing,
and consuming countries. (b) It is important to avoid bureaucratic
satisficing (that is, the tendency of all institutions to meet their own
immediate needs while failing to address the forces creating problems).
102 crossin, hayman, and taylor
• Harmonization with existing international law: (a) Are new control
systems compatible with existing control regimes? (b) Are they
compliant with the WTO? If not, is a challenge likely?
If political will exists, it is perfectly possible to establish a successful
CTR based on these elements subject to contextual considerations.
The 10 elements can also provide a basic framework for building new
CTRs. The paper begins by examining the five basic elements of a
good generic tracking system by drawing on the experiences of the
control regimes listed in table 4.1. It then broadens the perspective to
examine the five wider contextual matters to be considered in the
design or reform of any given CTR. A set of conclusions is presented
to facilitate further discussion.
Comparison of the Five Necessary Elements
with Existing CTRs
This section describes our five essential elements of an effective CTR
and compares and contrasts the operational lessons from existing control
regimes.
Element 1: Common Definitions and Reporting Requirements
As the majority of tracking systems need to follow transboundary commodity
flows, it is preferable that a commodity agreement be established
on an international level. Although this seems obvious, there are
clear examples where commodity tracking efforts have been hamstrung
by lack of effective coverage. For example, the Montreal Protocol on
Substances That Deplete the Ozone Layer only instituted a global requirement
for licensing of trade in ozone-damaging substances some
10 years after the protocol was originally negotiated. This allowed
“virgin” ozone-depleting substances to be easily passed off as recycled
material (which was not controlled by the protocol) because it was impossible
for an importer to check the provenance of specific shipments
with an exporter.
The absence of agreed international controls on forestry means that
national controls are not reciprocated or respected by trading partners.
Hence, once illegal timber has left a producer country, it will not be detected
or sanctioned elsewhere. As a result, although rough estimates
suggest that about 60–70 percent of the tropical timber imported into
the European Union (EU) may be sourced illegally, the member states
where did it come from? 103
do not assist exporter countries by impounding shipments or even
questioning their origin (European Union 2001).
Likewise, there is no coherent international tracking system to trace
flows of either small arms and light weapons or radioactive material.
Instead, those jurisdictions attempting to trace the movement of either
commodity must adopt time-consuming and cumbersome methods to
request information from a range of agencies, departments, and manufacturers
within individual states along suspected supply routes.
Although this is feasible, but highly inefficient, for the most important
radioactive materials, it is less viable for the radioactive materials used
in medicine or for small arms. Such systems are also porous because a
lack of clearly defined responsibilities makes accountability difficult.
Some CTRs, like the Basel Convention on Transboundary Shipments
of Hazardous Waste, have failed to specify clear definitions of
the fundamental concepts on which CTRs are to be based. The Basel
convention does not define “hazardous waste” but, rather, creates a
mechanism to determine when a given waste can be considered hazardous.
2 In this regard, the convention is very much the product of the
circumstances surrounding its negotiation in the 1980s3 and of the innately
diffuse nature of waste generation. According to this approach,
a waste is hazardous if it is generated by certain processes or contains
certain constituents (specified in Annex I of the convention) or if it possesses
certain characteristics, such as being explosive. This deliberate
avoidance of an explicit definition was intended to provide a degree of
flexibility within the convention but confounds effective implementation,
as different national interpretations reflect different environmental
and economic priorities. For example, what may be considered
hazardous in terms of domestic disposal may not be treated so for export.
One company’s waste stream may be another’s recycling opportunity.
Thus it is easy to describe highly toxic waste streams mistakenly
as raw materials, resources for recycling, or bogus commercial products
like fertilizer (see, for example, Wang 1996, p. 679). Definitional
problems are amplified where no predefined category of commodities
exists, as with attempts to distinguish between products produced by
forced labor, including child labor, and goods produced through legal
labor practices.
It is also necessary to have clear definitions of when products opt
out of a tracking system. For example, attempts to control the ivory
trade in the 1980s under the Ivory Export Quota System under the UN
Convention on International Trade in Endangered Species of Fauna
and Flora (CITES) were a disaster, not least because minimally modified
or slightly carved raw ivory was exempt from the quota system.
104 crossin, hayman, and taylor
Thus poached ivory was crudely carved or modified to avoid trade restrictions.
Similarly, disagreement exists on the exact meaning of small
arms—a major reason why there is still no international convention
controlling supply and trade. The Kimberley process covers “rough
diamonds” but does not specify when such commodities become
finished diamonds and are no longer tracked.
If a lack of consensus prevents international agreement, then multilateral
or regional arrangements provide a useful interim opportunity
for partners to cooperate. This may include agreements on collaboration
between customs officials, law enforcement agencies, export and
import regulations, recognized and verifiable certification and chainof-
supply documentation, information sharing, and capacity building
(especially in the case of developing countries). For example, the April
2002 memorandum of understanding signed between the Indonesian
and United Kingdom governments on forest law enforcement cooperation
provides for a test case on cooperation between a major producer
and consumer of tropical timber on comparing import and
export data. The memorandum also allows for focused technical
assistance and capacity building for the government to gather trade statistics
and oversee export licensing. Similarly, there are several regional
agreements on the control of small arms and light weapons whose measures
could be merged to create a more comprehensive global tracking
system.
As with small arms and light weapons, regional agreements may be
a good interim solution for illegal logging. A crucial first step would be
to undertake bilateral cooperation between producer and consumer
countries to enforce domestic legislation in both. If not in existence,
legislation should be passed in producing countries to outlaw illegal
logging. Consumer countries should recognize this legislation, and a
bilateral agreement between the two countries should ban the trade in
illegal timber. These bilateral agreements would form a body of international
law that, in turn, could form the basis of a future multilateral
international agreement.
Element 2: Efficient Reporting Structure and Effective
Information Exchange
Unless partners efficiently and accurately report key information and
share intelligence in a way that facilitates enforcement, commodity
tracking becomes an exercise in moving paper. Clear international and
national management structures and contact points are needed, as well
as coordinated facilities for information exchange and cooperation,
such as accessible databases and intelligence-sharing agreements.
where did it come from? 105
The trade controls imposed by an Appendix II listing under
the CITES—one of the first CTRs proposed by the international
community—provide a good example of an inefficient structure.
Appendix II procedures cover species that are not necessarily threatened
with extinction now but may become so unless trade in them is
subject to strict regulation. Range-states of that species must issue an
export permit based on a nondetriment finding that importers are
obliged to accept. Given the minimal information on the status of
species within most developing countries, such permits are issued freely
with minimal due diligence, and consuming countries have no reason to
refuse such imports. Also, once issued, licenses are not rechecked with
exporters and are easily modified to incorporate new items. Thus, despite
moving around lots of papers and occupying lots of bureaucratic
time, trade in most species under CITES has been relatively unrestricted,
with range-states left operating national controls independently
of one another, without any international assistance or expert
oversight.4 These problems have gradually been addressed by various
oversight mechanisms, discussed under element 4.
National institutions may be similarly dysfunctional and work at
odds with each other. One example is the way in which the Indonesian
Ministry of Industry and Trade issues timber-processing licenses without
consulting the Ministry of Environment, which issues the permits
for cutting. As a result, processing capacity in the country is almost
twice the legal annual allowable cut.
Administrative functions need not be centralized in one body (indeed,
national governments are always wary of creating creatures they
cannot control), but there have to be clear reporting responsibilities
within any jurisdiction in which relevant information may reside.
For example, it is unclear whether the Kimberley process’ lack of a dedicated
secretariat will be compensated for by clear national harmonization
and data exchange structures to allow cross-checking and
verification of shipments. It has been left entirely up to national participants
to develop mechanisms to ensure that all diamond buyers, sellers,
and exporters keep accurate records of the names of buying or
selling clients and what diamonds are bought and sold in their jurisdiction
(appendix 4.1). Information is made available to an “intergovernmental
body or other appropriate mechanism” only on a quarterly
basis for imports and exports and on a semiannual basis for production.
A question mark therefore exists over whether the information
that is collected will be actionable. The current EU initiative to track
the movement of livestock suffers similar problems, with a lack of coherence
between national standards and the bookkeeping systems of
individual member states.
106 crossin, hayman, and taylor
CTRs should also gather sufficient data to allow distinctions between
products and include comprehensive review procedures to provide feedback
to policymakers on compliance with, and the impact of, international
controls. In addition to material directly relevant to the type,
origin, and destination of specific shipments, data on prices, volume,
and values of licit and illicit markets, gaps in commodity data between
trading partners, stockpiling of data, registration details and capacities
of processing and treatment centers, national implementation, policing
efforts, and offenses detected should be recorded. No CTR currently
comes close to such standards, although CITES reporting is perhaps
the most comprehensive after a series of reforms designed to address
previously poor implementation.
The Basel convention shows a particularly moribund standard of reporting,
due to the absence of a definition of hazardousness and few
guidelines on what should be included in national reports. Thus,
although its secretariat collects information, the data submitted by national
authorities cover widely disparate types of waste, collected over
different time periods, and using divergent nomenclature. Data for
1997 show a 10–15 percent difference between total quantities of waste
reported as exported and those reported as imported (Basel Secretariat
1999). Recorded imports from countries in the Organisation for Economic
Co-operation and Development (OECD) to other countries are,
at least, 10 times higher than recorded exports from OECD countries,
raising a substantial question about the integrity of data. Details of how
and where such wastes are to be treated were absent in 45–60 percent
of the cases—despite the convention’s prior-informed-consent procedure
for handling waste. Similarly, among non-OECD countries, those
importing waste reported a volume of trade twice as large as exporting
countries. In these cases, 70–85 percent of reports failed to specify how
these imports were handled.
Similarly, data on the international timber trade preclude the rational
assessment of threat and the identification of illegal trade (see
appendix 4.2). As the International Tropical Timber Organization
notes, “Production statistics . . . are often weak or nonexistent. The
primary problem in many producer countries is the lack of a comprehensive
forest out-turn measurement system as well as any kind of
regular industrial survey to obtain production figures” (ITTO 1999).
Consumer countries are usually unable to distinguish the processing
of types of timber: “Many make errors or omissions in providing
trade data . . . [and] also have serious problems in their customs
statistics” (ITTO 1999). No facility exists for producer countries to request
information on the volume of imported material being declared
to a consumer country’s authorities for taxation purposes; moreover,
where did it come from? 107
if illegal exports are detected, they cannot be sanctioned in consumer
countries.
There is no quick fix to bring together disparate reporting regimes,
scattered information, and dysfunctional institutions, apart fromreverseengineering
existing agreements. A process of incremental reform is
required that involves all stakeholders at every level, interagency cooperation,
and the establishment of clear operational guidelines on the
form and content of required information through convention secretariats.
Guidelines must set achievable deadlines and specify the minimum
degree of detail and format of reports. Ideally, submission of regular reports
should be mandatory, with penalties for noncompliance. Guidelines
must also be flexible, since reporting will work best when it is part
of existing national economic and social accounting processes.
Memoranda of understanding between the World Customs Organization
and the secretariats of the Basel convention and CITES and between
Interpol and the secretariats of the Basel convention and CITES
have recently been signed to improve coordination between relevant
intergovernmental bodies.5 Similarly, in developing EU initiatives to
track the flow of genetically modified organisms, there has been discussion
of linking unique identifiers to facilitate the search for information
through the Montreal protocol’s Biosafety Clearing House and
the OECD’s BioTrack System.
Revisiting the CITES Appendix II example, a number of reforms have
improved coordination and oversight outside the mechanisms originally
enshrined in the treaty. The significant trade imposed under a revision to
Article 4 of the convention has partially addressed the coordination of
range-state permits by providing expert advice on species status through
its periodic review of heavily traded species. The process then enlists
consumer states in observing global trade quotas, which also relieve
range-states of the burden of making nondetriment findings on a caseby-
case basis. The 1992 U.S. Exotic Wild Bird Conservation Act introduced
the concept of “reverse listing,” meaning that a species is
protected unless it can be proved that trade will neither deplete the
species nor harm the welfare of individuals in trade. The EU’s new
wildlife control legislation system has altered the standard operating
procedures of the convention to require an import quota for any shipment
of Appendix II species into Europe, thus requiring harder evidence
that an export will not harm the population of the species in question.
Harmonized Reporting. As the number of commodity tracking
systems has multiplied, the amount of reports and information required
has grown dramatically. This has placed a particular burden on developing
countries with limited funds and capacity to complete reports.
108 crossin, hayman, and taylor
In early 2001 the Environmental Management Group of the United
Nations Environment Programme (UNEP) agreed to establish a subgroup
dealing with the harmonization of information and reporting
among the commodity control regimes instituted by its numerous multilateral
environmental agreements.6 In particular, the Subgroup on the
Harmonization of National Reporting was concerned with examining
ways of realizing the full value of data gathered by overcoming problems
of limited access and a lack of comparability of information. The
benefits of streamlining CTRs were suggested to include the following:
• Provision of more accurate and detailed information needed to
determine the volume, severity, and nature of illegal trade
• Reduced duplication of efforts between organizations and member
states
• Assistance to other parties to implement provisions by giving
details on lessons learned, case studies, and experiences
• Improved efficiency in the use of information technology and
communications
• Improved cooperation and analytical capacity
• Increased ability to use and develop clearinghouse mechanisms
to trace commodity flows.
UNEP ran four national pilot projects to test different methods and
develop guidelines for harmonized reporting. The results of the pilot
scheme were presented at the Earth Summit in Johannesburg in 2002.
At the time ofwriting, no follow-up harmonization initiatives have been
announced for multilateral environmental agreements on biodiversity.
Information overload is compounded by overlapping reporting
requirements under different, but related, international agreements.
For example, there are parallels between CITES, the Convention on
Migratory Species, the Convention on Wetlands, and the Convention
on Biodiversity. There are also evident similarities between provisions
under the Basel Convention on Hazardous Wastes and the Stockholm
Convention on Persistent Organic Pollutants. Many countries—
developed and developing—have expressed concerns over the burden
of gathering and reporting information. It is widely acknowledged that
improving the cooperation between secretariats and setting common
standards for gathering and reporting information are fundamental to
the effectiveness of commodity tracking systems.7
The Food and AgricultureOrganization (FAO) of the UnitedNations,
the UN Economic Commission for Europe, the European Union, and
the International Tropical Timber Federation have begun to streamline
international reporting procedures, submitting joint questionnaires to
national forest administrations in April-May 1999. The effort saved
by eliminating duplicate reporting practices is to be put into gathering
where did it come from? 109
international data on price, industry structure, secondary-processed
products, and undocumented production and trade.
A further initiative that may strengthen biodiversity-related commodity
tracking schemes is the Global Biodiversity Information Facility
(GBIF), an intergovernmental body created with the aim of increasing
access to global biodiversity information. The GBIF will create an
Internet-based catalogue of species and harmonize databases and search
engines. The diagram in figure 4.1 illustrates how harmonized information
and reporting and linked inter-regime databases (such as that to be
created by the GBIF) may facilitate efficient commodity tracking.8
Pilot programs would be an excellent method of testing the feasibility
of procedures to streamline information. Lessons from pilot schemes,
such as under the recent Stockholm convention, provide clear signposts
Figure 4.1 Measures to Build Bridges between Related
Tracking Systems
Information-sharing
agreement(s) between
related conventions,
parties, and major
industry stakeholders
Agreement on uniform
(and preferably
mandatory) reporting
guidelines on content,
format, language,
deadlines, and timelines
for each tracking scheme
Interconvention website
or search engine (with
access to national data
on type and quantity of
commodities exported
and imported, dates, and
intermediaries involved
at all stages of chain of
custody)
Central or intra-agency
administrator to manage
data, analyze trends, and
collate interconvention
reports and reviews
established by agreement
and cooperative funding
arrangements
Creation of
meta database
incorporating
all related
official
documents,
decisions,
guidelines,
reporting
handbooks,
and timelines
Harmonized and
linked websites
Standard definitions and
keywords to facilitate
searches
Source: Authors.
110 crossin, hayman, and taylor
to how broader schemes should operate and indicate how and where
national capacity building should take place (element 5).
Customs Codes. Improved coordination between trade tracking
systems may also involve expansion of the World Customs Organization’s
Harmonized System of Customs Coding, which uses a six-digit
number to identify traded goods. So far, the system has failed to keep
up with an ever-expanding body of CTRs, as it is only revised and updated
periodically (a complete revision takes about seven years). At
present, the primary purpose of the harmonized system is to determine
trade statistics—it is not designed to be a tracking device.
The statistical information that harmonized codes provide can
assist in constructing patterns in the volume of goods exported,
transported, and imported. When measured and analyzed against
trading data supplied by national authorities and industry, anomalies
and gaps can be identified that may indirectly indicate points of illicit
commodity flows. The U.S. single product code for the Patagonian
toothfish,9 for example, has helped to distinguish between legitimate
and illegitimate sources of a wide range of products made from
the fish. Harmonized system codes are, however, easy to falsify, and
it is possible to describe the same product in a number of different
ways (for example, the ozone-damaging pesticide methyl bromide
has at least four separate and equally convincing classifications), so
cross-checking is necessary, and over-reliance on coding is best
avoided.
Role of Information Technology. There is immense untapped
potential for information technology to provide better-quality information
for efficient commodity tracking. The analytical capacity of
convention secretariats is hampered by a lack of software tools formodeling,
time-series, and trend analysis and for Geographic Information
Systems analysis. Greater investment in building technological capacity,
as well as in harmonizing convention websites and databases,
would provide a solid foundation for tracking commodities covered
by more than one international or multilateral agreement.10 As discussed
below, technology may also improve the tracking of a commodity
through various stages of production.
The analysis of trade records and the integration of data from different
national and international authorities with “drill down” software
that checks for irregularities and discrepancies should be central to any
form of intelligence-led policing. Simple and cost-effective versions of
such software need to be developed explicitly for developing countries.
Internet access is often necessary for quick and regularized exchange of
where did it come from? 111
enforcement information, but many government departments in the developing
world are not Internet enabled or restrict access to high-level
officials who fail to transmit information down the line.
Extensive new technologies can make a big difference to national
and international enforcement efforts. Compliance and inspection
methodologies such as vessel monitoring systems, fine-scale satellite
monitoring of forestry concessions, and forensic analysis of wildlife
traffic have considerable potential to achieve economies of effort and
lower monitoring costs. Despite this enormous potential, systems will
be developed only if policy needs for their use are clearly identified. At
present, technological developments precede policy rather than being
driven by it, suggesting the need to promote directly the development
of new enforcement methodologies and forensics.
Element 3: Commodity Labeling and Audited
Chain-of-Custody Arrangements
Clearly, the core of any CTR is the ability to trace commodities and to
distinguish approved materials for accounting and inventory control.
Labels, certificates, or markings should supply important information
about the origins of a commodity, how it has been produced, and who
has been involved in the chain of supply. Chain-of-custody certification
takes such labeling a step further by monitoring the commodity flow
itself to ensure that commodities bearing a label have been produced
from certified sources including monitoring at the point a raw product
is extracted or mined, receipt at first measurement of the raw commodity,
checks at delivery points, verification at each stage of processing or
production, and tracking of movement through brokers, wholesale
dealers, exporting and importing agents, and retailers. Procedures will
inevitably differ depending on the commodity. Nevertheless, it is still
possible to establish minimum requirements for chain of custody that
may be used as a template for implementing chain-of-custody certification
processes. Chain-of-custody certification may be built into
commodity tracking systems that use product labels to differentiate
products from verifiably legal or sustainably managed sources.
The reliability and integrity of any chain-of-custody system will
depend on the transparent and independent auditing of procedures.
Centralized and transparent monitoring is clearly essential; oversight
should not be dispersed among various units, as separate audits of
each link in the marketing chain create problems of varying methodology
and investigative gaps. Similarly, it would be very difficult for
consumer countries to cooperate with producers to check custody
arrangements if information were not centralized.
112 crossin, hayman, and taylor
Certification procedures also require an effective means of issuing
and verifying the licenses or certificates, which implies separate systems
for administration and monitoring. Such systems require significant
investment in new monitoring capacity, as the commodity chain
provided by articles like shipping waybills lacks adequate information.
Such procedures may involve the use of tagging, bar coding, and
transponder technologies and registers of approved traders and processing
facilities. Currently, there are no generic “legality” certification
tools for most CTRs, although some chain-of-custody standards such
as an ISO 9000 mark exist. Thus, when Swedish flat-packed furniture
giant IKEA wanted to make sure that all its timber was legally sourced,
it had to develop its own system.
Such methods may imply significant reform of legal and administrative
arrangements in the producer countries, possibly encouraged
by donor pressure. Often matters relating to export controls are the
responsibility of finance or trade ministries, whereas the monitoring of
resource extraction falls under ministries of the environment or natural
resources.
Consumers, retailers, and importers of the products need to be
educated to look for and demand the license or certificate and to refuse
products without certification. Central and local government procurement
programs can also play an important role in leading these markets
and rewarding compliance.
The Kimberley process has perhaps the most advanced regime in
this regard. Its core provision for tracking rough diamonds is that
individual shipments must be sealed in tamper-proof containers accompanied
by an official certificate of origin. Certificates are forgeryresistant
documents that identify a shipment of rough diamonds as
being in compliance with the requirements of the certification scheme.
Nevertheless, certain activities, described as “high risk” by diamond
industry experts, such as the flow of diamonds from the mine to the
first export point, are subject to recommended controls. Similarly, the
scheme “encourages” participants to ensure that mining companies
maintain effective security standards so that conflict diamonds do not
contaminate legitimate production and “recommends” that a participant
establish a license or registration scheme for all diamond buyers,
sellers, exporters, agents, and courier companies. Figure 4.2 illustrates
how these elements and considerations may be integrated into an
effective certification-based CTR.
Both the timber and fisheries sectors lack systems that focus on the
legality of material alone, but both sectors have market-driven labeling
schemes, such as those of the Forest Stewardship Council (FSC)
and the Marine Stewardship Council (MSC), identifying sustainability
Figure 4.2 Common Elements of Effective Certification
Tracking Systems
Body Action Result
Standard-setting
body
Government
of import
Accredited
certification
body
Central
data-gathering
body
Independent
third-party
auditor
Government of
country of
origin (export)
Accredited label,
tamper-proof
identifying mark
or certificate
accompanies/
attached to
product at all
stages of chain
of supply
Product
differentiated
in market as
being from
accredited,
legitimate
source
Assessment of
product
management
Verification of
chain of custody
Assessment of
compliance with
scheme and
associated laws
at all stages
Reform of laws
regulating
importation;
capacity building
of customs
authorities
Collection and
analysis of
data on exports,
imports, values,
and other factors
along chain of
supply
Reform of laws
and regulations
related to
industry
Cooperative
agreements with
other countries in
chain of supply
Standard setting
Database of
information
available
for thorough
commodity
tracking
Accountability;
noncompliance
and other
problems
identified
Streamlined
procedures;
enhanced
monitoring
More-effective
law enforcement
Better
identification
of certified
products
Product
certification
standard
Certificate of
chain of
custody
Product
certificate
113
114 crossin, hayman, and taylor
of production, which should imply legality as well. The main point of
the system is that use of the MSC logo is permitted only where there
has been independent verification that the product originated from an
MSC-certified fishery. A chain-of-custody certificate provides this verification.
The chain-of-custody certifier requests documentation relating
to that supply chain and usually visits randomly one or more
points in the supply chain to verify the product stream. A certifier must
consider all parts of the supply chain (from fishing vessel to end consumer)
when assessing the supply chain against the MSC standard.
The costs of certification are agreed between the certifier and the client
and depend on the size and complexity of the supply chain.
The importance of closely following a commodity through each
stage is acknowledged in the timber certification system set up by the
Forest Stewardship Council (FSC). Under the FSC scheme, labeled
operations must have “forest management certification,” which implies
that harvesting activities are sustainable and legal, and “wood product
certification,” which demonstrates that independent chain-of-custody
procedures have tracked the wood harvested in certified forests
through all stages of their transport, processing, and marketing. FSC
is the only international timber certification scheme to require such
chain-of-custody certification explicitly. Figure 4.3 illustrates the main
stages of production covered by the FSC scheme.
Swiss logistics company SGS is promoting the establishment of a
system of independent validation of legal timber based on the concept
of independent monitoring and verification of land-use changes, timber
flows, and resource management. This could lead to sustainability certification
like that of the FSC, but it does not have to and can be used
simply to demonstrate that production is legal and licensed. Box 4.1
explains the main components of the system. Steps 1 and 2, which
would be compulsory, provide the independent validation of legal
timber, whereas step 3 is voluntary and would provide a certificate of
sustainable forest management.
Labeling as Laundering. Trade-permitting systems themselves are
prone to fraud and, if drafted without due care, may serve more as a
laundering facility than as an effective check on contraband. Lack of
political will, bureaucratic inertia, limited information, and corruption
are common problems in many government departments; hence, without
separate checks, there is the danger that any marking or labeling
system will simply create a better and more effective method of laundering
contraband.
CITES has perhaps the most complex administrative and permitting
system of the various CTRs, and this has provided many opportunities
to subvert and abuse agreed controls. Mismanagement of the
where did it come from? 115
Figure 4.3 Forest Stewardship Council Chain-of-Custody
Certification
Forest
Sawmill
Sawn wood merchant
Drying service
Manufacturing company
Finished wood
product merchant
Consumer
Finished product
with FSC logo
Semifinished
products
Dry sawn wood
Sawn wood
(humid)
Sawn wood
Round timber
Note: FSC  Forest Stewardship Council.
Source: Authors.
permitting system has sanctioned activities that would not have been
allowed under a strict interpretation of the convention. As a result,
there may be little need to smuggle animals directly when permits can
be doctored or fraudulently declared to give shipments a false legitimacy.
It is a simple matter, for example, to declare lesser-known endangered
species improperly, especially if they have many look-alike
species or if illegally caught specimens can be labeled as “captive
bred.” Smuggled animals or products can also be laundered as coming
from preconvention stockpiles or from noncontrolled populations.
The notorious management quota system for African elephant
ivory in the 1980s serves as an example of how a system without independent
checks on its integrity can facilitate illegal traffic. The combined
effect of no controls over the volume of certificates issued and
the presence of large stockpiles of illegal material that could acquire
considerable additional value if they were certified led to a hopeless
116 crossin, hayman, and taylor
Box 4.1 Independent Validation of Legal Timber
A stepwise, pragmatic approach is proposed to address the problems of
illegal logging through the compulsory independent validation of legal
timber, while providing a link or possibly integration with voluntary
certification of sustainable forest management.
To illustrate this approach, a system of labeling sustainable timber
is suggested in three steps: (a) timber from a legal origin, (b) validated
legal timber, and (c) sustainably produced timber. Each step is conditional
on a certificate issued independently by an accredited third-party
verifier or certifier at different stages of the process.
The certificate of legal origin is the result of the successful verification—
essentially through implementation of a log-tracking system—that the
logs or timber products (a) were legally purchased from the rightful
owner and have legally been sold and transferred down the chain of
custody to the point of reference of the certificate and (b) conform to
national or international product-specific regulations such as protected
species or minimum diameters. The system would also periodically
verify that duties have been paid and that allowed volumes of cut
or quotas have been respected. Past, unsettled lack of compliance
may block the whole process. In the suggested labeling system, compliant
logs and timber products could be labeled as timber from a legal
origin.
The certificate of legal compliance is awarded where forest management
is found compliant with specified national legislation and regulations
including the terms of the concession agreement or permit. This
essentially refers to the preparation and implementation of the management
and harvesting plans, including the forest inventories. Logs or timber
products already certified as from a legal origin at this stage could
be labeled as validated legal timber if the certificate of legal origin for
the timber can be linked with a certificate of legal compliance for the
forest yielding the timber.
The certificate of sustainable forest management refers to the certificate
awarded or maintained as a result of successful auditing of forest
management against the principles, criteria, and indicators of an international
forest certification scheme such as that of the Forest Stewardship
Council. It is suggested that logs or timber products already certified
as being from a legal origin and originating from a forest certified
both as legally compliant and, at this stage, sustainably managed could
be labeled as sustainably produced timber. A certificate of chain of custody
issued under the forest certification scheme would not be enough
to replace a certificate of legal origin, whose scope is wider and which is
based on advanced log-tracking systems.
where did it come from? 117
Box 4.1 (continued)
Independent validation of legal timber covers the first and second
steps—that is, verification of the legal origin of the timber and verification
of the legal compliance of the timber source. From producer to consumer,
the system of independent validation of legal timber has the potential to
provide an effective tool to aid law enforcement by the government, a
powerful market-based instrument both for producers (market access,
fair competition) and for buyers (sound, transparent timber trade), and
reliable information for all stakeholders, locally and internationally.
Source: See SGS proposal at www.sgs.com.
inflation of the system, with the end result that legal ivory trade
amounted to under 20 percent of the total “legitimized” trade under
the system (Barbier and others 1990).
To the extent that a tracking system relies on self-reporting as the
principal means of monitoring, it will lack credibility with stakeholders
and the public. Instead, it is preferable that regular independent
third-party monitoring and auditing of systems should become an integral
part of tracking systems to ensure that they are run according to
their policy objectives. In the case of commodity tracking systems set
up by industry and government partnerships (such as the Kimberley
process), self-regulation should be avoided, as it lacks transparency.
There is less temptation to turn a blind eye to violations when an independent
party has the power to expose failings and gaps in a tracking
system. For example, part of the FSC certification scheme’s excellent
reputation is due to the annual audits carried out by independent
FSC-accredited bodies to assess observance of all stated principles and
criteria of forest management.
A small degree of transparency and measures for independent monitoring
were integrated into the Kimberley process after nongovernmental
organizations strongly opposed self-regulation. The process now
provides for a form of peer review in which a participant who considers
another participant not to have adequate laws, regulations, rules, procedures,
or practices to implement the scheme will inform that other
participant through the office of the chair. However, such methods rely
on one participant being sufficiently annoyed with another to call it publicly
to account. Verification and review of complaints can take place
only with their consent, and the membership and terms of reference of
any agreed monitoring or verification mission are yet to be determined.
118 crossin, hayman, and taylor
A lack of independent monitoring also undermines the effectiveness
of the Basel convention. No impartial, independent mechanism yet exists
for ensuring that consenting importing states have the capacity to
dispose of waste in accordance with the convention. It is left to importing
authorities to verify the adequacy of processing facilities.11
The presence of an external tracking organization can raise problems
of national sovereignty and interference, and co-management of the
process with the host country may sometimes be necessary. In Cameroon,
a cooperative system operates where government enforcement and independent
certifiers work in tandem. Another option is to develop a
“super-agency” charged with specific responsibility for monitoring and
certification and having a strong self-interest in ensuring that the system
functions properly. However the auditing is carried out, an important
point is that the entire procedure should be transparent.
Private companies such as SGS provide independent monitoring
services, issuing documents allowing for the movement, sale, distribution,
and export of forest products. This third-party service removes
the certifiers of legal products from corrupting influences and precludes
interference with the process from interministerial disputes or
rivalries. If the third-party tracking organization discovers irregularities,
it can then report them to government enforcement authorities for
subsequent investigation. Separation of the law enforcement functions
from the routine administration of forestry management is generally
required for effective enforcement (element 4).
Even independently audited chain-of-custody schemes can suffer
from evasion of rules; no system is infallible, and its integrity will always
depend on the extent to which the chain of custody is monitored
in practice. The point about the third-party approach is that it offers
the possibility of monitoring at every stage and a transparent means of
auditing these efforts. Along with any kind of certification where a
market niche is established, it also benefits from a built-in incentive on
the part of the operators to ensure that the system is fully implemented
and to guarantee the integrity of the certificate.
Allied to these enforcement and monitoring reforms, processes can
be set up to allow field observation and intelligence from local communities
and nongovernmental organizations—assuming that the system
is transparent enough for them to know what they are supposed to
be monitoring. Networks of local and international nongovernmental
organizations already exist in many producing countries, and donor
countries have sometimes provided financial and technical assistance
to help them to develop. The U.K. government, for example, funded
the Environmental Investigation Agency to run training workshops in
monitoring forest activities for local nongovernmental organizations
where did it come from? 119
and communities in Indonesia. The reform of property rights to devolve
management of resources to local communities with a vested interest in
their long-term security can also prove helpful.
Use of New Technology. As with data exchange, many technologies
exist to help account for product inventory and trade. Also, as with
data exchange systems, technological developments in tracking have
tended to precede policy rather than to have been driven by it.
There are clear drawbacks to not employing technologically sophisticated
tracking methods. For example, the outdated paper-based certificates
or movement documents issued under CITES and the Basel
convention are easily forged. Paper documentation, when not supplemented
by electronic verification, is unreliable; falsification of CITES
certificates is a common problem, particularly for high-value products
such as caviar, as are the sale and theft of blank documents.
Table 4.2 gives examples of technology applicable to the monitoring
of logs, although the methods are readily adaptable elsewhere and
should be seen as complementary rather than exclusionary. The technologies
listed are relatively self-explanatory: remote sensing and
automatic cameras are clearly “large-scale” technologies that are not
designed to measure individual logs but areas of operation and aggregate
volume of traffic. Microtaggants are microscopic particles
composed of layers of different colored plastics—millions of permutations
are possible by combining several colors in different sequences.
The coding sequences are then read with a X100 pocket microscope.
Radio frequency identity tags can be read-only or read-write and
can be programmed in the field or in advance. They are passive in
that they transmit data only when “excited” by a signal from an appropriate
reader. Reflectors are read by laser devices and may be of
value to aerial surveillance teams trying to identify concession boundaries,
log trucks carrying illegal loads, and the like, while satellitebased
sensors can be read over enormous distances but are relatively
cumbersome.
Element 4: Effective Compliance and Enforcement Measures
Compliance refers to a state’s commitments under international law.
Enforcement refers to a set of actions that a state may take within its
national territory to ensure implementation of its international commitments,
including adopting national laws and regulations, monitoring
controlled activities, and deterring evasion of national regulations.
Countries often sign up for controls but fail to pass adequate laws
or assign sufficient funds for their effective implementation. Responsibilities
for implementation of controls may be assigned to an agency
120
Table 4.2 Forest Product Monitoring Technologies
Technology Security and reliability Practicality Cost Level of information
Microtaggant
tracer paint
and
microscopes
Chemical
tracer paint
Very high: virtually
impossible to
counterfeit;
durable; identifies
log origin from
annual coupe;
recommended by
U.S. Forest Service
for covert
enforcement
Medium: provides
only custodial
information, not
origin; limited
accountability
controls; can give
false readings if
paint degrades
or reacts
Practical: easy to apply with
spray gun; fastest-marking
technique; one application
for trees and cut logs; no use
of sensitive electronic
equipment; can be difficult to
read in field; and wet or
muddy logs may not take
marker well; training
required to read codes
Practical: same as for
microtaggant, but less
training is needed
Development and
installation costs are
high, but operating
costs are low: $145
for an 8-ounce bottle
of microtaggants in
clear lacquer (1,000
applications); $30 for
spray applicator; $20
for microscope
Low
Very high: can be coded
with the name of the
concession, location of
coupe, time of cutting,
name of authorized
paint users, issuing
authority, and so forth
Low: custodial
information is limited
to those allowed to
use paint (assuming
none is stolen, for
example)
121
Bar-coded tags
and scanners
Radio
frequency
identification
tags
Good: easily read;
can be combined
with microtaggant
or chemical tracer
paint for greater
security
Very good: tag is
undetectable;
accurate and
reliable
Practical: very easy to read, even
from several meters; can link to
automatic scaling system; can
be difficult to apply; sensitive
scanners may break down; tags
can fall off or be cut out; metal
staples can be fouled by milling
equipment and vice versa;
training is required for system
use and data entry
Very practical: transponders very
durable (more than eight years);
codes can be reprogrammed;
can be read remotely (and under
water); direct interface with
computers for data gathering;
training in installation and
reading required as well as
equipment maintenance
Medium: $150 for
standard application
tool ($300 for
pneumatic); $1,000
for automatic feed
and paint application;
$0.10 for a standard
tag; $0.60 for a tag
with paint application
Very high (but falling):
$3,000 for applicator
and reader; $800 for
additional reader;
$3–$8 per
transponder in
100,000-unit volumes
Very high: as per
microtaggant and
may be linked to
automatic scaling
information
Very high: as per
microtaggant, but
with direct computer
link
(Table continues on the following page.)
122
Brand
hammers
CIRAD-Foret
Unique
reflector
identifiers
Poor (fair if combined
with
documentation):
easy to copy brand
marks and hammers
themselves
Good: impossible to
substitute logs in
a shipment; can
counterfeit forms
and hammer marks
to get through
checkpoints but will
be detected by audit
Very good
Fair: quick and easy to apply, but
can be difficult in large piles of
logs; cannot apply until tree is
cut, so requires a system for
standing inventory; difficult
to read; minimal training
Practical: easy to learn and use
as builds on existing skills
Poor but improving: technology
is in infancy; reading is fast
and accurate and can be
achieved remotely (from air,
for example); laser devices not
yet robust enough for field use
Very low
Low: scaling and grading
already done, so added
cost is only that of the
forms and time taken
to fill them out
High: $500 for laser
measuring device;
$0.75 per reflector in
100,000-unit volumes
Poor: not site specific;
concessionaire can
use one hammer and
forester or scaler can
use another
High: form contains
all the necessary
information, but
cross-checking and
auditing required;
log has form for
matching serial
numbers
Low (but improving):
can be modified to
incorporate memory
cards and unique
identifiers to store
more that just
location information
Table 4.2 (continued)
Technology Security and reliability Practicality Cost Level of information
123
Ground video
surveillance,
cameras, and
automatic
activation
devices
Satellite-borne
sensors
Genetic
fingerprinting
Good: signal can
be transmitted to
remote site to
enforcement
personnel
Very good
Very good:
chloroplast DNA
cannot be faked
Not practical for monitoring
movements of individual logs,
but good for monitoring
major transportation routes;
can be activated by light,
sound, or motion detectors;
repeaters necessary if line-ofsite
to monitoring station not
available; difficult to hide
cameras for covert
surveillance
Not practical for monitoring
movements of individual
logs but provides valuable
information across whole
concession; may be linkable
to individual transponders
in future
Not practical for monitoring
individual logs; experimental
but will be very useful if
customs intercept unidentified
timber
High: $5,000 per unit;
approximately $2,500
for repeater units
High but large-scale
application
High (but falling);
individual test requires
specialist support
High
High over large scale
Low-medium; can trace
origin of shipments to
specific regions
124 crossin, hayman, and taylor
that is already overloaded. Even where the rules on the books are adequate,
lack of resources can cripple efforts to control environmental
crime. Bureaucrats and enforcement agents are often poorly trained,
underfunded, and inefficient. Customs, police, and other enforcement
personnel may not be aware of the problem: customs staff tend to give
a higher priority to other contraband such as arms and drugs, while
the police tend to focus on robberies and violent crimes. Enforcement
agents may have to endure hostile conditions or cover large geographic
areas.12 In addition, property rights for renewable resources may be
unclear, as may be their actual value, meaning that the authorities may
assign insufficient resources to their protection. Such capacity problems
are becoming more evident given the increasing involvement of
developing countries in many CTRs.
Regulatory failures involve inadequate regulations that fail to implement
an environmental treaty properly, contain loopholes, or fail to
deter (or even punish) evasion. Even when the rules themselves are adequate,
institutional failures such as inadequate resources, untrained
staff, or cumbersome administration may prevent the effective operation
of controls.
Compliance Assurance. Signatories to an agreement establishing a
tracking system must transfer provisions into domestic law and apply
sufficient resources for their effective administration and enforcement,
but this rarely happens. States often have little incentive (or no mechanism)
to police one another, meaning that implementation is left to national
priorities at the expense of the global control regime. In the worst
cases, noncompliance with, and free riding on, treaty provisions may
undermine a treaty’s sound implementation elsewhere. For example, in
the ivory market, as the majority of the value was added to the product
during its carving, the carving industry tended to settle in areas with the
least restrictions. As restrictions were imposed on ivory-carving factories
in Hong Kong (China), the industry shifted to Macau (China), then
Singapore, then Taiwan (China), and finally the United Arab Emirates.
Once carved, ivory was not subject to CITES procedures and could be
traded relatively freely.
Gaps in implementation and enforcement are a near-universal
theme of international policy discussion on CTRs. Significant implementation
problems in commodity tracking by multilateral environmental
agreements were highlighted at the Rio Earth Summit in
Agenda 21; United Nations Development Programme and the Global
Environment Facility’s Capacity Development Initiative; the European
Commission’s Sixth Community Environmental Action Program;
communiqués from the Montreal meeting of environment ministers of
where did it come from? 125
the Americas in March 2001; UNEP’s February 2001 Montevideo III
Program; UNEP’s February 2001 Guidelines for Compliance and
Enforcement in Multilateral Environmental Agreements; and the 1997
G-8 Ministers’ Statement on Environmental Enforcement, International
Cooperation, and Public Access to Information, held in Miami,
Florida, United States.
A necessary minimum for the correct implementation of CITES is
that national management and scientific authorities should be designated,
trade in specimens violating the convention should be prohibited,
and penalties and confiscation procedures should be specified. A
large number of parties have been unable to fulfill these simple requirements:
in 1994 of more than 80 parties to the convention, only onefifth
had adequate legislation for the implementation of CITES, while
one-third had wholly inadequate legislation.
National data reports are often central to assessing compliance
with international controls, but they are frequently late, incomplete,
and sanitized. Taking CITES again, a report to the secretariat in 2000
highlighted that only about 40 percent of national data submissions
were on time, while a significant number of parties failed to submit
any annual report.
Noncompliance and inadequate implementation of CTRs are, perhaps,
the biggest causes of tracking failures and system breakdown.
Increased transparency of national reporting in many CTRs and diagnostic
tools are needed to assess the quality of implementation and enforcement
in partner countries. This, of course, is a sensitive area, as
states understandably resist transferring any part of their sovereignty
to an external or international body. Experience shows that national
bureaucracies must have ownership of the development of legislation
or they are unlikely to take action. Donor countries interested in legislative
reform need to identify domestic constituencies for change
and work with governments to improve judicial and administrative
capacities.
There also needs to be a way to reward compliance and deter noncompliance.
CTRs need to include measures to encourage compliance.
In many cases, the reward will be financial, as revenue gathering
improves. However, if states bear very different costs and see quite different
benefits from a proposed measure, political will to implement
and comply will differ widely. States with high costs and low benefits
may well downgrade their implementation efforts, which may result in
significant costs elsewhere by, for example, allowing the laundering of
contraband.
Thus compliance procedures should allow for the independent assessment
of problems and their amelioration. Such measures should
126 crossin, hayman, and taylor
provide an opportunity for settlement and assistance with capacity
building. In particular, states reaping the benefits of controls should
compensate those bearing the costs: developed countries should fund
capacity-building programs in developing-country partners to the
treaty. The multilateral fund of the Montreal protocol is perhaps the best
successful example—contributions amounted to about $1.3 billion at
the end of 2001.
The Significant Trade Process imposed under Article 4 of the CITES
convention has partially addressed the failure of Appendix II listings
procedure by providing independent expert advice on species status
through its periodic review of heavily traded species. The process then
enlists the help of consumer states in observing global trade quotas,
which relieve range-states of the burden of making nondetriment findings
on a case-by-case basis. The European Union’s (EU’s) new system
of wildlife control legislation has altered the standard operating procedures
of the convention to require an import quota for any shipment
of Appendix II species into Europe, therefore requiring harder evidence
that a given export will not have a harmful effect on the population
of the species in question. The CITES secretariat now runs a
Legislation and Compliance Unit, where legal and enforcement professionals
provide real-time enforcement assistance to the parties and
assessment of national compliance efforts. Activities include a rolling
program of national legislation assessment, the issuance of CITES alerts
to member states detailing actionable intelligence, cross-examination
of permits and certificates, information outreach, and national missions
for needs assessment or information verification.
A number of the major fisheries conservation treaties run schemes
to detect and sanction reflagged vessels that may be free riding on
catch controls. These mostly involve a register of noncontracting party
vessels sighted in controlled waters, which face direct inspection if
they put into the ports of contracting parties. Landings or transshipments
from such offenders are banned unless the vessel can prove that
controlled species on board were not caught in the regulatory area. In
addition, some conventions also allow trade sanctions to be imposed
on noncompliant states on the basis that they could not be exporting
certain fish products unless they were catching them in an area controlled
by the treaty.
Trade measures have proved an essential component in addressing
noncompliant states. CITES, for example, has seen unilateral action
under Article 14(1), which allows parties to undertake stricter domestic
measures than are formally required under the convention to allow
for targeted sanctions on noncompliant states including Bolivia, Democratic
Republic of Congo, Greece, Italy, Thailand, and United Arab
where did it come from? 127
Emirates (twice). Sanctioned parties must then agree to a compliance
plan with the secretariat or a deputation of other parties in return for
a phased withdrawal of trade sanctions.
Parties have also imposed trade controls on nonmembers to prevent
them from free riding on the treaty and to encourage buy-in toCTRmeasures.
Perhaps the most significant example was the Montreal protocol’s
trade restrictions on ozone-depleting substances and products containing
such substances under Article 4. Although criticized as “trade war by
environmental decree” by some developing countries, Article 4—in conjunction
with the multilateral fund—has helped to drive the near-global
ratification of the protocol. It was also one of the first treaties to include
a specific noncompliance procedure; although slow in some instances,
the model has been successful in expediting reporting requirements and
promoting open dialogue and has since been widely copied.
It is worth noting that, in almost all cases, noncompliance procedures
remain the creatures of the national parties—no CTR has delegated
direct authority to sanction to an extraterritorial body.
Development Assistance Conditionality. Aid conditionality has
also been used to generate domestic impetus for policy reform. This is
not always an extraneous linkage of issues: proper management of
natural capital such as the forest sector may be vital for state revenue
and macroeconomic stability in developing countries. In Indonesia,
the World Bank delayed a loan disbursement of $1.2 billion in mid-
1999 (of which $400 million was forest related) because of illegal
logging.13 However, such methods have met with varying degrees
of success, as a 1999 review comments, “The World Bank has approached
the use of conditionality for environmentally oriented reform
as a high-stakes poker game . . . the assumption implicit in this bargaining
approach is that the borrower government is a unitary actor
and that there is little genuine motivation for reform . . . . The twistingarms
approach by itself is of limited use even in achieving the limited
goal of getting forest laws and regulations on the books” (Dubash and
Seymour 1999, p. 14). A recent policy shift among Indonesia’s Consultative
Group donors has been to change the focus of treating
illegalities from timber concessions to addressing the discrepancies
between production and supply in the processing sector (“WB Leads
Move” 2000).
National Enforcement. Effective national enforcement is predicated
on the following:
• Designing and implementing a clear national control regime
• Undertaking effective national capacity building
128 crossin, hayman, and taylor
• Targeting flagrant violators
• Increasing sanctions and introducing probation penalties
• Improving case processing times
• Encouraging compliance through positive incentives.
National legislation often needs to be reformed to include clear
definitions of illegal activities, establish significant deterrent sanctions,
and specify enforcement responsibilities at every stage of a commodity
chain. Adequate resources must be committed to ensure effective enforcement.
In cases where tax evasion occurs, improved enforcement
may yield an immediate increase in revenues.
Lack of specialist knowledge and training may be addressed best by
cascade, training-the-trainer programs followed by refresher courses,
combined with the appointment of specialist prosecutors to cooperate
with investigating officers. Frontline agents and specialist enforcement
personnel should be put into early contact with each other and with
their opposite numbers in other countries. Regularly updated national
and international directories of enforcement expertise may facilitate
contact.
Criminal profiling is vital for focused enforcement efforts. Risk
analysis involves compiling records on importers and exporters and integrating
this with actionable intelligence and enforcement actions to
allow for the profiling of contraband, trafficking methods, and likely
countries of origin. This process is reiterative—seizure and confiscation
statistics from subsequent enforcement interventions should then be
analyzed and the results fed back into the system to adjust profiles.
Special enforcement units have had a positive record in gathering
intelligence, performing market surveillance, pursuing allegations of
corruption, and prosecuting complex corporate investigations. South
Africa’s Endangered Species Enforcement Unit is a good example. The
unit was founded by experienced officers from the rangeland crime
division familiar with the need to penetrate networks, go undercover,
gather intelligence, and conduct sting operations. Specialist units are
likely to be most effective when run on a “stovepipe” arrangement, in
which they are connected into the legal and administrative structure at
a level sufficient to bypass regional and local “regulatory capture.”
The model of bypassing existing bureaucracy can be taken further to
create “super-ministries” such as the Kenyan Wildlife Service, whose
broad remit and responsibilities, including almost all aspects of national
park management, cooperative wildlife management, research, tourism,
and infrastructure, allow for coordinated policies on wildlife protection.
The result is a 24-hour operations room, a host of specialist units, a pool
of paid informers, a network of honorary wardens to gather intelligence,
and a highly motivated, well-paid staff.
where did it come from? 129
Imaginative national and international enforcement programs are
necessary, and adequate resources are required for their success. Actionable
intelligence needs to be collected and disseminated, and enforcement
needs to be targeted at weak points in global commodity chains.
Regional enforcement cooperation agreements that allow for shared
jurisdictional competence may also help to overcome the limitations
of partitioning enforcement responsibilities between separate jurisdictions,
especially where cross-border gangs are active and able to take
advantage of territorial divisions. Perhaps the most innovative model is
the 1996 Lusaka Agreement on Cooperative Enforcement Operations
Directed at Illegal Trade in Wild Fauna and Flora, which makes extensive
provision for shared, cross-border investigations into transnational
wildlife poaching gangs in central and eastern Africa. The region’s first
multinational task force was constituted in 1999, with diplomatic status
conferred on members to facilitate their work. The European Union’s
Europol Bureau may assume a similar role in helping to police some
environmental CTRs across the EU, although its current mandate
extends only to atomic and radioactive waste.
International Intelligence Coordination. National intelligence on
CTR violations needs to be collated and disseminated more efficiently
to allow for coordinated enforcement between jurisdictions. Actionable
information is often withheld in order to avoid embarrassing the
countries involved or because of the perceived confidentiality of
national enforcement processes. Information may be sanitized or sidelined
into ritual exchanges at meetings rather than presented in an
actionable way.
The CTR secretariats, relevant UN agencies, and transnational enforcement
facilitation organizations like Interpol and the World Customs
Organization all have a (coordinated) role to play in delivering
better intelligence, information exchange, and training to their member
states to improve CTR implementation and enforcement. That said,
it is also important to understand the culture and the standard operating
procedures of different organizations and where they fit into the
picture. For example, Interpol passes information that “names names,”
whereas the World Customs Organization does not.
More international research is also needed on trafficking routes
where nongovernmental organizations may be valuable partners. Trade
Record Analysis of Flora and Fauna in Commerce, for example, acts
as an occasional independent monitor, clearinghouse, and international
research organization for information on wildlife trade (and
some fisheries and forestry issues). Supported by the International
Union for the Conservation of Nature, the World Wildlife Fund, and
others, this is perhaps the most developed attempt to provide sustained
130 crossin, hayman, and taylor
intergovernmental support and intelligence to a CTR. Other nongovernmental
organizations like GlobalWitness, Global Survival Network,
WildAid, and the Environmental Investigation Agency have also
carried out extensive investigations into trade routes of particular
forms of contraband.
Interagency Partnerships. Multiagency partnerships may also be
necessary. The U.K. Metropolitan Police’sOperation Charm has linked
with the East Asian traditional medicine community and wildlife conservation
nongovernmental organizations to educate traders and increase
public awareness of the trade in endangered species through
widely publicized enforcement actions, public information packs, and
new forensic resources.
Clear processes can be set up to allow field observation and intelligence
from industry informants, the public, and nongovernmental
organizations to be relayed through appropriate government and enforcement
agencies. Established networks of local and international
nongovernmental organizations already exist and can be further promoted
and developed.
Whether it is better to have a specialized unit or a multiple-agency
partnership or simply to provide general training to all enforcement
agents depends on the size of the available resources. Multiple-agency
partnerships often lack dedicated budgets and tend to be highly dependent
on the goodwill of the participants involved. When few dedicated
resources are available, it may be better to concentrate them in
a specialist unit to prevent dilution and loss of enthusiasm. Where
larger funds are available, it may be possible to integrate an understanding
of the basic principles and aims of specific CTRs into the curricula
of law enforcement agencies and customs and to take a phased
approach to capacity building through clustering and training-thetrainer
programs.
Effective (Criminal) Sanctions. Penalties are often inadequate and
may be treated more as operating costs for unscrupulous entrepreneurs
than as a serious deterrent to market entry. Even when deterrent
penalties are permitted in national legislation, they may not be applied
by the judiciary, which is generally unaware of the aim and purpose of
CTRs and the potentially devastating effects of their violation. A lack
of awareness and cooperation among prosecutors and investigators
may lead to loss of cases through technicalities. In addition, costs of
enforcement tend to be “sunk” and are rarely recovered on successful
prosecution of offenders.14
The use of criminal sanctions to deter some of the more serious
CTR breaches on hazardous waste and endangered species has gained
where did it come from? 131
widespread international acceptance. The provision for criminal
penalties has also been central to involving law enforcement organizations
in such incidents. Where there are difficulties with pursuing criminal
prosecutions—for example, where it is difficult to prove intent to
violate laws or to acquire evidence of guilt to the criminal standard of
“beyond reasonable doubt”—strict liability procedures may prove
more effective. These sanction a company or an individual for failure
to exercise due diligence and operate irrespective of fault or intention.
There may also be scope for the use of innovative extraterritorial and
reciprocal enforcement legislation to allow for the effective sanctioning
of deliberate evasion of CTRs outside the boundaries of a single nationstate.
For example, in March 1998, the Norwegian government
imposed the requirement that all Norwegian-registered companies or
vessels operating in waters “outside the jurisdiction of any state” must
obtain a one-year registration. Removal from the register—for contravening
conservation or management measures laid down by regional
or subregional agreements—also invalidates access to all quotas in
domestic or cooperative fisheries.
The U.S. Lacey Act Amendments of 1981 contain a different sort of
long-arm measure that makes it unlawful to “import, export, sell, acquire,
or purchase fish, wildlife, or plants taken, possessed, or sold in
violation of state or foreign law.” It thus provides for extraterritorial
action, but instead of making it an offense to violate U.S. law elsewhere,
the act allows for laws violated elsewhere to be prosecuted in
the United States. Such reciprocal measures may form the basis of
future enforcement cooperation on many CTR issues.
Money laundering legislation may also provide for effective sanctions
since finance often represents the soft underbelly of trafficking organizations.
The main obstacle may be the collateral damage imposed
on licit finance. Nevertheless, stricter controls on money transfers
as part of the war on terrorism may provide for significant progress in
this area.
Element 5: Capacity Building
Without consistent application and enforcement of regulations set
down by commodity tracking agreements across all countries involved
in the supply chain, it is unlikely the system will be effective.
However, differing levels of administrative capacity exist in developed
countries, transition countries, and developing countries. There are
also serious equity issues in any CTR, particularly where povertystricken
developing countries bear the burden of access restrictions for
the common good.
132 crossin, hayman, and taylor
The recent Stockholm convention contains detailed provisions to
assist developing states in meeting common reporting and enforcement
standards. The Global Environment Facility and UNEP are running
pilot programs with 12 countries to develop national implementation
plans for the management of persistent organic pollutants.15 This is in
line with Article 13, which establishes a financial support mechanism
for developing countries and parties with economies in transition, and
with Article 14, which entrusts the Global Environment Facility with
the interim operation of the financial mechanism (until the first
meeting of the conference of parties). Part of this project involves
the elaboration of detailed action plans to identify the required national
responses, processes, and measures to reduce the release of persistent
organic pollutants. Activities include establishing inventories
of persistent organic pollutants, identifying management options, and
preparing schedules of estimated costs for remedial and management
actions.16
The existence of a clear financial mechanism to build the compliance
capacity of developing states is highly desirable. In Article 13, the
Stockholm convention specifically requires developed parties to provide
resources to assist in meeting the full incremental costs of meeting
their obligations under the convention. This mechanism is more
detailed in the Montreal protocol, where the 1990 London amendment
instituted a multilateral fund to finance technology transfer and
capacity-building programs.
Market-based certification programs should also consider equity
issues. Frequently such schemes marginalize or exclude the small,
community-oriented operations that should be encouraged for sustainable
development. The Marine Stewardship Council, for example,
has explicitly developed a community-based certification methodology
to account for the small-scale, complex nature of some fisheries. At the
same time, the MSC program is working to enhance the auditing and
certification infrastructure in more remote fishing regions in Africa.
Annual certifier workshops provide a forum for training and updating
certification skills.
There are a number of methods to make capacity-building assistance
more efficient. A cascade approach of training the trainers, for
example, may give greater returns than broader but more shallow
seminar programs. Similarly, if funding is limited, it may be most effective
to set up a specialist administrative or enforcement unit and
create a culture of empowerment and excellence. With larger funds,
mainstreaming compliance into basic training for enforcement agents
may be possible. Better use of existing technologies and forensics and
the development of new enforcement tools should also be promoted to
where did it come from? 133
improve the efficiency of policing. Joint capacity-building missions that
cluster relevant CTRs may allow quicker implementation and improve
the ability to share the lessons learned between similar control problems.
Clustering would also allow more effective regional studies of
implementation as well as shared training.
Capacity building should not be limited to state agents. Public education
efforts should be significantly increased to create a duty-of-care
culture and to balance vested government and private sector interests.
It is essential to have international control efforts be seen as justified
and in everyone’s best interests rather than have violations be seen as
entrepreneurship.
Contextual Considerations
Our five basic elements should inevitably be adapted to specific circumstances
and contexts. Some of the issues that are likely to have a significant
impact on the success of a specific CTR are elaborated in this
section. Specific technical, legal, institutional, and political circumstances
will shape any CTR, and there is a need to understand the
international market that underpins a specific commodity. Many CTRs
are often dogged by an ad hoc and unsystematic approach where individual
enforcement agencies attempt to target individual traffickers in
contraband without reducing the size of the illegal market in which
they operate.Without addressing demand and supply pressures that determine
profit-making opportunities, other operators will expand or
new operations will enter the market. Thus controls must go beyond
simply increasing enforcement of national laws to address the international
demand and supply of the commodity.
Consideration 1: Detailed Understanding
of the Commodity Chain
Complicated networks link raw materials and producers to customers
through a web of supplier relationships with the involvement of ancillary
specialist services and other key actors such as legitimate businesses,
government officials, and consumers. These interactions are
critical in shaping a CTR regime. For example, in the case of diamonds,
the global mining industry consists of three main sectors: mining, rough
diamond trading, and cutting and polishing. A diamond tracking system
must therefore take into account well-organized large companies,17
uncontrolled smaller operations, and the hundred or so countries that
participate in the exporting, cutting, and polishing of rough diamonds.
134 crossin, hayman, and taylor
Mixing of commodities from different sources must also be considered
in the design of a commodity tracking system. Just as conflict diamonds
can easily be added to batches of legitimately mined diamonds
if there are insufficient checks and monitoring of their precise origin, so
illegally harvested timber can be mixed with legally produced timber—
indeed, some logged-out forest concessions are on the books purely
for this purpose. Similarly, potential mixing of genetically modified
grains is routine in the United States but is problematic under proposed
EU regulations, which require strict separation, testing, and
labeling to control the importation and movement of genetically
modified substances.
The dynamics of specific commodities are also central in understanding
how (and indeed whether) to regulate a commodity. For example,
concern has been raised that mining of coltan, a key component in chips
for mobile electronic devices like cellular phones, in the Democratic Republic
of Congo may have exacerbated regional conflict. Coltan has a
long and complex commodity chain (illustrated in figure 4.4; see Volpi
2002).The fact that coltan mining in the Democratic Republic of Congo
is highly fluid and chaotic—the country provides less than 4 percent
of the world’s supply—and the nature of the product—a component in
a bigger chip that has to be processed several times before reaching
the consumer—make chain-of-custody certification problematic. Enduse
consumer pressure is therefore unlikely to be effective as a driving
force for change. Extraction from the Great Lakes region is likely to
decrease in importance as new reclamation technologies are developed
(the vast majority of the world’s supply is sourced from treated tin mining
slags and existing inventories). World coltan prices are falling, and
capacitor manufacturers are increasingly turning to fixed-contract
arrangements with large suppliers. However, there are only three large
processing companies, so these are likely to be the most significant players
in any potential control regime; they could be effectively engaged in
screening suppliers. The additional sourcing costs could then be passed
up the chain to consumers.
Where profits are high and risks low, it is clear that expertise in
avoiding specific controls will develop gradually. Also restrictions or
bottlenecks at certain points along international commodity chains
allow for more classic “organized” criminals to evade specific CTRs,
as with cross-border smuggling groups that specialize in avoiding border
checkpoints. Thereafter, however, the contraband passes into very
different channels of distribution. For example, Mexican and U.S.
organized smuggling gangs may move endangered parrots, ozonedepleting
substances, narcotics, and weapons together across the Rio
Grande. Chinese nationals who specialized in “sanctions busting” for
where did it come from? 135
Local buyers generally
Congolese/Rwandan
Regional dealers based
in Bukavu, Butembo,
Goma, Katale, Kisangani,
and so on. Democratic
Republic of Congo has
only 19 licensed coltan
trading posts
(3)
Transported to Kampala
and Kigali (either by air
or by road under
armed escort)
Trading companies in
Kampala, Kigali, Nairobi
Coltan flown directly
to Belgium or London or
shipped via Dar es Salaam
or Mombasa
International
metals-trading companies
Coltan processed into
variety of tantalum
products by processing
companies
Capacitator
manufacturing
Consumer goods
manufacturers (for example,
IBM, Intel, Lucent, Nokia)
Congolese mines Consumers
Local and
international
financial
intermediaries
Figure 4.4 Coltan Extraction Chain from Eastern Democratic
Republic of Congo
(1)
(2)
(4)
(5)
(11)
(10)
(9)
(8)
(7)
(6)
Source: Authors.
South Africa’s apartheid regime also ran lucrative sidelines importing
stolen vehicles from the United Arab Emirates and exporting ivory and
rhino horns poached under South African sanction from countries like
Angola to the Far East.
It may even be possible to distinguish different criminal constituencies
within a specific CTR. In the wildlife trade, for example, there are
clear differences between (a) low-volume, low-value “tourist” cases;
(b) high-volume, low-value opportunist smuggling; (c) high-volume,
high-value smuggling by organized criminal networks; and (d) lowvolume,
high-value smuggle-to-order operations for collectors. In the
primate trade, tourists tend to buy protected species randomly; smuggling
to order tends to involve high-value animals like orangutans
or chimpanzees that make good tourist attractions; and professional
136 crossin, hayman, and taylor
smugglers tend to concentrate on supplying rhesus monkeys to the lucrative
laboratory market by laundering wild-caught animals through
captive-breeding facilities.
Considerations 2 and 3: Market Forces That Drive
Enterprise Crime
Evasion of CTR controls is known as enterprise crime. Traditional law
enforcement bureaucracies have been set up to tackle traditional predatory
crime, which involves the involuntary redistribution of wealth
through theft and robbery. In contrast, enterprise crimes are structured
around consensual and mutually beneficial exchanges among producers,
processors, retailers, and final consumers where supply and demand
for services interact in a free-market relationship. Because there
is no obvious victim to report a crime, the authorities are required to
take a lead in investigating and prosecuting such offenses. If theft is involved,
it is more often theft from the state than theft from an individual.
Society as a whole is victimized—although the individuals trading
in conflict diamonds may gain from their transactions, those commodities
are funding belligerents. Trade in conflict timber not only
funds national or regional destabilization but also damages the global
environment.
The traditional “head-hunting” approach adopted by law enforcement
agencies to tackle predatory crime does little to address the pressures
of supply and demand that shape profit-making opportunities.
Society as a whole is often unaware of its victimization, so regulators
may not set appropriate levels of enforcement effort and restitution;
regulatory institutions may even assume that because many problems
related to enterprise crime are not directly quantifiable, they are not
significant.
Indeed, commodity control regimes themselves may inadvertently
create incentives for evasion of regulations by artificially altering supply
and demand. Supply may be constrained to conserve a scarce environmental
good such as an endangered animal population or because
of the increased costs of complying with altered environmental regulations.
Similarly, demand may be adjusted through policies like taxation
to compensate for an associated cost or externality related to the
production or consumption of particular commodities. Avoidance of
these “restrictions” may bring significant profits.
In the case of the Montreal protocol, a lack of consideration of
market forces and different phase-out schedules for ozone-depleting
substances between the developed and developing world generated a
significant black market. Although direct supply restrictions were put
where did it come from? 137
in place, demand was generally left to adjust to market forces (apart
from bans on products like aerosols). Although the replacements for
ozone-depleting substances themselves were often cheaper, significant
capital costs were involved in prematurely retiring machinery dependent
on ozone-depleting substances; thus a significant latent demand
for ozone-depleting substances remained to service existing equipment
in developed countries. At the same time, such materials were cheaply
and freely available on developing-country markets. This demand was
further exacerbated because, despite numerous technical innovations,
one critical application did not emerge: there was no quick substitute
for CFC-12, the most widely used chlorofluorocarbon (CFC) in small
refrigeration and air conditioning. Replacing CFC-12 in car air conditioning
initially cost around $250–$500, while a recharge cost around
$50 in the black market. The demand for CFC-12 was particularly
high in the United States (and Canada) because more than 90 percent
of automobiles were fitted with CFC-dependent air conditioning, compared
with about 10 percent in Europe. In 1995 some 110 million
automobiles were using CFC-12; this demand was met by some
10,000–20,000 tons of illegally imported CFC-12, worth more than
$100 million.
The illegal dumping of waste has increased as regulations governing
the safe and proper disposal of hazardous waste tighten, increasing
handling charges and decreasing the capacity for safe disposal at licensed
facilities.18 As illegal dumpers do not have to connect buyers
and sellers in a clandestine market, but simply lose the material somewhere,
waste dumping does not require specialists, and entry costs
into the illegal market are low. In one New York police sting in 1992,
undercover detectives, posing as illegal dumpers, went into the business
of disposing of toxic waste from small businesses for $40 a barrel,
but they found the competition so fierce that they had to lower
their price (New York Times, May 13, 1992). The cost of legal waste
disposal was about $570 per barrel.
The design of tax regimes may also affect incentives to evade CTRs.
The stumpage tax on most timber harvesting, based on the value of
logs at the stump (that is, the cost of extraction plus a reasonable
profit margin), provides strong incentives for tax evasion by underreporting
harvests, undergrading the quality of the timber harvested,
or inflating costs to show zero profits. The Cambodian forest sector
experienced all these problems in the 1990s. In 1997 authorized log
production was about 450,000 cubic meters, while estimated total
harvesting was 4.3 million cubic meters. Transnational subsidiaries
may also “transfer price” timber shipments by underselling and undergrading
timber shipments to their parent companies; the real value
138 crossin, hayman, and taylor
of the goods is then reaped higher up the corporate chain, often being
deposited in tax havens. Transfer pricing on timber sales from Papua
New Guinea in the 1980s was estimated at $5–$10 per cubic meter,
resulting in losses of up to $30 million per year.
Sole emphasis on enforcement of existing regulations may ignore (or
tacitly condone) the context of the wider system that generates such
opportunities to offend. Thus, in addition to simply improving frontline
enforcement, a coordinated approach to commodity controls must address
the pressures of supply and demand that shape an illegal market.
Enforcement agents can rarely address these factors themselves, yet they
routinely have to deal with the results; therefore, enforcement agents
and government officials should be locked in dialogue to maximize the
efficiency of global controls.
Globalization of Trade. As globalization vastly increases the volume
and speed of goods and persons in transit, customs-led interdiction
strategies look increasingly ineffective as a method of addressing
evasion of CTRs. The problem of “trying to promote legal crossborder
economic flows while simultaneously enforcing laws against illegal
flows has been an increasingly awkward and delicate task and a
growing source of frustration for law enforcement bureaucracies”
(Andreas 2000, p. 4). Data from the U.S. Office of Drug Control for
1999, for example, indicate that more than 75 million passengers and
crew arrived in the United States by air, in 900,000 aircraft; 9 million
arrived by sea, using some 200,000 ships; and 395 million crossed land
borders, in 153 million trucks, trains, buses, and cars; and there were
16 million cargo containers (White House 2000). London’s Heathrow
airport sees some 5 million shipments of airfreight, about 0.5 million
tons, per year. Because of the high rent, traders in illegal commodities
can afford to have large amounts seized.
Supply-Side Controls. The supply of contraband can be adjusted
by market intervention, such as altering the management structures or
property rights that govern access to resources or subsidizing alternatives.
Supply businesses also need to be given incentives to comply with
international controls; monopoly and cartel arrangements may play
an important role in ensuring that those in the marketplace have a
vested interest in keeping competitors out. The diamond industry’s reaction
to conflict diamonds is another example of how self-interest can
be an important element in the drive to establish an effective CTR.
Without the active involvement of De Beers Consolidated Mines, which
controls more than 70 percent of the global diamond trade, it is unlikely
where did it come from? 139
the Kimberley process would have progressed as far as it has in establishing
an international diamond certification scheme.
Supplies of look-alike commodities also need to be addressed to prevent
laundering. Trade controls may be key, but collateral damage on legitimate
commerce may be an important constraint. For example, more
than 20,000 of the species regulated under CITES are non-threatened
orchids, which results in considerable bureaucracy and antagonism for
both the CITES authorities and the orchid breeding industry.
Another key supply-side policy is to identify and eliminate surplus
capacity. Much illegal logging stems from overallocation of logging
concessions and processing licenses, frequently associated with corruption.
As mentioned, the Indonesian forestry sector has a processing
capacity that is almost double the size of legal supply. Aid conditionality
on forest sector reform has only recently begun to move from
getting “laws on the books” to addressing such issues. Subsidies to industrial
fishing fleets have served to promote massive excess capacity
and inflate demand for catches. In 1989, due to the excessive number
of vessels and government support across the world, total subsidies
and expenditure on fleet support cost $92 billion, while the total value
of fish extracted was only $70 billion.
Demand-Side Controls. Demand-side policies complement supplyside
strategies by attempting to create incentives for enlightened selfinterest
by manufacturers. For example, dozens of voluntary certification
programs have been developed to meet the demand for ethical
products. In addition to the FSC and the MSC programs, another
good example is the Indian Rugmark Program, which began in 1994
to identify Indian carpet manufacturers who avoided using child
labor. The licensees themselves help to finance monitoring by paying
0.025 percent of the value of their carpets to the scheme, which then
certifies their products subject to surprise inspections and cross-checking
of export records.
Such certification systems will be even stronger if backed by an educated
and informed public. In some cases, consumer demand has led
CTRs, such as the regulation of trade in genetically modified organisms.
Consumer pressure has apparently prompted the European Commission
to design a stringent tracking system. Similarly, consumer pressure
has driven some clothing and carpet manufacturers to impose International
Labour Organisation standards on their own factories and their
suppliers. In May 1998 Nike announced that it was imposing a minimum
age of 16 for light manufacturing workers and 18 for footwear
manufacturers. Reebok has implemented a system for monitoring and
140 crossin, hayman, and taylor
labeling soccer balls made in Pakistan to ensure that no underage workers
are involved. Companies like Mattel and Wal-Mart have published
policies stating they will not use child labor for the production or sale of
their products.
Government and private procurement programs can complement
certification schemes by creating demand for “ethical” products. The
U.K. government, for example, is attempting to procure all its timber
from legal or certified sources. A more general duty-of-care culture can
also be fostered through “soft” regulatory mechanisms, such as due
diligence schemes—often used in the antiques trade—that may help to
provide for formal liaison between traders and law enforcement. Due
diligence may be reflected in industry certification procedures, such as
adherence to International Standards Organization programs like the
ISO 14000 standards or the European Eco-Management and Audit
Scheme, that classify an organization or company by its ability to manage
all aspects of its business in an environmentally sound manner.
Lateral thinking is also necessary to convince insurance companies
and banks to assess the legality of operations as part of their financial
due diligence procedures. Investors, banks, and export credit agencies
that have funded illegal activities or activities without due diligence
could perhaps be targeted by tort litigation, money laundering, or
proceeds-of-crime legislation. Due diligence procedures imposed by
insurance companies concerned with potential cleanup liabilities, for
example, have been one of the major drivers in compliance with U.S.
Superfund hazardous waste legislation.
Considerations 4 and 5: Political and Legal
Context of Regulations
Any CTR will be partly a product of the political, economic, and social
circumstances of producing, processing, and consuming countries. In
addition, prior legal precedent, developing international jurisprudence,
and national case law all will profoundly affect the shape and
methodology of specific control regimes. For example, attempts to
control illegal fishing and impose access restrictions on fishing fleets
have been hindered by the “freedom of the high seas.” Within this
broad context, the Convention on the Conservation of Antarctic
Marine Living Resources (CCAMLR) Treaty that protects southern
ocean resources has a number of unique features and must be understood
against the background of the Antarctic Treaty System from
which it emerged. In the Antarctic Treaty of 1959, the 12 potential
claimants of portions of Antarctica19 agreed to set aside their territorial
claims in the interests of international harmony. Article IV of the
where did it come from? 141
treaty contains the central provision that decrees the mutual abeyance
of parties’ territorial claims and ambitions on the continent, although
specifically without prejudicing their future positions on the issue.
CCAMLR inherited this unresolved jurisdiction and consensus approach
to decisionmaking from the Antarctic Treaty System, both of
which have hindered subsequent attempts to crack down on illegal
and unregulated fishing in the CCAMLR area.
Similarly, although the Basel convention requires setting up systems
to ensure that participants “exercise due care” in the waste trade,
no attempt is made to regulate its volume, organizational complexity,
or geopolitical reach (Wynn 1989, p. 137). This approach sharply
contrasts with the Montreal protocol where explicit controls on production
and consumption of CFCs and other gases are central to
international efforts to protect the ozone layer. “The inability of the
developing countries to obtain a North-South ban in the context of the
[initial negotiations surrounding] the Basel convention shaped the future
development and tone of all subsequent negotiations,” not least in
shifting the axis of negotiation away from discussing the environmentally
sound management of industrial processes. Indeed, “neither the
third world nor the developed countries pressed for a definition that
would address the major problem underlying the hazardous waste trade:
the polluting and toxic nature of many industrial processes. Although
NGOs [nongovernmental organizations] such as Greenpeace identified
the existence of dirty industries as a significant problem to be
addressed, the priority for developing countries was the issue of the
hazardous waste trade itself” (Miller 1995, p. 97). Political recognition
has only recently occurred that regulating transboundary movements
should be part of a broader strategy of waste management to generate
less waste and to uncouple industrial activity from environmental
damage.
Lack of Government Transparency, Governance Failures, and
Corruption. Civil strife and breakdown of government have created
conditions that allow illegal trade to flourish. Beyond simply rendering
a government incapable of fulfilling its tracking obligations, ruling
elites may actively abet such disorder to preside over massive public
losses for their private gain.
Revenues from illegal logging, for example, may exacerbate national
and regional conflict. In turn, the state of emergency from such conflicts
may allow for the leakage of formal state revenues, which would be
far more difficult in peacetime. Examples include Cambodia, where
the timber trade funded the genocidal Khmer Rouge; the Democratic
Republic of Congo, where the world’s largest timber concession (about
142 crossin, hayman, and taylor
33 million hectares) funds the incremental cost of neighbors’ standing
armies in the country; and Liberia, where almost $100 million in revenues
and direct logs-for-arms swaps help to fund the government of
Charles Taylor, posing a serious threat to regional stability. In each
case, this “conflict timber” has been routinely imported into northern
markets.
More generally, extractive activities such as logging are difficult to
disguise, and illegal access is heavily reliant on corruption.20 As the
World Bank’s recent review of its global forest policy observes,
“Countries with tropical moist forest have continued to log on a massive
scale, often illegally and unsustainably. In many countries, illegal
logging is similar in size to legal production. In others, it exceeds legal
logging by a substantial margin . . . poor governance, corruption, and
political alliances between parts of the private sector and ruling elites
combined with minimal enforcement capacity at local and regional
levels, all played a part” (World Bank 1999, p. xii; “World Bank Sees
Flaws” 2000).
This problem is not confined to developing countries, but the problems
there are generally more evident and more serious because the
salaries of enforcement officials and bureaucrats are often low, civil
society is weaker, and transnational companies that offer inward investment
are relatively more powerful. Allocation of licenses to exploit
resources like timber can also be used as a mechanism for mobilizing
wealth to reward political allies and provide patronage. Even in such
highly corrupt situations, some rules must still exist, if only to allocate
patronage to specific individuals or sectors of society. Enforcement,
however, becomes an instrument to control the flow of illegal rents
and ensure the patronage of clients.
Wider forces may also be at work in the failure of commodity controls.
For example, the 1996 Commission of Inquiry into the Alleged
Smuggling of and Illegal Trade in Ivory and Rhinoceros Horn in South
Africa provided a wealth of detail about the South African apartheid
regime’s policy of destabilizing neighboring states funded through
illegal trade.21 Smugglers of illicit commodities such as currency, gemstones,
ivory, rhino horn, and the drug mandrax had formed complicated
networks involving senior government officials in surrounding
states. Infiltration of these networks by South African intelligence
operatives was thus an effective way of penetrating the machineries of
these states in pursuit of regional political destabilization. From the
late-1970s to the mid-1980s, South Africa’s special forces ran large
quantities of diamonds, ivory, rhino horn, and teak out of Angola and
Mozambique and used the proceeds to fund the equipment and training
where did it come from? 143
of insurgents like the National Union for the Total Independence of
Angola and Mozambique National Resistance.
If a tracking system is also intended to monitor commodity flows
from conflict zones, intelligence gathering requires an entirely different
level of involvement, commitment, and courage. Some enterprise crimes
may also be inseparable from human rights abuses, especially those derived
from place-based operations that directly affect the health and
well-being of local populations.
Government Transparency. Political, economic, and social features
of the countries of origin or transit have a direct impact on how
freely and effectively a tracking system will be able to function. In
particular, monitoring will be stymied when confronted with uncooperative
national governments that are reluctant to allow foreign interference
in “sovereign” trade practices. For example, monitoring labor
standards in some countries is frustrated by the reluctance of officials
to permit external verification. In contrast, some countries, such as
India and Pakistan, are more amenable to external observation of
workplace practices. Monitoring of work practices in India is also assisted
by civil society and nongovernmental organizations that conduct
independent investigations.
World Trade Organization Implications. Any restrictions on trade,
including labeling requirements, tariffs and taxes, potential embargos,
or other forms of discrimination, are potentially subject to the discipline
of the various multilateral trade agreements administered by the
World Trade Organization (WTO). Virtually all the CTRs mentioned
in this chapter require parties to control or restrict trade in various
ways, including imposing requirements for licensing requirements or
requiring different forms of informed consent for trade to occur.
WTO jurisprudence shows a number of simple lessons from previous
disputes and adjudications:
• The less trade-disruptive the measure, the lower the chance of a
successful WTO challenge—a requirement simply for labeling or for a
government procurement policy would be less likely to fail than a ban
on imports.
• The more it can be shown that less trade-disruptive measures—
such as preferential tariffs—have been attempted and have not proved
effective, the greater the chance more trade-disruptive measures have
of being found acceptable. This may even extend to non-trade-related
efforts, such as capacity-building assistance to the exporting countries
concerned.
144 crossin, hayman, and taylor
• Similarly, the more precisely targeted the measure, the less the
chance of a successful challenge. An embargo applied, for example,
to an entire country’s fish exports because some of them are believed
to be illegal would be more vulnerable to a WTO challenge than an
embargo applied only against products that could be proved to be
illegal or not shown to be legal. In the latter case, adherence to an internationally
accepted means of determining legality in this context—
for example, a requirement for chain-of-custody documentation
audited by an independent third party—would also help to justify
the measure (as long as one’s own industry is subject to the same
requirements).
• The less discriminatory the measure, the lower the chance of a
successful challenge to its operation. A very strong case could be made
under the WTO if a country was applying more restrictive measures to
imports than to its own production.
• The greater the effort to ensure that a measure is multilaterally
acceptable, the less it is likely to be challenged.
Two important WTO rulings in this regard are the Mexico and
United States tuna-dolphin dispute and the India, Malaysia, Pakistan,
Thailand, and United States shrimp-turtle dispute, in which the
United States banned imports of shrimp caught without the use of
turtle excluder devices. In both cases, commodity import restrictions
that were nominally intended to promote conservation were challenged
and overturned as an invalid exception to Article XI(1) of the
General Agreement on Tariffs and Trade, which prohibits quantitative
trade measures.22 In the tuna-dolphin dispute, one of the central reasons
for rejecting the import restrictions was that the measure discriminated
between similar products. The United States banned tuna
from Mexico and used a retroactive standard (the dolphin kill ratio)
as its reason, so it was impossible for Mexican fishermen to know in
advance the standard that they had to meet. Similarly, the shrimpturtle
dispute was partially motivated by complaints that the sanctioning
mechanism enacted by the United States looked only at
relevant procedures at a national level, rather than at whether individual
boats were using the devices. Thus a fisherman who was using
a turtle excluder device but whose country did not have an official certification
program (designed to certify that the vessel was meeting
standards consistent with those required of domestic fishermen under
the Endangered Species Act) would face an import ban on his products.
In addition, fishermen from different countries were given a different
length of time in which to comply with certification. Thus,
although the appellate body recognized the U.S. sovereign right to use
where did it come from? 145
trade restrictions for environmental protection, the United States did
not do so in a nondiscriminatory manner.
WTO jurisprudence highlights the need for flexibility when applying
unilateral standards to other states and the need to apply any control
measures or certification scheme with an even hand to prevent
unjustified discrimination. There is sufficient flexibility on the impact
of WTO agreements that it should be possible for many different types
of trade-restrictive measures to be designed and implemented so as to
survive a WTO challenge, provided they are not overtly protectionist
or discriminatory.
Conclusions and Recommendations
If the political will exists, it is perfectly possible to establish a successful
CTR based on our five basic elements, subject to the five contextual
considerations discussed above. These 10 factors can also provide a
basic framework for building new CTRs, including measures to control
access to commodities like coltan and tanzanite.
In all cases, clear and effective national legislation detailing enforcement
responsibilities and deterrent sanctions for crimes is necessary,
as are transparent and effective international noncompliance measures
to discourage free riders, while encouraging countries to share their
problems openly. The need to focus on transit countries and the laundering
of transshipments has also been raised. Controls and feedback
structures should be engineered in a precautionary manner rather than
the current “wait and see” attitude.
A central part of these processes should be direct access to enforcement
experts at CTR meetings and when preparing control measures.
There is also a strong case for setting up a specialist unit on enforcement
and compliance in CTRs to institutionalize such expertise. Such
measures may also serve to depoliticize the process of enforcement and
compliance.
Evasion of CTRs is a consensual, economic crime where there are
rarely victims to complain, so that the state must bear the burden of
enforcement. CTRs must gather sufficient data in their basic operations
to allow distinctions between products and should contain comprehensive
review procedures to provide feedback to policymakers on
compliance with, and the impact of, international controls. In addition
to information directly relevant to the type, origin, and destination of
specific shipments, there is a need to record price data on controlled
commodities, the volume and values of licit and illicit markets, gaps in
146 crossin, hayman, and taylor
commodity data between trading partners, data on stockpiling, details
on registration and capacities of processing and treatment centers,
policing effort, and offenses detected. It is apparent in the work of
Global Witness that widespread resource mismanagement has been
facilitated by the extension of bureaucratic controls by central governments
over resources, without the corresponding development of
effective feedback and information systems.
In establishing any system of tracking, it is also necessary to keep
in mind the international market incentives that drive opportunities
to offend. Labeling sustainably produced timber and fish is unlikely
to reverse rampant depletion if massive overcapacity exists
within an industry. In such situations, simply head-hunting individual
malfeasants will not touch the pressures of supply and demand that
drive offenses.
Traffic in controlled commodities should be made “conditional” on
the provision of adequate data sharing that it is within the boundaries
specified by a specific commodity tracking regime. The burden on the
state as direct sole manager of resources should be lessened through
efficiently managing resource externalities in the collective interest and
through individual or collective privatization, in which the resources
are given to the owner who most values them. Placing management of
resources in the hands of local collectives may be an effective way to
address problems of both poverty and compliance with controls.
Computer and tagging technology can play a major role in efficient
tracking and information exchange. For example, most corner grocery
stores are able to keep a near real-time inventory of their merchandise
through the use of bar codes, so there is almost no excuse for the primitive
paper-only systems that are currently used for all international
controls.
Lessons from first-generation commodity control agreements should
now inform second-generation agreements. Assembling all 10 factors
of a successful CTR implies a higher level of international cooperation
than currently exists. This exercise may also involve building institutions
that are not simply the creatures of their constituent governments
and for governments to yield some of their sovereign authority.
Appendix 4.1. Diamonds
The primary purpose of the Kimberley Certification Process Scheme is
to establish an international certification scheme for rough diamonds
based primarily on internationally agreed minimum standards for
certificates of origin and on national certification schemes.23 It aims to
where did it come from? 147
protect the legitimate diamond industry and stem the flow of “conflict
diamonds.”24
The process acknowledges that an international certification
scheme for rough diamonds will be credible only if all participants
have established internal systems of control to eliminate the presence
of conflict diamonds in the chain of producing, exporting, and importing
rough diamonds within their own territories. Participants—
states or regional economic organizations such as the European
Union—are to establish internal controls to eliminate the presence of
conflict diamonds from shipments of rough diamonds imported into
and exported from their territory. This will include designating importing
and exporting authorities, as applicable, to monitor diamond
shipments and to ensure that all diamonds are imported and exported
in tamper-resistant containers accompanied with Kimberley process
certificates. Participants are obliged to amend or enact appropriate
laws or regulations to implement and enforce the certification scheme
and to maintain penalties for transgressions. They also are to collect
and maintain relevant official production, import, and export data and
to collate and exchange this information when necessary (Sections IV
and V).25
In taking account of chain-of-custody monitoring requirements, the
scheme defines country of origin as the country where a shipment of
rough diamonds has been mined or extracted; whereas country of
provenance is the last participant from where a shipment of rough
diamonds was exported, as recorded on import documentation. The
scheme recommends that the importing participant complete an
import confirmation part for the certificate containing the following
information: the country of destination, identification of the importer,
the carat weight and value in U.S. dollars, the relevant Harmonized
Commodity Description and Coding System, and the date of receipt
and authentication by the importing authority.
Each participant is to ensure that a duly validated certificate accompanies
each shipment of rough diamonds on export and import
(Section II). The original of the certificate must be readily accessible
for at least three years to facilitate the tracking of diamond flows.
To further filter out conflict diamonds, participants are to ensure
that no shipment of rough diamonds is imported from or exported to
a nonparticipant. Participants through whose territory shipments
transit are required to ensure that the shipment leaves its territory in
an identical state as it entered its territory (that is, unopened and not
tampered with; Section III).
A degree of transparency and monitoring was integrated into the
process after nongovernmental organizations voiced strong opposition
148 crossin, hayman, and taylor
to proposals that the regime be self-regulating. Section V provides for
a type of peer review mechanism where a complainant who considers
that another participant does not have adequate laws or procedures
can inform that participant through the chair.
The scheme formally began in November 2002, but implementation
had yet to begin at the time of writing. Will it be successful in
tracking the flow of diamonds? Although the process has been an
important first step, significant technical and operational issues remain
to be addressed, including the following:
• Some “high-risk” activities, such as the flow of diamonds from
the mine or field to the first export, are subject only to recommended
controls.
• Participants are merely encouraged to ensure that mining companies
maintain effective security standards to ensure that conflict
diamonds do not contaminate legitimate production.
• It is only recommended that participants establish a license or
registration scheme for all diamond buyers, sellers, exporters, agents,
and courier companies.
• Instead of setting common minimum standards and procedures
to meet, the process leaves many controls to be designed and implemented
by national authorities (Section IV). Without independent,
regular monitoring of all national systems, it will be very difficult
to assess with certainty whether certificates are genuine or whether the
process is halting conflict diamonds from entering international trade.
• The process has not adequately dealt with the uneven enforcement
capabilities of participants. There is no initial mechanism to determine
whether an applicant country is able to fulfill the requirements of the
scheme. It is unclear how and when capabilities will be assessed and
what measures will be introduced (if any) to redress imbalances.
• The period after rough diamonds enter a foreign port or final
point of sale will be entirely self-regulated by the World Diamond
Council system of warranties.26 Participation in the World Diamond
Council system is voluntary and may not be monitored independently.
Unless there is independent, third-party monitoring of this and all
other stages of the scheme, there is some doubt over the scheme’s
accountability and effectiveness.
• There is continued disagreement over how best to implement the
scheme with respect to alluvial diamonds (diamonds washed onto
riverbeds). Alluvial diamond fields tend to be widely scattered and
difficult to monitor.
• There is as yet no international secretariat (or similar body) to
administer the scheme.
where did it come from? 149
• The process fails to specify or designate a database or central
body to control and enable the sharing of vital statistical information.
There is also a lack of detail on what information should be gathered
by participants and when it will be shared and used. The proposed
scheme recommends only that information be made available to an
“intergovernmental body or other appropriate mechanism” on a quarterly
basis for imports and exports and a “semiannual” basis for
production.
• The process has not specified the consequences of noncompliance.
It is unclear, for example, whether countries that contravene certification
provisions will be excluded from trading with participants.
• Membership is voluntary, and some countries involved in the
diamond industry have not participated in negotiations over development
of the diamond-tracking system.
• It is unclear how existing stockpiles of rough diamonds of undetermined
origin will be dealt with.
• The monitoring mechanism put in place by the Kimberley
process is based on states reporting on other noncompliant participants.
However, verification and review of a participant’s activities can
take place only with their consent, and the precise membership and
terms of reference of monitoring or verification missions are yet to be
determined. State sovereignty will potentially be a major block to the
effective implementation and oversight of the scheme at the national
level.
• There are no details on how or when participants should carry
out self-assessment.
Whether the Kimberley process will be successful depends on
whether these problems are properly resolved. Effectiveness will also
be highly contingent on the legislative and administrative measures
introduced at the national level to implement the scheme.
Appendix 4.2. Timber
Timber trade is characterized by endemic corruption, links to organized
crime, and, in numerous instances, links to various warring factions.
Despite this, consuming countries and multilateral agencies display a
remarkable lack of concern for the illegal activities of logging companies.
Timber is, of course, a legally tradable commodity. However,
according to Friends of the Earth UK, based on 1999 figures, approximately
70 percent of tropical timber imports into the European Union
150 crossin, hayman, and taylor
are illegal. There is no reason to suppose that worldwide imports are
much better.
There is currently no comprehensive global tracking regime for
monitoring flows of timber, nor is there an international agreement or
treaty specifically intended to control illegal logging. Efforts to track
timber, therefore, rely on a series of voluntary schemes, most of which
incorporate certification and classification procedures. These schemes
are intended either to differentiate commodities that have been produced
in accordance with set criteria and indicators of legal and sustainable
forest management or to classify timber-related organizations
or companies by their ability to manage all aspects of their business in
an environmentally sound manner (for example, in accordance with
ISO 14,000).
International Initiatives
The international community has no legislative power, other than
United Nations (UN) sanctions, to place an embargo on a producer’s
timber exports. The UN Security Council has taken this action only
once. In 1992 it was recognized that the Khmer Rouge guerrillas in
Cambodia were obtaining funding essential to their war effort by trading
timber with Thailand. The United Nations passed Resolution
792 banning exports of round logs from Cambodia, effective from
January 1, 1993. As described below, the ban was effective in undermining
the financial basis of the Khmer Rouge but had several unintended
consequences that need to be considered in future bans.
The G-8 has taken a strong stance on illegal logging, particularly
the five-point Okinawa statement, and should provide direction to
international action. Given the pace at which the forests are being
destroyed, and the fact that armed conflict and criminality are both
driving this destruction, members of the G-8 and the United Nations
should consider more immediate and direct measures.
The Convention on International Trade in Endangered Species of
Fauna and Flora (CITES) provides the only existing international
framework for licensing imports and exports. Its relevance to logging
is restricted, of course, to endangered or threatened species; 15 tree
species are currently listed under CITES, although the World Conservation
Monitoring Centre has identified more than 300 Asian and
African species in trade. However, individual countries may unilaterally
list any species that they wish to protect on Appendix III, and then
trade cannot proceed without an export permit. A CITES listing is,
of course, a species-specific measure; nevertheless, it would give
where did it come from? 151
authorities in consumer countries the mandate to refuse shipments of
certain precious wood species that may have been illegally obtained in
producer countries. Given the speed and scale of the illegal timber
trade, CITES should probably be considered an adjunct to more wideranging
measures rather than a solution in itself.
A number of prominent, but disparate, international bodies are
involved in creating forestry policy and guidelines. These are outlined
briefly below. However, the various international institutions that discuss
forestry issues do not yet have a specific mandate to take comprehensive
action to combat illegal logging. These fora could be worthwhile
arenas to exchange ideas, but they are unlikely to be active in reaching
international agreements or coordinating action.
UN Forum on Forests
The United Nations (UN) Forum on Forests was established in 2000 to
replace the Intergovernmental Forum on Forests created at the UN
General Assembly Special Session (“Rio plus Five”) in 1997. The predecessor
of the Intergovernmental Forum on Forests was the Intergovernmental
Panel on Forests, which submitted a report containing
policy recommendations to the fifth session of the UN Commission on
Sustainable Development. The Intergovernmental Panel on Forests
was mandated to review implementation of the 1992 Earth Summit’s
forest-related decisions; international cooperation in financial assistance
and technology transfer; research, assessment, and development
of criteria and indicators for sustainable forest management; and
international organizations and multilateral institutions and instruments.
The report called for an intergovernmental dialogue on forest
policy, despite the existence of issues where a consensus could not
be reached, including financial assistance, trade-related issues, and
whether to begin negotiating a binding convention. It also called for
national action and international cooperation to reduce and eventually
eliminate the illegal forestry trade. In 2000 the final report of
the Intergovernmental Forum on Forests called for the creation of
an intergovernmental arrangement on forests and the establishment
of the UN Forum on Forests, acting as a subsidiary body of the UN
Economic and Social Council. The UN Forum on Forests is to meet on
an annual basis.
At its first meeting in 2001, the UN Forum on Forests adopted a
multiyear program of work, which noted that an intergovernmental
arrangement for global forest policy, over which member countries still
differ, should promote the management, conservation, and sustainable
152 crossin, hayman, and taylor
development of all types of forests. There is no mention of illegal logging
in the program, although this might be encapsulated in the provision
noting the importance of good governance and an enabling environment
for sustainable forest management.
The UN Forum on Forests is supposed to consider the prospects for
a legal framework on all types of forests within five years. This would
provide an obvious forum for global discussion of the issues raised by
illegal logging and conflict timber. However, the participants at the
forum remain divided over whether a forestry convention is needed,
let alone over the need for measures aimed specifically at the forestry
sector. Any discussion of a forestry convention should include on its
agenda the issues of illegal logging and conflict timber.
Food and Agriculture Organization
The linkage between human development and sustainable management
forms the cornerstone of the forestry mission of the Food and Agriculture
Organization of the United Nations (FAO). Its Forestry Program
seeks to “maximize the potential of trees, forests, and related sources to
improve people’s economic, social, and environmental conditions, while
ensuring that the resource is conserved to meet the needs of future generations.”
The FAO Program on Forestry and Planning provides for the
collection, analysis, and dissemination of information on numerous
matters, including trade, production, and consumption. The FAO also
works with other international bodies on forest policy. It chairs the Inter-
Agency Task Force on Forests, which coordinates the work of other international
organizations, and it is the lead organization in the UN
Forum on Forests on rehabilitation of forest cover, technology transfer,
and supply and demand analysis of wood and nonwood forest products.
The FAO’s Forest Products Division provides technical, environmental,
and economic advice and assistance in the harvesting, transport,
processing, trade, and marketing of wood and nonwood forest
products, including wood-based energy and the management and
development of forest industries appropriate to the conditions of individual
countries. The Forest Harvest, Trade, and Marketing Branch
undertakes a wide range of activities, including monitoring and analyzing
forestry and trade in forest products. It also prepares studies on
tariff and nontariff barriers, reviews trade policies of relevance to marketing
of forest products, and promotes the development of appropriate
policies of relevance to trade in forest products. In addition, it
works on schemes for timber certification from sustainably managed
forests. No specific program at FAO is looking at illegal logging or
corruption in the forestry sector.
where did it come from? 153
International Tropical Timber Organization
Initial efforts at the International Tropical TimberOrganization (ITTO),
such as the establishment of a Market Information Service to assist
trade monitoring, appear to be promising for cooperation in the tracking
of forest products. It is hoped that the results from these types of
technical capacity-building initiatives will feed into developing a consensus
among members and overcome the previous inability to reach
an accord on illegal logging.
The ITTO also announced its intention to promote sustainable
timber trade. A mid-term review estimated the combined cost of
institutional strengthening and capacity building as $22.5 billion
(Adams 1997). Estimates may come out much lower, however, if
the exercise concentrates on the relatively few major players in the
global marketplace. There are only six big producers—Bolivia,
Brazil, Cameroon, Gabon, Indonesia, and Malaysia, which together
account for 60–80 percent of world markets. Overall, some 70–100
concession holders harvest around 25–30 percent of all the tropical
timber entering the global market. Concentrating financial and technical
assistance and monitoring on these concessions could reap early
rewards.
That said, the ITTO—an organization funded by timber trading
countries—is often used as a shield by producers trying to fend off
more onerous initiatives such as Forest Stewardship Council certification
and, possibly, international efforts to curb illegal logging. Furthermore,
critics argue that the tropical timber industry is far better at
negotiating solutions to problems of illegal logging than implementing
any of the resultant recommendations.
Forest Stewardship Council
The Forest Stewardship Council (FSC) is an independent, nonprofit,
and nongovernmental organization that administers the first and most
authoritative forest-product certification scheme. It has developed
global standards for forest management through consultation with
stakeholders from social, economic, and environmental sectors.
Forest certification is the process whereby forestry operations are
measured against the FSC’s 10 principles and 56 criteria for good
forest management. Independent, FSC-accredited certification bodies
conduct thorough assessments according to the criteria requested by
landowners. If the forests conform with FSC standards, a certificate
is issued that allows the producer to sell FSC-certified wood and to
use the FSC logo on its products. An award of a certificate is predicated
on adherence to all applicable laws of the country, including
154 crossin, hayman, and taylor
international agreements to which the country is a party, as well as
specific forest management plans. It also requires all prescribed fees,
royalties, and taxes to be paid. Further, FSC Criterion 1.5 requires
the forests under approved management to be protected from illegal
harvesting, settlement, or other unauthorized activities. Also the FSC is
the only international certification scheme to require chain of custody
as an explicit component.
The FSC logo provides consumers with assurance that the wood
they purchase is from sustainably and legally managed forests. While
the certification process does add to the cost of production, the impact
on the selling price is small. FSC certification has received recognition
from major supply chains (first was U.K. 95+ Buyers Group) and a
commitment to buying and selling of FSC-endorsed products. The
marketing and selling of FSC products in Europe have been successful,
as the market in this region is sensitive to nonsustainably produced
timber. However, in Asia (particularly in Japan) consumers are not so
discerning, and even in Europe and the United States demand for FSC
products is not uniform. This problem can be addressed partly by
better consumer education and information campaigns.
Rival industry-based or quasi-government certification schemes have
been created to fill a growing demand for certified timber products. It is
possible that the presence of other international certification processes
will weaken the hold of FSC or confuse the marketplace.
Currently, there are more than 2,400 FSC-certified companies in
66 countries, and FSC-certified forests cover some 71 million acres
globally. As impressive as the FSC scheme is, the majority of FSCcertified
forests and companies are located in North America or
Europe. The FSC scheme has little impact in Asia or Africa, where
there are very few certified bodies—areas with the worst aggregate
records for illegal and unsustainable forest management. Until there
is greater global consumer demand for certified timber products,
other methods of control and tracking need to be implemented to
address illegal logging. Regional agreements to control the timber
trade and schemes like the FSC are useful starting points, but to attack
a global problem like illegal logging, a global solution is required.
Policy Recommendations
Policy recommendations fall into eight categories:
• Greater transparency in global forestry operations. This is essential
to the prevention of illegal logging and should be applied to every
stage of a logging operation. Allocation of concessions should be by
competitive and technical tender, with the results widely publicized.
where did it come from? 155
Concession boundaries, the allocation of cutting licenses, and forest
revenues accrued to the state should all be publicly available.
• Involvement of local communities. If local communities had a
share of the profits deriving from a logging operation, they would be
inclined to protect their forest from outsiders, insist that it be managed
sustainably, and, in short, be the best monitors of the operation. Local
communities should be included in the decisionmaking process related
to the use of forests.
• Enhanced enforcement. Forest management authorities may
need external capacity building to fulfill their mandates. External
monitoring—for example, in Cambodia and Cameroon—can enable
national enforcement units to tackle situations that would ordinarily
be too sensitive for that country’s nationals. Donor countries need to
work with governments to improve capacities to detect and suppress
forest crime.
• Creation of legality certification schemes. The current lack of
international legislation suitable for tackling illegal logging means
that as soon as illegally obtained timber leaves the borders of the
producer country, it is de facto immediately laundered into the legal
timber trade. A certificate of legality could be awarded by the appropriate
authority in the producer country and be subject to independent
verification. In turn, the certificate would be recognized in the
legislation of signatory consumer countries. All timber imports would
need to be accompanied by this certificate, with other imports being
impounded. Like all systems, this would be vulnerable to forgeries
and evasion, but monitoring and enforcement should minimize this
problem. Producer and consumer countries should begin to develop
a certificate of legality for timber shipments, in order to distinguish
between legal and illegal timber.
• Improved chain-of-custody monitoring. Tagging of timber, bar
coding, and transponder technologies need to be used to establish
chains of custody and prevent the mixing of legal and illegal material.
Accurate systems of accounting and inventory control are
imperative and will result in enhanced revenue collection. Simple
computer packages should be developed to permit governments
and enforcement agencies to track products from the forest to the
marketplace.
• Customs collaboration. If customs officials were directed to
look for illegal logs or timber, or required importers to declare the
legality of its source, this would improve due diligence assessments by
industry partners. At the moment, importers are largely unaware of and
uninterested in the processes and authorizations required to export the
timber. Shipping companies may unknowingly transport illegal timber
156 crossin, hayman, and taylor
or products. The exporting country would also be involved in the
process since an export certificate may legitimize the shipment.
• Consumer-country controls. Consumer-country customs authorities
might, for example, follow a “red-amber-green” approach to investigating
illegal timber shipments. For instance, exports from countries
with known illegal logging problems could be flagged for further
inspection; information on the shipment could then be exchanged with
national authorities in the producer country. For the purpose of ensuring
an efficient customs management process, a standard certificate
would be desirable.
• International cooperation and legal reform. Bilateral cooperation
between producer and consumer countries is needed to enforce domestic
forestry legislation in both countries. If not already in existence,
legislation should be passed in producing countries to outlaw illegal logging.
Consumer countries should recognize this legislation, and a bilateral
agreement between the two countries should ban the trade in illegal
timber. These bilateral agreements would form a body of international
law that could form the basis of a future multilateral agreement.
Notes
1. Compliance refers to a state’s situation with regard to its obligations
under international law. Enforcement refers to a set of actions—such as adopting
laws and regulations or arresting and prosecuting malfeasants—that a
state may take within its national territory to ensure implementation of a specific
CTR. In other words, compliance is used in an international context and
enforcement in a national one.
2. The Basel convention defines “wastes” somewhat tautologically as substances
that are disposed of.
3. That is, the necessity to get an agreement up and running quickly as
arguments over the precise categorization of hazardous waste could have gone
on for years.
4. Of over 25,000 species regulated under CITES, more than 90 percent are
listed on Appendix II.
5. Interpol signed memoranda of understanding with the CITES Secretariat
in 1998 and with the Basel convention secretariat in 1999.
6. This is in line with UN General Assembly Resolution 55/198 on enhancing
complementarities among international instruments related to environmental
and sustainable development. See www.unep.org/gc_21st/Documents/
gc-21-INF-19/e-GC-21-INF-19.doc.
7. For example, the fifth goal of the CITES 2000 strategic plan (Strategic
Vision through 2005) emphasizes the importance of cooperation and links
where did it come from? 157
with UNEP and other biodiversity-related conventions. Further, the Nairobi
Declaration on the Role and Mandate of UNEP (1997) identifies one of the core
UNEP purposes as developing “coherent interlinkages among existing international
environmental conventions.” The European Environmental Agency is
also working on a range of projects regarding harmonizing reporting requirements,
including the compilation of a database listing all obligations (legal and
moral) resulting from reporting requirements under a wide range of international
agreements.
8. Developed from a diagram in Johnson and others (1998, p. 20).
9. A valuable, white-fleshed fish caught in the southern ocean area, also
known as Chilean sea bass.
10. The Centre for International and European Environmental Research
conducted research in 2000 on links between forest-related multilateral environmental
agreements at global, regional, and national levels and recommended
greater use of technology in ensuring harmonized and complementary reporting
of forest-related obligations to international bodies.
11. Article 19, Basel convention.
12. This problem is especially common in fisheries and forestry operations.
Data from EU enforcement of its common fisheries policy show that there are
about 50,000 vessels spread across approximately 106 square kilometers of
sea, or an average of one vessel per 20 square kilometers. EU enforcement
authorities carried out 20,357 inspections in 1990. Hence, the average chance
of inspection is once every two years.
13. Kyoto, January 31, 2000.
14. Data from the Brazilian forest sector for 1996 show that only about
26 percent of the cost of enforcement actions was covered by the fines awarded.
See Amigos da Terra (1996).
15. Barbados, Bulgaria, Chile, Ecuador, Guinea, Lebanon, Malaysia, Mali,
Micronesia, Papua New Guinea, Slovenia, and Zambia. Additional countries
will participate in subregional consultations to share experiences and lessons
of the pilot countries.
16. See www.unep.org/unep/gef.
17. De Beers Consolidated Mines, Alrosa, Rio Tinto, and BHP Billiton
together mine approximately 76 percent of the world’s rough diamonds.
18. This interaction between tightening regulations and crime was made
very clear in a U.S. court case in July 2000 where a Detroit-based company
was caught deliberately contaminating rivers with diesel fuel and other toxins
with the aim of profiting by providing a clean-up service. If the regulations did
not exist, the waste would not have been dumped in the river as a kind of
environmental “protection racket.”
19. Argentina, Australia, Chile, France, New Zealand, Norway, and the
United Kingdom all claim a specific portion of Antarctica; the claims of
Argentina, Chile, and the United Kingdom overlap. The United States and
158 crossin, hayman, and taylor
the Soviet Union rejected these claims and argued that their own substantive
presence in the region could constitute a future claim. Belgium, Japan, and
South Africa constituted the other original consultative parties to the Antarctic
Treaty System.
20. Corruption is different from facilitation payments. The former is a
bribe to induce an official to do something that he/she should not do as part
of his/her job (that is, to award a contract without an open tender); the latter
is a payment to encourage an official to do something that he/she should
already be doing.
21. The commission was presided over by Judge M. E. Kumleben under the
auspices of the South African Truth and Reconciliation Committee.
22. Article XX(g) of the treaty allows exception to this provision for the
purposes of “conservation of exhaustible resources” or environmental protection.
However, the various dispute panels felt that such measures did not
achieve these aims in a manner consistent with the objectives of the General
Agreement on Tariffs and Trade.
23. Angola, Guinea, and Sierra Leone have national certification schemes
and receive technical support from the High Diamond Council in Antwerp.
24. Conflict diamonds are defined as diamonds that originate from areas
under the control of forces that are in opposition to elected and internationally
recognized governments or are in any way connected to those groups.
25. The sections cited in this appendix are from the Kimberley process
working document dated January 2002.
26. The World Diamond Council is an industry association formed by
the World Federation of Diamond Bourses and the International Diamond
Manufacturers Association to address the problem of conflict diamonds. In
late March 2002, the World Diamond Council announced it would implement
its own control system of warranties that would endorse every rough
diamond transaction at international trade centers. The council claims its system
will complement the Kimberley process regime, but it is unclear whether
the schemes will be complementary or confusing.
References
The word “processed” describes informally produced works that may
not be commonly available through libraries.
Adams, Michael. 1997. “Resources Needed but Directed Where?” ITTO
Newsletter 7(3). Available at www.itto.or.jp/newsletter/v7n3/19.html.
Amigos da Terra. 1996. Forest Management at Loggerheads. 1996 Update
Report on Illegal Logging in the Brazilian Amazon. São Paulo.
where did it come from? 159
Andreas, Peter. 2000. “Contraband Capitalism: Transnational Crime in an
Era of Economic Liberalization.” Paper presented at the conference on international
organized crime in the global century, International Organized
Crime in the Global Era, Oxford University, July 5–6. Processed.
Barbier, Edward B., J. C. Burgess, T. M. Swanson, and David W. Pearce. 1990.
Elephants, Economics, and Ivory. London: Earthscan.
Basel Secretariat. 1999. Hazardous Waste by the Numbers. Press Kit for the
Tenth Anniversary Meeting of the Basel Convention. Fifth meeting of the
Conference of the Parties, December 6–10.
Dubash, Navroz K., and Frances Seymour. 1999. “The Political Economy of
‘Environmental Adjustment’: The World Bank as Midwife of Forest Policy
Reform.” Paper presented at the conference International Institutions:
Global Processes–Domestic Consequences, Duke University, Durham, N.C.,
April. Processed.
European Union. 2001. “Special Report: EU Illegal Timber Imports.” EU
Forest Watch (July-August). Compiled by Forests Monitor on behalf of
Fern. Available at www.fern.org/pubs/fw/srsep01.pdf.
ITTO (International Tropical Timber Organization). 1999. Annual Review
and Assessment of the World Tropical Timber Situation 1998. Yokohama.
Johnson, T., and others. 1998. Feasibility Study for a Harmonized Information
Management Infrastructure for Biodiversity-Related Treaties. Cambridge,
U.K.: World Conservation Monitoring Centre.
Miller, Marian. 1995. The Third World in Global Environmental Politics.
Buckingham: Open University Press.
Volpi, M. 2002. “Is Greed or Grievance at the Root of the Current Conflict in
the Democratic Republic of Congo?” M.Sc. Thesis, University of London.
Wang, Xi. 1996. “The International Control of Transboundary Illegal Shipment
of Hazardous Wastes: A Survey of Recent Cases That Happened in
China.” In Proceedings of the Fourth International Conference on Environmental
Compliance and Enforcement, April 22–26, Vol. II.Washington,
D.C.: International Network for Environmental Compliance and
Enforcement.
“WB Leads Move to Link Indonesia Aid to Forest Conservation.” 2000. Asia
Pulse, February 1.
White House. 2000. National Drug Control Strategy: Annual Report.
Washington, D.C.
World Bank. 1999. “Forest Sector Review.” Washington, D.C. Processed.
“World Bank Sees Flaws in Forest Policy.” 2000. Financial Times,
February 11.
Wynn, Brian. 1989. “The Toxic Waste Trade: International Regulatory Policy
and Options.” Third World Quarterly 11(3):120–46.

chapter 5
Follow the Money: The Finance
of Illicit Resource Extraction
Jonathan M. Winer and Trifin J. Roule
AN UNINTENDED CONSEQUENCE OF THE reduction in trade barriers and
border controls is the increased use of the infrastructure of legitimate
cross-border trade to move narcotics and weapons, smuggle persons,
and transport the proceeds of crime from one country to another in
violation of applicable national legal and regulatory barriers (see, for
example, Findlay 1999; “Globalization of the Drug Trade” 1999).
This is sometimes referred to as the dark side of globalization (see, for
example, Litan 2001; Summers 2000). Central to this problem are
abuses of the integrated system for global movements of funds, allowing
people to store and transport monetized value almost anywhere
(International Institute of Strategic Studies 2002). To combat these
abuses, a series of international initiatives have been undertaken, beginning
with the inclusion of anti–drug money laundering and law enforcement
commitments in the 1988 United Nations (UN) Convention
to Combat Illicit and Psychotropic Drugs (Vienna convention) and
the creation of the Financial Action Task Force on Money Laundering
(FATF) by the G-7 in 1989. They have since included the 1998
Organisation for Economic Co-operation and Development (OECD)
Project against Illicit Tax Competition, the G-7 creation of the Financial
Stability Forum in 1999, the 2000 UN Convention against
Transnational Organized Crime (Palermo convention), the Council of
Europe’s GRECO Program to assess and implement mechanisms to
prevent and prosecute corruption, and the creation of various regional
bodies to engage in a process of mutual assessment as a means to
achieve greater financial transparency.1 Further related but separate
initiatives to promote financial transparency have been undertaken by
161
162 winer and roule
important self-regulatory organizations, such as the Basel Group of
Bank Supervisors, in connection with its revised standards for assessing
risk to bank capital, the International Organization of Securities
Commissions,2 and the Offshore Group of Bank Supervisors, among
others. Finally, a coalition of private sector financial institutions, denominated
the Wolfsberg Group, has established its own set of transparency
standards, initially created in 2000 to prevent the use of their
banks and brokerage firms to hide the proceeds of corruption and
extended in late 2001 to prevent terrorist finance.3
The increasing integration of national financial payments and clearing
systems into a global financial infrastructure has made it possible
for changes in financial regulatory systems to be contemplated, mandated,
and enforced at a global level, as the twin name-and-shame
exercises initiated in 1999 by FATF and OECD have already demonstrated.
In these exercises, countries with lax financial regulatory systems
were warned that they could face loss of market access to major
financial centers if they did not harmonize their standards for financial
transparency with the requirements levied by the members of those
organizations. Both FATF and OECD developed lists of jurisdictions
deemed not to be in compliance with those standards. In each case,
many of the targeted jurisdictions complained bitterly that the approach
did not respect their sovereignty. However, in each case, jurisdictions
threatened with being blacklisted adopted comprehensive
domestic legislation, which on paper complied with the required norms
almost immediately.4
The initiatives share many common elements. These include the need
to know one’s customers to ensure that they are not engaged in illicit
activity; the need for financial institutions to share information pertaining
to illicit activity with regulators, with law enforcement, and, when
needed, with one another; the need to trace such funds; and the need of
each country to assist all others in enforcing violations of their domestic
laws. Principles initially used to combat drug trafficking and later
extended to include all serious crimes and, recently, terrorist finance
and corruption have now been extended to include many fiscal offenses,
as countries have come to recognize that a beggar-thy-neighbor approach
to tax violations threatens to beggar all jurisdictions.
To date, cross-border exploitation of illicit extraction represents an
aspect of the illicit use of the global financial services sector that has
received comparatively little attention. Existing financial transparency
initiatives have not addressed the need to combat the flow of funds from
abuses of natural resources in cases of conflict. Although such activity
could often fall within the parameters of standards and regulations designed
to address money laundering, terrorist finance, or corruption, the
follow the money 163
existing standards do not directly address the steps that a financial
institution is supposed to take in handling what may be the proceeds of
the sale of coltan, diamonds, oil and gas, tanzanite, timber, or similar
commodities that warring political factions use to sustain conflict. The
closest the current standards come to dealing with these issues are the
requirements that financial institutions eschew the proceeds of corruption
and that they respect UN sanctions. While both standards have existed
in principle for a long time, enforcement is very recent and remains
incomplete.
Access to the global financial services infrastructure is a critical element
in sustaining resource-related conflict, as its use is usually required
to transport and store the wealth of those who are using the natural
resources they control to remain in power and fund conflicts. Indeed,
these services are necessary to speed the transportation and investment
of, and to provide security for, funds generated by the exploitation of
resources by persons whose control of those resources is often very
insecure. The power to control the resources may be the combatant’s
most important asset and the one that opposing factions can most easily
capture. Thus the ability during conflict to strip assets quickly and
convert them into money stored safely can become a critical element in
building the capacity to sustain a military or political force.
Purely domestic mechanisms within a country in the midst of conflict
are especially unlikely to be effective in countering illicit exploitation
of natural resources. If there are to be any practical impediments to
such exploitation, they must necessarily be built so as to strengthen the
capacity of critical institutions situated outside the country at war.
To be effective, rules limiting financial transactions involving illicit
commodities must be enforced by persons and entities located not only
locally but also at a distance from the conflict. Absent other systems of
incentive and sanction, those persons and entities may have little immediate
stake in cutting off trade associated with the conflict.
As the Kimberley Certification Process Scheme has suggested for diamonds,
an adequate response to the exploitation of natural resources
to sustain conflict will likely require new approaches to handling the
movement of physical goods across borders.5 To date, even the most
developed states have had tremendous problems in combating crossborder
smuggling, with substantial deficiencies evident even in the
world’s most important borders, such as that of the Schengen area in
the European Union or the 2,000-mile-long U.S.-Mexican border. A
system of adequate controls to segregate licit from illicit goods that
move across borders remains an essential element of combating other
critical global security problems, including drugs and arms trafficking
and terrorism. The sheer investment in personnel, engineering systems,
and the technology required to individually monitor and inspect goods
in transit means that such initiatives will be long term in nature. By
contrast, extending the new regimes covering the global financial
services infrastructure explicitly to cover abuses of natural resources
could take advantage of initiatives that are well under way and already
beginning to have an impact in other areas important to global security.
Although it may appear counterintuitive, the enforcement of documentary
requirements and regulatory oversight over intangible goods
(money) may be in certain respects relatively easier than the enforcement
of such controls on tangible goods. Intangible goods require legal
rules of recognition for validity: thus tightening such rules and insisting
on their embodiment in the data-processing software necessary for
electronic fund transfers have the potential to regulate and monitor all
the funds that enter electronic payment systems.
The growing literature on the relationship between resource abuse
and conflict includes many studies of how commodities such as diamonds,
oil and gas, and timber have been used to fund corrupt political
leaders and parties, armies, guerrilla groups, and terrorists (de Soysa
2001). The literature also provides insights into the economics of conflict
and war. However, substantial gaps remain in articulating and assessing
how the money has actually moved, the nature of the persons
and institutions handling it, and the mechanisms used to launder the
funds and avoid sanctions or other legal restrictions. This chapter seeks
to provide an initial review of the financial infrastructure used to exploit
natural resources linked to conflict.
The chapter first outlines a conceptual framework for viewing the
financial infrastructure used in connection with violent conflict, corruption,
and poor governance. It then turns to a series of case studies
involving different forms of resource exploitation in connection with
these phenomena and the mechanisms used to finance such exploitation.
For each case study, the paper reviews the existing regulatory and
enforcement capabilities within the affected jurisdiction or region and
their adequacy in countering illicit resource exploitation. The paper
then reviews the existing initiatives created to address illicit resource
exploitation and their handling of the illicit money flows that arise
from such exploitation. The paper seeks to address the implications of
the typological similarities and differences in the financial mechanisms
used to exploit different kinds of natural resources at different levels of
conflict. It also explores potential synergies between existing financial
transparency and anticorruption initiatives and their ability to be refocused
to combat resource exploitation in areas of conflict. Finally,
the chapter articulates a series of possible initiatives that could be undertaken
to respond to the existing problems and capacity gaps by
164 winer and roule
various institutions, including governments, international financial
institutions, international organizations such as the United Nations,
regional bodies, self-regulatory organizations, and parts of the private
sector. This section identifies possible new initiatives under which
oversight mechanisms could be created to discourage resource exploitation
in areas of conflict.
Any effective response to the exploitation of natural resources in
areas of conflict will require cooperation among a diverse set of global
and regional institutions and entities. These include not just individual
governments and international organizations but also international
financial institutions, self-regulatory organizations, important
nongovernmental organizations, and key elements of the private sector.
The participation of all the legitimate stakeholders in the solution is
likely essential for progress to be possible, let alone sustainable.
Definitions and Concepts
With the end of the cold war, policy analysts and academics initiated a
concerted effort to account for the growing number of civil conflicts
arising across the globe. Some widely held explanations for civil conflicts
attribute the onset of civil strife to environmental stress, demographic
pressure, and a variety of societal factors, such as religious and
ethnic differences (see, for example, Homer-Dixon 1999; Snow 1996).
Increasingly, the growth in conflicts has been attributed to groups determined
to achieve a “payoff” for their efforts through the trafficking
of illicit commodities. As Paul Collier concludes, some individuals can
“do well out of war” (Collier 2000). Collier’s conclusion can be extended
beyond individuals to entire government agencies, especially
security forces such as the military, police, and customs officials, organized
criminal groups, terrorists, drug traffickers, and private security
forces such as paramilitary groups and guerrilla organizations. However,
scant literature is devoted to the financial networks that these
groups use to exploit natural resources in times of conflict.
The exploiters of natural resources in areas of conflict generally rely
on a common infrastructure for handling illicit proceeds. This includes
the formal financial services system of local banks linked to foreign
banks, alternative remittance systems such as hawala and hundi institutions,
import-export firms that participate in false invoicing schemes,
precious metal markets, and the use of trusts, international business
companies, and nontransparent jurisdictions as mechanisms to hide
funds. Such exploiters are themselves often interrelated. Governments
of questionable legitimacy often have significant ties to criminal
follow the money 165
organizations, especially when both are involved in resource extraction.
However, there are also important differences in the infrastructure
that tends to be available to governments, criminals, terrorists,
and private security forces. Accordingly, it may be useful to distinguish
the principal types of exploiters in order to determine the financial infrastructure
that is most relevant to their exploitation. It is also important
to define the major differences between lawful and illicit resource
extraction in order to articulate more precisely what is illicit than the
general formulation “I know it when I see it.”
Defining Legitimate Resource Extraction
Numerous legitimate governments license private sector entities to engage
in resource extraction or, alternatively, engage in such extraction
themselves. The extraction of commodities as a legitimate function of
government commonly includes (a) fairness in bidding for sales or leasing,
so that the government receives the maximum possible revenue for
the resources sold; (b) transparency in the pricing and amounts of commodities
sold; (c) conservation measures designed to minimize the permanent
loss of the commodities and to maximize the length of the
extraction period; (d) reinvestment in the means of production for
extracting the resources, such as investments in pipes or drilling equipment
for oil or replanting of trees in logging concessions; (e) restoration
of the environment from which the commodities have been extracted,
to minimize the environmental damage and to maximize the long-term
economic value of the extraction area; and (f) deposit of the funds
generated from the extracted resources in the state treasury, where they
are then used to fund government operations.6
Defining Illicit Resource Extraction
Illicit extraction by governments features the converse of the principles
of licit resource extraction. Ordinarily, illicit extraction involves
(a) politicized or crony-based contracts for the sale of commodities,
(b) limited or falsified information on pricing and quantities, (c) asset
stripping with no regard to the future, (d) little to no investment in
long-term production, (e) failure to restore stripped areas, and (f) disappearance
of the revenues from the sale of the resources so that they
cannot be traced, with minimal or no benefit to the state treasury.
When all of these factors are present, a particular case of extraction is
likely to be illicit.
Other cases may be less clear. For example, a government that
issues contracts for the sale of commodities to insiders on a noncompetitive
basis to permit kickbacks to corrupt officials may still insist on a
166 winer and roule
portion of the revenues returning to the state treasury. Such routine
corruption may undermine both the revenue base and the popular support
for a government, but only the criminalized portion of the transaction
might be characterized as illicit. The standard definition of
corruption is the exploitation of public resources for private gain
(World Bank 1997, p. 8). In practice, the determination of whether particular
natural resources are public goods or available for private sale
may be both uncertain and fluid, as was demonstrated in the many
ambiguities that arose in the course of the privatization of state-owned
oil and gas resources from the Soviet Union during the 1990s.
Accordingly, illicit resource extraction is here defined as the sale of
natural resources from a country by means that avoid the payment of
taxes to the national government in the host country or that violate
UN resolutions. Thus, when taxes are properly paid on resources
extracted at market prices for goods not subject to sanction, the sale
is deemed licit.
Defining Conflict
Contemporary conflicts are most often intrastate, rather than between
states, and involve aspects of both political and criminal violence; it is
these forms of conflict that have been most linked to the exploitation
of natural resources (Collier 2000). There have been numerous efforts
to define “armed conflict.”7 This chapter uses as its definition “a contested
incompatibility that concerns government or territory or both
where the use of armed force between two parties results in at least 25
battle-related deaths and where at least one of the two parties is the
government of a state.” This definition fits nicely within a study whose
focus is the contested incompatibilities of control over natural resources
that have economic value to the person or entity controlling
them and the mechanisms used to translate that value into wealth,
store that wealth, and make that wealth available to strengthen the
political control that the person or entity is seeking to exercise over
government, territory, or merely the commodities themselves.
Defining the Entities Exploiting Illicit Commodities
Roughly speaking, at least four distinct types of entities systematically
use the funds from illicit commodities to fund their security operations
and control in areas of conflict. The four entities are governments,
rebel groups, organized criminals, and terrorists. Although there are
important differences among them and their relationship to the illicit
commodities, the categories are not exclusive. Corrupt officials often
form relationships with organized criminals, as do terrorists, in what
follow the money 167
Michael Ross (forthcoming) has termed “cooperative plunder.” Similarly,
relationships between rebel groups and organized crime have
existed in Angola, Congo, Kosovo, and the Philippines. Comparable
linkages between organized criminal and terrorist groups have been
prevalent in Colombia and Sri Lanka. Typically, in cases where governments
are funded by illicit commodities, organized groups of criminals
and terrorists that are funded by them also spring up, as government
exploitation of illegal commodities is closely related to poor governance,
popular unrest, and high levels of criminality and violence.
Where governments, organized criminals, and terrorists are exploiting
illicit commodities, there is greater risk of a secessionist movement
or outright civil war, generating rebel groups funded by such
commodities.8
Governments Financed by Illicit Commodities. Because governments
financed by illicit commodities govern poorly and provide little
in return from their resource exploitation to the people of the country,
they are often not democratically elected regimes and retain power in
part through the funds generated by commodity sales. Regimes in
Cambodia and Myanmar, for example, have been subject to repeated
rebellions, civil wars, warlordism, and guerrilla movements but have
survived in substantial part by sharing the revenues of the sales of
opium, precious stones, and timber with groups necessary to help
them maintain their security (see Curtis 1998; Takano 2002). The
Abacha regime in Nigeria similarly retained power and put down challenges
in part by ensuring that oil revenue went to those factions of the
military needed to sustain control (see, for example, Ihonvbere and
Shaw 1998). Charles Taylor’s Liberia remains perhaps the prime example
of such exploitation and its impact on a region, as his exploitation
of Sierra Leone’s diamonds played a substantial role in sparking
and sustaining a brutal civil war.9 In other cases, countries may be
democratic, but governance is weakened by the involvement of government
in illicit commodities, which weakens law enforcement structures,
reduces tax collection, and empowers corrupt officials and organized
criminals.
Rebel Groups Financed by Illicit Commodities. The principal difference
between rebel groups financed by illicit commodities and terrorist
groups financed by illicit commodities is the nature of the forces
(O’Neill and Meyer 2001). Rebel groups control territory and target
government territory in military operations, while terrorists primarily
target civilians. Long-term rebel activity in which illicit commodities
sustained rebel military forces have included Angola, where the
National Union for the Total Independence of Angola (UNITA) largely
168 winer and roule
funded their war against the government through diamond revenues
during 1992–2001; Sierra Leone, where the Revolutionary United
Front similarly exploited diamonds throughout most of the 1990s;
and Afghanistan, where the Taliban and the Northern Alliance each
built their military operations on the exploitation of opium and precious
stones.
Organized Crime Financed by Illicit Commodities. In poorly
governed countries, criminal organizations can use payments to wellplaced
officials in order to secure revenue streams for themselves from
the exploitation of natural resources. In such cases, the corrupt officials
may receive payment, but the criminal organization, which manages
most elements of the exploitation, retains the greatest share of
the proceeds. In such countries, the governments formally oppose the
asset stripping. Elements of the government may even be ineffectively
trying to discourage it, but the capacity of the government to prevent
the exploitation is weaker than the capacity of the criminals to carry it
out. In such cases, the only persons within the country who benefit
from the resource extraction are the criminals and those who have
been corrupted by them.
Terrorists Funded by Illicit Commodities. While some aspects of
terrorist finance remain uncertain, the reliance of a number of terrorist
groups on trafficking in illicit drugs—chiefly coca and opium—is well
documented.10 Illicit drugs, like illicit sales of metals, oil and gas,
precious stones, and timber, mostly move through the same transport
systems and modalities as licit commodities. That is, terrorists, like governments
and organized criminals, need to use the formal banking system
to handle the proceeds of their illicit activity. To do so, they need to
launder the revenues derived from their illegal activity, which they accomplish
through similar techniques. These include the use of false invoicing,
trusts, and international business companies; reliance on bank
secrecy havens; and reinvestment of illicit funds in legitimate businesses.
Unlike governments, terrorists also rely on black market money exchange
systems, such as the black market peso exchange used by Latin
America and the United States and the hawala system used by the Middle
East, South Asia, and the rest of the world, to avoid having to move
currency across borders and to retain value in their native currencies at
home. For similar reasons, they also convert their funds into gold and
gemstones, as both are anonymous commodities that are readily convertible
into cash.11 Terrorists generally fund their activities by providing
security to farmers growing illegal coca or opium rather than
engaging in more demanding forms of resource extraction. This limitation
may be related to lack of opportunities to secure illicit control over
follow the money 169
licit commodities. Historically, terrorists have played an important role
in sustained conflict in numerous countries, including Bolivia, Colombia,
and Peru (coca), Afghanistan and Pakistan (opium), Kosovo (primarily
opium), Lebanon (opium), and Myanmar (opium). Recently, important
terrorist groups have included the Abu Sayyaf Group in the Philippines,
Al-Qaeda in Afghanistan and Pakistan, the Kosovo Liberation Army,
the KurdishWorkers Party in Turkey, Liberation Tigers of Tamil Eelam
in Sri Lanka, and the Revolutionary Armed Forces of Colombia, each
of which has funded their operations through the sale of narcotics.
Common Elements of Finance by Illicit Commodities
Money launderers, terrorist financiers, corrupt officials, and tax evaders
have relied on a relatively standard set of tools to transfer, store, and
conceal money generated domestically from government mechanisms
in their home countries. Although many other tools are in the toolbox
of illicit finance, the basics include the following.
To generate illicit proceeds:
• Work in collusion with purchasers of smuggled or illicit goods to
prepare invoices that falsify the identification of importer, exporter,
quality, or quantity of goods
• Unilaterally engage in invoice fraud, with false declarations of
importer or exporter and quality or quantity of goods
• Collude with customs or corrupt officials to smuggle illicit goods
from a country and then sell them to an independent no-questionsasked
third party at a discount from market prices
• Provide a license for others to obtain illicit goods and sell them in
violation of law, by providing safe haven for the illicit activity within
a territory and receiving a kickback for providing this protection or
opportunity
• Obtain cash in return for the illicit good and place it in a financial
institution that either does not object to receiving the proceeds of
illicit commodities or is in collusion with the seller.
To layer illicit proceeds in order to hide their actual ownership:
• Establish shell companies to engage in import and export
transactions
• Create overseas trusts to shield the ownership of assets and to
permit the assets to be managed by a trusted third party with a duty of
secrecy to the owner of the assets
• Open bank accounts offshore in the name of other fictitious
trading, investment, or service companies
• Hire local agents to act as nominees for shell companies and
bank accounts held in the name of shells or fictitious companies
170 winer and roule
• Use underground or alternative remittance systems, including
black market currency exchanges, to avoid cross-border currency
controls
• Exchange one potentially traceable commodity, such as oil or
timber, for another less traceable commodity, such as gold
• Sell a poorly traceable commodity, such as gold, in a major commodities
market, such as Dubai in the United Arab Emirates or the
Colon Free Zone in Panama
• Smuggle cash to another jurisdiction for placement in a willing
financial institution.
To reinvest, use, or expend illicit proceeds:
• Use funds held at a foreign bank in a false name or company to
purchase legitimate businesses and then use those legitimate businesses
to generate new funds
• Purchase goods outside of the country with the illicit proceeds and
then sell those goods inside the country to generate new clean revenues
• Receive payment domestically from a broker in local or hard
currency at some discount in return for the broker making an offsetting
payment in another jurisdiction
• Leave the funds in a foreign trust under the control of a local
agent as an insurance policy against the day when the persons controlling
the money need to flee their home jurisdiction.
Common Elements of Conflicts Financed
by Illicit Commodities
A recent study by Michael Renner for the World Watch Institute
(Renner 2002) describes a number of common elements in conflicts
financed by illicit commodities. As described by Renner, essential components
of conflicts financed by illicit commodities are (a) the availability
of “lootable natural resource wealth,” (b) licit or illicit taxation on
resource extraction by various forces with uncertain legitimacy, (c) ability
to keep revenue streams “off the books” and hidden from oversight,
(d) enrichment of corrupt elites, and (e) use of extreme violence against
civilians to establish and enforce control over resources through intimidation
(Renner 2002, pp. 10–14). These criteria are strikingly reminiscent
of those applicable to traditional, mafia-style organized crime
and reflect the standard approaches to business still used by criminal
organizations and terrorist groups wherever they operate. Thus the
conflicts themselves feature precisely the elements of the critical legal,
social, and economic infrastructure required by criminals and terrorists.
It is logical that such conflicts generate organized crime and terrorism
to accompany the exploitation of natural resources undertaken
follow the money 171
by governments and rebel groups, as each type of group takes advantage
of common mechanisms to secure and harness the revenues
extracted from the resources.
Existing Initiatives
International efforts to respond to abuses of commodities linked to
conflict have run along a number of separate tracks, only some of which
deal with financial aspects. Most of the initiatives fall into one or more
of the following categories, each of which is reviewed briefly to assess
the degree to which it has addressed financial flows and mechanisms
associated with resource exploitation:
• Embargoes, in which the United Nations has agreed on measures
to limit transborder transactions during the conflict
• Certification programs, in which goods are permitted to move
across borders only if they meet certain documentation requirements
• Disclosure regimes, in which public or private participants in
transactions involving a commodity linked to conflict must disclose
certain information about any transaction for it to be lawful
• Anticorruption and transparency standards and norms, which
may indirectly criminalize the activities of officials and private persons
involved in various forms of commodity exploitation
• Antiterrorist standards and norms, which may lead to the regulation
of financial mechanisms used by terrorists and by groups involved
in the exploitation of illicit commodities.
• Anti–money laundering standards and norms, which may sanction
countries that facilitate various forms of commodity exploitation
• Drug or crime control standards or norms, which establish broad
international obligations to combat drug trafficking or organized
crime by criminalizing certain forms of conduct, authorizing procedures
for enforcement, requiring certain regulations, and mandating
forms of international cooperation, including criminalizing and regulating
the laundering of the proceeds of illicit transactions involving
narcotics
• Private sector “seal” initiatives that establish minimum standards
to which a business must agree to adhere in order to be certified
as a member in good standing of the seal organization
• Name-and-shame exercises, both governmental and nongovernmental.
Each of these categories has areas of effectiveness and limits, and these,
together with examples of each type of initiative, are discussed below.12
172 winer and roule
Embargoes
An ongoing conflict in which contesting military or security forces are
operating within a territory is generally the prerequisite to the UN
authorizing a broad regime of sanctions that covers a territory, with certain
exceptions to allow for the imposition of sanctions on regimes that
have initiated conflict and are deemed to be dangerous (such as Iraq).
Sanctions regimes can be total or partial, short term or long term.13
The imposition of embargoes reduces access to markets, especially
those in the most developed countries, which constitute the most sustained
source of demand for the products of an embargoed country. In
cases where there is a political consensus in support of sanctions, the
loss of market access for both imports and exports can have an immediate
and substantial impact on the civilian population of the targeted
country, undermining political support over time for continuation of
the conflict. Embargoes also may make it harder for people to export
illicit natural resources, as buyers become scarce. By reducing demand,
embargoes may accomplish their immediate objective: reducing the
sources of funds for warring combatants. They may also have the
secondary benefit of reducing the harvesting of the commodities.
Embargoes are only as good as the political consensus that sustains
them. Black marketers, criminal organizations, corrupt officials, and
legitimate businesses willing to ignore sanctions in favor of profits will
routinely violate sanctions to the extent that broader regulatory and enforcement
measures do not prevent them from doing so. Embargoes on
countries selling goods such as oil and timber that have inelastic markets
may increase the price on global markets for the banned commodity,
rewarding those willing to violate the sanctions. Embargoes may
also strengthen the relative political and economic power of those
violating them, both within and outside the embargoed country, by giving
those willing to break the law a market advantage over those abiding
by the law. Civilian populations tend to experience the brunt of
across-the-board sanctions, as local security forces requisition key
commodities for themselves, focusing any market deprivations on the
general population, which may then blame the sanctions rather than
the government or local security forces for their suffering.
The imposition of sanctions on South Africa played a critical role,
over time, in forcing the dismantling of apartheid and the creation of
democracy in the country. Sanctions imposed on Serbia made a key
contribution to the eventual displacement of the Milosevic regime.
Indeed, some U.S. policymakers have argued that Milosevic’s downfall
was brought about by the impact of sanctions once funds controlled by
Milosevic and held in financial institutions outside Serbia were identified
and the sanctions began to impose constraints on the well-being of
follow the money 173
those within the regime.14 By contrast, sanctions imposed on Iraq after
the GulfWar did not bring about regime change or attenuate the power
of Iraq’s military ruler, as the Iraqi regime was able to sell enormous
quantities of oil illegally despite the sanctions. Similarly, sanctions have
done little to stop the conflict in the Democratic Republic of Congo. In
neither case did the limitations on the sale of commodities stop the conflict
or bring about regime change. In the South Africa case, the sanctions
did not prevent the government from exporting large quantities
of the country’s most important commodity: diamonds. Serbia had
no commodities to exploit. The comprehensive UN sanctions on Iraq
and the Democratic Republic of Congo did not prevent security and
military forces from selling enough commodities to sustain themselves
irrespective of sanctions. There have also been extraordinarily few
prosecutions or seizures of assets of entities or persons engaged even
in systematic violations of sanctions, rendering enforcement risks low
and enforcement action largely symbolic.
As has been commonly observed, broad sanctions imposing barriers
on trade can reduce the funds available to regimes engaged in conflict
but require active support from many, if not most or all, countries to
be effective (Cortright and Lopez 2002; Hufbauer, Schott, and Elliott
1990). Such sanctions certainly have not prevented exploitation of
natural resources when the legitimate market for the commodity is of
substantial size and scope. Other limitations on effectiveness include
the limited capacity of some governments and the impact of corruption
and criminality in facilitating illicit activity.
Sectoral Embargoes. A small number of commodities are widely
viewed to be incompatible with social stability in general and are subject
to international embargo, with limited exceptions for commercial
or military use. These mainly include illicit drugs, especially opium
and coca derivatives, certain forms of weaponry, and some precursor
materials that can be used to create weapons of mass destruction. Of
these, narcotics and nuclear material controls are most relevant to this
study, as each is a prohibited commodity.
Sectoral embargoes on illicit narcotics, military weapons, and the
precursors of weapons of mass destruction have established global
standards and norms that have, for all practical purposes, eliminated
any lawful commercial market for these products. Those participating
in buying or selling embargoed goods face substantial criminal as well
as civil penalties in almost every country. Most countries cooperate well
with one another in investigating violations of sectoral sanctions and,
in general, are willing to extradite violators. Over time, most persons
174 winer and roule
violating sectoral sanctions are punished, and most of the persons
producing the illicit commodities find they can no longer remain in
the illicit business.
Prohibitions may not eliminate substantial market demand for the
commodities. To the extent such market demand continues, those willing
to violate the legal norms are likely to have substantial economic
incentives to engage in the prohibited conduct. Regions of conflict produce
especially widespread violations of sectoral sanctions. Typically,
such regions are located in countries or provinces that provide safe
havens or impunity for those involved in illicit production, sale, and
purchase of sanctioned goods. Indeed, sectoral embargoes tend to
concentrate production in areas where governments, military forces,
or other security forces can exploit illicit production. Sectoral sanctions
also tend to reward those involved in black markets, increase the
size of black markets, and over time create networks of private sector
entities and corrupt officials participating in the illicit activity. Thus
sectoral prohibitions can weaken governance by encouraging rentseeking
behavior and increasing the relative economic and political
strength of criminals and criminal organizations.
International conventions universally regulate opium and coca
derivatives, with the most important instrument being the Vienna convention,
which prohibits the cultivation and production of these products
as well as their transportation, purchase, sale, and financing. The
convention has been the backbone of all subsequent international
efforts to combat the sale of illicit drugs. Its signatories include almost
every country in the world.15 The requirements of the prohibition
regime have driven signatories to build new anti–money laundering
enforcement and regulatory regimes, capacities, and agencies. Many
countries have created entire antidrug agencies to implement their
obligations under the convention. Notably, the impetus for the creation
of financial intelligence units and the Egmont Group also arose
as one of many consequences of the convention’s adoption. Drug
money–laundering prosecutions and asset seizures are fairly common
internationally, making drug trafficking and drug money laundering a
business that has real rather than theoretic risks for market participants.
The United Nations plays an important role in assessment and
implementation of the prohibition regime through the UN International
Drug Control Program and the annual meetings of the Commission
on Narcotic Drugs in Vienna. Similarly, the many conventions
covering nuclear weapons have created an international prohibition
regime that is largely, although not universally, accepted. The conventions
include the Treaty on Non-Proliferation of Nuclear Weapons,
follow the money 175
the Convention on the Physical Protection of Nuclear Material, and
the Convention on Nuclear Safety, among others. These conventions
generally prohibit the acquisition of nuclear weapons and relevant
precursors by those who do not already have them. These control
regimes criminalize or regulate relevant forms of commercial activity,
both domestic and transborder, involving nuclear material and related
items, with national adherence to the regimes monitored through the
International Atomic Energy Agency, also based in Vienna. The relevant
conventions and the International Atomic Energy Agency are focused
on the control of particular substances and technologies, not on
the financial aspects of nuclear smuggling. However, criminal involvement
in nuclear smuggling has been separately addressed by the Palermo
convention, which does cover money laundering.
Effective action against narcotics has required the development of
anti–money laundering capacities that adhere to international standards.
By contrast, control of nuclear material within the private sector
has been largely effective irrespective of financial control mechanisms,
with the notable exception of nuclear smuggling in which state actors
have been the source of demand.16 The international consensus that
the material should not enter the stream of commerce for any entity
other than a state has helped to maintain adequate controls. However,
one additional and unique element of controls over nuclear material is
the physical danger involved in smuggling radioactive substances,
which both increases the barrier to entry in direct exploitation of the
material (mining) and reduces the incentive to smuggle. Notably, even
in this extraordinarily tough enforcement and regulatory environment,
nuclear smuggling has remained an active, although comparatively
infrequent, phenomenon.17
Certification Regimes
In at least a general sense, customs authorities have always relied on
country-of-origin certification requirements, which, although often
falsified or ignored, provide a baseline for the imposition of duties.
Beyond the standard country-of-origin requirements levied by customs
authorities, commodities long covered by international certification
regimes have tended to fall into two categories: (a) commodities
regulated because they are dangerous, such as weapons, both military
and small, and technologies useful for military purposes as well as for
standard commercial applications and (b) commodities regulated
because they are deemed irreplaceable or “at risk” as a result of prior
exploitation, such as endangered species. Recent efforts to create certification
programs covering timber might also fall into the second
176 winer and roule
category. However, a third category may also now exist: (c) commodities
regulated because of their exploitation in connection with
sustaining conflict. Diamonds were the first commodity subject to
certification within this category, as a result of the Kimberley process.
Tanzanite may be a second example if the Tucson protocols are
implemented.
Goods moving in international commerce are generally required to
bear country-of-origin certifications, using a standard form or certificate
of origin adopted by the Customs Cooperation Council of the
World Customs Organization in 1973. The standard form requires
identification of the exporter and consignee, particulars of transport,
description of the goods, and country of origin. Customs agencies
have generally been the sole enforcers of such certifications. The limitations
of individual customs agencies due to low pay, poor training,
inadequate resources, and corruption inhibit effective enforcement of
country-of-origin certifications in developing countries. Because the
goods move across borders, these domestic weaknesses are exported
with the goods, as certifications of origin are only as good as the enforcement
mechanism in the weakest link in the customs chain. Customs
certifications typically are accompanied by declarations of value.
False declarations are endemic to international trade, especially as underinvoicing
provides the opportunity to reduce taxes at the country
of origin and tariffs at the country of destination. To date, there has
been no systematic effort to tie certification schemes on a global basis
to transparent payment mechanisms. Certification is required in several
notable sectors: diamonds, endangered species, and firearms. We
deal with each in turn.
Diamonds. Since May 2000, representatives from 37 nations, the
diamond industry, and a number of nongovernmental organizations
have conducted negotiations (referred to as the Kimberley process,
after the town in South Africa where the first meeting was held) to
develop an international system of diamond certification. In March
2002, delegations reached agreement on a range of issues, including establishment
of a database and standards for handling rough diamonds
at each successive stage. Ultimately, the process failed to adopt one important
element that had been recommended by a number of participants,
namely, independent, effective monitoring of the regulations and
control mechanisms that each nation is supposed to put in place so that
a global system can go into effect. Very few countries have adequate
measures in place. Consequently, the process relies primarily on voluntary
participation and adherence by governments and industry; it lacks
an international authority to monitor and enforce rules. The process
follow the money 177
entails recommendations, rather than binding controls, for how diamonds
are to be handled from mining to export. Participation in the
“chain of warranties” that follows the initial export is voluntary, and
monitoring and enforcement are left to self-regulation. After the rumors
that members of Al-Qaeda were attempting to exploit the loosely
regulated tanzanite markets, American dealers in precious stones undertook
initial steps to apply to tanzanite measures similar to those
specified in the Kimberley process, although implementation has yet
to take place (“Kimberley Process for Tanzanite” 2002). Neither the
Kimberley process nor the Tucson protocols include any measures
covering financial mechanisms.
Endangered Species. In 1975 the Convention on International
Trade in Endangered Species of Wild Fauna and Flora (CITES) came
into force, affording various degrees of protection to more than 30,000
species of animals and plants, whether they are traded as live specimens,
fur coats, or dried herbs. There are currently 160 parties to
CITES, which requires that the export of any specimen of a species included
in its Appendix I require permission and the presentation of an
export permit and that the import of such a specimen require permission,
an import permit, and either an export permit or a reexport certificate.
18 CITES requires parties to criminalize trade in protected species
and to maintain records of trade in the protected species.19 The convention
does not address financial mechanisms that may be used in such
trade. The Palermo convention covers transnational criminal activity
involving endangered species, however, including an obligation to regulate
and enforce the laundering of the illicit proceeds of trafficking in
such species.
Firearms. Although many countries have long required end-user
certificates for weapons, a common certification approach was not
adopted until the passage in June 2002 of the Protocol against the
Illicit Manufacturing of and Trafficking in Firearms, Their Parts
and Components, and Ammunition supplementing the Palermo convention.
20 The certification approach is similar to that of CITES, requiring
import, export, and reexport certificates as applicable. Notably,
the firearms protocol lies within the framework of a convention that
criminalizes the laundering of the proceeds of any activity that violates
its terms. Thus the firearms protocol is backstopped by the obligation
to criminalize, regulate, and enforce violations of the protocol, which
include all forms of illicit cross-border activities involving firearms.
The firearms protocol also prompted the Customs Cooperation Council
of the World Customs Organization to add particular categories
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of weapons and components to the harmonized system by which
national customs agencies track goods in transit.
Strengths and Weaknesses. Certification regimes provide a level
of harmonization and control over commodities requiring certificates.
They provide a means by which well-intentioned entities and persons
can choose to deal only in licit commodities, thereby creating market
incentives for licit goods to be of greater value than illicit goods. The
certification process simultaneously creates universal rules to distinguish
licit from illicit activity and thus provides a basis for structuring
national regimes and national regulatory and enforcement activity in
support of national regions. Finally, the certification regimes provide
an evidentiary trail for regulatory and enforcement activity, as abuses
by corrupt officials and criminal organizations through unlawful issuance,
forgery of certificates, or frauds are exposed.
Regimes requiring the certification of goods have not tended to create
adequate verification mechanisms. None of the certification regimes
has simultaneously provided for immediate integration of record
keeping regarding certified commodities and the actual financial
mechanisms (whether wire transfers or currency deposits) that accompany
the physical movements of goods. The sectoral regimes have not
been able to address problems of domestic capacity and corruption in
areas of weak governance, with the result that links in the chain have
facilitated considerable circumvention of the certificate process. Notably,
enforcement activity against those involved in illicit buying and
selling of prohibited commodities, including diamonds, endangered
species, and firearms, remains relatively haphazard and often confined
to a few jurisdictions. Financial institutions generally have little
awareness of certification regimes, and financial regulators do not
make their enforcement a visible component of anti–money laundering
obligations.
Certifications have had an impact in every sector in which they have
been adopted. However, limited capacity and corruption create substantial
gaps in regulatory and enforcement activity, and criminal organizations
structure their activities to circumvent certification programs.
Certification regimes rely especially on the institutional competence
and integrity of customs agencies, which are often deficient. These
deficiencies worsen substantially where such competence and integrity
are needed most—in areas of resource exploitation and in areas of
conflict. To date, cross-fertilization between certification regimes and
anti–money laundering regulations has been minimal. The Palermo convention
requires anti–money laundering laws to cover all illicit proceeds.
follow the money 179
Accordingly, the convention necessarily covers laundering of the proceeds
of crimes involving certification abuses. However, there is no
international mechanism to coordinate activity between those regulating
and enforcing the laws governing money laundering or financial
transparency and those seeking to enforce certification regimes.
Disclosure and Monitoring Initiatives
The United Nations, international financial institutions, and various
nongovernmental organizations have undertaken a wide range of private
sector disclosure and public sector monitoring initiatives in connection
with the illicit exploitation of commodities.21 These include all
of the sectoral certification processes discussed above as well as various
local mechanisms in other sectors, including timber and oil.
The Forest Crimes Monitoring Unit, established in Cambodia by
the World Bank and the government and supported by the United
Nations Development Programme (UNDP), the United Nations Food
and Agriculture Organization (FAO), Australia, Denmark, and the
United Kingdom. The unit is designed to assist the Cambodian government
to combat forest crime. This unit includes a Forest Crime Monitoring
Office in the Department of Forestry andWildlife, a Department
of Inspection in the Ministry of the Environment, and independent
monitoring by GlobalWitness, whose efforts led to the initiative. A key
component is the development of systems for tracking logs and cases
of forest crime, which have improved accountability and transparency
and led to a significant increase in enforcement actions. In an attempt
to curtail illegal logging, bilateral agreements have been drawn up
between Indonesia and its largest trading partners. The Indonesian
government has signed an agreement with the British government
under which the United Kingdom will move to ban the import of illegal
Indonesian logs into Europe. This was driven by the large “green
movement” in the United Kingdom, which also assisted in the “lighttouch
mechanisms” placed in the U.K. Pension Act. Extensive use of
such agreements with other countries may result in a significant decrease
in the export of illicit timber from Indonesia. International pressure
has convinced Malaysia to join the International Tropical Timber
Organization, which issues guidelines for the sustainable management
of natural tropical forests. To date, none of these timber-related initiatives
contains a financial monitoring element relating to formal or
informal financial sectors.
Although other initiatives have been undertaken in the oil sector
whereby private sector entities make various commitments to socially
responsible extraction, the Publish What You Pay campaign, launched
180 winer and roule
in June 2002 by George Soros and Global Witness, provides the first
significant effort to focus attention on monitoring not only the purchase
and sale of a commodity but also the funds used to pay for it.
Notably, Publish What You Pay does not focus on the mechanisms by
which illicit commodity sales move, but rather on the amounts, timing,
and recipients of particular revenues paid by licit private sector
companies purchasing energy. The information that could be developed
from such a regime, in turn, would be available to assist regulators
and law enforcement officials in determining whether a particular
transaction not reported under Publish What You Pay may have been
illicit in nature. Separately, the International Association of Oil and
Gas Producers has established industry guidelines on issues such as
environmental management and in November 2001 held an initial
meeting in Houston to discuss corruption. Among the ideas discussed
were proposals to share best practice in due diligence and training,
both within the association and, ideally, with other industry associations
(Bray 2002). Potentially, the initiative could propose standardizing
the provision of information to the public that would facilitate the
tracing of corrupt payments in the energy sector.
Anticorruption and Transparency Standards and Norms
During the late 1990s, anticorruption initiatives were being undertaken
at a rapid rate, covering active and passive bribery.22 These
included regional conventions against corruption within the Organization
of American States and the Council of Europe, each of which
focused on criminalizing the taking of bribes, and a major global convention
undertaken at the OECD, which focused on the making of
bribes. The initiatives arose in an environment in which capital flows
to emerging and developing countries had shifted markedly in favor
of the private sector, rather than on a government-to-government
basis. As a result, multinational corporations and financial markets
generally became a more significant factor in transfers of capital than
official assistance. Economic collapses in East Asia, Mexico, and
Russia often revealed extreme corruption in financial and business sectors,
even as they created substantial private sector losses. The Latin
American malaise and the Asian economic flu, in turn, prompted the
International Monetary Fund and the World Bank to focus on strengthening
standards and norms not only in fiscal but also in regulatory
areas. The regulatory standards emphasized documenting financial
transactions involving governments—and account records at financial
institutions generally—in order to facilitate prevention and punishment
of corruption.
follow the money 181
The OECD Convention on Bribery in Transnational Business
Transactions was signed in 1997 and came into force in 1999. Under
the terms of the convention, the OECD’s 35 member countries have
agreed to introduce laws similar to the Foreign Corrupt Practices Act
enacted in 1977 in the United States to make it possible to prosecute
companies that pay bribes abroad. Major elements of the OECD convention
are the requirement to criminalize active bribery, to make
bribes no longer tax deductible by corporations, to require companies
and businesses to provide adequate recording of relevant payments,
and to provide mutual legal assistance to facilitate inquiries into suspected
breaches. Of particular importance to the issue of resource
exploitation is the OECD convention’s requirement to criminalize extraterritorial
bribery. As a result, bribes paid by a person who is a citizen
of a signatory country anywhere in the world are subject to prosecution.
The OECD convention also provides for a process of mutual assessments
as amechanism to evaluate and improve compliance. The process
of evaluation is critical, as no prosecutions of corrupt activity have been
attributed to domestic laws enacted as a result of the convention.
Enforcement of the OECD convention could also highlight where corrupt
practices have led to resource exploitation and critical nodes by
which corrupt payments have been made. Jurisdictions or institutions
identified as nodes for handling funds relating to illicit exploitation of
natural resources could be required to put greater due diligence mechanisms
into place as a condition of market access for the jurisdictions and
of licensing for the institutions.23
Antiterrorism Standards and Norms
After September 11, 2001, in an effort to assure UN support for combating
terrorist finance schemes, the UN Security Council unanimously
adopted Resolution 1373, a binding document that requires all 189
member states to do the following:
• Criminalize the use or collection of funds intended, or known to
be intended, for terrorism
• Freeze immediately funds, assets, or economic resources of persons
who commit, attempt to commit, or facilitate terrorist acts and
entities owned or controlled by them
• Prohibit nationals or persons within their territories from aiding
or abetting the persons and entities involved in terrorism
• Refrain from providing any form of support to entities or persons
involved in terrorism
• Deny safe haven to those who finance, plan, support, or commit
terrorist acts or provide safe havens.
182 winer and roule
The resolution requires member states to answer a series of queries
and report their findings to the United Nations, but the UN cannot
sanction member states for failing to comply with international standards
for combating terrorist finance schemes.24
In April 2002 the Financial Action Task Force on Money Laundering
published guidance specifying in some detail the criteria for detecting
possible terrorist transactions. This guidance covered laundering of the
proceeds of narcotics and other commodities as well as other forms of
terrorist finance. It asked financial institutions to focus on the following:
• Accounts that receive periodic deposits and otherwise are dormant.
Such accounts may prove to be “sleeper” accounts for later use
by terrorists.
• Accounts containing minimal sums that suddenly receive deposits
or a series of deposits followed by daily cash withdrawals that
continue until the transferred sum has been removed.
• Refusals by a customer to provide adequate identification.
• Accounts for which several persons have signature authority
when the persons appear to have no family ties or business relationship.
• Accounts opened by a legal entity or an organization that has the
same address as another legal entity or organization but for which the
same person or persons have signature authority, with no apparent
economic or legal reason for the arrangement.
• The opening by the same person of multiple accounts into which
numerous small deposits are made that in aggregate are not commensurate
with the expected income of the customer.
• Use of mutual personal and business accounts to collect and then
funnel funds immediately or after a short time to a small number of
foreign beneficiaries.
• Foreign exchange transactions performed on behalf of a customer
by a third party followed by wire transfers of the funds to locations
that have no apparent business connection with the customer.25
These and the other mechanisms listed in the guidance have general
applicability for money laundering and terrorist finance. They are not
especially applicable to financial transactions involving commodity
exploitation in which officials and private companies collude to place
illicit funds under the name of front companies in a minimally regulated
jurisdiction.
Anti–Money Laundering Standards and Norms and the FATF
The Financial Action Task Force (FATF) is an intergovernmental body
whose purpose is the development and promotion of policies, at national
follow the money 183
and international levels, to combat money laundering. The FATF is a
policymaking body that works to generate the necessary political will to
bring about national legislative and regulatory reforms to combat money
laundering. The FATF monitors members’ progress in implementing
anti–money laundering measures, reviews money laundering techniques
and countermeasures, and promotes the adoption and implementation
of anti–money laundering measures globally. In performing these
activities, the FATF collaborates with other international bodies
involved in combating money laundering. It does not have a tightly
defined constitution or an unlimited life span. It reviews its mission
every five years.
The FATF was established during the French presidency of the G-7
in 1989, in response to recognition of the threat that drug money laundering
posed for their banking and financial systems. The FATF’s initial
mandate was to examine the methods used to launder drug proceeds
and to develop recommendations for combating them. The 40
recommendations, developed during the first year, became the basis
for what was then an innovative implementation system. The FATF,
which had a tiny secretariat and was not a chartered international
organization, but only a voluntary association, initiated a system for
self- and mutual assessment. Under this system, each member would
first assess its own compliance with the 40 recommendations. Then
other members would visit the jurisdiction, question the authorities,
and reach their independent determination of where the jurisdiction
was failing to meet the recommended standards. This approach included
several innovations. First was the notion that technical experts
would develop standards that, over time, would bind their countries in
compliance even without entering into a formally binding international
agreement. Second was the concept of mutual evaluation, in
which a country would submit to peer review as a means of improving
its domestic capabilities.
The 40 FATF recommendations can be summarized as five basic
obligations:
• Criminalize the laundering of the proceeds of serious crimes and
enact laws to seize and confiscate them
• Oblige financial institutions to identify all clients, including all
beneficial owners of financial property, and to keep appropriate records
• Require financial institutions to report suspicious transactions
to competent national authorities and to implement a comprehensive
range of internal control measures
• Put into place adequate systems for the control and supervision
of financial institutions
184 winer and roule
• Enter into agreements to permit each jurisdiction to provide
prompt and effective international cooperation at all levels, especially
with regard to exchanging financial information and other evidence in
cases involving financial crime.26
In 1996, under the U.S. presidency, FATF expanded its mission to
cover money laundering involving all serious crimes, not just drug
trafficking. It also agreed to take on new developments in money laundering,
especially those involved with electronic funds transfers. It also
broadened its authority to include efforts to change the behavior of
nonmember jurisdictions. Accordingly, FATF developed a “black list”
of other countries whose practices were deemed to facilitate money
laundering and therefore were considered “noncooperative” with its objectives.
The development of a black list reflected a dramatic change in
approach, necessitated by growing recognition of the interdependence
of the global financial infrastructure and the inability of any jurisdiction
to protect itself in the face of bad practices in other jurisdictions.
By 2000 FATF had developed its initial list of noncooperative countries
and territories. To date, the threats of enhanced scrutiny or greater regulatory
barriers have been used against a number of jurisdictions but
imposed on none. The simple threat has been enough to cause essentially
any country targeted with immediate action to change its laws,
with Antigua, the Bahamas, Hungary, Indonesia, Israel, Liechtenstein,
Russia, St. Kitts and Nevis, and Vanuatu, among others, all taking
action in response to the threat of sanctions.
Neither FATF nor any of the regional bodies that replicate FATF
standards and conduct mutual assessments27 have focused on combating
money laundering involving illicit commodities apart from narcotics.
No attention has been given to the laundering of the proceeds of
coltan, oil and gas, tanzanite, timber, or gemstones, except a few references
to the use of diamonds and gold in connection with discussions of
terrorist finance. Accordingly, FATF and other bodies have yet to develop
typologies describing the mechanisms by which the funds from
these commodities are handled. This is an informational, regulatory,
and enforcement gap that no other international body has sought to fill.
Antinarcotics and Anticrime Standards and Norms
Only brief reference is made in this chapter to international instruments
governing antinarcotics and anticrime and their relationship to the
financial mechanisms used in resource exploitation. The two most important
of these are the 1988 Vienna convention and the 2000 Palermo
convention, each of which requires signatories to adopt anti–money
follow the money 185
laundering regulations and enforcement measures and to carry out mutual
assistance to combat, respectively, the production and trafficking of
illicit drugs and transnational organized crime. The Palermo convention
implicitly criminalizes the laundering of all proceeds of illicit commodities
extraction, as it covers all serious transnational crimes involving
more than one person. It pays scant attention to extraction-related criminal
activity, focusing largely on better-recognized crimes against private
persons and private property such as trafficking in persons, trafficking
in women for sexual exploitation, and trafficking in firearms. Notably,
it also criminalizes the laundering of the proceeds of corruption.
Private Sector Seal Initiatives
Seal initiatives represent a method by which private sector institutions
agree to abide by certain standards of corporate conduct in return for
being placed on a white list that provides either practical or public relations
benefits. Significant recent seal initiatives include the International
Chamber of Commerce rules of conduct to combat extortion and bribery
in international business transactions and theWolfsberg principles.
International Chamber of Commerce Rules of Conduct. Rules
developed by the International Chamber of Commerce in 1996 prohibit
extortion and bribery for any purpose, a broader standard than
the OECD convention’s focus on public officials. The rules also call on
governments to make their procurement procedures more transparent
and to condition procurement contracts on abstention from bribery,
including the requirement for antibribery certification from bidders.
The International Chamber of Commerce’s Standing Committee on
Extortion and Bribery is charged with promoting the corporate rules of
conduct; it could perhaps consider calling on major companies in the
forest products industry to participate in its proceedings and develop a
corporate code of conduct when bidding for concessions.
The Wolfsberg Principles. In October 2000, 11 leading international
banks working with Transparency International announced
agreement to a voluntary set of global anti–money laundering principles.
Initially, the Global Anti–Money Laundering Guidelines for Private
Banking applied solely to private banking, that is, to the accounts
of the extremely rich—those with deposits of $3 million to $5 million—
but the obligations they articulate have potentially broad applicability.
The guidelines are as follows:
• Adopt client acceptance procedures so that the banks accept “only
those clients whose source of wealth and funds can be reasonably
established to be legitimate,” including (a) taking reasonable measures
186 winer and roule
to establish the identity of its clients and beneficial owners before
accepting money; (b) demanding adequate identification before opening
an account; (c) determining the source of wealth, the person’s net
worth, and the source of the person’s funds; and (d) requiring two persons,
rather than just one, to approve the opening of an account
• Engage in additional diligence or attention in cases involving the
use of numbered or alternative-name accounts, high-risk countries,
offshore jurisdictions, high-risk activities, or public officials
• Updateclient fileswhentherearemajorchangesin controloridentity
• Identify unusual or suspicious transactions, follow them up, and
then decide whether to continue the business relationship with heightened
monitoring, end the relationship, or advise authorities
• Monitor accounts through some means
• Develop and implement a “control policy” to ensure compliance
with bank rules
• Establish a regular method of reporting on money laundering
issues to management
• Train bank employees involved in private banking on the prevention
of money laundering
• Require the retention of bank records that might be material to
anti–money laundering matters for at least five years
• Establish an “exception and deviation procedure that requires
risk assessment and approval by an independent unit” for exceptions
to the previous nine principles
• Establish an anti–money laundering unit at the financial
institution.28
The signatories to the Wolfsberg principles did not create a mutual
assessment or other evaluative mechanism, relying instead on an
honor system whereby reputational injury was considered an adequate
disincentive to any failure by a member to meet its public commitments.
In just two years, the Wolfsberg Group has extended its original
mandate twice. In January 2002 it issued a set of principles on the
suppression of the financing of terrorism, and in September 2002 it issued
a set of principles for correspondent banking, which has been one
of the areas of greatest vulnerability to money laundering for money
center banks. Major elements of the Wolfsberg principles for antiterrorism
include the following:
• Require strict adherence to “know your customer” policies by requiring
the proper identification of customers by financial institutions
and the matching of such identifications against lists of known or suspected
terrorists issued by competent authorities having jurisdiction
over the relevant financial institution. This principle further includes
follow the money 187
the requirement to implement procedures for consulting applicable
lists, taking steps to determine whether its customers are on the lists
of sanctioned persons or persons of interest to the government, and
reporting to the relevant authorities matches from lists of known or
suspected terrorists
• Identify high-risk sectors and activities
• Engage in heightened monitoring of unusual or suspicious transactions
indicative of terrorist finance.
Major elements of the Wolfsberg correspondent principles for
banking include the following:
• Make risk-based due diligence a component of evaluating all
financial institution accounts to determine whether higher scrutiny
should be given to their transactions because the jurisdiction in which
they are based has inadequate anti–money laundering standards, has
insufficient regulatory supervision, or presents a greater risk for crime,
corruption, or terrorist financing
• Review the location of owners, the corporate legal form of the financial
institution, the transparency of the ownership structure, as well
as the involvement of high-level officials and their associates, termed
“politically exposed persons,” in their management or ownership
• Review the customer base of each financial institution to determine
whether its clients may be at higher risk for money laundering or
terrorist finance
• Create an international registry by which financial institutions
can share information useful for conducting the due diligence specified
in the principles.
Each of these sets of principles is potentially applicable to combating
the financing of illicit commodities. The terrorist finance principles together
create a framework by which governments or international bodies
can match their customers against a government-endorsed list and
then monitor or freeze their assets, as the government that regulates
them may direct. The Panel of Experts on the Illegal Exploitation of
Natural Resources and Other Forms of Wealth of the Democratic Republic
of the Congo has created such a list, which highlights both the
opportunities and the pitfalls of such an approach. The list named a
number of persons and financial institutions as being in violation of
international sanctions without, in many cases, providing any background
on such violations, let alone evidence of them (UN Security
Council 2000). Any list provided to financial institutions for heightened
scrutiny or asset freezes must be subjected to a high standard of evidence
to minimize violations of due process and personal rights. The correspondent
banking principles potentially could be applied to customers
188 winer and roule
in general, not just financial institutions. Thus financial institutions participating
in the seal approach adopted by the Wolfsberg Group would
be required to vet all new accounts for possible money laundering risk,
including the laundering of proceeds from illegal extraction. In order
for due diligence to include a focus on illegal extraction, substantial
publicity and education would be required of regulators and financial
institutions to identify “red flags” indicating such activity and specific
examples of individuals or institutions laundering such funds.
Name-and-Shame Initiatives
The most prominent name-and-shame initiatives dealing with the
inappropriate handling of transborder financial activity have included
that of FATF, discussed above, and the OECD tax haven initiative,
discussed here.
As of the late 1990s, the growing recognition that lack of transparency
was creating substantial problems even for the most affluent
countries began to embrace the area of taxes. OECD came to recognize
that international tax evasion was linked to a host of other serious
threats to the global system; in the words of its general secretary, “There
are strong links between international money laundering, corruption,
tax evasion, and other international criminal activities. These illegal activities
are widespread and involve such sizeable sums that they can pose
a threat to the stability of the global system of finance and even the global
trading system” (Johnston 2000). In May 1998 OECD governments issued
a report on harmful tax competition, which led to the Forum on
Harmful Tax Practices, the Guidelines for Dealing with Harmful Preferential
Regimes in Member Countries, and finally, a series of recommendations
for combating harmful tax practices. The initiative adopted three
FATF elements. First, it developed a set of agreed standards to combat a
set of agreed problems; second, it put into place a system of multilateral
assessment of each jurisdiction’s implementation of the agreed standards;
third, it agreed to “name and shame” nonconforming jurisdictions
that would face loss of market access or other sanctions if they did
not take action. In four years, the initiative has had substantial results,
causing some targeted jurisdictions to change their laws immediately and
most others to agree to complete doing so by the end of 2005. TheOECD
standards are similar to those of the FATF and theWolfsbergGroup, and
their application to the financing of commodity exploitation would address
a number of the mechanisms by which the proceeds of illicit extraction
are converted from public to private ownership (OECD 2001):
• Ensure that information is available on beneficial (that is, actual)
ownership of companies, partnerships, and other entities organized in
the jurisdiction
follow the money 189
• Require that financial accounts be drawn up of companies organized
in the jurisdiction in accordance with generally accepted accounting
standards and that they be appropriately audited
• Put into place mechanisms for the jurisdiction to share information
pertaining to tax offenses with corresponding authorities in other
jurisdictions
• Ensure that its regulatory and tax authorities have access to
bank information that may be relevant for the investigation or prosecution
of criminal tax matters.
In particular, agreement to share information on the ownership of
companies, regardless of where they are located, to require appropriate
audits of each company organized in a jurisdiction, to require such
audits to become available to the public, at least for publicly traded
firms, and to match tax information with bank information and the
records maintained by the business of its activities all have potential
applicability to efforts to punish those exploiting revenue streams from
illicit commodity extraction.
Gaps and Possible Institutional Responses
Today a patchwork of initiatives for monitoring illicit commodities
involves numerous institutions, none of which has broad jurisdiction over
the tracking of natural resource commodities and the proceeds of their
exploration. Moreover, none of the initiatives has sought to develop a
reporting or disclosure mechanism to create documentation that would
simultaneously track the physical transactions and movement of commodities
and funds. The Publish What You Pay initiative would
provide a precursor to such tracking by providing documentation at
the front end of commodity transactions, such as oil and gas, that involve
highly concentrated markets of both sellers and buyers. Similarly,
the Wolfsberg initiative, which includes an obligation to exercise
heightened scrutiny of large private bank accounts, could also provide
a structure applicable to tracking the funds generated by the sale of
natural resources. The existing Wolfsberg principles already require
participating institutions to impose higher levels of scrutiny on certain
types of transactions in some regions to determine whether they might
be the proceeds of corruption. Thus they could help to create greater
accountability over the illicit proceeds of commodity exploitation,
should typologies for such exploitation and “red flags” be developed to
indicate that illicit proceeds from commodity extraction are being
laundered.
190 winer and roule
Current capacity limitations exist at the national and international
levels. Many national regulatory and law enforcement agencies deal
poorly with money laundering and the smuggling of goods that are
clearly illicit, such as narcotics. International organizations responsible
for developing harmonized standards to combat such smuggling, such
as the World Customs Organization and FATF, have tiny secretariats
and limited resources. Regional law enforcement agencies, such as
Europol for cross-border police investigations within the European
Union and Eurojust for cross-border prosecutions of such crimes,
remain in their infancy and, to date, have focused on traditional crimes
such as the smuggling of drugs and people. Existing certificate-of-origin
mechanisms are also in their infancy and face significant limitations
in enforcement. The example of the Kimberley process is instructive. A
certificate-of-origin system can be undermined by poor enforcement
and circumvented by intricate international smuggling networks. Lax
government controls in the major diamond-trading and -cutting centers
and the opaque, unaccountable nature of the diamond industry have
also been major obstacles in the struggle to root out conflict diamonds.
Other than diamonds, most types of natural resources linked to conflict
are not the subject of internationally agreed standards. For example,
no international rules or agreements presently address the issue of
illegal logging and conflict timber. The UN Forum on Forests, for instance,
does not have a specific mandate for such a purpose, although it
could prove a useful forum for international discussion. A certification
system might build on existing efforts by the Forest Stewardship Council
to ascertain whether timber is being produced in a sustainable manner.
The council effort, initiated in 1993, entails independent audits to
verify compliance with a series of requirements. Of particular interest
is its chain-of-custody certification, which seeks to trace the lumber or
furniture on consumer store shelves all the way back to the forest where
the trees were felled. Such a tracking system could determine whether
timber had been produced in conflict situations but would need to be
matched against financial transactions to determine whether the asserted
facts contained on certifications are authentic. This form of matching
system could also be used to trace diversions of commodities through
middlemen participating in the transactions as well as to identify the
physical and financial infrastructure (transportation vehicles, financial
institutions) used to move the illicit commodities.
Some of these gaps might be filled by the creation of an international
legal framework to cover the sale of natural resources used in conflict
or accompanied by serious corruption. Such a framework would focus
on establishing common tracking and disclosure mechanisms for the
extraction and sale of certain categories of commodities and extend the
follow the money 191
principles for international cooperation against money laundering to
that involving the proceeds of illicit extraction of natural resources. An
intergovernmental mechanism may also be needed to exercise oversight
over the implementation of such a framework and to integrate
work undertaken by international financial institutions and development
agencies by existing intergovernmental organizations such as the
World Customs Organization, CITES, and Interpol. Such a framework
and mechanism could cover a group of commodities, including gemstones,
oil and gas, precious metals, and timber, and establish standard
documentation and disclosure mechanisms that would be universally
applicable. Just as the Vienna convention and the Palermo convention
established national requirements for money laundering regulation
and enforcement and judicial cooperation covering narcotics and organized
crime, this framework and mechanism would focus on building a
common approach to handling both the commodities and the funds
they generate. The framework would resemble the recent Organization
of American States firearms convention and the UN firearms protocol,
as well as existing efforts by the World Customs Organization, by
requiring standard documentation for the commodities covered, an
approach outside the two UN conventions. Notably, the UN firearms
protocol and existing certification requirements of theWorld Customs
Organization focus on documenting licit movements of goods across
borders, highlighting illicit activity in the process. The firearms protocol
and the existing certification initiatives are to be implemented
largely by the private sector. A framework covering both the movement
of commodities-in-transit through certifications and the corresponding
financial movements would rely not only on the private sector involved
in handling the commodities but also on the financial institutions
already laboring to deal with drug money laundering, terrorist finance,
criminal money laundering, and the proceeds of corruption.
As this study suggests, there are very significant differences in the
market structure for different commodities in different situations. The
market for oil and gas tends to be concentrated, with few players.
Tropical timber has some concentration of markets among the end
users, but many players are capable of exploiting the timber. Coltan,
diamonds, and tanzanite more nearly resemble timber than energy,
with an extremely deconcentrated set of suppliers and an increasingly
narrow band of purchasers as the products move to the end users. Accordingly,
a framework covering all these commodities would need to
focus on the potential choke points through which each type of commodity,
and its financing, would be likely to pass.
Certain financial mechanisms used to handle the proceeds of illicit
extraction are already being addressed by initiatives to handle money
192 winer and roule
laundering and terrorist finance. These follow on FATF and OECD
recommendations and have received International Monetary Fund and
World Bank assistance. Offshore money laundering havens, jurisdictions
offering nontransparent international business companies, and
trusts that can be readily used as fronts are already under substantial
pressure to replace their current laws with regimes that meet prevailing
international standards. Geographic regions that remain largely uncovered
by money laundering and financial transparency frameworks,
especially the Middle East and most of Sub-Saharan Africa, will remain
the object of ongoing efforts to bring about reform regardless of
whether the financing of illicitly extracted natural resources is included
within the scope of the reform efforts.
Other important financial mechanisms used to launder the proceeds
of illicit resource extraction have yet to be subject adequately to international
regulatory and enforcement standards or action. Some of these
mechanisms, especially alternative remittance systems such as hawala
and hundi, are now being developed to counter terrorist finance. Other
mechanisms associated with illicit resource extraction, such as the use
of gold and precious metals to launder proceeds, have not yet been subject
to international disclosure rules. An effective response to illicit resource
extraction requires coverage of high-value barter commodities.
Developing a strategy to integrate such commodities in international
financial transparency and disclosure mechanisms might properly be
undertaken by an intergovernmental organization focused on combating
the extraction of illicit resources.
Any intergovernmental organization mandated to combat illicit
resource extraction must also work (a) to develop mechanisms by
which the financial movements of the proceeds can be incorporated into
the reporting of suspicious activity and due diligence requirements of
existing frameworks and (b) to devise mechanisms for enabling international
mutual legal assistance in connection with investigations of illicit
extraction. Such an organization would need to assure compliance by
the affected industries and promote a regulatory scheme that harmonizes
international standards rather than impedes legitimate trade.
One alternative to creating a new intergovernmental organization
would be for the G-8 to establish a steering group to review the recommendations
made here and in the other papers in this study and
to provide a consensus view of whether an international framework
and intergovernmental organization are necessary or whether existing
frameworks and organizations could be reoriented to deal with illicit
resource extraction. For example, theWorld CustomsOrganization has
extensive experience in developing standard certifications and perhaps
could develop such certifications for commodities that require more
follow the money 193
detailed information on chain-of-custody and payment mechanisms.
Similarly, the FATF might be asked to develop a set of typologies for
the laundering of the proceeds of various commodities and to recommend
procedures by which FATF members could implement appropriate
regulatory and enforcement actions to cover funds generated by
illicit resource extraction.
TheWolfsberg approach provides a possible third model for action.
The G-8 could ask that all relevant international or intergovernmental
entities with a role in combating illicit resource extraction meet with
representatives of the major sources of demand in the relevant markets:
oil and gas, timber, precious metals, and gemstones, together with
major participants in the key transportation markets (ground, sea, and
air) and the global financial services infrastructure. The mixed private
sector, public sector group, which could also include nongovernmental
organizations, may possibly establish principles for tracking the purchase,
sale, and flow of those commodities and the associated financial
mechanisms. An agreed plan of action could be reached, with designated
responsibilities for follow-up by each participant and a timetable
for completion of the mandated activities. The group would meet periodically
to discuss implementation issues and to report back to the G-8
on progress. Successes could be followed by additional mandates, and
alternative approaches could be developed to respond to inadequacies
in the regime.
A related approach would involve the development of further seal
for major market players among purchasers and sellers of commodities
subject to illicit extraction. Such “white lists” could include commercial
and government entities involved in commodity extraction as
well as the transportation and financial infrastructures handling the
commodities and the funds generated.
A necessary element of any approach will be continued research
and analysis. This chapter provides only a partial overview of the
mechanisms by which those engaged in illicit resource extraction handle
the proceeds of their activities.29 To date there have been no detailed
studies of the financial mechanisms used by the purchasers and
sellers participating in illicit resource extraction. Such studies would
provide greater texture and depth to the observations and analysis
put forth here and would require fieldwork in addition to this literature
review.
With these options in mind, and setting important areas for additional
research, the next section provides a series of recommendations
that could be included within a basic framework for combating illicit
resource extraction. The recommendations establish a basic framework
designed for universal application, covering the criminal justice
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system and law enforcement, the financial system and its regulation,
and international cooperation. The measures build on existing international
obligations and are designed to focus on disclosure, accountability,
and cooperation in cross-border trade and financial transactions
without impairing the freedom to engage in legitimate transactions or
threatening economic development.
Recommendations
The following constitutes a possible global framework for combating
illicit resource exploitation. It should be seen as an initial set of suggestions
to stimulate further analysis and review rather than as a finished
set of guidelines for adoption in its current form.
General Framework
Each country should take immediate steps to ratify and fully implement
all international conventions related to the oversight of illicit commodities.
An effective oversight mechanism should include increased
multilateral cooperation and mutual legal assistance in money laundering
investigations as well as prosecutions and extradition in money
laundering cases, where possible.
Role of Individual Firms in Combating Illicit Commodities
The role of individual firms in combating illicit commodities needs to
be strengthened in the following areas: (a) rules for identification and
record keeping; (b) measures to cope with the problem of countries
with no or insufficient anti–money laundering measures; (c) measures
to monitor, detect, and prosecute illicit trafficking; and (d) the implementation
and role of regulatory and other administrative authorities.
Identification and Record-Keeping Rules. First, all industries
should label the origination point of the product through a central
database that includes the official or other reliable identifying document
and should record the identity of their clients, either occasional or
regular, when establishing business relations or conducting transactions.
In order to fulfill identification requirements concerning legal entities,
financial institutions should, when necessary, take measures (a)
to verify the legal existence and structure of the customer by obtaining
from a public register or the customer proof of incorporation, including
information concerning the customer’s name, legal form, address,
directors, and provisions regulating the power to bind the entity and
follow the money 195
(b) to identify and verify that any person acting on behalf of the customer
is authorized to do. Second, firms should maintain, for at
least five years, all necessary records on transactions, domestic or international,
to enable them to comply with official requests for information.
Such records must be sufficient to permit reconstruction of
individual transactions so as to provide evidence for criminal prosecution
if necessary. Financial institutions should keep records on
customer identification (for example, copies or records of official identification
documents like passports, identity cards, driving licenses, or
similar documents), account files, and business correspondence for at
least five years after the account is closed. These documents should be
available to domestic authorities in the context of relevant criminal
prosecutions and investigations.
To improve the diligence of firms, if a financial institution suspects
that funds stem from a criminal activity, including the evasion of taxes
due on the sale of natural resources, or represent the proceeds of any
form of corruption, it should be required to report promptly these suspicions
to the authorities.
Financial institutions should develop programs to assure proper
oversight of commodities. These programs should include, at a minimum,
(a) the development of internal policies, procedures, and controls, including
the designation of compliance officers at the management level, and
adequate screening procedures to ensure high standards when hiring
employees, including reference to prevention and detection of transactions
involving the proceeds of illicit resource extraction; (b) issuance of
instructions regarding red flags for transactions or accounts that may involve
the proceeds of illicit resource extraction; (c) an ongoing employee
training program; and (d) an audit function to test the system.
Measures to Cope with the Problem of Countries with No or
Insufficient Anti–Money Laundering Measures. Firms should ensure
that the recommended principles are also applied to branches and
majority-owned subsidiaries, wherever they are located, including in
countries that do not apply or insufficiently apply these recommendations,
to the extent that local applicable laws and regulations permit.
When local applicable laws and regulations prohibit this implementation,
competent authorities in the country of the parent institution
should be informed that the financial institution cannot apply these
recommendations.
Firms should give special attention to business relations and transactions
with persons, including companies and financial institutions, from
countries that do not or insufficiently apply these recommendations.
Whenever these transactions have no apparent economic or visible
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lawful purpose, their background and purpose should, as far as possible,
be examined, and the findings should be established in writing and be
available to help supervisors, auditors, and law enforcement agencies.
Other Measures to Monitor, Detect, and Prosecute Illicit Trafficking.
Countries should consider implementing feasible measures to detect or
monitor the physical cross-border transportation of specific commodities.
They should consider the feasibility and utility of a system where
banks and other financial institutions and intermediaries report all domestic
and international currency transactions above a fixed amount to
a national central agency with a computerized database, available to
competent authorities for use in money laundering cases and subject
to strict safeguards to ensure proper use of the information.
Countries should further encourage firms to develop modern and
secure techniques of commodity management, including increased use
of checks, payment cards, direct deposit of salary checks, and book entry
recording of securities to encourage the replacement of cash transfers.
Countries should take notice of the potential for abuse of shell
corporations by money launderers and should consider whether additional
measures are required to prevent unlawful use of such entities.
Implementation and Role of Regulatory and Other Administrative
Authorities. The authorities supervising firms should ensure that the
supervised institutions have adequate programs to guard against trafficking
in illicitly extracted resources. These authorities should cooperate
with and, on request, lend expertise to other domestic judicial or
law enforcement authorities in money laundering investigations and
prosecutions.
The authorities should establish guidelines to assist firms in detecting
suspicious patterns of behavior by their customers. It is understood
that such guidelines must develop over time, will never be exhaustive,
and will primarily serve as an educational tool for the personnel of
financial institutions.
The authorities regulating or supervising financial institutions
should take the necessary legal or regulatory steps to guard against
control or acquisition of a significant participation in firms by criminals
or their confederates, including any person or entity found to
have been involved in illicit resource extraction.
Strengthening of International Cooperation
International cooperation needs to be strengthened in the following
areas: (a) administrative cooperation; (b) exchange of information relating
to suspicious transactions; (c) cooperation in confiscation, mutual
follow the money 197
assistance, and extradition; (d) improved mutual assistance; (e) development
of further standards; and (f) oversight.We offer recommendations
for each of these in turn.
Administrative Cooperation. National administrations should
consider recording, at least in the aggregate, international flows of commodities
through a series of tracking measures, including Global Positioning
System and import-export records from relevant states. Such
information should be made available to an international oversight
body.
International authorities, perhaps Interpol and the World Customs
Organization, should be given responsibility for gathering and disseminating
information to authorities about developments in combating the
trafficking of illicit commodities. Central banks and bank regulators
could do the same in their network. National authorities, in consultation
with trade associations, could then disseminate this information to
financial institutions in individual countries.
Exchange of Information Relating to Suspicious Transactions Involving
Illicit Commodities. Each country should make efforts to
improve a spontaneous or upon-request international information
exchange relating to suspicious transactions and to persons and corporations
involved in those transactions. Strict safeguards should
be established to ensure that this exchange of information is consistent
with national and international provisions on privacy and data
protection.
Cooperation in Confiscation, Mutual Assistance, and Extradition.
Countries should try to ensure, on a bilateral or multilateral basis, that
different knowledge standards in national definitions—that is, different
standards concerning the intentional element of the infraction—do
not affect the ability or willingness of countries to provide each other
with mutual legal assistance. The signing of memoranda of understanding
in instances where treaties are not viable may be especially important
for the oversight of illicit commodities. The use of GPS systems
and import records from allied states could assist in the oversight.
International cooperation should be supported by a network of bilateral
and multilateral agreements and arrangements based on generally
shared legal concepts, with the aim of providing practical measures
to affect the widest possible range of mutual assistance covering illegal
natural resources.
Focus of Improved Mutual Assistance on Combating Illicit Commodities.
Cooperative investigations among countries’ authorities
should be encouraged. There should be procedures for mutual assistance
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in criminal matters regarding the use of compulsory measures, including
the production of records by financial institutions and other persons, the
search of persons and premises, and the seizure and gathering of evidence
for use in money laundering investigations and prosecutions and
in related actions in foreign jurisdictions.
There should be authority to take expeditious action in response
to requests by foreign countries to identify, freeze, seize, and confiscate
proceeds or other property of corresponding value to such proceeds,
based on the extraction or trafficking of illicit commodities.
To avoid conflicts of jurisdiction, consideration should be given to
devising and applying mechanisms to determine the best venue for
prosecuting defendants in the interests of justice in cases that are subject
to prosecution in more than one country. There should also be
arrangements for coordinating seizure and confiscation proceedings
that may include the sharing of confiscated assets.
Countries should have procedures in place to extradite, where possible,
individuals charged with crimes related to illicit commodities.
Each country should legally recognize the extraction and trafficking
of illicit commodities as an extraditable offense. Subject to their legal
frameworks, countries may consider simplifying extradition by allowing
direct transmission of extradition requests between appropriate
ministries, extraditing persons based only on warrants of arrests or
judgments, extraditing their nationals, and introducing a simplified
extradition of consenting persons who waive formal extradition
proceedings.
States, entities, or individuals found to be in violation of these recommendations
should be subject to sanctions, including the freezing
of financial accounts and travel restrictions.
Development of Further Standards. The Customs Cooperation
Council, which is associated with the World Customs Organization,
should be asked to review the certification form it uses to specify countryof-
origin to determine whether it should contain additional information
to facilitate identification and tracking of licit goods and financial
payments and thereby distinguish them from illicit goods.
FATF should be asked to review its 40 recommendations to determine
whether they provide an adequate basis for combating the
laundering of the proceeds of illicit resource extraction and to develop
recommendations or other mechanisms to improve the reporting of suspicious
activities involving the proceeds of illicit resource extraction.
Transparency International and the Wolfsberg Group should be
asked to determine whether they can agree on additional guidelines
that could be used to assist financial institutions seeking to avoid being
follow the money 199
used to launder the proceeds of illicit resource extraction and related
corrupt activities.
An ongoing consultative process should be created with the mandate
to reach agreement on methods to improve reporting, disclosure, and
tracking of natural resources in international trade, together with the
financial aspects of the transactions. This process should be preceded
by a special meeting of experts from relevant stakeholders, including
representatives of other international and intergovernmental organizations,
governments, resource extraction industries, nongovernmental
organizations, and financial institutions to assess whether these or
other standards could become the basis for a global framework to
combat illicit resource extraction.
Oversight. Consideration should be given to creating an international
organization or intergovernmental process that includes a secretariat
to coordinate efforts to combat illicit resource extraction and to
monitor implementation of this legal framework and related initiatives.
Such an organization or process would also be responsible for
administering the ongoing consultative process specified in the previous
recommendation.
Appendix 5.1. Coltan and the Democratic
Republic of Congo
Coltan is composed of a mixture of the elements columbium (or
niobium) and tantalum, an extremely heavy element used throughout
the electronics industry to carry a charge. The market price for coltan
has ranged from $20 a pound in 1990 to $350 a pound in December
2000, retreating to prices of $100 to $120 per pound since then
(Zajtman 2001). Coltan mining during the Congolese civil wars was
undertaken by a number of different military forces. There are no official
figures for the revenues derived from illicit coltan sales during the
years of civil war, although one estimate places coltan revenues for the
Rwandan army alone at $20 million a month in 2000 (Ware 2001).
Tantalum is an increasingly important component of high-end consumer
electronics, especially automobiles, cellular phones, and computers.
The demand prompted many international companies to import
coltan from the Democratic Republic of Congo through Rwanda. The
United Nations (UN) expert panel identifies 85 multinational businesses
that it says violated ethical guidelines set down by the Organisation
for Economic Co-operation and Development (OECD). They
include banks as well as gem and mining firms based in Belgium,
200 winer and roule
Canada, Germany, the United Kingdom, and the United States (UN
Security Council 2000; see also Montague 2002).
In addition to coltan, illicit trade in cobalt, coffee, diamonds, gold,
and timber contributed to what is sometimes referred to as Africa’s
“first world war,” in which the death toll approached 4 million in
three years; of these, coltan is the most lucrative.30 Rebel forces and
armies from neighboring states funded their operations through fullfledged
commercial operations in coltan, thus helping to prolong the
conflict.
The Congolese civil war enabled cross-border security forces and
businesses to play a critical role in resource exploitation. The coltan
mining areas in the eastern region of the Democratic Republic of
Congo have no significant roads and minimal employment opportunities
other than mining. As a result, coltan mining was a central means
of obtaining food and other supplies from the military forces occupying
the area. Profits earned from Congolese coltan financed a large
part of Rwanda’s military budget. For example, according to the UN
panel of experts, after Rwandan army soldiers took control of a
mine near Kasese, they awarded a single firm the right to commercialize
the ore. The company paid approximately $1 million per month to
the Congolese Assembly for Democracy (RCD), a rebel movement. By
2001, the RCD controlled a near-monopoly on the exploitation of
coltan through the firm, which reportedly paid the RCD $10 per kilogram
of exported coltan until the RCD abolished the monopoly late in
the year.
The UN expert panel has provided the most detailed information
and analysis available on the logistical mechanisms used to exploit
natural resources in the Democratic Republic of Congo (UN Security
Council 2000). The panel’s report describes the specific military
forces controlling the coltan, individuals transporting it from eastern
Democratic Republic of Congo, and various commercial middlemen
and ultimate purchasers of the coltan. The mechanisms described include
elaborate multiparty transactions involving false documents on
country of origin. However, the report does not specify the financial
mechanisms used to pay for the complex logistical transactions (UN
Security Council 2000, par. 79–82). Notably, these are likely to involve
not the Democratic Republic of Congo itself, but its neighbors.
The country has not had a modern financial system for some time.
According to the head of its central bank in late 2001, it is still common
practice for those in business in the Democratic Republic of
Congo “to eschew regular banking channels to transfer funds from,
say, Kinshasa to Lubumbashi. Packing the cash in a suitcase and catching
the next flight could save a wait of 30 days.”31 Throughout the civil
follow the money 201
war, the country continued to have access to international banks, both
from local offices of major banks and from local banks that maintained
correspondent accounts with major banks.With control of coltan, it is
logical that rebel armies would repatriate excess funds to their home
countries. Indeed, reports by both nongovernmental organizations operating
in the Democratic Republic of Congo and the UN expert panel
link neighboring officials with profiteering and suggest that they used
banks in neighboring countries to handle the funds (see “Four Companies
Named” 2000; UN Security Council 2000). Regional financial institutions
also remained engaged in the Democratic Republic of Congo
throughout the conflict, and some profited directly from it.
The Democratic Republic of Congo has no functioning government
in the coltan-extracting areas. It is not surprising that the various military
forces that controlled the mining areas applied no regulatory or
enforcement measures except the use of force against their enemies.
Regulatory or enforcement action would be possible only if the country’s
neighbors were to undertake such action. Instead, the neighbors
sought to profit from the civil war. In general, these countries have
poor regulation and enforcement of money laundering laws. The failure
is one of both political will and institutional capacity.
Given the ongoing conflict, the Democratic Republic of Congo fails
to meet the most rudimentary international anti–money laundering
norms. Regulatory and enforcement gaps include the following:
• No meaningful measures by financial institutions to obtain information
about the true identity of the persons on whose behalf an
account is opened or a transaction conducted
• No requirements to report suspicious transactions
• No programs in financial institutions against money laundering,
such as internal policies, procedures, and controls, or screening procedures
to ensure high standards when hiring employees
• No measures to detect or monitor the physical cross-border
transportation of cash and bearer negotiable instruments
• No laws banning the use of anonymous accounts or accounts in
obviously fictitious names
• No barriers in practice to the laundering of funds by essentially
any person for any purpose, other than the logistical barrier of placing
funds in a banking system that is still based largely on outdated practices
and technologies.
In 2002 the International Monetary Fund announced a program of
technical assistance for the Democratic Republic of Congo, which
includes reforms to the banking sector. Regardless of such reforms, the
exercise of control over coltan mines by foreign security and rebel forces
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means that the Democratic Republic of Congo with the best of intentions
will not be able, by itself, to discourage the exploitation of coltan.
Very little information is available specifying the particular financial
institutions and financial mechanisms most involved in handling
conflict coltan, although it is likely they are similar to those used in
handling illicit diamonds and other commodities. The lack of information
does not hide the basics of the trade, however, which involve
(a) military forces (b) self-financing through (c) resource exploitation
involving (d) the sale of coltan from local, low-paid miners to (e) intermediaries
on the country’s borders who, in turn, (f) sell the coltan
to middlemen from more developed countries by making payment of
electronic funds to (g) neighboring banks. In turn, these banks conduct
transactions upstream with financial institutions based in major financial
markets and downstream with local institutions created in the
Democratic Republic of Congo to take advantage of the profits of the
war. The breakdown in governance did not create a corresponding
breakdown in the payments system. Instead, local, regional, and international
financial institutions adapted to the conditions created by the
war to continue to provide services, without regard to the provenance
of the goods sold, the sellers of the goods, the buyers of the goods, or
the source or purposes of the funds involved in the transactions. In
short, rather than constituting a technical failure susceptible to technocratic
solutions, the exploitation of coltan in the Democratic Republic
of Congo represented an ongoing political problem arising out
of decisions of parties throughout the region to exploit coltan and the
Democratic Republic of Congo rather than to cut off the trade and
finances used to maintain the war. Accordingly, even if the sensible
suggestions for reform made by the UN panel of experts were put into
place, regional agreement and regional corrective action are needed to
address the financial mechanisms sustaining conflict in the Democratic
Republic of Congo.32
Appendix 5.2. Narcotics and Terrorists
Since the decline of state sponsorship of terrorism, terrorist groups have
increasingly turned to the sale of illicit drugs to finance their operations.
Indeed, in 1994, Interpol’s chief drugs officer, Iqbal Hussain
Rizvi, observed, “Drugs have taken over as the chief means of financing
terrorism” (Reuters News Agency, December 15, 1994). In every
case where large quantities of illicit narcotics have been produced and
transported to licit markets, the illicit drug activity, over time, has
drawn terrorist organizations. Links between terrorist organizations
follow the money 203
and drug traffickers take many forms, ranging from facilitation, protection,
transportation, and taxation to the terrorist organization
itself trafficking in the drugs to finance its activities. Traffickers and
terrorists have similar logistical needs to move illicit goods, people,
and money, and relationships between them often benefit both. The
military skills, weapons supply, and access to clandestine infrastructure
possessed by terrorists can help traffickers to move illicit drugs. At
the same time, drug traffickers can provide terrorists with both drugderived
revenues and expertise in money laundering. Moreover, both
groups rely on corrupt officials to assist them in moving illicit goods,
people, and money across borders. Both types of organizations tend to
rely on a structure of cells to accomplish their goals, with the members
of local cells responsible for carrying out operations on a day-to-day
basis. Drug traffickers and terrorists also use similar financial mechanisms:
bulk cash smuggling, front companies, and multiple bank accounts
in the name of such fronts, together with alternative remittance
systems (hawala) or black market currency exchanges.
Drugs have financed terrorist groups in many regions in conflict, including
Europe, Latin America, the Middle East, South Asia, Southeast
Asia, and the former Soviet Union. Major cases include the Shining
Path in Peru from the 1980s through the 1990s, the FARC (Revolutionary
Armed Forces of Colombia), ELN (National Liberation Army),
and AUC (United Self-Defense Forces of Colombia) in Colombia from
the 1980s to the present, Al-Qaeda and Kashmiri separatist groups
operating in South Asia, the Tamil Tigers of Sri Lanka, Hezballah in
Lebanon, members of the Irish Republican Army, the Basque Fatherland
and Liberty Party, and the United Wa State Army in Myanmar, among
others. Such groups tend to intensify their drug trafficking and their
terrorist activities in parallel with intensified civil conflict.
The most successful use of narcotics to fund terrorist activities was
overseen by the Al-Qaeda network, which received millions of dollars
through the production and distribution of opium. Prior to the U.S.-led
invasion of Afghanistan, the Taliban and Al-Qaeda produced thousands
of metric tons of opium each year in 18 of the 31 Afghan provinces.
Opium cultivated by Al-Qaeda has been smuggled through neighboring
Central Asian states and transported to distribution networks in East
Africa. Although the Taliban officially banned the cultivation of opium
poppies in July 2000, a UN Security Council report finds that the move
was aimed at boosting the price of heroin, while the Taliban retained
large stocks of the drug to continue to supply the market (“Afghan
Opium Threatens” 2001). The Taliban also taxed heroin laboratories
and heroin and opium convoys passing through Taliban checkpoints,
charging producers and smugglers 10–20 percent of the total value of
204 winer and roule
the wholesale opium, with the tax collected by village mullahs for the
leadership in Kabul. During the period of Taliban rule, the military and
security forces of the Taliban and Al-Qaeda were intermingled. Because
of the use of alternative remittance systems and an absence of oversight
of financial transactions in Southwest Asia, it is not possible to trace
opium profits from Afghanistan to particular Al-Qaeda operations.
In Colombia, the enormous profits created from the drug trade
have enabled FARC to establish a vast and sophisticated military and
financial network. This network was responsible for the sustained
growth and success of FARC throughout the 1990s. The drug trade,
combined with other sources of funds (kidnappings, road tolls, and
robberies), has enabled the continued purchasing of large amounts of
weapons, including sophisticated surface-to-air missiles as well as
heavy weaponry and military vehicles (Kinsell 2000). With more than
half of FARC’s funds coming from the drug trade, some $250 million
to $300 million annually, drug cartels have become FARC’s partners
in maintaining its capacity to operate against the government. FARC
commonly purchases arms and equipment with large amounts of cocaine
(Kinsell 2000). It is believed that FARC has an annual income of
$500 million to $600 million (Klepak 2000).
While drug traffickers may receive the proceeds of drug sales at various
stages of the chain of distribution, from opium or coca farmers all
the way through small urban dealers, terrorist groups that control
national territory receive funds almost entirely at the first stages of
production—that is, at the location of extraction. These terrorist
groups typically receive their share of narcotics funds in cash and then
seek to avoid cross-border currency controls by placing the funds in
local financial institutions that are willing to accept drug proceeds.
Alternative remittance systems, such as hawala and black market
pesos, become central to the placement function, permitting terrorist
groups to move funds to where they need them. Other techniques for
hiding drug funds often rely on barter, or substitute commodities, for
cash, such as gold or precious gems. It is sometimes said that terrorist
finance differs from money laundering in that terrorists take clean
money and hide it to fund criminal activities, while money launderers
take dirty money and hide it to fund lawful activities. In the area of
terrorism funded by narcotics, however, the terrorists use precisely the
same infrastructure for handling their funds as do drug traffickers.
Systems that are open to drug money laundering prove to be equally
as open to terrorist money laundering, except that the identity of the
collusive parties may be colored by ideological overlays not present
in the context of commercial drugs. The differences between money
laundering by terrorist organizations in Latin America, Southeastern
follow the money 205
Europe, and Southwest Asia are more the result of minor regional differences
in mechanisms than of operational distinctions. With that in
mind, the following financial mechanisms have been used to launder
drug funds:
• Exploitation of poor governance to provide safe havens for those
generating drug wealth in source countries and making payoffs to underpaid
officials in such regions. This feature accompanies the use
of narcotics funds by terrorists in Latin America (Colombia, Peru),
the Middle East (historically, Lebanon), Southeast Asia (Cambodia,
Myanmar, the Philippines), and Southwest Asia (Afghanistan,
Pakistan).
• Reliance on ideologically sympathetic corrupt officials to facilitate
the placement of drug funds for terrorist groups. This phenomenon
has been especially important in Pakistan for both Al-Qaeda and
various Kashmiri militant groups but may have played a role in the
Andes (Colombia, Peru), Lebanon (Hezballah), and Southeast Asia
(Cambodia, Myanmar).
• The use of long-established money laundering centers, such as
Dubai, Indonesia, and Panama, for placement of funds, before moving
them to jurisdictions that previously paid little attention to terrorism,
such as Kenya, Malta, and Singapore.
• Reliance on nontraditional methods of transferring currency,
including hawalas and cash couriers, and then infiltrating these funds
into the formal financial system.
• Physical transportation through complacent or collusive banks
or other financial institutions, typically located in developing countries
adjacent to countries producing the drugs. For example, FARC is believed
to have a series of such banks operating in Ecuador to facilitate
the transfer of funds outside of Colombia. From there, FARC can
manage its finances electronically, using computers and accessing its
accounts online from the jungle. Arms shipments have frequently been
arranged using this method, minimizing risk (Klepak 2000).
• Camouflage of terrorist finance through import-export businesses,
such as buying and selling honey, fish, or grain.
• Collusion with otherwise legitimate businesses that work with
collusive financial institutions to invest terrorist funds in legitimate
real estate and business ventures (Klepak 2000).
• Investment of the proceeds of narcotics trafficking in real estate.
Real estate investment is a traditional refuge for the proceeds of
drug trafficking, and traffickers have controlled substantial elements
of the urban construction of luxury hotels and resorts in neighboring
countries.
206 winer and roule
Prior to the September 11 terrorist attacks, there were only minimal
global efforts to target terrorist finance per se. Few countries had ratified
the only significant international treaty covering the issue: the
1999 United Nations Convention for the Suppression of the Financing
of Terrorism. As a result, the convention had yet to come into effect.33
The principal anti–money laundering organizations, including the
Financial Action Task Force on Money Laundering (FATF), had yet to
take up terrorist finance in a meaningful way. After September 11, the
FATF issued eight special recommendations on terrorist financing.
These included (1) ratifying the 1999 UN convention, (2) criminalizing
terrorist finance and money laundering, (3) freezing and confiscating
terrorist assets, (4) requiring financial institutions to report suspicious
activities related to terrorism, (5) calling for international cooperation
and the sharing of information on terrorist finance and for
countries to take measures to ensure they do not provide safe harbor
to terrorist financiers, (6) taking measures to regulate alternative remittance
systems, (7) taking measures to require financial institutions
to include accurate and sufficient information on wire transfers to
permit transactions linked to terrorism to be traced to their source,
and (8) reviewing the adequacy of laws and regulations of nonprofit
organizations, such as charities, to discourage terrorist finance.34 These
very general recommendations have yet to be implemented in the countries
most central to the placement of terrorist funds or, in a meaningful
way, in countries ideologically sympathetic to particular terrorist
causes. Generally, they add little to existing requirements for enforcement
of anti–drug money laundering, in effect adding terrorist finance
to the preexisting framework for anti–money laundering regulation
and enforcement established by the FATF over the previous 10 years.
A few of the recommendations, however, are potentially significant,
especially the recommendations to require registration of alternative
remittance systems, regulation of nonprofit organizations, and adequate
documentation of wire transfers. Notably, none of them addresses
the relationship of terrorism to the exploitation of drugs or any other
form of natural resource, focusing solely on the identity of the persons
moving the funds (that is, terrorist groups).
The global effort to combat terrorist finance is still in its infancy, and
there has yet to be any particular focus in regulatory or enforcement
efforts on the relationship between the finance of terrorism and drug
trafficking. To the contrary, enforcement efforts against narcotics and
terrorism have tended in most governments to remain discrete, with
limited cross-fertilization between those responsible for combating
each problem. Although there is relatively limited information on how
terrorists move the proceeds of narcotics to fund their operations, the
follow the money 207
information that is available suggests that terrorists use essentially the
same infrastructure and armamentarium as do traffickers, from bulk
cash to barter, from alternative remittance systems to front companies.
They also use many of the same jurisdictions and even the same financial
agents, relying on many of the same mechanisms to prevent the
tracing of their funds back to their source. The effort to combat
narcotics-financed terrorism, therefore, requires similar solutions as
the effort to combat narcotics-financed crime and corruption more
generally. These solutions begin with ensuring that formal financial institutions
maintain barriers against money of uncertain provenance,
monitoring those barriers, and sanctioning those that fail to maintain
standards. Although such standards are increasingly being adopted,
even in countries where corruption is endemic, too often they remain
inspirational only. In countries where governance is weakest, and terrorists
comparatively strong, such standards remain largely absent
and, when present at all, systematically ignored. To date, despite the
name-and-shame process for noncooperative countries and territories
initiated by the Financial Action Task Force, sanctions have not actually
been imposed on any country, as potential targets enact laws that
bring them in formal compliance with international standards. It is too
early to determine whether the new frameworks that were established
in many countries during 2001 and 2002 will be enforced in practice.
Without such enforcement in the jurisdictions where narcotics are
placed, the targets of terrorism in other jurisdictions are likely to remain
largely unprotected, absent controls on access from the poorly regulated
or lax jurisdictions.
Notes
1. These include the Caribbean Financial Action Task Force (1990), the
Asian-Pacific Group (1997), the Financial Action Task Force on Money Laundering
in South America (2000), and the Financial Action Task Force on
Eastern and Southern Africa (1999) to undertake assessments of anti–money
laundering vulnerabilities and enforcement capacities. They also include
Organization of American States conventions against money laundering
(December 1995, amended October 1998), the European Union’s First and
Second Money Laundering Directives (1991 and 2001, respectively), and, to
some extent, the work undertaken by the Basel Committee of Bank Supervisors
in its current initiative (2000–03) to revise standards for the treatment
of bank capital, which would include certain provisions pertaining to risks
associated with lack of transparency.
208 winer and roule
2. Current membership includes the securities regulators and enforcement
agencies of approximately 60 countries.
3. The Wolfsberg Group consists of the following leading international
banks: ABN Amro, Banco Santander Central Hispano, Bank of Tokyo-
Mitsubishi, Barclays Bank, Citigroup, Credit Suisse Group, Deutsche Bank,
Goldman Sachs, HSBC, J. P. Morgan Chase, Société Générale, UBS AG. See
www.wolfsberg-principles.com.
4. FATF is engaged in a major initiative to identify noncooperative countries
and territories in the fight against money laundering. Specifically, this has meant
the development of a process to seek out critical weaknesses in anti–money laundering
systems, which serve as obstacles to international cooperation. The goal
is to reduce the vulnerability of the financial system by ensuring that all financial
centers adopt and implement measures for the prevention, detection, and punishment
of money laundering according to internationally recognized standards.
In June 2000, 15 jurisdictions (Bahamas, Cayman Islands, Cook Islands,
Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue,
Panama, the Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the
Grenadines) were named as having critical deficiencies in their anti–money
laundering systems or a demonstrated unwillingness to cooperate in anti–money
laundering efforts. In June 2001, FATF updated the list: four countries left the
list (Bahamas, Cayman Islands, Liechtenstein, and Panama), and six were added
(Egypt, Guatemala, Hungary, Indonesia, Myanmar, and Nigeria). In September
2001, two countries were added (Grenada and Ukraine), and in June 2002 four
countries were removed (Hungary, Israel, Lebanon, and St. Kitts and Nevis).
5. See chapter 4 and appendix 4.1 for a description and analysis of the
Kimberley process and www.kimberleyprocess.com.
6. Countries that exemplify this model might include Botswana (diamonds),
Canada (timber), and Norway (oil). An oil counterexample is Angola. Iraq’s
handling of its oil sales includes both licit and illicit resource extraction.
7. A summary of many of the efforts is set forth in Geditsch and others
(2001).
8. For definitional purposes, terrorists funded by illicit commodities are
groups whose violence is directed principally at civilian targets and thus can be
readily characterized as terrorist in nature, while rebel groups funded by illicit
commodities are groups engaged in military activity directed against a government.
In practice, the two categories are often difficult to distinguish.
9. United Nations (2000). According to recent press accounts, Taylor has
facilitated terrorist finance through diamond smuggling involving agents of
Al-Qaeda, taking bribes in return for providing safe harbor to financial officers
of the terrorist organization. See Farah (2002).
10. Each year, the U.S. Department of State publishes an “international
narcotics control strategy report” (for example, see U.S. Department of State
2001), which provides an overview of drug trafficking throughout the world.
follow the money 209
In the course of its country-by-country assessments, it has provided extensive
information on the use of narcotics proceeds by terrorist groups in each of the
major illicit drug–producing areas. During the period of 1994 through 1999,
there was no exception to this phenomenon: wherever substantial amounts of
illicit narcotics were produced, terrorists or rebel groups were taking advantage
of drug profits.
11. For terrorists, gold and gemstones have generally been vehicles for laundering
money, rather than commodities to be exploited. Since the September 11,
2001, terrorist attacks, numerous public reports have highlighted these
mechanisms.
12. The examples provided are illustrative rather than exhaustive.
13. Many other studies have undertaken considered reviews and assessments
of the impact of sanctions on areas of conflict. See, for example,
Cortright and Lopez (2002); Hufbauer, Schott, and Elliott (1990). Adequate
consideration of this topic is beyond the scope of this chapter. The following
brief discussion of sanctions is offered only as a summary relevant to financial
mechanisms pertaining to illicit commodities transactions in zones of
conflict.
14. Interviews of former U.S. ambassador for the implementation of the
Dayton Accords, Robert Gelbard, November 2002, and of former U.S. special
envoy to the Balkans, James O’Brian, March 2002, each by Jonathan Winer.
15. As of November 2002, 166 countries were signatories to the Vienna
convention. Two notable exceptions remain Cambodia and Myanmar. See
www.vienna.convention.at/.
16. We do not address illicit resource purchases by governments as a matter
of government policy, which raise different issues from illicit resource sales
by officials within a government acting in their individual capacity.
17. A U.S. Central Intelligence Agency chronology of nuclear smuggling
from November 1993 through March 1996 lists more than 70 reported incidents
involving nuclear material. See www.cia.gov/cia/public_affairs/speeches/
archives/1996/go_appendixa_032796.html.
18. Article III, Regulation of Trade in Specimens of Species Included in
Appendix I, CITES.
19. Article VIII, CITES.
20. The UN firearms protocol was, in turn, based on a ground-breaking
regional convention, the Inter-American Convention Against the Illicit
Manufacturing of and Trafficking in Firearms, Ammunition, Explosives, and
Other Related Materials adopted by the Organization of American States,
November 4, 1997, signed by 33 of the 34 member states. The Organization
of American States firearms convention requires signatories not to export,
import, or permit the transit of weapons except when the movement of the
firearms is simultaneously lawful in the countries of export, import, and transit.
The treaty mandated not only end-user certifications but also the labeling
210 winer and roule
of all firearms with unique markers at the time of manufacture and the time
of import.
21. This section is included for the sake of a complete review that analyzes
the financial aspects of commodity control regimes and is necessarily incomplete
given the scope of the chapter. A more detailed and precise discussion of
the reporting of resource revenues, especially in oil and timber, is set forth in
chapter 4.
22. “Active” bribery is defined as the offering or making of a bribe by the
person or entity seeking to influence official action; “passive” bribery is the request
for or acceptance of a bribe by an official offering to take government
action on behalf of a private interest.
23. OECD Convention on Combating Bribery of Foreign Public Officials
in International Business Transactions. See www.oecd.org/pdf/M00017000/
M00017037.pdf.
24. For copies of the reports of member states and related documents, see
www.un.org/Docs/sc/committees/1373/.
25. For a complete description of FATF initiatives related to terrorist
finance, see www1.oecd.org/fatf/TerFinance_en.htm.
26. The full text of the FATF’s 40 recommendations is available at the
FATF’s website at www.oecd.org/fatf.
27. These are the Asia/Pacific Group on Money Laundering; the Caribbean
Financial Action Task Force; the Council of Europe Select Committee of
Experts on the Evaluation of Anti–Money Laundering Measures; the Eastern
and Southern Africa Anti–Money Laundering Group; and the South American
FATF. Only two regions—Central and Western Sub-Saharan Africa and the
Middle East—remain largely outside the scope of these anti–money laundering
institutions; each of these regions has little capacity to prevent the laundering
of the proceeds of illicit activity, including those derived from commodity
exploitation.
28. For a description of the Wolfsberg principles and related documents,
see www.wolfsberg-principles.com.
29. Among the many gaps in this chapter is a discussion of the monitoring
and tracking mechanisms put into place in countries such as Botswana and
Norway that have avoided the resource curse.
30. The scope of the paper does not permit a review of the illicit commodities
used by political officials in the Democratic Republic of Congo.
31. International Spotlight advertising supplement, Washington Post (purchased
by the Democratic Republic of Congo), November 28, 2001, in a promotional
article noting the country’s intention to adopt a new electronic payments
system in the near future.
32. According to the UN panel of experts, measures must be developed to
deal with the revenues that would be lost for all the parties involved in illegal
exploitation within the Democratic Republic of Congo, and these measures
follow the money 211
would be effective only in the context of a regional political process. The suggested
reforms include capacity building for Congolese institutions, including
customs, tax authorities, and natural resource agencies. The panel also recommended
restrictive measures, including freezing the assets of persons involved in
illegal exploitation, barring select companies and individuals from accessing
banking facilities and other financial institutions, and barring them from receiving
funding or establishing a partnership or other commercial relations with
international financial institutions. These recommendations suggest that financial
mechanisms knit together illicit resource extraction within the country and
broad access to the financial resources and institutions of developed countries.
33. On March 10, 2002, the UN convention reached the minimum number
of ratifications (22) stipulated as necessary for it to come into effect. As a
result, it went into effect on April 10, 2002. As of the end of March 2002,
132 countries had signed the convention, but just 24 had deposited ratification
instruments with the United Nations.
34. Financial Action Task Force special recommendations on terrorist
financing, October 31, 2001. See www1.oecd.org/fatf/TerFinance_en.htm.
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214 winer and roule
chapter 6
Getting It Done: Instruments
of Enforcement
Philippe Le Billon
“Let’s choose to unite the powers of markets with the authority of
universal ideals.”
UN Secretary General Kofi Annan, Davos, 1999
“Well, if you know everything, then why don’t you catch us?”
UN sanctions buster questioning a UN panel of experts 20001
ACCESSIBLE AND INTERNATIONALLY MARKETABLE resources such as diamonds,
oil, and timber—not to mention drugs—figured prominently
in armed conflicts during the 1990s. Arguably, natural resources have
provided the bulk of revenues that have financed wars in developing
countries since the end of the cold war. For many armed groups, profiteering
from resource exploitation has become an end in itself, with
violence and the context of war providing the means and impunity to
control resource revenues. Access to international markets has been
crucial in allowing myriad armed groups and their business allies
to prosper from criminally controlled but legally traded resources.
Belligerents can benefit from resources in a number of ways, including
the award of concession contracts to access resources; direct
exploitation or partnerships; and taxation, protection schemes, or
racketeering of resource companies, their subcontractors, or the local
economy.
Given the devastation caused by civil conflicts, a broad set of reforms
on natural resource governance is needed that places the basic needs
215
216 philippe le billon
and security of affected populations before the political agendas and
profits of their domestic elites, businesses, and consuming countries.
In terms of development and conflict prevention, such reforms would
cover issues of economic diversification and greater access to international
markets, commodity price stabilization and buffer mechanisms,
environmentally and socially sound management of resource exploitation,
and accountability of resource revenue distribution.
In terms of conflict termination, such reforms should focus on
curtailing the use of natural resources—or so-called conflict resources—
to finance belligerents (see box 6.1). The economic value of these transactions
may not always be large in global terms, but it is generally
significant in local contexts and for business interests or criminal networks
involved in laundering money.
This chapter examines international instruments of enforcement
relating to the trade of conflict resources—conflict trade—with the
Box 6.1 Defining Conflict Resources
Conflict resources are natural resources whose control, exploitation,
trade, taxation, or protection contribute to, or benefit from the context
of, armed conflict.
Conflict goods are “nonmilitary materials, knowledge, animals, or
humans whose trade, taxation, or protection is exploited to finance or
otherwise maintain . . . war economies. Trade can take place by direct
import or export from the conflict zone or on behalf of military factions
(government and nongovernment)” (Cooper 2001, p. 27).
Conflict timber is “timber that has been traded at some point in the
chain of custody by armed groups, be they rebel factions or regular
soldiers, or by a civilian administration involved in armed conflict or its
representatives, either to perpetuate conflict or take advantage of conflict
situations for personal gain . . . . Conflict timber is not necessarily
illegal, as the legality (or otherwise) of timber is a product of national
laws” (Global Witness 2002, p. 7).
Conflict diamonds are “rough diamonds used by rebel movements or
their allies to finance conflict aimed at undermining legitimate governments,
as described in relevant United Nations Security Council (UNSC)
resolutions insofar as they remain in effect or in other similar UNSC
resolutions which may be adopted in the future, and as understood and
recognized in United Nations General Assembly (UNGA) Resolution
55/56, or in other similar UNGA resolutions which may be adopted in
future” (see www.kimberleyprocess.com).
getting it done 217
objective of ending armed conflicts. It is rare for conflicts to be financed
solely by conflict resources. Diaspora remittances, foreign support,
looting of consumer goods, human trafficking, and embezzlement of
humanitarian aid also provide revenue for combatants and the criminal
networks with which they may be linked. Accordingly, this chapter
covers only a few instruments within a broader array of policies and
legal instruments that are aimed at controlling war economies in the
interest of peace.2 Furthermore, although recourse to violence must be
condemned, international instruments of enforcement curtailing access
to resource revenues for armed groups might, in some cases, be counterproductive
if no effective alternative is provided to end oppression
and injustice.
The main rationale behind instruments of enforcement is that the
availability of resources to belligerents and competition over the control
of their revenues generally prolong conflicts.3 Natural resource
revenues can support the weaker party and allow it to continue fighting
and to maintain access to a source of wealth. Furthermore, as profits
take priority over politics, the conflict risks becoming increasingly
commercially driven, with the belligerents correspondingly motivated
by economic self-interest. As such, controlling conflict resources can
help to starve belligerents of revenues and promote peaceful modes of
conflict resolution.
The relationship between resources and the duration and impact of
armed conflicts is not straightforward, however, and instruments of
enforcement need to take this into account if they are to be effective in
promoting peace. On the one hand, resources can prolong and intensify
armed conflicts by providing access to weapons and matériel.
Fighting can be intensified where competition arises over control of
areas of economic significance. This occurred in Sierra Leone over the
best diamond areas and in Cambodia over log yards. Armed groups
can also settle for a “comfortable stalemate” in which opposing parties
can secure mutually beneficial deals to produce and market resources,
thereby prolonging conflict. This relationship can, however,
favor localized peace agreements and defections, when local commanders
lower the intensity of conflict and even negotiate their individual
disengagement without approval from their supposed leaders.
Resource revenues can also prolong conflicts by providing political
networks of support, including commercially driven diplomacy. In
Uganda, diamonds not only allowed the National Union for the Total
Independence of Angola (UNITA) to buy arms but also attracted diplomatic
and logistical support from regional political leaders (United
Nations 2000b). On the other side of the Angolan conflict, the Popular
Movement for the Liberation of Angola rapidly gained favor with
218 philippe le billon
major Western powers and their oil companies once it was established
that UNITA had lost the elections and was unable to gain power
through military means.
Finally, resource wealth can prolong conflict by weakening the
prospects for third-party peace mediation. Access to resources can act
as a divisive factor among international players. Bilateral actors are
inclined to accommodate domestic interests in order to secure commercial
benefits for their corporations. In addition, the ability of the belligerents
to draw on private financial flows decreases the potential
leverage that multilateral agencies (for example, the International Monetary
Fund, the World Bank, and the United Nations) exercise through
grants and loans. In many contemporary armed conflicts, private capital
inflows have assumed greater importance than foreign assistance,
especially in comparison with conflicts during the cold war era.
Although access to resource revenues can contribute to prolonging
conflicts, curtailing belligerents’ access to resource revenues does not
automatically ensure that a war will be shorter or have a less harmful
impact on populations. First, belligerents lacking access to resources
may intensify predation and attacks on civilian populations. However,
there does not seem to be a clear correspondence between access to
resource wealth by belligerents and attacks on civilians. In theory, largescale
revenues can allow belligerents to shift from a war of terror targeting
“soft targets” such as civilians to a conventional type of conflict
more respectful of the laws of war. In practice, however, wealthy rebel
groups such as the Revolutionary United Front (RUF) in Sierra Leone
and UNITA have used widespread terror tactics against civilians.
Second, resources can allow a party to settle a conflict by winning the
war. Massive oil revenues allowed the Angolan government to mount
a decisive military campaign between 1999 and 2002 against UNITA,
which was unable to exchange its significant stockpiles of diamonds for
arms and logistical support. Ironically, UNITA’s diamond wealth may
have encouraged it to pursue a bold but ultimately self-defeating strategy
of conventional warfare (Malaquias 2001).
Third, internal competition over resource revenues can also undermine
the cohesion of armed groups and facilitate their fragmentation
and ultimate demise. As a Khmer Rouge commander noted, “The big
problem with getting our funding from business [rather than China]
was to prevent an explosion of the movement because everybody likes
to do business and soldiers risked doing more business than fighting.”4
In order to prevent such “explosion,” or fragmentation, the Khmer
Rouge fully supported soldiers and their families, tightly controlled
cross-border movements, and supervised business dealings by local
units.
getting it done 219
Fourth, under certain circumstances, resources can provide an economic
incentive for insurgents to defect to the government or negotiate
for peace. Several Khmer Rouge commanders defected to the
Cambodian government after being guaranteed amnesty and continued
control over gems and timber resources. The caveat is that unsupervised
or ill-considered wealth-sharing mechanisms can prolong
wars rather than consolidate peace, even if they can tactically be used
to bring belligerents to the negotiating table. A mechanism of economic
“demobilization” and “supervision” during peace processes is
proposed later in this chapter.
Finally, rebel groups exploiting natural resources are easily portrayed
as mere bandits or criminals driven more by economic selfinterest
than by political ideals. This portrayal can lessen support from
the population and allies. It can also facilitate the sanctioning and
political isolation of rebel movements, like it did for the RUF, UNITA,
and the Revolutionary Armed Forces of Colombia (FARC). However,
this policy runs the risk of making a political resolution of the conflict
more difficult than a military solution. Along with ignoring similar
“criminal” practices on the part of government officials or paramilitary
groups, this can prolong the conflict and fail to address its root
causes.
For lack of international legislation, “conflict resources” are not
always illegal—the commodities involved are legally traded on international
markets and the economic activities involved are licit. Even
trade with rebel groups can be considered legal under international
law unless a United Nations or other sanctions regime and domestic
legislation define it otherwise. Generally, conflict trade involves a mix
of legal and illegal actors and activities, posing special challenges for
the regulation of conflict trade, including the following:
• Defining legality, responsibility, and notions of complicity
throughout supply chains and their connections to financial, transport,
and insurance services
• Dealing with economic sectors in which the share of conflict
resources may be minimal, resulting in not only a need for targeted regulations
but also a frequent resistance to regulation on grounds of costs
and inconvenience on the part of authorities and business interests
• Curbing financial access for belligerents while promoting economic
activities benefiting populations and investments in the long
term
• Intervening within an international political economy driven by
“free trade” and private sector actors that are generally adverse to
prescriptive regulations.
220 philippe le billon
There is, however, an advantage to tackling otherwise legal trade and
commodities. By increasing the risks of sanctions without increasing
prices, regulation is likely to reduce the commercial viability of conflict
trade. For example, interdiction policies on narcotics have largely failed
to curb revenues, crime, and their impact on conflicts. Yet this failure
has come precisely from the global nature of interdiction policies, in
particular in importing countries. In a sector where all the supply is
illegal, but demand is high and enforcement difficult, prices and profits
are likely to rise. Unlike with narcotics, legal producers and importers
shape the international price of otherwise licit natural resources.
This points to a potential advantage of enforcement instruments aimed
at controlling conflict trade, in that criminalizing specific suppliers
within a broader market is less likely to inflate prices and thus to
increase the profitability of illegal supply. This conjecture is, however,
general in nature; agencies considering the application of enforcement
instruments should take into account possible counterproductive
results, particularly in terms of prices, profitability, and attractiveness
for belligerents and criminal networks.
Institutional Structure of Enforcement Instruments
A broad range of instruments is relevant to conflict trade, with a variety
of goals, targets, means, and scale of application. The most relevant
ones have been specifically designed as international legal instruments,
such as United Nations (UN) Security Council economic sanctions, but
many others have been developed to address broader environmental
and social issues or to respond to threats posed by transnational organized
crime and international terrorism. States remain the most important
actor in terms of legislation and enforcement. Yet intergovernmental
organizations, private businesses, and civil society groups have
played an increasing role in shaping a new generation of instruments
and policies defining ethical norms and mixing voluntary compliance,
market-based incentives, and independent monitoring. Given the blurring
of boundaries in design and implementation, governance models
for enforcement instruments to control the flow of natural resources
are increasingly diverse. For example, nongovernmental organizations
are now participating more in the design of mandatory instruments led
by governments, while governments are participating in industry
self-regulation schemes. Overall, however, these initiatives have been
developed largely in response to pressure from civil society and advocacy
groups.
getting it done 221
The proliferation of actors involved in the governance of natural
resources means that resource exploitation linked to human rights or
environmental abuses is more likely to be detected than in the past.
Violence is also less and less accepted as a means of political struggle,
meaning that economic activities supporting violence are more likely
to be denounced. Yet, although large extractive companies come
under greater scrutiny, the complexity of commercial and financial
operations, the use of independent brokers and offshore companies, as
well as difficulties of access to many exploitation sites continue to
leave too much room for conflict trade to operate. Furthermore, coordination
is largely fragmented when it comes to effective decisionmaking
and enforcement. International instruments largely continue to
rely on national governments for enforcement, while the rise of voluntary
measures by private actors risks weak self-regulation and ineffective
enforcement.
Despite the diversity of governance models and fragmentation of
enforcement instruments, some common issues can be identified. In
particular, three key issues for the design of enforcement instruments
to control natural resources related to conflict are the goals of the
enforcement instrument, target and regulatory mechanisms, and scales
of application.
Enforcement instruments relevant to conflict trade have two primary
goals:
• To prevent resource exploitation and trade from financing war
• To motivate belligerents to resolve a conflict through nonviolent
means.
In order to achieve these goals, instruments can target investments
and technology transfer in resource exploitation and aim to prevent
access to markets for conflict resources. Other measures can include
the external control of resource areas and the destruction of
resources—as is the case with drug eradication programs. These measures,
however, are more properly viewed as military interventions
rather than resource governance; this chapter examines such measures
only in the light of peacekeeping deployment and the enforcement of
economic sanctions.
Instruments of enforcement need to be based on criteria deciding
which economic operations are licit and which are not. The incentive
structure will depend to some degree on the target of the enforcement
instrument:
• Resources identified as conflict-prone or as involved in fueling
war are submitted to specific trade regimes (for example, certification
of rough diamonds).
222 philippe le billon
• Activities associated with conflicts and human rights abuses are
prohibited (for example, prohibition of corruption or forced labor).
• Actors described as belligerents or war criminals are excluded
from legitimate trade (for example, UN targeted sanctions on rebel
leaders).
Regulatory instruments range from purely voluntary measures
designed and adopted by resource businesses to mandatory regulations
imposed by intergovernmental bodies under international law:
• Prescriptive legal instruments creating a disincentive for an offense
(for example, mandatory sanctions)
• Market-based legal instruments creating an incentive for compliance
(for example, tax rebates or market access and rewards linked to
ethical business practices)
• Voluntary approaches creating an incentive for compliance
(for example, corporate code-of-conduct and voluntary product
certification)
• Normative pressure instruments (for example, advocacy campaigns
by civil society groups).
Each instrument has its own advantages and disadvantages, which
vary according to the type of target. It is often argued that voluntary instruments
have the advantage of being internally defined by businesses
and thus represent a greater ownership of policy and better adaptation
to specific conditions than mandatory regulations. They can also offer
the advantage of cutting across national jurisdictions and being global
in scope when applied across amultinational company, its subsidiaries,
and business partners. Yet voluntary instruments can be limited in
scope—generally concentrating on core activities—and frequently lack
accountability through independent auditing and enforcement. They
are also unlikely to act as a deterrent, unless clearly linked to market
incentives. Although generally slow and dependent on effective enforcement,
mandatory regulations have undeniable advantages, considering
that:
• Opportunistic belligerents and business people can be motivated
solely by profits, whatever the cost to populations in conflict-affected
regions.
• The absence of a level playing field within a sector or market
places legitimate businesses following “pro-peace” best practices at a
disadvantage compared with their less scrupulous competitors.
• A constraining “wartime” regulatory framework, such as trade
sanctions, may motivate businesses to take a more active role in
promoting peace.
getting it done 223
Mandatory and voluntary mechanisms are not mutually exclusive
and can usefully complement each other. There is some apprehension
on the part of some human rights organizations, however, that voluntary
mechanisms somewhat reflect the weakness or complacency of
governments toward businesses and that voluntary mechanisms may
become a long-lasting alternative to binding and enforceable instruments.
As the International Council on Human Rights Policy
(2002) argues in its review of the international legal obligations of
companies, voluntary mechanisms alone are insufficient. Not only do
legal instruments allow for consistent and fair judgments, but “even
where voluntary approaches are working, . . . anchoring these in a legal
framework is likely to enhance their effectiveness. And where voluntary
approaches are not effective, a legal framework provides powerful tools
and incentives for improvement.”
The most common form of international legal framework—
international treaties—frequently suffers from a lack of national
enforcement. Furthermore, as a result of negotiation and consensus
building, the offenses cited by such legal instruments are sometimes
ambiguous, while compliance measures are weak or left to national
authorities to define. It should therefore not be taken for granted that
a mandatory international instrument will prove more effective than
a voluntary one. Instruments mixing voluntarymembership and mandatory
compliance—through strong incentives to join, peer or independent
monitoring, credible mutual enforcement, and threats to ensure
compliance, as in the Financial Action Task Force on Money Laundering
(FATF)—may prove the most effective in the current international
environment.
Finally, enforcement instruments can be designed and applied on
three main scales: national, regional, and international.
National instruments are sponsored and enacted by one government
(for example, domestic legislation on customs, import-export regimes,
tax codes, company law, unilateral economic sanctions). They remain
the most widely applied and possibly the most robust means of combating
conflict trade, including the national application of international
economic sanctions. This strength comes from the sovereign
jurisdiction and judicial capacity of states within their national territory
and in international arenas. Controversially, national instruments can
also seek extraterritorial jurisdiction, as with U.S. unilateral sanctions
seeking extraterritoriality (for example, the Helms-Burton Act) and
U.S. courts accepting transnational suits (for example, the U.S. Alien
Tort Claims Act). However, the internationalization, growth, and multiplication
of trading channels have complicated the task of national
authorities, while weak judicial systems, legal loopholes, or collusion
224 philippe le billon
and economic self-interest seriously limit the effectiveness of domestic
regulation in many countries. The transnational nature of the flow of
conflict resources means that national strategies alone are inadequate
and that regional or international enforcement instruments are required
to fill this vacuum or limit collusion by domestic authorities.
Regional instruments, designed and enforced by regional organizations
(and their member states) overseeing neighboring conflict-affected
countries, have a strong potential. These regional actors are likely to be
well informed about, and sensitive to, conflict trade as well as political
dynamics in neighboring conflicts. However, like national initiatives,
regional efforts may be constrained by limited capacity and complicated
by local political or economic interests. Effective regional initiatives
thus demand an assessment of national and local interests and
agendas, as well as international support for capacity building.
International instruments, designed and enforced by international
organizations (and their member states), represent an ideal given the
global nature of conflict trade. However, international organizations
may be prone to a time lag with respect to awareness of the significance
and dynamics of conflict trade and may be delayed in taking adequate
measures by other international issues. Furthermore, although
an independent monitoring capacity is now emerging (that is, UN panels
of experts investigating sanctions violations and war economies)
international instruments continue to rely on national authorities for
their implementation, and the record of enforcement is poor.
Regardless of the type of instrument considered, effective enforcement
will depend on cooperation between different implementing
agencies at various levels. Institutional structures of cooperation are
essential, both horizontally within agencies dealing with similar matters
(for example, financial regulation, customs, justice) and vertically
(for example, national, regional, and international). Interpol, FATF, or
the “fatal transactions” transnational advocacy network on conflict
trade demonstrates the diversity of collaboration initiatives.
A comprehensive international regulatory instrument could be more
effective than the current ad hoc approach of tackling this issue on the
basis of individual actors or conflicts, commodities, or activities. Ideally,
a comprehensive global instrument would deal not only with conflict
trade in natural resources but also with other economic activities
sustaining human rights abuses. Current international laws and principles
as well as enforcement mechanisms provide a basis for such a
global enforcement instrument. Elements constituting a comprehensive
framework could include (but not be restricted to) targeted sanctions,
economic protectorates and trust or escrow funds, certification
regimes, and economic monitoring (see table 6.1). These enforcement
225
Table 6.1 Overview of International Instruments of Enforcement
Instrument Goal Institutional structure Effectiveness Future plans
Sanction regimes
UN Security
Council
sanctions
Regional
sanctions (for
example, by
ECOWAS)
UN panels of
experts
Attenuate and resolve
conflicts through
economic leverage
and criminalization
Attenuate and resolve
conflicts through
economic leverage
Report on sanctions
violations and war
economies and
recommend followup
actions
Mandatory. International
law implemented by
member states and
targeting states,
groups, or individuals
Mandatory. Regional
regulation
implemented by
member states and
targeting states,
groups, or individuals
Voluntary. Independent
group of experts
mandated by the UN
Security Council and
reporting to the UN
Secretary General
Strong to medium, if
effectively enforced
Medium, function of
implementation by
neighboring-trading
countries
High in terms of
exposure and
“naming and
shaming”; weak in
terms of enforcement
via recommendations
More precisely targeted
sanctions and effective
criminalization of
sanction busting by
member states
Improved compliance and
enforcement mechanisms
by member states
Systematic use during
sanction regimes;
centralized support unit
(Table continues on the following page.)
226
Table 6.1 (continued)
Instrument Goal Institutional structure Effectiveness Future plans
Judicial
instruments
International
Convention for
the Suppression
of the
Financing of
Terrorism
International
Criminal Court
UN Convention
against
Organized
Crime
Prevent the financing
of terrorism
Provide an international
jurisdiction over war
crimes, genocide,
crimes against
humanity
Promote international
legal standards on
resource exploitation
and trade
Mandatory.
Implementation by
states overseeing
activities of private
sector and individuals
Mandatory. International
tribunal
Mandatory.
Implementation
by states
Potentially strong,
function of relation
to Al-Qaeda; weak
for other types of
terrorists (besides
use by national
authorities)
Untested
Untested
Possible application of
the broad definition of
terrorism to include
all war criminals;
development of relevant
financial tracking
mechanisms
Possible extension of
jurisdiction to financial
accomplices of crimes
covered by the statute
Possible protocol on the
illicit exploitation of and
trafficking in natural
resources
227
Certification
regimes
Kimberley
Certification
Process Scheme
Timber
certification
(for example,
forest
certification
schemes)
Aid
conditionality
Economic
supervision
Prevent laundering of
conflict diamonds
in legitimate trade
Achieve sustainable
forest management
Use economic leverage
to improve
governance by
aid recipient
Supervise resource
exploitation, trade,
and revenue
allocation during
peace processes
Mandatory. International
agreement by
participating member
states to be legally
implemented
by industry
Voluntary. Adhesion to
an independently
monitored certification
process
Mandatory. Suspension
or cancellation of
loans and grants by
donor agency
Mandatory.
Implementation by
transitional authority
mandated by resource
project contract, peace
agreement, UN
Security Council
Weak, until globally
adopted and
effectively monitored,
which is unlikely
Weak, concerns only
a minor share of the
timber trade
Untested, problem of
foreign policy focus
on terrorism, function
of significance of aid
versus resource
revenue
Untested in the context
of a peace process
(weak for Cambodia
1992–93)
Extended globally to
restrict market access for
noncertified diamonds
and provide independent
monitoring
Extended globally to
restrict market access
for conflict timber
(noncertified)
Integration of standards of
resource governance in
aid and trade agreements
Incorporation into peace
negotiations, and UN
peacekeeping and
transitional authority
mandates; possible future
use in context of Sudan
(Table continues on the following page.)
228
Table 6.1 (continued)
Instrument Goal Institutional structure Effectiveness Future plans
Chad-
Cameroon
Petroleum
Project
Corporate
conduct
Global Mining
Initiative
UN Global
Compact
OECD
Guidelines for
Multinational
Enterprises
Electronic
industry and
conflict coltan
Monitor oil revenue
allocation to promote
development and avoid
renewed conflict
Identify and address
environmental and
social challenges facing
the mining industry
Adoption by business
of UN principles on
environmental, labor,
and human rights
Improve the practices of
corporations and offer
“soft” regulatory
channel
Prevent the use of
Democratic Republic
of Congo conflict
coltan in downstream
industries
Mixed. Domestic hostcountry
legislation
and international
monitoring mechanism
Voluntary. Industry
association and
independent research
Voluntary. UN team
facilitating dialogue,
nonbinding principles
Voluntary. Set of
guidelines, advisory
commission, and
national contact points
for dissemination and
soft regulation
Voluntary. Warning and
recommendations by
industry associations
Potentially strong, but
untested in condition
of normal oil revenue
Medium normative impact;
untested effectiveness,
function of follow-up
implementation by
industry
Medium in terms of
visibility and dialogue;
effectiveness remains
to be seen
Weak enforcement impact;
medium normative
impact
Medium, function of
alternative sources of
coltan and UN reporting
Systematic use by World
Bank and industry in
petroleum project
development in
developing countries
Industry guidelines,
continued dialogue
with stakeholders
Long-term, value-based
platform for dialogue,
short-term outputs in
corporate practices
Strengthening of
enforcement and
increased adoption by
non-OECD countries
Continued avoidance
until the issue is
cleared up
getting it done 229
instruments, and others, are discussed in detail later in the chapter.
However, there are major political, legal, and practical obstacles to the
development of a global instrument. Politically, a great diversity of
states and nonstate actors needs to come to a consensus, and issues of
state sovereignty, trade freedom, and North-South relations are likely
to pose major difficulties. Legally, complex issues need to be addressed,
including jurisdiction over individuals and organizations (for example,
corporate liability), circumstances of application (for example, level of
repression or state of war), and definition of offenses, degree of complicity,
and sanctions. Enforcement faces numerous practical obstacles,
ranging from policing a vast informal trade to tackling the vested interests
and confidential practices of powerful businesses and state officials.
As a result, the institutional structure of enforcement instruments
is likely to remain dominated by existing multilateral sanctions regimes
and national legislation on money laundering as well as by ad hoc initiatives
bringing together industries, governments, and civil society
organizations to devise mixed regulatory regimes on a commodity or
activity. Although generally motivated by and targeted at the worst
abuses of human rights such as conflict trade, these initiatives should
be encouraged to deepen their analysis of and response to broader
issues of economic and social governance.
Existing Instruments of Enforcement
This section examines enforcement instruments relevant to controlling
the transborder trade in natural resources that finances armed conflicts.
It focuses on international legal instruments but also considers
examples of enforcement instruments that have been applied to resource
governance but that are not legal rules under international law
(that is, rules designed for authoritative interpretation by an independent
judicial authority and capable of enforcement by the application
of external sanctions). The analysis also touches on national instruments
that are relevant to international trade in resources. National
instruments in some cases can be highly relevant; for example, of all
the individuals who are currently facing criminal charges in relation to
conflict trade, only one is charged with violating international legislation,
in this case a UN arms embargo.
The following instruments are examined in terms of goals, institutional
structure, and, to the extent feasible, effectiveness:
• Trade sanctions
• Judicial instruments
230 philippe le billon
• Certification instruments
• Aid conditionality and economic supervision
• Corporate conduct instruments
• Advocacy nongovernmental organizations and the media
• Other transboundary resource and environmental governance
instruments.
Trade Sanctions
International trade sanctions represent one of the most powerful
instruments of enforcement bearing on transborder trade in conflict
resources. Although trade sanctions can directly affect the flow of
resources and therefore stop resources from financing war, they have
been used largely as a coercive measure and as a means of gaining economic
leverage over exporting countries to serve the interests or objectives
of sanction-imposing countries. The United States, in particular,
has repeatedly used this instrument in foreign policy. Exporting countries
have also used trade sanctions to send a political message and to
achieve economic leverage over importing countries, most noticeably
in the case of the 1973 oil ban imposed by the oil-producing Arab
nations on trade with the United States. This section deals with international
trade sanctions established under international law through
the UN Security Council as well as under regional arrangements, but it
does not specifically examine unilateral trade sanctions.
UN Commodity Sanctions. Under Article 41, Chapter VII, of the
UN Charter, the Security Council may impose restrictions on economic
relations by UN members with targeted countries or groups “to maintain
or restore international peace and security.” Once this decision
has been taken according to the voting rules of the Security Council,
UN member states are obliged to accept and carry it out in accordance
with the UN Charter (Article 25, Chapter V).
The implementation of sanctions is followed and assisted by Security
Council–mandated sanctions committees, which solicit and review reports
on measures that states take to implement sanctions, seek further
information from states on implementation measures and violations,
report periodically to the council on persons or entities reported in violation
of sanctions, and recommend appropriate measures and promulgate
guidelines to both the Security Council and states to facilitate the
implementation of sanctions. Sanctions committees also deal with matters
relating to the target list, administer the exceptions process, and assist
the council in finding solutions for nontargeted states economically
affected by sanctions (Article 50; Biersteker and others 2001). The
breadth and effectiveness of the work of the sanctions committees have
getting it done 231
recently been enhanced by the creation of UN expert panels mandated
by the Security Council to conduct independent investigations of
sanctions violations.
The imposition of international trade sanctions on a multilateral
basis under the aegis of the United Nations is a relatively new phenomenon.
During the cold war, the ability of the five permanent members
of the UN Security Council to veto any such resolution generally
prevented these measures. The only clear exception over that period
was sanctions imposed in 1966 against “the illegal racist [minority]
régime in Southern Rhodesia” with a view to secure the “freedom and
independence” of its population.5 The UN economic sanctions against
Iraq in 1990, aimed at securing Iraq’s withdrawal from Kuwait and
then disarmament of its weapons of mass destruction, opened a new
era. Since then, UN sanctions or monitoring measures targeting natural
resources have been imposed on nine occasions (table 6.2). Timber,
oil, and precious gems have been the most frequently targeted
resources. Sanctions have been imposed generally in an effort to curtail
the financial means available to rebel factions or to entice these
factions to sign or implement a peace agreement. When the commodity
involved is already illegal on the international market, the Security
Council has attempted to curtail items necessary for its production.
For example, in the case of heroin in the Afghan conflict and international
terrorism links, the Security Council attempted to curtail the
provision of chemicals used in the production process.
Very few implementation measures have involved ground policing
through military deployment by member states or UN peacekeeping
missions. However, there have been at least two cases of military
deployment. First, between 1966 and 1975, the British Navy attempted
to enforce a naval blockade on the importation of oil by Rhodesia,
mostly through the port of Beira. Although the high-profile blockade
was ineffectual, the British government did not end it until Mozambique
gained independence and assured the United Nations that no oil would
reach Rhodesia through its territory (Mobley 2002). Second, immediately
after the Iraqi invasion of Kuwait in 1990, the Security Council
imposed a sanctions regime to block Iraqi oil exports. The Multinational
Interception Force led by the U.S. Navy acts under Security
Council Resolution 665 (1990) to interdict all maritime traffic to and
from Iraq to ensure the strict implementation of sanctions. Iraqi oil
exports declined 90 percent between 1990 and 1995, crippling its
economy.6 Yet Saddam Hussein proved sufficiently resilient and unconcerned
by the plight of his population to withstand sanctions that were
progressively eroded by the Oil-for-Food Program and smuggling.7 By
the late 1990s, oil smuggling brought in annual revenues in excess of
232 philippe le billon
Table 6.2 UN Security Council Sanctions against Natural
Resource Exports
Year Country Resolution
1966
1990
1991
1992
1993
1994
1998
2000
2000
2000
2001
Southern
Rhodesia
Iraq
Yugoslavia
Cambodia
Libya
Haiti
Angola
Afghanistan
Congo,
Dem.
Rep. of
Sierra
Leone
Liberia
S/RES/232 (1966) and 253 (1968): all
commodities
S/RES/661 (1990): all commodities; S/RES/665
(1990): calls for halting, inspecting, and
verifying all maritime shipping in the Gulf area
to ensure strict implementation of S/RES/661
S/RES/757 (1991) and 787 (1992): all commodities
S/RES/792 (1992): log exports; requests the
adoption of an embargo on minerals and gems
exports and the implementation measures by
UN Transitional Authority in Cambodia
S/RES/883 (1993): bans the provision to Libya of
equipment for oil refining and transportation
S/RES/917 (1994): all commodities
S/RES/1173 (1998): all diamonds outside
government certificate-of-origin regime and the
provision of mining equipment and services
to areas not under government control;
S/RES/1237 (1999): establishes an expert panel;
S/RES/1295 (2000): establishes a mechanism for
monitoring sanctions
S/RES/1333 (2000): bans the provision to Talibancontrolled
areas of acetic anhydride used in
heroin production
S/PRST/2000/20: establishes an expert panel on
the illegal exploitation of natural resources
and other forms of wealth
S/RES/1306 (2000): all rough diamonds pending
an effective regime of government certificates
of origin; creates an expert panel on the
implementation of sanctions
S/RES/1343 (2001): all rough diamonds:
establishes an expert panel; S/RES/1408 (2002):
calls for establishment by the government of
Liberia of transparent and internationally
verifiable audit regimes on use of timber
industry revenues
getting it done 233
$500 million.8 Major as well as minor oil purchasers and companies
are involved. Nevertheless, there remains some potential for more
effective enforcement of sanctions. The unique physical characteristics
of oil fields and the availability of databases allow for identification of
the oil transported to the international market (Myers 2000).
In addition to military deployment, civilian and peacekeeping forces
can be involved in on-the-ground monitoring. Such monitoring by UN
peacekeeping forces has been very limited:
• Military observers from the UN Transitional Authority in
Cambodia were deployed at key cross-border points to monitor a
ban on log exports.
• In the former Republic of Yugoslavia, border monitors from the
UN Transitional Authority in Eastern Slavonia, Baranja, and Western
Sirmium were deployed to supervise local police forces and customs
officials—although this did not prevent the exportation of timber from
Eastern Slavonia to Serbia for the benefit of local mafia groups.9
Regional security organizations have also assisted in the monitoring of
UN sanctions. For example, the Commission on Security and Cooperation
in Europe deployed international border monitors to help seal
the border of the former Republic of Yugoslavia and later on the
transit from Serbia to Bosnia.
• Troops from the UN Mission in Sierra Leone occasionally contributed
to conflict resolution in diamond-mining areas but did not
play a major role in the enforcement of sanctions on diamond exports
by the RUF, as they were mandated only “to coordinate with and
assist, in common areas of deployment, the Sierra Leone law enforcement
authorities in the discharge of their responsibilities” (Resolution
S/RES/1289, emphasis added).10 The suggestion by the Economic
Community of West African States (ECOWAS) that UN monitors be
deployed along Liberian borders to monitor the trade of natural resources
was rejected, owing in part to the insecurity prevalent in border
areas as well as the near-impossibility of effectively monitoring
diamond trade across a land border.
The association of criminal organizations and terrorists directly targeting
Western interests has reinforced the view within the United
States that transnational crime could be kept in check more effectively
through a global system of enforcement. A U.S. State Department
official recently argued in favor of a new type of international law
enforcement system composed of “UN inspection teams in ports and
airports, with the authority to detain aircraft or ships or arrest people”
but had no illusion that such a system could happen anytime soon
(International Consortium of Investigative Journalists 2002b, p. 6).
234 philippe le billon
Recent progress, however, has been made in terms of the international
monitoring of UN sanctions through independent UN expert panels.
Mandated by the Security Council and reporting through the chair
of the sanctions committees and the UN secretariat, these panels publicize
their findings, thereby enabling a name-and-shame strategy, while
their recommendations have included sanctions on complicit states or
individuals. Experts do not work undercover and rely on voluntary testimonies;
this makes their task more difficult than intelligence or police
work. Greater cooperation from intelligence agencies and the financial
sector is needed in this regard. Even if their most sweeping recommendations
have not been implemented, UN expert panels have provided
information that has significantly affected the operations of sanctions
busters, by indirectly curtailing their access to financial credit and forcing
them to change their logistical base or to seek protection in friendly
countries.With staff hired on a consultant basis and budgets averaging
$1 million for a typical team of five working over a six-month period,
expert panels are relatively easy to set up and inexpensive to run in
comparison to peacekeeping operations. Adding Interpol representatives
also facilitates exchanges with police institutions worldwide.
Although there is no coordinating facility between the different panels,
several experts have worked on multiple panels, thereby maintaining
an institutional memory.With peace in Angola and Sierra Leone, there
is a risk that the use of expert panels will be greatly reduced. There is a
need to reflect on this experience, notably to consolidate the future use
of such instruments and to create a small permanent unit to track war
economies and sanctions violators.
Economic sanctions have long been a tool of coercion and enforcement
in international relations. There is a vast literature on their effectiveness
and on the reasons and criteria for judging success or failure
(see, for example, Heine-Ellison 2001; Mansfield 1995). Reviewing
largely unilateral and comprehensive economic sanctions between
1914 and the 1990s, Hufbauer, Schott, and Elliot (1985) find that
34 percent of sanctions were at least partially successful.11 Success
depended on several factors:
• The sanction’s goals were modest.
• The target was economically weak, politically unstable, and
smaller than the country imposing sanctions.
• The sender and the target conducted substantial trade and were
otherwise “friendly toward one another.”
• Impact was maximized by imposing sanctions quickly and
decisively.
• The sender avoided high costs to itself.
getting it done 235
The argument that “sanctions work,” however, is refuted by Robert
Pape (1997), who finds only 5 percent effectiveness among the same
sample. Pape argues that economic sanctions have not achieved major
foreign policy goals, because there was no cooperation among sanctioning
states and because modern nation-states are not “fragile”
(Pape 1997, p. 106). A previous study by Knorr (1975), on a smaller
sample of sanctions imposed between 1811 and 1974, also finds that
sanctions were rarely effective.12
Examining 12 multilateral economic sanctions in the 1990s,
Cortright and Lopez (2000) estimate that 36 percent were effective
and blamed the failures on flaws in design, implementation, and enforcement
rather than on the general principle of sanctions. In their
view, both comprehensive and targeted sanctions can be effective, as
long as member states are committed and effective in implementing
and enforcing them strictly. However, they note that sanctions must
remain a tool of coercive persuasion that assists in negotiation and
bargaining and not become a form of punishment. They argue that
combining positive incentives and sanctions can improve compliance
on the part of targeted groups or states.
Looking at UN sanctions during the 1990s, Mack and Khan (2000)
argue that sanctions have mostly failed to change the behavior of targets,
but that they should not necessarily be considered as failures,
especially in terms of stigmatizing and containing targets. In this perspective,
sanctions can be effective as an instrument of policing and
punishment. The counterargument is that economic sanctions, including
targeted ones, can further aggravate conflicts by criminalizing targeted
belligerents, making it more likely they will be less inclined to
negotiate politically (Kopp 1996). Mark Duffield suggests that war
economies need to be seen in a different light and that “transborder
networks associated with organized violence have stimulated enterprise
across large tracts of the South” (Duffield 2002, p. 160). Regulating
these war economies through sanctions also means privileging
some operators over others, with the risk of creating a climate in which
criminal syndicates thrive, while more legitimate businesses, large and
small, suffer.
The record of commodity sanctions in the 1990s is ambiguous. Since
1990, out of the 10 conflicts in which UN sanctions or monitoring
regimes targeting resource exports were used, eight were resolved. But
for five of these, resolution was mostly an outcome of military intervention
(Afghanistan, Angola, Haiti, Sierra Leone, former Yugoslavia).
Of the others, only Libya is a possible success in terms of the limited goal
of extraditing two suspected terrorists in the bombing of a UTA airliner.
In the case of sanctions on the Khmer Rouge, the United Nations was no
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longer enforcing them, and this relative success resulted instead from
pressure by the nongovernmental organization Global Witness and
donors on the Cambodian and Thai governments, as well as sustained,
although not decisive, military action on the part of the Cambodian
government. In the case of the Democratic Republic of Congo, no
sanctions regime was imposed as such, only “naming and shaming”
through UN expert panel reports, whereas negotiations and donor
pressure were key to resolution of the conflict. The two unresolved
“conflicts” are Iraq and Liberia. The case of sanctions on Iraq—a mixed
regime including both comprehensive and targeted sanctions—is
widely seen as a failure, although some analysts point to its success as a
containment measure (see O’Sullivan 2002; “When Sanctions Don’t
Work” 2000). Some success has been registered in the case of Liberia,
but the weakening of the government has further prolonged the conflict
with a rebel movement (Liberians United for Reconciliation and
Democracy), and President Taylor is alleged to remain involved in criminal
activities.
Judging by the record in the 1990s, military interventions are more
effective than commodity sanctions at ending conflicts. Advocates of
sanctions point out, however, that they often weaken the targeted
groups. In the case of Angola, following the killing of Jonas Savimbi
in February 2002 and the end of the conflict, the highest-ranking UNITA
official stated, “Sanctions weakened UNITA tremendously; they
played a decisive role.”13 No such statement has come out of the RUF
in Sierra Leone, although the UN expert panel on Liberia indicated that
Taylor had limited some of its assistance to the rebel group as a result
of targeted sanctions (Doyle 2002: United Nations 2000a). Successive
sanctions have curtailed the purchasing power of targets for rearmament
or deployment, addressed the economic motivation of belligerents,
and created tensions within the chain of command of the targeted
group as a result of financial and logistical difficulties. In Cambodia,
the interdiction of transborder timber trade, which had sustained the
Khmer Rouge during the early 1990s, contributed to the demise of the
movement.
With regard to the institutional structure and practices of the
United Nations, there are several barriers to more effective enforcement.
The composition and voting rules of the Security Council and
the powers it grants to its five permanent members at times have jeopardized
the legitimacy of its decisions, leaving dissenting states to use
inadequate or limited enforcement as a way to express their views and
protect their interests.
Regarding state-level enforcement, while states may themselves be
sanctioned for noncompliance, there is a general reluctance to multiply
“secondary sanctions.” Furthermore, the lack of adequate national
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legislation and enforcement by some governments has left many sanctions
with a merely rhetorical effect. Such weak enforcement can favor
criminal groups by forcing legitimate companies out of resource sectors,
with potentially negative consequences for conflict prevention.
Recognizing this dynamic in the context of sanctions against UNITA,
the Security Council has urged “all States . . . to enforce, strengthen, or
enact legislation making it a criminal offense under domestic law for
their nationals or other individuals operating on their territory to violate
the measures imposed by the Council.”14 A general model law resulting
from the Interlaken II Process aims to facilitate the drafting of
such legal measures.15
With regard to ground monitoring, border monitors deployed in
Cambodia or the former Yugoslavia had limited impact. Monitors can
be constrained by combatant forces or the forces and border patrols of
allied neighboring states. Movement along the border is generally limited
for security reasons—especially at night—leaving many smuggling
routes open, and monitors generally lack the power of arrest or the
mandate to seize goods, having to rely on local authorities. When the
security concerns of monitors and high cost of implementation are included,
ground monitoring is viable only when the resources targeted
cannot be easily smuggled and trade is taking place in an area where
local authorities support and can assist in the sanctions regime. In
other cases, investigation of the trade by UN-mandated experts should
be more effective. Even then, critics have argued that “naming people
without shame” is ineffective and that, unless the authorities of countries
where sanctions busters reside intervene judicially, little can be
expected from such initiatives.16
To sum up, the following course of action can be recommended
when natural resource revenues are suspected to contribute to an
armed conflict:
• Creation of an expert panel by the UN Security Council to investigate
the matter and possibly prohibit imports of the conflict resource
by member states pending adequate national certification or international
supervision of the resource sector (including humanitarian assessment
of the potential effect of sanctions)
• Assessment of the potential role of UN peacekeeping deployments
in targeted resource areas, especially if a mission is ongoing, by
the Department of Peace Keeping Operations, Department of Political
Affairs, or representative of the UN secretary general in liaison with
the expert panel
• Review of legislation and practices in resource extraction and
trading in neighboring countries and other areas identified as transit
or importing countries by the expert panel
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• An Interpol-sponsored regional meeting to exchange information
on trade patterns and suspected resource brokers and assistance
missions to relevant countries to effect potential UN Security Council
sanctions as well as a compensation scheme and buffer (Article 50, UN
Charter)
• Financial aid and technical assistance to targeted countries to
facilitate compliance with international certification schemes and Security
Council resolutions
• Criminal prosecution of sanctions busters using national and international
legislation
• Potential use of diplomacy, aid conditionality, and sanctions to
curtail the transit or importation of sanctioned resources.
Unilateral and Regional Trade Sanctions. Individual countries and
regional organizations have also imposed sanctions on commodity
exports. In the United States, the federal administration, state governments,
and even municipalities have imposed unilateral sanctions
against countries or individuals—sometimes with extraterritorial reach,
as through the Iran-Libya Sanctions Act (1996). Few of these sanctions,
however, have been targeted at belligerents supported by resources. The
U.S. government imposed sanctions against Iraq immediately after its
invasion of Kuwait. It also targeted the military regime in Myanmar in
1995, through an investment moratorium affecting mostly U.S. energy
companies. But that measure fell short of requiring divestment or even
deterring reinvestment in existing projects. Because of growing and
diversifying international trade flows, unilateral sanctions—even those
imposed by the United States—are unlikely to have a significant impact
on conflict trade except, of course, if the target country is utterly dependent
on the sender country for exploitation technology, transport infrastructure,
or market.
Regional organizations have also imposed commodity export sanctions.
In Liberia, ECOWAS imposed economic sanctions on areas controlled
by Charles Taylor’s National Patriotic Front of Liberia (NPFL)
in 1993, after its military arm, the ECOWAS Monitoring Group (ECOMOG),
had organized a military blockade and takeover of Taylor’s
leading port in Buchanan, from which the NPFL imported arms and
exported iron ore, rubber, and timber (Atkinson 1997). The sanctions
regime suffered from the weakness of regional state institutions to perform
their regulatory functions (Aning 2002). Sanctions were also imposed
on Burundi in 1996 by the Central African states, but this regime
was systematically violated not only by smugglers but also by participating
states, allowing for the export of key commodities from Burundi,
notably the smuggling of coffee (Mthembu-Salter 1999, pp. 18–19).
getting it done 239
Many observers argued that the sanctions regime was not only ineffective
but also counterproductive in humanitarian terms, with a vast
amount of smuggling in both arms and commodities taking place, while
humanitarian and development aid was impeded (Haq 1997).
In contrast to many unilateral sanctions imposed by a “distant”
power attempting to control imports into its markets, regional sanctions
may have been more capable of impeding conflict trade by intervening
in both transport links and the exploitation of commodities.
This intervention, however, may create significant vulnerability, as
major local interests often can undermine the design and effective implementation
of sanctions. Furthermore, the enforcement capacity of
neighboring countries can be weak, especially when dealing with easily
concealable commodities such as diamonds or gold.
Judicial Instruments
The judicial prosecution of sanctions busters and of resource companies
and traders engaging with belligerents is in its infancy, both in
terms of permanent international legislation—rather than ad hoc ones
like UN resolutions—and in terms of institutions with international jurisdiction.
The judicial prosecution ofUNsanctions is also in a fledgling
stage. As mentioned in the discussion of UN sanctions, many member
states have failed to criminalize sanctions busting, and even fewer have
acted on such legislation. So far there has been no arrest on charges of
commodity sanctions busting, and only two individuals—one of them
also a primary commodity trader—have faced charges for violating a
UN arms embargo. In terms of judicial enforcement, national legislation
and institutions remain key instruments of enforcement.
National Legislation. Although this chapter focuses on international
instruments, national-level judicial instruments are highly relevant,
starting with the implementation of legislation flowing from the
imposition of UN sanctions. National-level instruments are used to
target a wide range of “classic” criminal activities (such as money
laundering) and other activities relevant to conflict trade (such as complicity
in human rights abuses). This section examines two ways in
which national-level enforcement instruments have been employed: to
target rogue traders and to target multinational companies.
Since many national-level instruments are being applied in the context
of armed conflicts, they constitute a potential instrument of enforcement.
In general, though, these instruments have been deployed as a
means of advocacy, redress, and deterrence rather than as a mechanism
of enforcement to curtail conflict trade per se.
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That national-level judicial instruments are, or could become, relevant
to the regulation of conflict trade is demonstrated by the list of
individuals dealing in conflict resources who are facing criminal
charges—there are currently 10 individuals on this list in addition to
seven unnamed diamond traffickers. Judicial authorities in several
countries such as Belgium, France, and Switzerland have also initiated
judicial proceedings against named individuals dealing in conflict commodities.
In these cases, the charges do not involve legislation specifically
related to conflict commodities per se (which does not generally
exist with the exception of legislation to implement UN sanctions) but
rather related to criminal activities involving money laundering, tax
evasion, arms trafficking, forgery, or breach of trust.
In parallel to domestic charges against rogue traders involved in
conflict trade, extraterritorial lawsuits have also targeted multinational
companies. In the United States, the Alien Tort Claims Act and
the Torture Victims Protection Act allow companies to be sued at
home for their behavior overseas and that of their business partners,
including host-government troops in charge of protecting staff and assets.
The Alien Tort Claims Act grants “the district courts . . . original
jurisdiction in any civil action by an alien for a tort only, committed
in violation of the law of nations or a treaty of the United States.”
The jurisdiction of the district courts to hear claims under this act is
limited by the constitutional requirements that the court obtain
proper personal jurisdiction over the defendant: the perpetrator of the
violation must be present within the territorial jurisdiction of the
court or be subject to the court’s long-arm jurisdiction. Yet plaintiffs—
local people from production areas and supported by advocacy
groups—are increasingly using the Alien Tort Claims Act and the
Torture Victims Protection Act as judicial instruments for human
rights claims and corporate accountability. These initiatives are not
unique to the United States; a judicial case was opened recently in
France against a French company on allegations of using forced labor
in Myanmar.
Calls have been made to create more far-reaching and updated
legislation, in particular, the U.S. proposal for a Foreign Human Rights
Abuse Act (Saunders 2001). Although this act may in the future come
into being, some commentators have argued in favor of global, rather
than nationally specific, legislation. Although global-level, comprehensive
legislation may in theory be more effective, there is disagreement
about how such global legislation could be designed and adequately
enforced. To date, most initiatives in this direction have been toward
voluntary regulation rather than mandatory legislation.
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International Legislation and Judicial Instruments. Three major
instruments can be identified, none of which has been designed or
tested in relation to conflict trade. As such, they represent only potential
enforcement instruments.
The first instrument is the International Criminal Court, which covers
the actions of individuals, not companies. The crimes defined include
seizing “the enemy’s property unless such . . . seizure be imperatively
demanded by the necessities of war” and “pillaging a town or place.”17
Corporate liability—excluded from the statute—would allow victims to
be compensated through the seizure of corporate assets (Carbonnier
2001). Accomplice liability on the part of economic actors facilitating
the commission of crimes is covered but requires that such complicity be
directed intentionally for the purpose of assisting others in committing
a crime.18 A broader definition of complicity—removing the dimension
of personal intention while retaining the knowledge of the intention of
the group to commit the crime—would make the statute more applicable
to tackling conflict trade; this redefinition is likely to be too broad to
be adopted. Another relevant point is that the international warrants
that the International Criminal Court issues could complement UN
Security Council resolutions, particularly for the purposes of identifying
and legally defining individual actors for specific sanctions.
The second instrument is the International Convention for the
Suppression of the Financing of Terrorism, which requires states to
criminalize the provision or collection of funds for acts defined as
offenses by previous antiterrorism conventions.19 It also requires states
to provide legal assistance with investigations and extradition regardless
of their bank secrecy laws and for state parties to cooperate with
one another in investigations and extraditions when these offenses are
committed. Adopted at the UN General Assembly on December 9,
1999, the convention entered into force on April 10, 2002, following
UN Security Council Resolution 1373 urging member states to ratify
it. The convention could be relevant to conflict resources and in particular
to resource businesses and financial institutions dealing financially
with terrorists and war criminals.20 Some rebel groups figure in the list
of terrorists in major jurisdictions such as the European Union (EU) or
the United States, and the definition of terrorism is very close to some
war crimes, such as murders or physical violence perpetrated against
noncombatants during wars.21
Resource businesses and financial institutions could be affected by
this convention in three ways. First, financial institutions and other
professions dealing with the finances of suspected terrorist groups
come under measures from state parties “to utilize the most efficient
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measures available for the identification of their . . . customers . . . and
report transactions suspected of stemming from criminal activities”
(para. 18.b). Second, businesses come under obligation of cooperation
with the judicial process as “State Parties may not refuse a request
for mutual legal assistance on the ground of bank secrecy” (para. 12.2).
Third, and most important, a business “commits an offence . . . if [it] by
any means . . . provides or collects funds with the intention that they
should be used . . . to carry out” acts of terrorism (para. 2.1). As such, a
business providing funds—such as taxes or “protection fees”—to a
combatant, with the knowledge that these funds are to be used to carry
out acts of violence against civilians, could be subject to prosecution.22
The renewed emphasis on fighting terrorism—including Osama Bin
Laden, who had “legitimate” business interests and circulated large
sums through formal financial networks—is certainly testing the application
of this convention to the private commercial sector (Sallam
2000). It could be applied to diamond dealers allegedly linked to Al-
Qaeda financing networks (Dietrich and Danssaert 2001; Farah 2001).
The third instrument is the UN Convention against Transnational
Organized Crime. With its focus on the criminalization of the laundering
of proceeds of crime (Article 6) and corruption (Article 8), this
convention has the potential to cover the laundering of natural
resource revenues obtained through criminal offenses defined domestically
(such as armed rebellion or “grand corruption”) or internationally
(such as war crimes).23 There is, however, no specific reference to
this type of criminal activity or to natural resources within the text of
the convention. Building on protocols already complementing the convention,
such as protocols on arms and human trafficking, the possibility
of a protocol specifically addressing the illicit exploitation of and
trafficking in natural resources could be considered (Bayart, Ellis, and
Hibou 1999; Berdal and Malone 2000).
Such a protocol is the Protocol against the Illicit Manufacturing of
and Trafficking in Firearms, Their Parts and Components, and Ammunition,
which provides both general provisions requesting a criminalization
of offenses defined by the protocol and specific provisions relating
to the prevention of offenses, including record keeping, marking of
firearms, international trading licensing and authorization systems,
and the registration and licensing of arms brokers.24 The protocol on
natural resources could cover a broad range of issues related to preventing
and terminating conflicts, including financial complicity in war
crimes, application of certification and sanctions regimes, legality of
exploitation, record keeping and public access to import-export and
revenue figures, and financial transparency of governments and the
private sector. The experience and recommendations of the UN expert
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panels could prove useful in a negotiation process—in particular those
of the Expert Panel on the Illegal Exploitation of Natural Resources and
Other Forms of Wealth in the Democratic Republic of Congo. The impact
of such a protocol on small-scale producers and traders, especially
in developing countries, should be carefully assessed to avoid creating
further economic imbalance to their disadvantage.
International Policing and Judicial Cooperation Organizations.
International judicial and policing cooperation is essential to effective
enforcement. Interpol provides a worldwide instrument of cooperation,
crime analysis, and information dissemination, as well as forensic
assistance between police forces.25 Interpol has been active in the field
of conflict resources by providing officers to UN expert panels, by participating
in regional and international meetings, and by conducting its
normal activities (for example, arms trafficking, money laundering). A
specialized branch within Interpol deals with the laundering of funds
derived from criminal activities (Fopac).26 Although its focus has been
on the laundering of drug proceeds, its activities could include proceeds
from conflict resources. The decentralization of Interpol into
subregional bureaus has enhanced regional cooperation, including on
matters related to the smuggling of conflict resources such as the cooperation
of Southern African police forces on diamond smuggling and
armed conflicts through the Southern African Regional Police Chiefs
Cooperation Organization and its Agreement on Co-operation and
Mutual Assistance in the Field of Crime Combating, which allows for
“police officers of the region to enter countries of other parties with the
authority to do so, for the purpose of police investigations, seizure of
exhibits, tracing and questioning of witnesses” (Msutu 2001).
Other policing and judicial cooperation organizations that can assist
enforcement efforts include the Centre for International Crime Prevention,
which can assist countries in their ratification and implementation
of international criminal law conventions and protocols;27 the UN
Interregional Crime and Justice Research Institute, which concentrates
on research, training, and field projects; as well as the World Customs
Organization, which can assist in tracking the trade in conflict resources,
in particular through its network of regional intelligence liaison
offices. A mapping exercise, identifying the relevant enforcement
agencies, their links, and avenues for progress, could prove valuable.
Certification Instruments
Like targeted sanctions, certification instruments set up a discriminatory
regime allowing for selective access of resources to the market.
Certification can be either mandatory or voluntary.
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In the case of mandatory certification, or “verification,” the primary
goal is to restrict consumer access to legal products—however defined—
by informing potential buyers and trade or customs authorities of the
legal standing of the resources and to prevent or dissuade them from
buying or licensing illegal resources. While resources certified as licit,
even if originating in conflict-affected countries, can access legal markets,
uncertified resources cannot and should thus be confined to the
black markets with significant discounts for the seller.
In the case of voluntary certification, the idea is to help (and somehow
create) the demand for products that meet or exceed specific
criteria. Higher prices or specific demand for certified products are used
as economic incentives to promote compliance by businesses. As such,
voluntary certification is a type of “smart,” rather than prescriptive,
legislation, which seeks to create demand for “good” products rather
than to curtail supply of “bad” ones. Yet as substantial profit margins
result from certifying resources, there is also an incentive for certification
authorities and traders to “launder” illicit resources through
a fraudulent certification process. A study by World Wide Fund for
Nature finds that out of a sample of 80 environmental claims put by
companies on wood or paper products, only three could be partially
substantiated.28 The effectiveness of a certification regime thus depends
on its independence and enforcement throughout the whole commodity
chain, from the verification of exploitation criteria to the integrity
of the commodity chain bringing the resource to consumers (for more
details on custody chains, see chapter 4).
Certification regimes have been used according to criteria as diverse
as consumer safety, quality, “fair” trading, or environmental friendliness.
Accordingly, there is a wide diversity of institutional structures,
from producer cooperatives to nongovernmental organizations, government
agencies, and international agreements. So far, only one certification
regime is designed specifically to prevent conflict resources
from accessing legal markets: the Kimberley Certification Process
Scheme for rough diamonds. Current certification schemes in the timber
industry, such as the Forest Stewardship Council identification of
wood harvested from sustainable sources, also provide an avenue to
influence the trade of conflict and illegal timber.
The overall effectiveness of a certification scheme relies on a relative
concentration of the industry, which allows companies or dependent
countries to champion the scheme, on potential exposure of the resource
to consumer pressure, and on ease of controls.
Diamond Certification: The Kimberley Certification Process. The
agreement on a Kimberley Certification Process Scheme seeks to rid the
getting it done 245
international rough diamonds trade of “conflict diamonds” by establishing
a voluntary system of industry self-regulation. This system is
based on a certification process requiring all participants:
• Not to trade in rough diamonds with any nonparticipant
• To accompany each shipment of rough diamond exports with a
certificate and to require such a certificate on all imports
• To establish a system of internal controls and shipment eliminating
conflict diamonds from any exports
• To collect and maintain statistical data on production, imports,
and exports
• To cooperate and be transparent with other participants, including
through external reviews and assistance to fulfill minimal
requirements.
Launched in May 2000 in Kimberley, South Africa’s first diamond
town, by African diamond-producing countries eager to protect their
trade, the Kimberley process consisted of a dozen international meetings,
drawing together government officials from up to 38 countries as
well as representatives of the diamonds industry and nongovernmental
organizations. The dominant position of De Beers in the marketing
chain, the existence of the Diamond High Council in the main trading
center of Antwerp, and the creation in 2001 of the World Diamond
Council, specifically tasked with eradicating the trade in conflict diamonds,
facilitated the negotiation process, as did implementation of the
country-specific certification scheme in Angola and Sierra Leone. The
constructive, if at times tense, engagement between nongovernmental
organizations, government, and industry was relatively innovative and
succeeded in preserving the legitimate 80 to 96 percent of an economic
sector that employs several hundred thousand people and is critical to
the economies of many countries, including Botswana and Namibia.
The institutional structure of the Kimberley scheme comprises the
following:
• Chair, nominated by participants (but without clear procedures
for candidature, nomination, and duration) and in charge of chairing
annual plenary meetings, collecting and disseminating information
from and to participants, and liaising with participants
• Participants, governments, or regional economic integration
organizations, for whom the certification is effective (fully open but
without compulsory review of compliance to requirements of the
scheme)
• Administrative support for the chair (but not in the form of a
secretariat)
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• Importing and exporting authority (or authorities) nominated by
each participant and in charge of, respectively, issuing certificates and
verifying their validity
• Independent auditors charged with helping government authorities
to verify systems of warranties put in place by individual companies
• Review missions, which require the consent of concerned participants
as to composition and conduct (in “an analytical, expert, and
impartial manner”)
• Observers, representatives of civil society, the diamond industry,
international organizations, and nonparticipating governments, who
are invited to take part in plenary meetings.
The participation criteria, as well as compliance and enforcement
mechanisms, are weak and formulated on a voluntary basis. Review
missions on compliance are to be conducted “with the consent of the
Participant concerned and in consultation with all Participants.”
When an issue regarding compliance arises, “any concerned Participant
may so inform the Chair, who is to inform all Participants without
delay about the said concern and enter into dialogue on how to
address it. Participants and Observers should make every effort to
observe strict confidentiality regarding the issue and the discussions
relating to any compliance matter.” Finally, there is no explicit mention
of an exclusion procedure for noncomplying participants.
The Kimberley scheme is complemented by self-regulatory measures
on the part of the industry. As declared by the World Diamond
Council’s chairman, “The self-regulation . . . is vital . . . and the industry
is committed to fulfilling its obligation in step with governments.
Individuals or companies that fail to observe the new rules will pay a
high price for that failure.”29 Critics point out that such declarations
have not so far left anyone “paying a high price” in the industry, at
least publicly, and self-regulation cannot be trusted. The scheme is also
complemented by national legislation.
The Kimberley process was concluded in November 2002 and was
to become effective on January 1, 2003, but this deadline had not been
met at the time of writing. There is no means of asserting its effectiveness
apart from the pilot certification projects conducted since 2001 in
Sierra Leone and, to some extent, in Angola. In both cases, the projects
did not completely stop the smuggling of diamonds, and, what is more
important, their impact on the conflict could not be assessed given
other external factors, such as military intervention and peacekeeping
deployment. The Kimberley scheme came into effect after the conflicts
in Angola and Sierra Leone had been officially declared over—largely
due to military interventions—and the conflict in the Democratic
Republic of Congo may be winding down. This does not mean that the
getting it done 247
scheme is now irrelevant. On the contrary, it is still of relevance to the
situation in the Democratic Republic of Congo, to the possible financing
of terrorism, and to the prevention of future conflicts.
Although the Kimberley scheme was implemented too late to apply
to some of the conflicts it was originally designed to address, many
observers argue that the process was rapid by international standards.
However, in addition to being “too late,” the Kimberley scheme
instrument was also deemed too weak by advocacy nongovernmental
organizations and has been described as a “watchdog without
teeth.”30 The U.S. General Accounting Office released a critical report,
also arguing that voluntary participation and self-regulated monitoring
represent “significant challenges” to creating an effective system
(U.S. General Accounting Office 2002, p. 16). This report also points
out that, without “sound controls that meet basic accountability and
transparency objectives . . . [the Kimberley scheme] risks the appearance
of control, while still allowing conflict diamonds to enter the
legitimate diamond trade and, as a result, continue to fuel conflict.”
Some critics even suggest that the scheme “will likely do little more
than make conflict diamonds harder to detect as they move [across]
borders” (Cambell 2002).
To sum up, the main obstacles to an effective certification regime result
from the conjunction of the physical and economic characteristics
of diamonds and the past tolerance of (illicit) practices within the industry,
which make diamonds a highly valuable, easily concealed, and
anonymous commodity. The Kimberley scheme in itself suffers from a
number of weaknesses, including the following:
• A narrow definition of conflict diamonds and the exclusion of
polished stones and jewelry from the certification process31
• The failure to establish sufficiently strong independent monitoring
requirements, including the absence of an initial review to allow for
participation or penalties for noncompliance (only strictly confidential
“dialogue” between participants and possibly observers is prescribed)
• The failure to include a mechanism of direct regulation for individual
companies, leaving this task to national authorities, while placing
the threshold of compliance at the state level. This would prevent
rapid penalties against offending companies that benefit from the complicity,
complaisance, or incompetence of national authorities32
• The failure to regulate nonparticipating countries apart from
excluding them from trading rough diamonds with participating countries.
Some of these nonparticipating countries may continue smuggling
illicit and conflict diamonds and may set up diamond-polishing
and -cutting activities to short-circuit the markets for rough diamonds
operating under the Kimberley scheme.
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In response to these shortcomings, nongovernmental organizations
that have initiated the “conflict campaign” are now seeking to establish
a voluntary but independent monitoring scheme to complement the
Kimberley scheme (Smillie 2002). If given more strength through widespread
participation and tougher monitoring, this instrument could (a)
deter large-scale investments in diamond mining in rebel-held territories
(as seen in Angola prior to the UN sanctions on diamonds); (b) slightly
increase the risks and possibly lower the profits for dealing in conflict
and illicit diamonds; and (c) help to curb illicit trading and increase
transparency in the trade, with the possibility of improving government
and corporate accountability. It is too early in any case to assess the
effectiveness of the Kimberley scheme, even with respect to these goals.
Forest Certification Schemes. As noted by Global Witness, in the
absence of international legislation on illegal logging, “as soon as illegally
obtained timber leaves the borders of the producer country, it is de
facto immediately laundered into the legal timber trade” (Global
Witness 2002, p. 10). According to studies by environmental groups,
about half of the timber imported in Europe is illegal, as is a third of the
timber imported by the G-8 and China (Friends of the Earth UK
2001; Toyne, O’Brien, and Nelson 2002). Illegal logging not only is
associated with environmental damage, frequent disregard for local
communities, and massive economic and tax revenue losses in exporting
countries but also promotes a climate of corruption and impunity in
the sector that comes to define its governance by authorities. Furthermore,
the international impunity of illegal logging greatly facilitates the
laundering of “conflict timber” benefiting rebel groups.
Among the measures needed to change this situation, certification
could assist in guaranteeing minimum exploitation criteria (legality,
financial transparency, community consultation, environmental impact)
and chain of custody in domestic and international trade. The Forest
Stewardship Council (FSC) scheme certifies sustainably harvested timber
and incorporates legality requirements.33 FSC is a global nongovernmental
organization of civil society groups, industry, and forest
product certification organizations. Its Principles and Criteria of Forest
Stewardship serve as standards for the independent certification of
well-managed forests. FSC also assists industry, governments, and civil
society groups to define local guidelines to achieve these standards.
FSC-accredited certification bodies are themselves evaluated and monitored
to ensure their competence and credibility. The scheme has
recently come under sharp criticism for allowing the certification of
companies allegedly implicated in human rights abuses (Rainforest
Foundation UK 2002). The scheme is voluntary, largely market driven,
and still far from achieving a global change in the governance
getting it done 249
of forest resources. It has been criticized for being established as a
“universal” standard and placed above intergovernmental and governmental
regulatory instruments.
Other wood certification schemes promoted by national or regional
authorities exist in this regard. Based on the criteria, indicators, and
operational guidelines developed by the Ministerial Conference on the
Protection of Forests in Europe, the Pan European Forest Certification
Council (PEFC) also promotes independent third-party forest certification
schemes within Europe.34 Like the Forest Stewardship Council,
PEFC relates to consumer markets through a logo for timber products
from certified forests. PEFC, however, has been criticized by environmental
nongovernmental organizations for its lack of consultation
with civil society groups during the negotiation process and for controversial
standards on logging practices.
In addition to these schemes, two complementary instruments can be
noted: ISO 14001 certifies the quality of an organization’s environmental
management system, but not the standards of the output of the certification
system, and EC Directive 84/450/EEC secures the integrity of
certification schemes by prohibiting misleading advertising (for example,
unsubstantiated claims to the sustainability of wood products).
While the Forest Stewardship Council and Pan European Forest
Certification Council focus on sustainable forest management, some
government, industry, and nongovernmental organizations have made
efforts to address the more specific problem of illegal logging. The
International Tropical Timber Organization is promoting legal and
sustainable timber trade. In a joint effort with the Food and Agriculture
Organization of the United Nations and the European Union, it is
collecting statistics on imports and exports and investigating inconsistencies
possibly indicating illegal trade. Commitments were made at
the G-8 meeting in 1998 as well as a ministerial conference organized
by the World Bank in September 2001 in Bali, which called for
“immediate action to intensify national efforts and to strengthen bilateral,
regional, and multilateral collaboration to address violations of
forest law and forest crime, in particular illegal logging, associated
illegal trade and corruption, and their negative effects on the rule of
law.” This led, for example, the European Union to set up a specific action
plan on the legality of EU wood imports (Forest Law Enforcement,
Governance, and Trade, FLEGT). From the perspective of importing
countries (FLEGT 2002), challenges to effective instruments include:
• Creation of a mechanism for identifying the legality of wood
production, tracking wood trade, and verifying legality
• Cooperation on customs and enforcement of rules of access to
markets
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• Policy coherence of international financial markets (aid, export
credit agencies, banks) and government procurement to avoid promoting
illegal practices
• Incentives and sanctions to ensure industry compliance along the
commodity chain.
FLEGT is still being negotiated, and it is therefore not possible to
assess its effectiveness.
Aid Conditionality and Economic Supervision
Aid conditionality and economic supervision schemes can provide a set
of (dis)incentives and institutional mechanisms to influence resource
governance and revenue allocation. Aid can provide an incentive and a
source of support for reforms, but, as with sanctions, critics point out
that developed countries, through their influence and voting power in
international financial institutions, can also use aid conditionality to
punish regimes they oppose.
International Aid Conditionality. International aid can play several
roles in relation to the enforcement of natural resource governance:
• It can assist communities, businesses, governments, or regional
organizations to consolidate their own regulation and enforcement
mechanisms through the provision of technical and legal expertise and
training and through the funding of enforcement agencies. This role
is particularly significant in the context of a peace process, when the
availability of weapons and resources coupled with the opening up of
market access and weak institutions during the transition period might
lead to a criminalization of the natural resource sectors and thus prolong
the conflict.35 International organizations and key individuals in
charge of transition processes—such as the UN Special Representative
of the Secretary General or United Nations Development Programme—
could give further attention to this problem (International Peace Academy
2002, p. 14).
• Aid may help to fund alternative livelihoods for persons reliant
on the illegal exploitation of natural resources (Stein 1988).
• Aid conditionality can be used as an instrument of enforcement
in itself, by acting as a dissuasive or coercive financial tool against
targeted actors.
Examples of aid conditionality used as an instrument of enforcement
in relation to conflict trade are considered below. The effectiveness of
aid conditionality in regulating resource flows is highly dependent on
the importance of the aid to the recipient as well as on the international
getting it done 251
standing and commercial relations it enjoys in relation to the country or
institutions setting the conditions. Targeting the resource sectors themselves
can also increase the leverage of aid conditionality as businesses
lose support for infrastructure work, for example. The risk, however, is
that aid conditionality may further resource exploitation as a revenue
alternative and delay reforms.
Aid conditionality was used with some degree of success on
Cambodia’s neighbor to restrict the trade in illegal logging, which was
fueling war in Cambodia.36 Such pressure significantly contributed to
the demise of the Khmer Rouge movement.
In 2000, following years of “quiet diplomacy” and aid commitment
toward the Liberian government to improve human rights and regional
stability, the EU suspended about $50 million in aid on evidence of
government involvement in arms and diamond trading with the RUF.
This suspension reportedly had little effect on the trade itself but was
part and parcel of broader measures that convinced the RUF to lay
down its arms.37
The Expert Panel on the Illegal Exploitation of Natural Resources
in the Democratic Republic of Congo recommended the reduction of
aid to noncompliant governments hosting individuals, companies, and
financial institutions involved in such activities. It is too early to see if
such aid conditionality will be uniformly imposed and achieve a lasting
solution to the conflict in the region, especially given the large
number of regional actors involved and vested interests.
It is difficult to assess the overall effectiveness of aid conditionality,
as much will depend on the aid dependence of the target, its international
trading environment, and the coordination and cohesion of the
donor community. Success is probably more likely when it is possible
to apply pressure on transit countries playing a crucial role in conflict
trade, when the capacity for enforcement is relatively high, and when
targeted countries have a comparatively high stake in maintaining
good bilateral and multilateral relations.
In addition to these initiatives, and within the framework of the
New Partnership for Africa’s Development (NEPAD) and the G-8
Africa Action Plan (see box 6.2), the possibility of an agreement on
a “partnership for transparency and accountability” among African,
G-8, and Organisation for Economic Co-operation and Development
(OECD) governments and companies should be examined,
within the context of broader relevant agreements (for example, the
Cotonou agreement). Such a partnership could cover issues such as
corporate transparency on tax payments, banking disclosure and
procedures for repatriation of embezzled funds, and customs declarations
and be backed by access to export credit guarantees, assistance
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Box 6.2 NEPAD and the G-8 Africa Action Plan
The New Partnership for Africa’s Development (NEPAD), which met in
Abuja in October 2001, represents a major initiative and commitment on
the part of African governments to improve political and economic governance
and create a context favorable to foreign investment and rapid
economic growth. NEPAD specifically recognizes the vulnerability of
African economies resulting from their dependence on primary production
and resource-based sectors and their narrow base of exports. Beyond
the need to diversify production and capture added value, NEPAD mentions
a number of objectives and actions indirectly relevant to tackling
conflict trade, including at an African level: (a) harmonize policies and
regulations to ensure compliance with minimum levels of operational
practices and (b) harmonize commitments to reduce the perceived investment
risk in Africa.
More generally, in reference to promoting African exports, NEPAD
also mentions that participation in the world trading system must enhance
“transparency and predictability as preconditions for increased
investment, in return for boosting supply capacity and enhancing the
gains from existing market access.”
The first NEPAD document did not specifically call for international
action on conflict trade. In response to NEPAD, however, the G-8
designed an Africa Action Plan at its 2002 meeting, in which member
states declared their willingness to work “with African governments,
civil society, and others to address the linkage between armed conflict
and the exploitation of natural resources, including by (i) supporting
United Nations and other initiatives to monitor and address the illegal
exploitation and international transfer of natural resources from Africa
that fuel armed conflicts, including mineral resources, petroleum, timber,
and water; (ii) supporting voluntary control efforts such as the Kimberley
Process for diamonds and encouraging the adoption of voluntary principles
of corporate social responsibility by those involved in developing
Africa’s national resources; and (iii) working to ensure better accountability
and greater transparency with respect to those involved in the import
or export of Africa’s natural resources from areas of conflict” (G-8
Africa Action Plan, Group of Eight, Kananaskis, June 27, 2002).
programs in resource management, grants and loans, and peer-review
mechanisms.
Economic Supervision. Economic supervision to control the flow
of resources and money could prove to be a powerful instrument for reducing
conflict trade while fostering legitimate trade. Such instruments
are likely to be resisted by governments and rebels, but cease-fire and
getting it done 253
peace agreements may provide an opportunity to use such measures.
Analogous to the process of demobilization of soldiers and monitoring
of elections attendant to most peace processes, a war economy could
be “demobilized” and “monitored” by economic supervision. Too frequently,
these periods of uncertainty and hope are used as mere breathing
spaces for military reorganization and rearmament. The economic
aspects of peace processes are generally neglected and too often placed
under the initiative of belligerents jockeying for key economic positions
within the new authority or simply embezzling funds to rearm.
For example, the RUF leader, Foday Sankoh, either ignored the mineral
commission he chaired following the Lomé agreement or used its legitimacy
to advance his personal interests and to rearm his movement.38
Similarly, while UNITA handed over to the government the control of
its main diamond areas in late 1997, the rebel movement continued
mining and purchasing weapons.
Beyond sanctions and global regulatory measures, it is thus imperative
to set up practical regulatory frameworks that deprive belligerents
of revenues that would allow them to follow a double agenda of
peace transition and rearmament, as happened repeatedly in Angola,
Cambodia, Colombia, Liberia, Sierra Leone, and Sri Lanka. Although
economic activities, even illicit ones, often contribute to social peace
by improving the well-being of the population and changing the focus
of groups in conflict, they run the risk of fueling the continuation of
war or future tensions.
Trade in conflict resources can at least be limited through internationally
supervised tax collection and budgetary allocation using escrow
funds (see figure 6.1), even if resources, like diamonds found in alluvial
deposits, remain difficult to control.
Resource
businesses
Escrow
account
Taxes
License to
operate backed
by audit and
sanctions (UN
Security Council
Budget resolution)
Audit
Figure 6.1 Economic Supervision Scheme during Peace Processes
• Demobilization
• Security sector reform
• Institutional capacity
building
• Public services
• Economic
development
Priority public
expenditures
• United Nations
• Domestic government
• Opposition movement
• Civil society
representatives
• International financial
institutions and donors
Budgetary commission
Source: Author.
254 philippe le billon
In such a scheme, populations would benefit from tax transfers to
social services, while the respective administrative and military structures
of belligerents would receive monitored budgetary support to
implement their effective integration into new government structures.
Businesses themselves would be deterred from operating outside the
scheme through a system of incentives, such as secure legal ownership,
and deterrents, such as effective sanctions. If successful, and in the
absence of alternative sources of support, opting out of a peace process
would become a prohibitively costly alternative for belligerents. Several
resource revenue-sharing schemes, such as those in Iraq, Angola,
and Chad, include supervision mechanisms and provide a model in
this regard.39
The Oil-for-Food Program, set up to assist in the implementation of
UN sanctions against Iraq and lessen their humanitarian impact, represents
an early example of such a scheme. Although this program was
cumbersome and achieved only limited results, a UN expert panel has
recommended a similar program to prevent the proceeds of the Liberian
shipping and corporate registry from financing the busting of arms
sanctions.40 The UN Security Council has moved in this direction by
calling on the government of Liberia to establish transparent and
internationally verifiable regimes for auditing its use of revenues derived
from its shipping and corporate registry, as well as the timber industry,
to demonstrate that these are not used for busting sanctions but
for “legitimate social, humanitarian, and development purposes.”41
Although not described in these terms, the attempt by the International
Monetary Fund (IMF) to audit the oil sector in Angola in 2000
and 2001 was also aimed, in part, at improving the accountability of
public finances by a government at war (IMF 2002).Within the framework
of a staff-monitored program including broader economic and
institutional reforms, the IMF succeeded in obtaining this agreement
from an Angolan government recently faced with minimal foreign reserves
and growing pressure by international donors and advocacy
groups. The resulting diagnostic study of the oil sector, conducted by an
international audit firm, examined the channeling of oil revenues to the
state treasury, not their subsequent allocation, as well as the conduct,
honesty, and integrity of the management of the revenues. Furthermore,
the findings of the audit were to be confidential. Human rights
groups criticized the audit for its lack of transparency and retroactivity
and for its limitations (Human Rights Watch 2001). With higher oil
prices, a victory against UNITA, and continued support from the oil
and private banking sectors, the Angolan government stopped its reform
program, which led the IMF to close its program. A leaked IMF
report estimated that about $4 billion had gone “missing” between
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1997 and 2001 (“Measuring Corruption” 2002, p. 48). This episode in
the long series of stalled reforms demonstrates the poor enforcement
capacity of the IMF in the context of a resource-rich country.42
The World Bank has an indirect oversight role over the Chad-
Cameroon Petroleum Development and Pipeline Project intended to
prevent conflicts and prioritize the allocation of oil revenues to social
sectors.43 After nearly three decades of civil conflicts, negotiations between
the northern-dominated government and the main southern rebellion
in the mid-1990s made it feasible for oil companies to develop
fields in southern Chad. The oil companies’ consortium viewed the
World Bank as the “centerpiece of its risk reduction strategy” by attracting
institutional funding as well as assisting the government in its
management of revenue and implementation of social and environmental
programs (Horta 1997). To manage the estimated $1.5 billion
in forecasted revenue over the next 28 years, the Chad Parliament
placed this revenue into an offshore escrow account, allocated it to
social and environmental priority sectors, and submitted it to a public
auditing and an oversight committee.44 However, President Déby, who
came to power through a military coup in 1990, used $4 million from
the oil development “signature bonus” to purchase weapons, triggering
an outcry among nongovernmental organizations and leading the
World Bank and the IMF to threaten exclusion from their debt relief
program (World Bank 2001). As “moral guarantor” of the scheme,
the World Bank also established an international advisory group to
observe implementation of the project and make recommendations to
both governments.45 Although there remains a risk that the oil factor
will bring about internal conflicts, the Chad-Cameroon project may
provide a useful model and blueprint for similar arrangements in some
resource-rich countries. With an ongoing war, rising oil revenues, and
a viable peace process, Sudan also appears to be a strong candidate for
a supervised mechanism for sharing wealth between the different
parties and among the population.
The key to long-term success, however, is strong democratic control
over resource revenues rather than weak external regulation.46 An
external supervision scheme poses risks, such as the resumption of conflict
if the scheme dampens pressure for democratization and provides
a façade of legitimacy through a partial control of the resource rents by
a few select civil society representatives and foreign advisers.
The effectiveness of economic supervision, like many other enforcement
mechanisms, appears to be highly relative. The economic situation
of the target, the nature of the resource involved, the willingness of and
compliance mechanisms on resource businesses, and the potential leverage
of international authorities are key to its success. In any case, the
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complexity of the administration of such an instrument, its transaction
cost, and the many possible loopholes should not be underestimated.
Corporate Conduct Instruments
Most resource businesses argue that they are neutral economic actors
disengaged from the “business of war” (Bray 1997, p. 3). Businesses can
have a positive influence in preventing or attenuating conflicts by generating
economic and employment opportunities, raising standards in
labor practices and social relations, and participating in political stability
and even economic justice. Yet businesses can also have negative
influences and exacerbate conflicts. If investment and commercial activities
are essential to economic and human development, resource businesses
need to recognize that they can produce—often unintentionally—
a number of negative consequences, including the following:
• Increasing inequalities and economic rents amenable to factional
control
• Sustaining poor governance by participating in the corruption
and legitimization of unrepresentative and repressive authorities
• Contributing, either directly or indirectly, to human rights abuse
by degrading local livelihoods and resource entitlements and turning
a blind eye to forced or child labor or to the use of disproportionate
force by security forces protecting their operations and staff
• Hindering peace processes by voluntarily or involuntarily bankrolling
belligerents and thereby reducing the leverage of local populations,
international institutions, and foreign powers (that is,
commercially driven diplomacy).
Once a conflict has started, businesses often play the role of financial
intermediary for belligerents. Although some businesses simply attempt
to cope with a degrading political and security environment, others see
in the situation an opportunity for competitive advantage. The complicity
of businesses in conflicts varies from simple economic intermediaries
to complex forms of influence, including political and military
support. Operating in unstable areas, businesses are frequently able to
act as financial supporters and brokers for arms deals.With a huge demand
for arms and income from mineral resources, Angola, for example,
became a prime target for savvy businesses juggling political
relations, arms dealing, and natural resources brokering in the 1990s.
Countries in conflict also constitute a valuable “niche market” for
businesses whose competitive advantage lies in their risk-taking
approach, political savvy, or connections with security services. To
access and secure resources in these markets, businesses often associate
getting it done 257
themselves with dubious regimes, rebel groups, arms brokers, or
mercenaries. Opportunistic businesses have long “invested” in rebel
factions in order to establish control over resource areas in the near term
or in the future, counting on a rebel success. Western businesses supported
Savimbi in Angola during the 1980s, not only to access diamonds
in the short term but also to be on his side in case of victory. Some
companies may even appear politically progressive as a result.
To date, most attention has been focused on the role of multinational
corporations, notably the extractive industry. Other private
sector actors who are deeply, if less visibly, involved include individual
brokers, domestic or regional businesses operating without an international
profile, and multinationals based in countries lacking strong civil
societies. These firms often have few incentives to operate responsibly
and face fewer sanctions for their activities. Whereas these firms may
engage in questionable practices, their overall business strategy is still
oriented toward legitimate ends. Still other companies specialize in,
profit from, and may seek to prolong conflict. This is particularly true
of businesses acting as fronts for laundering criminal proceeds.
In light of the recent literature on the issue of businesses and
conflicts over the last three years, there is a clear need for a regulatory
framework and instruments of enforcement to influence the behavior
of businesses in relation to conflicts.47 While voluntary and mandatory
regulations have flourished in the fields of environmental and corporate
labor practices, they are just beginning to emerge in relation to
armed conflicts. So far, most efforts have been directed at the positive
engagement and self-regulation of multinationals. One thorough review
of the case for positive business engagement in conflict prevention
identifies the following five principles: 48
• Strategic commitment on the part of management, translated
through explicit policies on human rights, corruption, and security
• Risk and impact assessment of the company’s core business and
social investment activities
• Dialogue and consultation with key stakeholder groups on a
regular basis
• Partnership and collective action with other companies, government,
and civil society organizations to address sensitive issues and to
invest in practical projects
• Evaluation and accountability through performance indicators,
independent verification, and public reporting.
With regard to enforcement instruments, few efforts have been
made so far, and most regulatory initiatives remain voluntary or selfregulatory.
Governments have refrained from imposing mandatory
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regulation on multinationals in the social and environmental realms,
preferring voluntary rules (for example, OECD Guidelines for Multinational
Enterprises). Corporations have adopted self-regulation
policies, in large part to reduce risks such as conflicts and costly government
regulations, to protect or enhance their reputation in relation
to social demands, and to respond to innovative concepts within the
business community. Self-regulation has been most frequent within
low-competition and high-asset-specificity industries, such as oligopolistic
extractive sectors tied to fixed reserves and infrastructures (Haufler
2001, pp. 21–30).
Self-regulation is both reactive and proactive and can fill the regulatory
gaps left by international and national regulations. But although
this type of instrument can positively influence the behavior of some
businesses, it often remains a limited one, both in scope and in accountability.
While some see in it a way to explore and prepare future public
regulation, others believe that it is becoming far too effective at retarding
regulation. Few governments appear to be ready to impose strict
regulation on businesses or individuals profiting from the trade in conflict
resources (on mandatory investment screening and code of conduct
in conflict-prone countries, see box 6.3). The consultation of governments
on the issue of corporate complicity in war economies and
human rights abuses by the UN expert panel on the Democratic
Republic of Congo yielded no support or suggestion for meaningful
measures to curb the trade among 11 transit countries. Out of 17 governments
of end-user countries, only Belgium suggested the imposition
of targeted sanctions against companies.49
The Global Mining Initiative and Other Reviews of Extractive
Industries. The stated goal of the Global Mining Initiative, sponsored
by nine of the world’s largest mining and minerals companies, is to
gain “a clearer definition and understanding of the positive part the
mining and minerals industry can play in making the transition to sustainable
patterns of economic development.” It contracted an independent
analysis of the industry in consultation with stakeholders—the
Mining, Minerals, and Sustainable Development (MMSD) Project—
that included a section on human rights violations and armed conflicts.
Relevant recommendations of the report are in the following areas:
• Managing and distributing mineral wealth
• Increasing transparency in the management of mineral wealth
• Combating corruption
• Promoting and protecting human rights
• Preventing conflicts
• Providing information and collective stewardship in the value
chain.
getting it done 259
Box 6.3 Mandatory Conflict Impact Assessment and
Code of Conduct
The history of international trade relations is replete with practices
perpetuating human rights abuses, corrupt and coercive political rule, as
well as underdevelopment. To ensure that businesses and their home government
are not contributing to human rights abuses and do not benefit
from such abuses, a number of initiatives have suggested that prospective
investments and commercial operations should be screened through a
mandatory conflict impact assessment and, once approved, should follow
a mandatory code of conduct (see Gagnon, Macklin, and Simons
2003).
The collusion or incapacity of many local authorities means that a
legal framework at an international or home-country level should regulate
dubious trade relations. Such regulation should focus on “conflictaffected”
or “conflict-prone” countries, a status to be decided by the
home government or an international institution such as the United
Nations Security Council. The conflict impact assessment as well as a
monitoring of the code of conduct could be conducted by a specific
agency or working group legally mandated by the home government or
international institution, such as the International Finance Corporation.
The assessment and recommendations of the screening agencies should
determine the availability of trade finance services provided by insurance
and export credit domestic or international agencies. Although
such regulation is unlikely to have any impact on the most dubious
forms of conflict trade involving “resource-for-arms” brokers, it has the
potential to positively influence the impact of capital-intensive projects
on governance and conflict prevention. Acting as a potential form of
economic sanction, however, such an instrument should itself be subject
to careful independent scrutiny including by civil society representatives
from host countries in order to foster, rather than deter, investments
contributing to peace building.
The Global Mining Initiative was criticized by some mining specialists
as being an “engineering engagement,” and many critics of the
mining industry boycotted the initiative. The initiative resulted in the
creation of the International Council on Mining and Metals, which
had its first meeting in December 2002. Thus it is too early to evaluate
its effectiveness.
The oil and gas sector has also recently conducted an industry review
of social issues relating to oil and gas projects (IPIECA and OGP
2002). The review was not independent of the sector; rather, it was
consultative and conducted through the International Association of
Oil and Gas Producers’s Social Impact Assessment Task Force. Despite
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its focus on social issues, the task force report does not address issues
of human rights and conflict resolution, revenue management and
transparency, and the role of governments, arguing that “these subjects
are complex and have only emerged relatively recently as significant
issues for the oil and gas industry and some of its stakeholders in some
areas of the world” (IPIECA and OGP 2002, p. i).
The World Bank Group is conducting a major independent review
and discussion of its role in the petroleum and mining sectors. Although
the review is focusing on the role of the World Bank Group rather than
on the activities and consequences of extractive sectors as a whole, its
outcome (scheduled for September 2003) should include policies
regarding the transparency and governance of financial and resource
flows in these sectors. Already, the International Finance Corporation’s
Oil, Gas, Mining, and Chemical Department has been conducting specific
consultation on the transparency and management of oil revenue.50
UNGlobal Compact. Set up in 1999 byUNSecretary General Kofi
Annan “to unite the powers of markets with the authority of universal
ideals,” the Global Compact is defined as a “value-based platform
designed to promote institutional learning.” The compact provides a
set of nine nonbinding principles on labor, the environment, and human
rights to be adopted on a voluntary basis by corporations. Participation
is a function of willingness and ability to contribute to the advancement
of the nine principles. Participating companies agree to share information
regularly with the United Nations on best practices they have
undertaken, to respect the principles, and to participate in policy dialogues
with nongovernmental organizations, trade unions, and other
relevant stakeholders.
The compact does not assess the performance of companies and has
neither the mandate nor the capacity to audit them; instead it seeks to
identify and promote good practices. However, to safeguard the initiative
and to avoid potential abuse, the United Nations reserves the right
not to accept participants, in particular for “complicity” in human
rights abuses (a term not further defined). It can also cancel company
participation if abuses take place. In the eyes of its detractors, however,
this voluntary approach demonstrates the weakness of the United
Nations in addressing the problem of corporate behavior. While supporting
the initiative, the UN High Commissioner for Human Rights,
for example, argues that the Global Compact should be complemented
by a credible and independent monitoring and enforcement mechanism
(UN Office of the High Commissioner for Human Rights 2000).
Begun in 2001, the first policy dialogue concerned the role of business
in zones of conflict and included about 120 companies, international
getting it done 261
agencies, and civil society organizations. To date, four working groups
have provided preliminary recommendations (on transparency, conflict
impact assessment and risk management, multiple-stakeholder initiatives,
and revenue-sharing regimes), but it is too early to assess the
effectiveness of this instrument beyond its relative success in raising
awareness among some businesses and facilitating dialogue.51
The Global Compact is not the only UN initiative dealing with corporate
social responsibilities in terms of human rights. Most noticeable
is a working group of the UN Subcommission on the Promotion
and Protection of Human Rights, which is drafting an addendum to
the UN Universal Declaration of Human Rights entitled Human
Rights Principles and Responsibilities for Transnational Corporations
and Other Business Enterprises. The draft text calls for business enterprises
to be subject to independent, transparent, and open measures
allowing for the verification of compliance.52
OECD Guidelines for Multinational Enterprises. The guidelines
consist of voluntary principles and standards recommended by OECD
governments to multinational enterprises operating in or from adhering
countries (about 36) for their operations in any country, including
through their supply chain. Of relevance to the issue of conflict resources
and armed conflicts, this instrument recommends that enterprises conduct
their affairs with transparency, refrain from discriminating among
potential employees, refrain from paying bribes or making contributions
to political parties (unless legally permissible), and “abstain from
any improper involvement in local political activities.” The guidelines
also state that enterprises should “respect the human rights of those
affected by their activities consistent with the host government’s international
obligations and commitments” (para. II.2).
While not legally binding, the guidelines represent a clear statement
of public policy at the interministerial level and include a procedure of
implementation with some similarities to a judicial process; they are
binding on member states, but not on multinational enterprises (Howen
2001). With specific reference to enterprises operating in conflictaffected
countries, an OECD background note invites enterprises to
contribute by “improving management in the immediate vicinity of their
operations (especially of security forces and resettlement operations);
[and] participating in the search for long-term solutions to these countries’
problems by helping them move toward healthier public governance
(in particular by becoming more transparent in their financial
relations with troubled host countries)” (OECD 2002, p. 13).
The guidelines have received support from the G-8’s 2002 Africa
Action Plan, which refers to their role in “intensifying support for the
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adoption and implementation of effective measures to combat corruption,
bribery, and embezzlement,” and from U.K. Prime Minister Tony
Blair for their role in promoting responsible behavior on the part of
multinational enterprises operating in conflict-affected areas of Africa.
Yet the guidelines have also faced many comments and criticisms on
the part of civil society organizations, which fear that they will become
an alternative to a binding and enforceable instrument, including the
following (Feeney 2002):
• Failure to incorporate “legal rights” for citizens and communities
affected by corporate activities incorporating the direct liability of
“foreign multinationals” and failure to respect the principle of “equality
of arms” of appropriate complaints and judicial mechanisms
• Weakness of consensual nonadversarial means and unenforceable
recommendations to be used by national contact points to address
allegations of violations
• Restrictive demands put on civil society organizations to file
complaints
• Low level of prioritization and staffing among many national
contact points, including potential conflicts of interests because of
their location within institutions primarily aimed at securing private
sector profitability overseas
• No clearly specified time frames for dealing with complaints, so
“flexibility” becomes a cover for inaction
• “Creeping bias” toward confidentiality protecting the interests
of enterprises, with some national contact points demanding that
nongovernmental organizations do not make public the complaints
they file—possibly to win the confidence of enterprises
• Lack of separation between the promotional activities of the
national contact points and the investigative and conflict resolution
activities, which should be assigned to an independent legal office (for
example, an ombudsman).
It is difficult to assess the effectiveness of these guidelines and the
implementation mechanisms in part because of a lack of transparency
and centralization of cases and in part because of the novelty of the
compliance mechanism. Specific instances of application of the guidelines
include the following:
• Complaints of forced labor in Myanmar by French enterprises
involved in the petroleum sector were raised by French labor unions
with the French national contact point, which led to consultations
with some of these enterprises and (nothing more than) public recommendations
by the national contact point on the practices that
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enterprises could take to contribute to the struggle against forced
labor (“Recommendations du point de contact” 2002). The secretariat
was asked to prepare a background note, entitled “Multinational
Enterprises in Situations of Violent Conflict and Widespread
Human Rights Abuses.” This note recognized that “the influence of
multinational enterprises in troubled societies, while often significant,
does have limits” and suggested the following two areas of contribution
for enterprises (OECD 2002):
• The threat of violent eviction of peasant farmers from a mining
concession in Zambia was removed by the “timely intervention” of
the Canadian national contact point after Oxfam Canada initially
raised the issue (Feeney 2002).
• A report by a UN expert panel included a list of 85 multinational
enterprises operating in the Democratic Republic of Congo that it
considers in violation of the guidelines. According to the panel, home
governments have “the obligation to ensure that enterprises in their
jurisdiction do not abuse principles of conduct that they have adopted
as a matter of law. They are complicit when they do not take remedial
measures.”53 The panel also proposed the creation of a monitoring
mechanism enabling the reporting of such enterprises to the OECD
national contact points in the home government of these enterprises.
Several national contact points have been contacted on this matter,
some of which have approached the UN for more information but have
received no reply (the mandate of the UN expert panel has not yet been
renewed, and as such it does not officially exist at the moment).54
Overall, the guidelines are a more effective enforcement instrument
than the Global Compact because of the compliance mechanism.
This instrument, however, is lacking in global coverage (for example,
Southeast Asian multinational enterprises) and is generally slow, ineffective,
and, critics argue, biased toward the interests of the enterprises
rather than those of the affected populations. This instrument could be
strengthened if more countries adhered to the guidelines, the OECD
Security Council strengthened its compliance mechanism, and national
contact points increased their capacity (and will) to intervene more
decisively.
Access to Markets, Corporate Reporting, and Transparency. The
rules of access and trading on financial markets can provide useful instruments
of enforcement in terms of reporting and financial accountability.
The restrictions on access to capital markets as well as export
credit guarantees and insurance can also complement commodity
sanctions by curtailing investments or transactions. Current efforts by
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governments and nongovernmental organizations in the field of corporate
responsibility include the following (Adams 2002):
• Prescriptive legislation instituting mandatory disclosure and
“smart legislation” stimulating the demand for corporate social responsibility
data
• Voluntary standards and principles, reporting guidelines, and
performance indexes
• Direct engagement with companies and industry associations
(high-level meetings, consumer pressure, independent monitoring).
These efforts have been directed mostly at the largest publicly listed
companies, which are generally dealing with governments rather than
groups or authorities.
Stock market regulations demand minimum levels of disclosure
from publicly listed companies on operations, risks, and finance; these
regulations can assist in the transparency and accountability of the
private sector. There is, as yet, no uniform reporting requirement on the
activities of the private sector. A voluntary initiative, the Global
Reporting Initiative, was established in 1997 to enhance the quality,
rigor, and utility of sustainability reporting on the economic, social, and
environmental performance of corporations and other organizations. It
is now a permanent institution, and more than 100 companies have
adopted its Sustainability Reporting Guidelines. To date, the guidelines
and associated documents do not make specific reference to the issue of
conflict resources, apart from a draft supplement for the mining sector
recommending questions on human rights violations. However, a member
of the Global Reporting Initiative’s board of directors, Roger
Adams, has suggested that the new guidelines should incorporate
“corporate accountability within war economies.”55
Risks for investors continue to be the cornerstone of mandatory
reporting, rather than the risks facing affected populations where companies
operate. The two are sometimes linked, however, for example,
through the reputation and security risks faced by companies. In the
United Kingdom, following recommendations from the Turnbull report,
prescriptive legislation now requires companies listed on the
London Stock Exchange “to create systems to identify, evaluate, and
manage their risks and to make a statement on risk management in
their annual report” that accounts for business probity issues. Smart
legislation—the U.K. Pensions Act—requires pension funds to inform
customers about social policy commitments and to disclose ethical
considerations in their investment portfolio. This has created a demand
for such data, which most listed companies now provide on
a voluntary basis. Such demand for social reporting is also created by
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ethical investment and pension funds specifically integrating environmental
or social responsibility as investment selection criteria. Like
other ethically minded investors, these funds use their financial influence
to encourage greater corporate social responsibility among the
firms in which they have invested. Some advocacy groups have purchased
shares only to be able to propose ethically driven resolutions.
Specific indexes assessing the ethical responsibility of listed companies,
such as the FSTE4Good Index or the Dow Jones Sustainability Index,
also facilitate the choice of investors and could play a greater role in the
future—although these indexes remain financially marginal and are
criticized for requiring low ethical standards.
Several recent initiatives relate to the financial transparency of
resource sectors in relation to armed conflicts. The G-8 promotes the
transparency principle through its 2002 Africa Action Plan (box 6.2).
U.K. Prime Minister Tony Blair launched at the World Summit on
Sustainable Development meeting in Johannesburg the Extractive
Industries Transparency Project, which is being backed by a number of
governments and major companies and could lead to either a voluntary
or a mandatory transparency instrument. A coalition of nongovernmental
organizations led by George Soros and Global Witness is also
seeking to improve the transparency of fiscal reporting through their
Publish What You Pay campaign, which aims to make the disclosure
of all payments by oil, gas, and mining companies to host governments
a mandatory condition for being listed on international stock
exchanges.56 Because this measure would not affect unlisted companies,
such as privately owned or state companies, the campaign also
aims to set similar obligations of public disclosure under national or
regional company law. A further loophole that will prove even more
difficult to close concerns the regulation of international brokers registered
in offshore jurisdictions and state companies in host countries.
Such brokers specialize in carrying out the “dirty work” of obtaining
resource concessions (often through corrupt deals), before selling them
in a “clean” manner to resource companies. Local “sleeping partners”
associated with the operations of resource companies, in the form of
board directors or state companies in charge of some subcontracting
operations, also act as vehicles for corruption by diverting large cash
bonuses, commissions, or profit shares.57 A system of mandatory disclosure,
peer review, and industry certification associated with financial
incentives and possibly market access thus needs to be extended to
these types of companies.
There is a strong argument in favor of global and mandatory instruments
given the financial confidentiality clauses imposed by many host
governments on resource exploitation contracts and the competitive
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nature of trade. Mandatory legislation in home countries would provide
the legal ground for overturning these financial confidentiality clauses.
Applied globally, this would help to create a level playing field for all
companies. More generally, these instruments would have the advantage
of being relatively cheap to implement, since they would rely on
available accounting data. Such legislation would avoid the charge of
being “neocolonial,” since it simply provides information to the public,
without dictating the ways in which revenues should be allocated.
Given these advantages, such measures should be promoted as an
essential element of good governance of the global economy.
Disclosure rules, and their consequences for investment, can increase
the social responsibility of companies; however, reporting is
rarely specific enough to assist in the detection of complicity by companies
in corruption or war economies. This could be improved by
more specific and socially oriented disclosure requirements, such as
social impact assessment in countries with a low Human Development
Index, financial reporting at a country level, and links to more specific
assessment reports. Many shareholders also complement company
analysis by monitoring both the activities of the companies and the
context in which they operate. This is particularly true of resource
companies operating in politically volatile situations where risks are
high. For most investors, however, the bottom line is more frequently
defined by share value and dividends and less frequently by ethics. In
this regard, the work of investigative journalists or advocacy nongovernmental
organizations can provide fund managers with a detailed
analysis of the practices of companies and their consequences
and result in a general divestment movement. Such measures, however,
require global action; many medium-size companies criticizing more
stringent rules on the U.S. stock exchange following the Enron scandal
threatened to withdraw to more lenient financial public markets or go
private altogether.
Multilateral and national export credit and investment insurers,
such as theWorld Bank’sMultilateral Investment Guarantee Agency or
the U.S. Overseas Private Investment Corporation, are not mandated
to consider or reduce the impact of their clients on conflict-affected
countries. Until recently, only the economic and political risk impinging
on the ability of firms to perform contracts and the ability of the
country to service its external debt were taken into consideration.
Agencies nevertheless are becoming increasingly aware of the broader
risks entailed by projects in conflict areas; by making their financial
assistance conditional on criteria such as the OECD Guidelines for
Multinational Enterprises, these agencies could provide a mechanism
for applying enforcement instruments directed at conflict resources.
getting it done 267
Advocacy groups and consumer watchdogs also monitor the activities
of companies and the ethical standing of their products; these
groups have some degree of influence on consumption patterns through
consumer information campaigns and direct action. Targets of consumer
boycotts have included banks alleged to be funding scientific
research involving vivisection, oil companies perceived as having poor
environmental records, and clothing manufacturers accused of exploiting
workers in the developing world. Consumers, it is argued, want
their preferred brands to reflect their social values, often prompting
companies to adapt business practices and to adopt public relations
countermeasures, including so-called “greenwash.”58 The threat of a
consumer boycott of diamonds was a critical factor in motivating the
diamond industry and the governments of producing countries to
change their public policies and to engage in the Kimberley process; this
demonstrates the effectiveness of a threat of consumer pressure.
Company Practices: The Case of Coltan. Companies involved in
the extraction and trade of coltan in eastern Democratic Republic of
Congo have come under pressure to stop “fueling the war” through
nongovernmental organization campaigning, nonregulatory governmental
pressure, and naming and shaming from UN expert panels. UN
expert panels reporting on the illegal exploitation of natural resources
in the Democratic Republic of Congo named several companies directly
or indirectly supporting rebel groups and their regional allies in the
eastern part of the country. Much of the media attention also focused
on the killing of endangered gorillas and environmental degradation by
coltan diggers and militias operating in national parks.
The Tantalum-Niobium International Study Center reacted by calling
on its member companies around the world “not to purchase raw
materials from illegal or illegitimate sources . . . [and] to take great
care in making purchases in the region of the Democratic Republic of
the Congo [since] trade which causes harm, or threatens to cause
harm, to local populations, to animals, or to the environment is not
acceptable.”59 The world’s largest manufacturer of tantalum capacitors
informed its coltan suppliers about these policies and asked them
to certify that they acted accordingly, although the company recognized
that it could not trace the origin from the product itself.60 The
world’s second-largest processor of coltan also declared—albeit in the
midst of a glutted market—that it would not buy coltan from the
Great Lakes region (Harden 2001). The Electronics Components,
Assemblies, and Materials Association urged its members to avoid
tantalum mined in environmentally protected areas of the Democratic
Republic of Congo. Many electronics companies publicly rejected the
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use of coltan from anywhere in Central Africa, relying instead largely
on Australian supplies (Delawala 2002). Investigations from the UN
expert panel suggest that leakages still occur and that considerable
incentives remain to use conflict coltan due to very low labor costs in
the Democratic Republic of Congo.
The relative success of these measures, in the context of falling
coltan prices, has led some international and local nongovernmental
organizations to question their humanitarian impact. The Congolese
POLE Institute—which included Congolese coltan traders—argued
that, despite the clear links between war and coltan as well as the need
to stop the illicit economy organized and controlled by armed groups,
“the people of the Kivu would not gain [from an embargo], but lose one
of their very few remaining sources of income” (POLE Institute 2001,
p. 4). The trade, however, appears to remain dominated by Rwandan
and Ugandan interests, with benefits apparently so low for the local
population that many have now abandoned this activity.61
U.S.-U.K. Voluntary Principles on Security and Human Rights.
Adopted in December 2000 by a number of (mostly resource-based)
companies and nongovernmental organizations at the initiative of the
U.S. and U.K. governments, this instrument defines voluntary principles
to guide companies in maintaining the safety and security of their
operations within a framework that ensures respect for human rights
and fundamental freedoms.62 Although not directly relevant to the
curtailment of conflict trade, this instrument provides a useful model
of collaboration between governments, resource companies, and
human rights groups. Continued dialogue between parties provides
the opportunity to review the principles and share experiences in
implementing them. The instrument is open to new parties and could
therefore set a global standard, although some companies operating in
conflict areas and most exposed to the problems of abusive and unaccountable
security arrangements are not welcome for fear of bad
publicity. The principles cover risk assessment (the identification of
security risks, potential for violence, human rights records, rule of law,
conflict analysis, and equipment transfers) and interactions between
companies and public and private security entities (security arrangements,
deployment and conduct, consultation and advice, responses to
human rights abuses).63 Although voluntary and nonbinding, the
principles are based on international humanitarian and human rights
legislation as well as international principles on the use of force and
firearms by law enforcement officials. If featured in securing contracts,
however, the principles could become legally binding.
In terms of their effectiveness, participating companies themselves
have noted that there are practical barriers to the viability of the
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principles, with significant delays and difficulties experienced in
application. Because these principles, like most voluntary codes of
conduct, lack compliance assessment by third parties, their efficacy
pivots on the good will and priorities of individual managers as well as
the operational context in which they have to make decisions; the
profit motive, competitive pressures, and the practices of local security
agencies constitute formidable countervailing forces.
The Role of Nongovernmental Organizations and the Media
Nongovernmental organizations and the media play a crucial role in
investigating conflict trade and creating pressure on authorities, business
intermediaries, and consumers through public information and
lobbying. Early work by advocacy groups dates back at least to the
slave trade and colonial period, when governments and companies
were accused of plundering the colonies.64 Nongovernmental organizations
have also monitored breaches of sanctions regimes, such as the
monitoring of oil tankers and shaming of companies “breaching” the
voluntary oil embargo against South Africa.65 Recent examples of campaigns
targeting conflict trade include the following:
• Disinvestment campaigns targeting oil companies; campaigns and
media focusing on the activities of petroleum companies in conflictaffected
countries.
• The “fatal transactions” campaign against the laundering of conflict
diamonds through legitimate trade. Orchestrated by a coalition of
nongovernmental organizations led by Global Witness, the campaign
launched a major international agreement and is generally assessed as
effective, at least in terms of creating industry and international policy
awareness.66
• The blockade of Liberian timber in a French port by Greenpeace
activists on both environmental grounds and alleged connection of the
Liberian timber trade with arms trafficking and conflict in the region
(Mallet 2002). The blockade attracted some media attention but did
not result in any major tangible outcome.
• The campaign on conflict timber emanating from Cambodia and
more recently from Liberia by Global Witness, which included public
information, pressure on regional governments and donors, as well as
briefing documents to the United Nations.67 The outcome was an effective
ban by Thailand on Cambodian timber (exported by the Khmer
Rouge), but little progress was made on Liberia.
Campaigns are generally led by human rights and environmental
nongovernmental organizations specializing in advocacy work.
Amnesty International, EarthRights International, Global Witness,
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Human Rights Watch, and others have been at the forefront of investigative
work, advocacy, and demands for regulatory improvements in
the domain of resource flows to belligerents. Mainstream operational
nongovernmental organizations and even intergovernmental agencies,
which previously shunned such “politicized” activities, are increasingly
involved, either through financial support to advocacy groups or
through direct engagement.Development and humanitarian nongovernmental
organizations, however, often face a serious dilemma and have
to balance the risk of being expelled by host governments they criticize,
the security of their local staff, and access to program beneficiaries.
In many cases, nongovernmental organizations have based the
legitimacy of their engagement on universal principles of human rights,
on the legislation of host countries, or on the contrast existing between
the wealth generated by resources and the poverty of local populations.
They employ a broad range of initiatives, including public information
campaigns, direct action (for example, blockades), consumer
boycotts, shareholder activism, institutional partnerships and negotiations,
as well as litigation. While some nongovernmental organizations
focus on corporate disinvestments, others seek constructive engagement.
Most nongovernmental organizations working on the issue of
conflict diamonds, for example, avoided a consumer boycott that
would have been damaging to the populations of producing countries
such as Botswana. Amnesty International never calls for sanctions
against businesses or for their withdrawal, stressing instead the importance
of a dialogue with businesses to promote the adoption of better
practices. The Henri Dunant Centre for Humanitarian Dialogue established
partnerships with oil companies in Aceh, Indonesia, to promote
a cease-fire and in Myanmar to monitor human rights abuses. Several
British nongovernmental organizations, including Christian Aid and
Oxfam, have also engaged in investigations and dialogue with British
Petroleum regarding its activities in Colombia. Overall, the engagement
of nongovernmental organizations has become more constructive,
leading to their participation in high-level negotiations with
industries and governments.
The media have also played a major role, notably in disseminating
the findings and arguments of nongovernmental organizations and
campaigners but also in conducting their own investigations. For
example, the links alleged by the Washington Post’s Douglas Farah between
diamonds from RUF-controlled areas in Sierra Leone and the
Al-Qaeda terrorist network lent further urgency to the Kimberley certification
process (Farah 2001). The media attention devoted to the issue
of conflict diamonds, however, is not guaranteed for other commodities
involved in conflict trade—as stated by a campaigner, “Diamonds are
getting it done 271
more sexy than logs.”68 Articles on the roles of such obscure resources
as coltan in both financing war and providing a source of livelihood
to civilians, however, have demonstrated that the media cannot only
disseminate news but can also add to the debate on conflict trade
(Harden 2001).
The major strength of nongovernmental organizations, and to some
extent the media, is their independence and their ability to engage with
“politicized” issues and to challenge the status quo of “business as
usual.” Interventions by nongovernmental organizations and media are
not without criticisms, however, which include the following:
• Campaigns mostly concentrate on Western multinationals:
leaving other companies “off the hook” may lead more accountable
companies to leave the country and worse ones to take their place.
• Campaigns often take a “piecemeal” approach: focusing on one
country or one company may prove less effective in the long term than
taking an issue-based approach.
• The media have a short attention span: advocacy campaigners
may opt for “simple” arguments and solutions.
• Initiatives remain dominated by Western-based nongovernmental
organizations: this raises the issue of legitimacy, even if it is useful
for these organizations to protect local nongovernmental organizations
by “taking the heat” on highly sensitive issues.
The effectiveness of interventions by nongovernmental organizations
and the media remains highly dependent on the issue and the
nongovernmental organizations involved, with a wide variety of track
records. However, increased coalition building and professionalism
among nongovernmental organizations, as well as greater legitimacy
within (inter)governmental decisionmaking processes, are lending
greater significance to their voice and values in current governance
processes.
Transboundary Resource and Environmental
Governance Instruments
Numerous transboundary resource and environmental governance
instruments exist in state and nonstate areas. Instruments for the protection
of biodiversity, the regulation of resource governance on the
high seas, and cooperation in the management of transboundary rivers
are well-known examples. Few of these instruments, however, are
legally binding or have comprehensive monitoring mechanisms. The
Convention on International Trade in Endangered Species of Fauna
and Flora (CITES) is an exception in this regard. Another instrument,
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the UN Agreement on Fish Stock, is also examined briefly for its relevance
to the enforcement of resource management in areas where there
is no state sovereignty, the high seas.
License-Controlled Trade: The Case of CITES. CITES is one of
the most comprehensive international agreements regulating trade for
noneconomic purposes. First drafted in 1963, it entered into force
in 1975. It now counts 160 parties and can be considered global in
reach. CITES has direct relevance to this report, as wildlife constitutes a
“natural resource,” and endangered species are often exploited during
armed conflicts due to the collapse of protection agencies. For example,
there was a thriving trade in tiger skins and cubs in Cambodia during the
early 1990s. Its greater relevance, however, arises from the enforcement
mechanisms it employs and its relatively long-established record.
Adhesion to CITES is voluntary, but legally binding. Signatories
that have ratified the treaty are subsequently required to reform their
national laws in accordance with CITES, if necessary. CITES establishes
a number of controls on the international trading of specimens
of approximately 3,400 selected species; these controls include a licensing
system for all import, export, reexport, and introduction from
the sea of species covered by the convention. Three degrees of protection
can be granted to species according to their vulnerability through
a system of listing consisting of three appendixes to the convention.
Species listed in Appendix I are threatened with extinction, and trade
is allowed only in exceptional circumstances. Appendix II includes
species not necessarily threatened with extinction, but in which trade
must be controlled in order to avoid use incompatible with their survival.
Appendix III contains species that are protected in at least one
country, which has asked other CITES parties for assistance in controlling
the trade. National scientific authorities assess the effects of trade
on the status of species (which is decided during international meetings),
and a system of import or export permits administered by national
state management authorities enforces the convention.69 Parties
may import or export (or reexport) a specimen of a CITES-listed
species only if the appropriate document has been obtained and presented
for clearance at the port of entry or exit. This document, and the
conditions attached to its delivery, varies according to the appendix in
which the species is listed. There are two main relevant conditions:
first, that the trade is not detrimental to the survival of the species and,
second, that the specimen was legally obtained.
The core institution of the convention is the secretariat, which is empowered
to study reports of the parties and to request any information
it deems necessary to ensure the implementation of the convention and
getting it done 273
to focus the attention of the parties on any pertinent matter (Article
XII, 2[d], 2[e]). The convention also provides for the secretariat to
notify a party directly if it believes that the convention is not being effectively
implemented, whereupon the party in question is to respond.
(It may also request an inquiry, with information from the inquiry
being furnished for the next meeting of the parties; Article X.) This
makes CITES’s secretariat possibly one of the more independent secretariats
in the environmental field (Hajost and Shea n.d.).
According to its secretariat, the value of CITES has been demonstrated
by the fact that “not one of the species protected by CITES has
become extinct as a result of trade since the convention entered into
force.”70 Yet criticisms of this instrument and its effectiveness continue
to be made, which include the following:
• Absence of a supranational institution enforcing international
obligations on individual states
• Poorly drafted sections of the convention that leave critical loopholes
(for example, reservations by parties and other exemptions)
• Lack of financial commitment by some parties to enforce CITES
at the domestic or international level and a poorly funded secretariat
• International-level instrument that does not affect domestic trade
• Listing system that puts the burden of proof on conservationists
rather than traders
• Absence of a computerized database for enforcement agents
(inspectors, customs)
• Vulnerability of the permit system to fraud resulting from the
absence of a permit-tracking system and a uniform and tamper-proof
permit form and registration of traders and transporters
• Potential for abuse in trade with nonparty countries and noncomplying
parties
• Absence of minimal training standards and an international corps
of inspectors
• Lack of transparency on inspection reports
• Lack of economic incentives for legitimate trade
• Lack of criminal and civil liability for illegal wildlife trade among
some parties.
The feasibility of applying similar instruments to all resources in
order to prevent conflict trade appears to be limited, given the greater
volume and greater difficulty in determining points of origin of regulated
commodities (as opposed to the identification of threatened species).
CITES nevertheless remains a valid model for the commodities most frequently
involved in conflict trade, particularly those with highly specific
or easily identified points of origin.
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Resource Governance in Nonstate Areas: 1995 UN Fish Stock
Agreement. The UN Agreement on Fish Stocks entered into force in
December 2001.71 Along with the Food and Agriculture Organization’s
Code of Conduct for Responsible Fisheries, this agreement outlines
principles for good governance of fisheries in terms of maximum
sustainable yield and applies a “precautionary approach” to the sector.
The agreement provides a tough mechanism for monitoring and
enforcement:
• Compliance and enforcement are ensured by the state in which
the vessels are matriculated (flags), irrespective of where the violations
occur. States will cooperate, either directly or through regional fisheries
management mechanisms.
• States are granted boarding and inspection on vessels—including
the right to use force “to the degree necessary to ensure the safety of the
inspectors and where the inspectors are obstructed in the execution of
their duties”—as well as the right to detain the vessel or otherwise incapacitate
a vessel when there is sufficient evidence of an alleged violation.
• States are “liable in accordance with international law for damage
or loss attributable to them in regard to this Agreement.”
• States “shall take measures consistent with this Agreement
and international law to deter the activities of vessels flying the flag
of non-parties which undermine the effective implementation of this
Agreement.”
In terms of the resolution of disputes and sanctions, states have the
obligation to resort to only peaceful means (for example, negotiation,
inquiry, mediation, conciliation, arbitration, judicial settlement, referral
to regional agencies or arrangements). The agreement recognizes the
special requirements of developing states, including their frequent lack
of inspection capacity, and calls on states and international agencies to
assist in this regard; it also asks implementing states to consider the
nutritional and subsistence needs of the populations of developing countries
and the economic needs of workers in small-scale fisheries.
The effectiveness of the agreement, however, depends on the national
or regional legislation passed, the quality of the data employed to
determine quotas, as well as the enforcement capability of states. The
agreement itself has been criticized for its engagement at the level of fish
species rather than the ecosystem (MacGarvin 2001). Its exclusionary
“relevancy rule,” which confers governance status over the fish stock
on relevant coastal states and on states having a “real interest in the
fisheries concerned,” has also been criticized as a significant departure
from the inclusive constituency defined by the Law of the Sea Treaty
(Admay 2000).
getting it done 275
Given that it deals with resources located outside or beyond state
sovereignty, the UN Agreement on Fish Stocks is somewhat relevant to
the regulation of conflict resources in rebel-held territories; however,
patrolling the high seas is undeniably distinct from monitoring and
intervening in war-torn territories. Its relevance is therefore limited.
Challenges to Effective Enforcement
Drawing from a number of consultations and research conducted, in
particular, by Global Witness, International Alert, the International
Peace Academy, and the Overseas Development Institute, there is
growing consensus that current international enforcement instruments
are ineffective and insufficient.72 Most of these consultations and research
exercises have found that a dual-track strategy is required, involving
improved identification, enforcement, and harmonization of
relevant policies and institutional mechanisms and possibly the development
of a new, inclusive, global regulatory framework.
The effective implementation of enforcement instruments for conflictrelated
natural resources faces major challenges, such as the following:
• Economic sectors are operated largely by private profit-driven
actors coming under a variety of jurisdictions, and occasionally including
international criminal outfits, that lack the will, incentives, or
normative prescriptions to act to prevent or terminate conflict.
• Effective domestic enforcement in conflict-affected countries is
extremely difficult. Such countries can provide a “safe haven” for
other criminal activities, such as money laundering and terrorism;
hence the reliance on international forces as well as regional or international
enforcement mechanisms, with key transit countries and businesses
acting as “market gatekeepers” against conflict trade as well as
by industrial states to extend domestic regulation to the extraterritorial
activities of multinationals and their subsidiaries.
• Lack of capacity and perverse incentives persist in police, customs,
and judiciary systems in many developing countries, but also in
industrial ones, notably because of the high volume of trading and the
focus of regulatory agencies on drugs or terrorism.
• Private and public economic and strategic interests are protected
by state apparatus (for example, corrupt interests of state officials, protection
of multinational corporations, access to strategic commodities
such as oil, international political alliances).
• Problems of consensus, coordination, and commitment by states
and multilateral agencies at the national, regional, and international
276 philippe le billon
levels hinder effective enforcement (for example, absence or poor
communication of both intelligence and public information, bureaucratic
red tape, lack of financial resources, slow judicial procedures,
and vested political interests).
• Uneven jurisdiction at the international level creates major loopholes
(for example, offshore banking and incorporation).
Even if well implemented, international instruments of enforcement
are unlikely to halt the mobilization of natural resources in armed conflicts.
Nonetheless, by raising the production and transaction costs
of belligerents and their accomplices, such instruments may be able
to drastically reduce the trade in otherwise legal “conflict resources.”
Raising transaction costs for belligerents and their accomplices can only
result from effective enforcement—even if simply by dissuading most
potential buyers. Furthermore, production and transaction costs need to
be sufficiently high to reflect the significant discounts that belligerents
are often willing to make. Moreover, although profit making has been
recently stressed as one of the motivations of belligerents, this is not
always the case. Politically motivated belligerents will find ways to
adapt their struggle to the difficult economic conditions resulting from
effective enforcement measures. Belligerents are likely to accept noneconomic
deals simply to increase their cash flow in the short term to
achieve their goals. Raised costs must also reflect the low cost of appropriation
or production by belligerents. Profit-motivated belligerents
controlling or exploiting resources at significant discounts in comparison
to normal authorities or businesses (for example, through theft, use
of forced labor, or disregard for environmental standards or sustainability
principles) are likely to accept significantly discounted buying prices.
Addressing these enforcement issues is complicated in the context of
fragmented governance in which the designated enforcement agency
and the most effective enforcement mechanism (self, soft, or hard) are
difficult to identify. Moreover, little expertise exists to enable an evaluation
of the effectiveness of enforcement instruments. Effectiveness can
be assessed, for example, on the basis of the following:
• The priority and visibility of the policy agenda in international
meetings or the media, but this does not guarantee effectiveness
• Expert knowledge within the industry or monitoring
organizations
• The number of individuals arrested or “named and shamed” or the
amount of resources and financial revenues seized, yet the impact on the
rest of the trade and the course of the conflict may be difficult to assess
• The termination of the conflict itself, although many other
factors frequently intervene.
getting it done 277
The assessments at this point are very tentative. Furthermore, many
of the instruments are recent or are still in the design phase. Given the
apparent weakness of current enforcement instruments to date and
the emergence of new ones, the assessment of enforcement is a critical
issue for future research.
Drawing on this discussion, specific areas for additional research
include the following:
• Information on resource businesses operating in conflict-affected
countries. Much of the information currently available results from
advocacy campaigns, limited investigative journalism, and UN expert
panel reports. There is no global picture allowing a “profiling” of
activities, the businesses involved, and regulatory efforts. Such information
could assist not only in the design of policy tools but also in
their enforcement.
• Mapping of the business intermediaries, authorities, and enforcement
agencies intervening along the commodity chains. This could
provide a clearer picture of areas where enforcement mechanisms can
intervene, where loopholes are located, and in which collaborations
and policies may be needed.
• Detailed examination of the decisionmaking and implementation
processes involved, as well as the effect on the conflict and broad resource
governance of enforcement mechanisms. Field-based investigation and
a broad stakeholder consultation on a number of cases involving, for
example, UN sanctions, the use of expert panels, advocacy campaigns,
and company divestment could provide valuable information for the
design of policy tools.
• Assessment of legal and political opportunities and constraints
likely to shape a process of international agreement on resource
governance. This could include the identification of applicable international
norms as well as of design and implementing agencies; the
definition of conflict resources, relevant offenses, and degree of complicity
on the part of economic intermediaries and authorities; and the
enforcement mechanisms and range of incentives and penalties.
Notes
1. Cited in interview of John Peleman, www.pbs.org.
2. An overview of these various means of financing conflict is provided in
Le Billon, Sherman, and Hartwell (2002).
3. No correlation is found by Collier, Hoeffler, and Söderbom (2001), but
most of the case study literature argues the contrary; see Ross (forthcoming).
278 philippe le billon
4. Interview with the author, Cambodia, January 2001.
5. Security Council Resolution S/RES/232 (1966, para. 4 and 5).
6. Security Council Resolution S/RES/661 (1990); available at www.eia.
doe.gov/emeu/cabs/iraq.html.
7. Oil exports represented 95 percent of Iraq’s foreign earnings, and 60–80
percent of the food had to be imported; see Melby (1998, p. 115).
8. UN Security Council Resolution S/RES/665 (1990, para. 1); Recknagel
(2000).
9. The author participated in border monitoring in 1996.
10. Interviews by the author in Sierra Leone, April 2001.
11. Their empirical study examines 115 cases and identifies 41 successes;
see Hufbauer, Schott, and Elliot (1985).
12. Knorr’s empirical study examines 22 cases; see Knorr (1975).
13. Secretary General Paulo Lukamba Gato, cited in United Nations (2002,
p. 38).
14. Security Council Resolution S/RES/1295 (2000, para. 27).
15. See www.smartsanctions.ch/Papers/I2/2wg2a1.pdf.
16. Interview by the author with Ian Smillie, Ottawa, March 2002.
17. Article 8-b (XIII, XVI).
18. Article 25 (c,d).
19. See www.un.org/law/cod/finterr.htm.
20. Adopted at the UN General Assembly in December 1999 and in
the process of being ratified by member states. See www.un.org/law/cod/
finterr.htm.
21. The definition of the offense includes any act “intended to cause death
or serious bodily injury to a civilian, or to any other person not taking an active
part in the hostilities in a situation of armed conflict, when the purpose of such
act . . . is to intimidate a population, or to compel a government or an international
organization to do or to abstain from doing any act” (para. 2.1[b]).
22.With regard to jurisdiction, the convention does not apply if the business
is from the state in which the offense is committed and is present in that state
and no other state has a basis to exercise jurisdiction (para. 3).
23. According to the convention, an “‘organized criminal group’ shall
mean a structured group of three or more persons, existing for a period of time
and acting in concert with the aim of committing one or more serious crimes
or offences established in accordance with this Convention, in order to obtain,
directly or indirectly, a financial or other material benefit . . . [and a] ‘Serious
crime’ shall mean conduct constituting an offence punishable by a maximum
deprivation of liberty of at least four years or a more serious penalty”
(Article 2).
24. Protocol supplementing the UN Convention against Transnational
Organized Crime (Resolution of the UN General Assembly 55/255 on May 30,
2001).
getting it done 279
25. See www.interpol.int/Public/Icpo/FactSheets/FS200101.asp. For the
structure of Interpol, seewww.interpol.int/Public/icpo/governance/default.asp.
26. See www.interpol.int/Public/FinancialCrime/FOPAC/default.asp.
27. See www.odccp.org/odccp/crime_cicp.html.
28. See www.fscoax.org/principal.htm.
29. Statement from World Diamond Council, press release, October 10,
2002, New York.
30. Ian Smillie, personal communication, Ottawa, March 2002.
31. See www.amnesty-usa.org/diamonds/update.html.
32. On the case of the South African Diamond Board, see International Consortium
of Investigative Journalists (2002a).
33. About 29 million hectares of forests are currently certified under the Forest
Stewardship Council scheme (for comparison, about 11 million hectares of
forests are lost annually, according to the Food and Agriculture Organization).
34. With more than 43 million hectares, it is reportedly the world’s largest
certification system. See www.pefc.org/.
35. For the case of logging in Cambodia, see Le Billon (2000).
36. Lobbying accompanied the first report of Global Witness, Forests,
Famine, and War (Global Witness 1995).
37. Interview by the author with Alex Vines, expert panel member, London,
February 2001.
38. Report of the Panel of Experts Concerning Sierra Leone, dated
December 13, 2000, S/2000/1195, para. 90-8.
39. For a review of some relevant revenue-sharing mechanisms, see Bennett
(2002a).
40. Resolution S/2001/1015, para. 59.
41. UN Security Council Resolution S/RES/1408 (2002, Article 10).
42. On reforms and the political economy of Angola, see Hodges (2001).
43. The oil development involves the construction of a pipeline through
Cameroon.
44. Article 1/PR/99 Concerning Oil Revenues Management, N’Djaména,
January 11, 1999.
45. See www.worldbank.org/afr/ccproj/project/iag_tor_en.pdf.
46. Interview by the author with Charmian Gooch, GlobalWitness, London,
June 2002.
47. A detailed review of this literature falls outside the scope of this report.
See Avery (2000); Bennett (2002b); Carbonnier (2001); Clapham and Jerbi
(2001); Frankental and House (2000); Howen (2001); International Council
on Human Rights Policy (2002); Keen and Tickell (2000); Lilly and Le Billon
(2002); Oloka-Onyango and Deepika (2000); Sherman (2001); Switzer (2001);
Taylor (2002); Utting (2000); Williams (1999).
48. For a detailed review and analysis, see Nelson (2000).
49. Resolution S/2002/1146, p. 26.
280 philippe le billon
50. Workshop on Petroleum Revenue Management, Washington D.C.,
October 23–24, 2002; see www.ifc.org/ogmc/petroleum.htm.
51. UN Global Compact (2002); for recommendations, see 65.214.34.30/
un/gc/unweb.nsf/content/zones_conflict.htm.
52. See www.business-humanrights.org/UN-Sub-Commission.htm.
53. Resolution S/2002/1146, pp. 31–32.
54. Kathryn Gordon, OECD, personal communication, November 2002.
55. Comments from ACCA, dated May 27, 2002. See www.globalreporting.
org/WorkingGroups/Revisions/Members/PublicComments2002/
ACCAFurtherComments.pdf.
56. Publish What You Pay, press release, Global Witness, London, June 13,
2002.
57. For more details, see chapter 3, on the reporting of resource revenues.
58. On brands and corporate social responsibility, see Klein (2000).
“Greenwash” can be defined as “the phenomenon of socially and environmentally
destructive corporations attempting to preserve and expand their markets
by posing as friends of the environment and leaders in the struggle to eradicate
poverty”; see www.corpwatch.org.
59. Tantalum-Nobium International Study Center, press release (n.d.) and
personal communication from official, November 2002.
60. Interview by the author with Kemet official, November 2002.
61. Field investigation by the author, April 2002; Jackson (2003).
62. The initial participants are British Petroleum, Chevron, Conoco,
Freeport MacMoran, Rio Tinto, Shell, Texaco, Amnesty International, Fund
for Peace, Human Rights Watch, International Alert, Lawyers Committee for
Human Rights, Prince of Wales Business Leaders Forum, and the International
Federation of Chemical, Energy, Mine, and General Workers Unions.
63. See www.state.gov/g/drl/rls/2931.htm.
64. For an account of the campaign against rubber exploitation in the
Belgium Congo, see Hochschild (1999).
65. Monitoring was conducted by the Amsterdam-based Shipping Research
Bureau; see Hengeveld and Rodenburg (1995).
66. See www.niza.nl/fataltransactions/.
67. See www.globalwitness.org.
68. Alex Yearsley, personal communication, 2002.
69. For more details, see www.cites.org/eng/disc/how.shtml.
70. See www.cites.org/eng/disc/what_is.shtml.
71. The United Nations Agreement on the Implementation of the Provisions
of the UN Convention on the Law of the Sea of 10 December 1982 relating
to the Conservation and Management of Straddling Fish Stocks and Highly
Migratory Fish Stocks.
72. International Alert, stock-taking workshop on the regulation of the private
sector in relation to armed conflicts, October 17, 2002; Sherman (2002).
getting it done 281
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chapter 7
Attracting Reputable Companies
to Risky Environments:
Petroleum and Mining Companies
John Bray
PETROLEUM AND MINING COMPANIES CONSIDER a wide range of technical
and economic factors when assessing the commercial viability of a
new project:
• What are the precise qualities of the mineral or petroleum deposit?
• How expensive is it to extract?
• How long will reserves last?
• What is the outlook for prices while the project is under way?
• How much will it cost to transport the product to market?
If there are no satisfactory answers to these questions, then there is little
more to discuss. The mere existence of a mineral or petroleum deposit
is far from guaranteeing its commercial viability.
This chapter focuses on the next level of inquiry. What other risk factors
influence company decisions? In particular, what special factors
must companies take into account when considering an investment in a
zone of actual or potential conflict? How have their calculations changed
in the last 10 years? And how far is it possible to encourage wellmanaged,
responsible companies to invest in regions affected by conflict?
Part of the Problem or Part of the Solution?
At first sight, there are strong social and commercial disincentives for
new investments in weak states with a history of political violence. In
287
288 john bray
the 1990s and early 2000s mainstream Western companies have been
stung by fierce controversy over their activities in resource-rich countries
as diverse as Angola, Colombia, Indonesia, Myanmar, and Nigeria.
Far from being seen as a blessing, mineral and petroleum resources are
all too often seen as a curse to the countries that possess them—and
international companies associated with these industries are tainted
accordingly.
Petroleum and mining firms have been associated with poor governance
and conflict in two ways. First, as discussed in other chapters,
companies operating on or beyond the margins of the law have helped
violent factions to raise money through the sale of natural resources
such as “conflict diamonds” (chapter 5). Second, even mainstream international
companies may—however unintentionally—contribute to
conflict. All too often, income from natural resources has served to
reinforce the powers of “predatory” states (see, for example, Fridthof
Nansen Institute and Econ 2000). The wealth brought by mining or
petroleum is often restricted to narrow social or political groups rather
than being distributed more broadly. Income from natural resources
has tempted governments to neglect other economic sectors such as
agriculture. The resulting inequalities are a source of tension, unrest,
and—in extreme cases—civil war (chapter 2).
Companies with existing investments have tended to resist pressure
to leave when conflict breaks out or escalates. However, in the light of
recent experience, it is much harder for companies that are sensitive to
their reputations to justify new investments in conflict zones.
Equally, the petroleum and mining industries could—if properly
managed—emerge as part of the solution to the problems of bad governance.
Without balanced economic development, weak states are
more likely to become failed states. For many African countries in particular,
minerals and petroleum offer the most substantial and readily
accessible sources of income. Foreign investment and expertise can
help to develop these resources and thus finance the institutions needed
to ensure stability.
The wider social and commercial case for investing in zones of
conflict is outlined in reports such as the United Nations (UN) Global
Compact’s business guide for conflict impact assessment and risk
management (UN Global Compact 2002). Political changes in the late
1980s and 1990s have opened up new markets to international business.
Many of these are in developing countries that are exposed to
conflict and might otherwise be considered unattractive. Nevertheless,
as the business guide points out, these regions offer important opportunities:
“It is in these areas of underdevelopment that we also find
the highest potential for business growth due to untapped pools of
attracting reputable companies 289
human, social, and natural capital, unmet basic needs, unmet expansion
opportunities, and lower operating costs.”
Such arguments have particular resonance in the petroleum and
mining sectors. These industries need to operate where geology dictates
and not merely in the political or geographic regions that happen
to be convenient. The “major” companies in both sectors need to build
up new resources as existing reserves become depleted. The “junior”
companies hope to make their fortunes by taking risks in regions where
more established companies are reluctant to venture. The business case
for exploration and investment in regions vulnerable to conflict is that
it is possible to get ahead of competitors by going in early or when
conditions appear difficult.
The central argument of this chapter is that investment by good,
entrepreneurial companies can indeed be “part of the solution” to the
problems of weak, post-conflict states. However, they cannot act effectively
on their own—not least because they lack the legitimacy to intervene
in matters that are often seen as “political.”
The Investment Climate
The early 1990s was a period of expansion and relative optimism in
both the mining and the petroleum sectors. Political changes in the former
Soviet Union and other former socialist countries opened up new
countries to foreign investment, and markets seemed favorable. By
contrast, the investment climate in the early 2000s is more sober. This
is partly because of the general economic downturn—which has hit
mining more severely than petroleum—but also because of the lessons
learned in the previous decade. Although the risk of outright expropriation
is now rare, there are new forms of political risk—notably
reputational risk—as well as the continuing hazards of substate conflict.
This section examines the lessons learned in the past decade and
the factors that influence the climate for extractive-industry investment
in developing and transition economies.
From Optimism in the 1990s to Caution in the 2000s
Petroleum and mining companies are constantly looking for
“elephants”—major new finds that will replenish old reserves and transform
their fortunes. In the early to mid-1990s hopes were particularly
high. Political changes in the former Soviet Union were echoed by a
general trend toward economic liberalization in developing countries.
In earlier decades the trend had been toward the nationalization of
290 john bray
natural resources. Now, host countries were actively encouraging foreign
investment.
As a senior Exxon economist points out, international capital had
access to roughly 35 percent of the world’s undiscovered oil and gas
potential at the beginning of the decade (MacDonald 1998, pp. 120–23).
By 1998, some 80 percent of potential reserves were open to private
companies. Similar trends applied to the mining sector. In 1990 few
African countries were open to foreign mining companies. By 1997,
almost all had developed new mining codes to facilitate exploration
and investment.
Technical advances reinforced the benefits of political change. Deepwater
oil and gas technology developed in the Gulf of Mexico and the
North Sea could now be applied to offshore fields in West Africa and
Southeast Asia. Similarly, international mining companies were keen to
apply new techniques to African and Asian countries that had been
either partially explored several decades earlier or totally neglected.
There have been some significant success stories in both the petroleum
and the mining industries. Central Asian oil and gas pipelines
are beginning to come on stream. Mali and Tanzania (and before
them Chile and Peru) provide cases where international investment has
either transformed existing mines or helped to develop major new discoveries.
However, few of the mineral exploration initiatives undertaken
in Africa in the last decade have resulted in new mines. This is partly
because of the long lead time—typically 10 years or more—between
exploration and full-scale operations but also because of the general economic
slowdown.
In 2001 and 2002 global flows of foreign direct investment declined
sharply. Wider concerns included the downturn in the U.S. economy,
heightened security concerns following the September 11 terrorist
attacks, and the possibility of renewed conflict in Iraq.
Petroleum has fared better than mining. Short-term oil prices are notoriously
volatile, but notwithstanding increased interest in renewable
energy sources, there is little doubt of the continued need for hydrocarbons.
To stay ahead of their competitors, the majors need new reserves
to replenish stocks that have already been consumed. For example, in
February 2003, British Petroleum announced that it would spend some
$20 billion on developing new fields to build up its dwindling reserves
(“BP to Spend $20 Billion” 2003). The broad rationale for new exploration
and development therefore remains unchanged, and new petroleum
developments inWest Africa and Central Asia are pressing ahead.
However, as an international operator in Russia points out, as many
as 83 countries are currently competing to offer oil and gas acreage
to international investors. Against this background of competition for
attracting reputable companies 291
investors, host governments with promising petroleum reserves cannot
afford to assume that international investors are automatically interested
in what they have to offer.
The investment climate for new mining operations is much tougher.
In a review of global markets in 2001, mining economist Philip
Crowson reports that diversified mining companies achieved slightly
higher returns than U.S. government bonds during the 1990s, but that
these returns were “probably not high enough to offset their higher
risk” (Crowson 2001). Low prices for base metals in the early 2000s
have reinforced this pessimistic trend. The fall in zinc prices has been
particularly painful—many working mines in developing countries
have had to close down or are being maintained solely on a care-andmaintenance
basis until prices rise to more profitable levels.
Gold has performed better than base metals. In February 2003
international gold prices rose to $380 per ounce, mainly because gold
was regarded as a safe investment at a time when there was a risk of
conflict in the Middle East. This represented a significant recovery
from the historic lows—less than $280 per ounce—in the late 1990s.
However, the long-term prospects even for gold are notoriously uncertain.
The fact that investors generally are feeling risk averse means that
there is less money for uncertain new ventures in possible conflict
zones.
Market uncertainties and competition between rival host countries
mean that investors can afford to—indeed are obliged to—look all the
more closely at the political, security, and reputational risks involved
in developing new prospects. Some of these risks are similar to those
faced in the past. Others are relatively new.
Political Risks
In theory, the spread of economic liberalism to developing countries
should mean that political risks are less significant than in earlier decades.
Most governments now accept the need for foreign investment and
expertise and, in principle, will do all they can to encourage them. The
reality is more complex. Political leaders have to satisfy a variety of
domestic interests to remain in power, and the task of improving conditions
for foreign companies may not be at the top of their agenda. When
asked what was the most important factor influencing investment, a
senior executive from one of the oil majors discussed a variety of issues
before summarizing them with a single sentence: “It’s governance, stupid!”
1 He had in mind not only the risk of direct political intervention
in business but also the failures of governance that lead to corruption,
social unrest, and human rights abuses.
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The overriding concern for would-be extractive-industry investors
remains security of tenure and the extent to which this might be threatened
by political unrest, legal uncertainties, changes in government
policy, or expropriation. The extractive industries share with downstream
energy companies the problem of the “obsolescing bargain.”2
Companies from these industries are obliged to make major capital
investments before they can expect to reap any profit. These investments
amount to a kind of “hostage.” Once the companies have paid for
multi-million-dollar fixed assets, they cannot lightly withdraw from
the host country.
Security of tenure is essential because of the long time period—often
well over a decade—between initial investment and payback. The
long time frame, large capital investment, and typically high political
risks mean that the companies feel justified in seeking high rates of
return.
Paradoxically, these same high rates can raise political risks, rather
than alleviate them, because they lead to charges that the company
is “profiteering.” Outright expropriation, the classic political risk of
the 1960s and 1970s, is now unusual. However, companies may face
forms of “creeping expropriation.” In Russia there have been cases
where local joint venture partners have unilaterally sold extra company
shares to local purchasers, thus diluting the foreign partners’
percentage stake without their knowledge. Elsewhere—for example,
Papua New Guinea in the early 1990s—host governments have forced
companies to renegotiate royalty agreements once mines came into
profitable production.
Meanwhile, nationalism still manifests itself in government reluctance
to lift restrictive regulations limiting foreign ownership. Despite
more than a decade of debate—and a recent change of policy by President
Gloria Macapagal-Arroyo—the Philippines has yet to reach consensus
on foreign participation in the mining sector. A case challenging
100 percent foreign ownership of mines is still lying unresolved in the
Supreme Court in Manila.
Uncertainties over security of tenure are all the greater in postsocialist
transition or developing economies that are still in the process
of developing the economic, legal, and fiscal regimes needed to attract
private investment initiatives. Both in the former Soviet Union and in
much of Africa, lack of confidence in the viability and transparency
of legal reforms continues to discourage investors in major, long-term
infrastructure projects.
Ultimately, security of tenure may depend less on legal formalities
and more on intangible qualities of trust. Major energy and mining
projects have little chance of long-term survival unless they are seen as
attracting reputable companies 293
being fair to stakeholders. Companies face the constant problem of
arguing their case to host governments and local communities that are
unfamiliar with the calculations made by international investors and
therefore have different views of what constitutes “fairness.” This task
is likely to be all the more difficult in post-conflict regions that are new
to international investment. The more that companies can do to build
up a wide body of support among different sections of the host population,
the safer their investments will be.
Security Risks
Meanwhile, companies operating in developing countries often have
to operate against a background or a threat of conflict. The extractive
industries are more exposed than other sectors: the vagaries of geological
chance often take them to remote areas, they have large fixed
assets that cannot be removed, and rival contestants for power may see
control over their resources as a strategic objective. Conflict often reflects
a history of poor governance, which in itself is a danger signal for
business.
A survey conducted by PriceWaterhouseCoopers for the Mining,
Minerals, and Sustainable Development (MMSD) Project in early 2001
found that 78 percent of the 32 mining majors surveyed had refrained
from investing or withdrawn from an investment because of political
instability, for example, armed conflict (PricewaterhouseCoopers
2001).
Nevertheless, the existence of a conflict in a host country does not
necessarily deter new entrants. The questions include the potential
economic value of oil or mineral deposits, the precise location of the
conflict, and the possibility of a peace settlement. Junior companies, in
particular, may see a competitive advantage in entering a region that has
suffered from political violence and has a good chance of recovery. As
one executive from a junior mining company comments, “It is often best
to go in early, when there is still blood on the floor. If you succeed, you’re
regarded as a hero.”3 He cites as a favorable example Newmont’s entry
into Peru in the early 1990s, when the country was still suffering severely
from the Sendero Luminoso (Shining Path) insurgency.
The Colombian state-owned company Ecopetrol uses a similar
argument in a recent sponsored statement in the Petroleum Economist.
Acknowledging that security is a concern for investors, the statement
nevertheless argues that conditions are likely to improve: “If the
situation improves dramatically, Colombia will be upgraded as an exploration
region from an investment point of view. But by then, it
might be too late. When is the timing perfect and when is it too late?
294 john bray
It may be appropriate to invest today, given that the perception of the
security risk in the country might improve significantly in the future”
(Ecopetrol 2002).
However, it will be harder to win financial backing for such investments
at a time when the wider market has been influenced by fears
of terrorism in the wake of the September 11 attacks and the threat of
a Middle East conflict. The World Bank’s Multilateral Investment
Guarantee Agency’s Foreign Direct Investment Survey published in
January 2002 found that 85 percent of the companies surveyed were
either “very concerned” or “somewhat concerned” about physical
security (MIGA 2002).
Ethics and Reputation
The most significant new political risks since the 1990s relate to the
risk of reputational damage to companies operating in regions with a
record of human rights abuses or corruption. This is not completely
new: companies operating in South Africa in the 1970s and 1980s
faced the risk of boycott from activists in the West. Nevertheless, improvements
in communication and especially the expansion of the Internet
have made it much easier for nongovernmental organizations
first to gather information about companies’ international activities
and then to mobilize effective campaigns (Bray 1997).
A symbolic turning point came in 1995 when Shell faced hostile campaigns
first over the disposal of its Brent Spar offshore installation and
then for its failure or inability to prevent the execution of Ogoni activist
Ken Saro-Wiwa in Nigeria. As John Mitchell and his fellow authors
point out in a recent study for the Royal Institute of International
Affairs, companies now have to consider not only whether resources
are available, but also whether they are acceptable to powerful constituencies
in their home countries (Mitchell and others 2002). Investment
can be problematic in countries where the host government is
accused of extensive human rights abuses, democratic processes are
absent or weak, or revenues are used for controversial purposes. As
Mitchell comments, “To develop new supplies under these circumstances
may not be acceptable for the companies concerned unless
they can satisfy potential international critics that their intervention is
serving the wider developmental purposes of promoting the expansion
of freedom for the people affected” (Mitchell and others 2002,
p. 270). ChevronTexaco Chairman Dave J. Reilly makes a similar point
in a recent interview: “Success is no longer determined solely by traditional
financial or operational metrics. Today we are held to new standards
for corporate citizenship, human rights, and the environment
attracting reputable companies 295
that are no less rigorous than the financial requirements of the investment
community” (Williams 2002, p. 28).
An example of how the new politics works in practice comes from
Afghanistan in the late 1990s when the U.S. company Unocal aspired
to build a pipeline linking gas reserves in Turkmenistan with potential
markets in South Asia. The project involved significant security risks as
well as the political and cultural difficulties of dealing with the Taliban
government. However, the decisive factor in killing U.S. government
support for the project came not from security concerns over Osama
bin Laden, who was already operating in Afghanistan, but from U.S.
women’s advocates who called for a tough stance against the Taliban
government out of solidarity with Afghan women (Rashid 2001,
pp. 170–82). In Mitchell’s terms, that particular project was clearly
“unacceptable” to the U.S. domestic constituency.
Corruption. Corruption is one of the most sensitive ethical and
reputational issues for international companies. A survey commissioned
by Control Risks Group in late 2002 showed that more than half
of the 23 oil, gas, and mining companies in the sample had put off an
otherwise attractive investment on account of corruption (Control
Risks Group 2002, p. 50).4 The survey covered 250 companies in eight
different sectors in Germany, Hong Kong (China), the Netherlands,
Singapore, the United Kingdom, and the United States (table 7.1).
The PricewaterhouseCoopers survey came up with a similar result:
41 percent of the 32 “world-class” mining companies surveyed had
refrained from investing or had withdrawn from an investment on account
of corruption, for example, being asked for unofficial payments
(PricewaterhouseCoopers 2001).5
Table 7.1 Companies Deterred from an Otherwise
Attractive Investment by a Country’s Reputation
for Corruption, by Sector
Sector Percent
Oil, gas, and mining 52.2
Public works, construction 44.2
Retail 42.9
Banking and finance 39.2
Power generation and transmission 37.5
Pharmaceuticals and medical care 35.7
Arms and defense 30.0
Telecommunications 27.3
Source: Control Risks Group (2002).
296 john bray
Companies in the extractive sectors are particularly vulnerable to
corruption both because of the large sums of money involved—which
increases the temptation for dishonest officials—and because of their
frequent and regular interactions with government. High levels of corruption
may have a direct practical impact: one oil executive interviewed
for this report stated that his company was considering withdrawing
from an investment in Central Asia because the arbitrary political environment
combined with high levels of corruption made it impossible to
get anything done or to be confident of the government’s willingness to
stick to an agreement.
Human Rights and “Constructive Engagement.” Human rights
emerged as a second major concern in the Control Risks Survey, although
not on the same scale as corruption. Retail companies were more concerned
about poor human rights, no doubt partly because they were
more exposed to consumer boycotts. However, some 20 percent of oil,
gas, and mining companies had put off an otherwise attractive investment
on account of human rights concerns (table 7.2).
Again the results of the PriceWaterhouseCoopers survey were similar:
33 percent of the mining companies surveyed had either been deterred
or withdrawn from investments because of human rights issues in the
area or country. The Myanmar and Sudan case studies in appendix 7.1
illustrate how investment in those countries has led to reputational concerns
for international companies operating there. One of the most sensitive
issues concerns the companies’ relationship with government
security forces that are protecting their assets and may be associated
with human rights abuses. Companies run the risk of being accused of
complicity with such actions and—at least in the United States—facing
legal action.
Table 7.2 Companies Deterred from an Otherwise Attractive
Investment by a Country’s Reputation for a Poor Human
Rights Record, by Sector
Sector Percent
Retail 28.6
Telecommunications 22.7
Oil, gas, and mining 21.7
Banking and finance 17.7
Arms and defense 16.7
Public works and construction 15.4
Pharmaceuticals and medical care 14.3
Power generation and transmission 12.5
Source: Control Risks Group (2002).
attracting reputable companies 297
The fact that some companies are put off by such risks does not
mean that all companies are deterred. A company’s approach to human
rights depends on its overall policies, and this theme is discussed below.
Corporate Social Responsibility
Pressure on ethical issues has contributed to the emergence of the new
and still developing field of corporate social responsibility and a growing
preoccupation with the principles of sustainable development.6
Corporate social responsibility is—or should be—justifiable on ethical
grounds alone, but it is linked to risk management in that companies
deemed to be socially responsible are less likely to face reputational
problems.
The larger oil and mining companies have responded to this agenda
both by taking extra measures to ensure that their work forces are well
treated (for example, mining companies have taken the lead in promoting
AIDS prevention and treatment among their workers in South
Africa) and by promoting links with local communities. Rio Tinto
stresses that its community policies include “mutual respect, active
partnership, and long-term commitment” (Rio Tinto 2001). Shell’s report
People, Planet, and Profits emphasizes the company’s commercial
objectives: “to engage efficiently, responsibly, and profitably” in its
respective industries (Royal Dutch Shell 2001). However, it also points
to the company’s values and its concern for sustainable development,
inclusiveness, and social investment.
Nevertheless, the scope and impact of corporate social responsibility
are still widely contested on a variety of grounds:
• One concern is the extent to which corporate social responsibility
is a preoccupation primarily of Northern, or even Northern European,
companies.
• Skeptical nongovernmental organizations question the depth
of companies’ commitment to the principles of corporate social
responsibility, arguing that it often amounts to a form of public
relations “whitewash” or—in the case of environmental initiatives—
“greenwash.”
• Some business leaders argue that companies should concentrate
on their prime commercial expertise rather than trespass into the domains
of development agencies and government.
In line with this kind of thinking, ExxonMobil Executive Vice President
Rene Dahan argues that a fundamental role of business is to create
prosperity and that this limits its willingness to address broader
social problems, particularly those brought on by conflicts: “Business
enterprises are at base neither philanthropic nor peacekeeping organizations”
(Williams 2002, pp. 28–29).
298 john bray
As is seen below, the extent to which company initiatives should
overlap with, or replace, government programs is a particularly sensitive
issue in zones of actual or potential conflict.
Constructive Engagement?
All reputable businesses acknowledge a responsibility to treat their
work force fairly. Most now also acknowledge a wider duty to local
communities. However, companies are generally unwilling to accept
responsibility for the host government’s use of the revenues they help to
produce. Many activists contest this view. For example, Oxfam Policy
Adviser Sophia Tickell argues, “A successful community program that
benefits 100,000 people is important, but counts as nothing if the taxes
you are paying keep in power a corrupt and dictatorial government”
(cited in Ward 2000, p. 4).
As the Myanmar and Sudan case studies show, nongovernmental
organizations have argued that foreign companies in those countries
help to preserve illegitimate governments while giving them the financial
resources to crack down on opposition movements. Companies
are likely to face similar arguments in other conflict-affected regions
ruled by controversial governments.
Company Policies on Risk
Individual companies adopt differing strategies on investment and conflict,
and these depend both on their resources and on their attitudes to
risk. The personalities of individual chief executive officers and boards
of directors play an important role in deciding company policy. Other
factors include size, stock market listing, and legal reform.
Defining Company Policy
The board of directors has overall responsibility for defining policies
on investment risk and on ethical issues such as the company’s policy
on human rights. These policies depend both on the company’s internal
culture and on its market positioning.
Some companies have taken a deliberately robust approach to highrisk
environments and informed their sponsors accordingly. These
include the U.K. independent Premier (currently or recently active in
Albania, Guinée Bissau, Indonesia, Myanmar, and Pakistan) and
the Malaysian company Petronas (currently active in 15 international
markets including Algeria, Iran, Myanmar, Sudan, and Turkmenistan).
The French company TotalFinaElf claims to be ahead of its competitors
attracting reputable companies 299
because of its aggressive exploration policy, including in areas that
might be considered high risk (Housego 2003).
The factors that influence company policy typically include the
following:
• The personality of the chief executive. Almost by definition, chief
executives tend to be strong, sometimes larger-than-life personalities.
British Petroleum Chief Executive Lord (John) Browne has been his company’s
most prominent spokesman on its corporate responsibility policies.
Jim Buckee, chief executive of the Canadian companyTalisman, has
become well known for his outspoken defense of his company’s presence
in Sudan. The projection of these companies’ policies would have been
different but for the part played by these individuals.
• Nationality. There is a perception that U.S. companies are likely
to be less sensitive to human rights issues than their U.K. and Northern
European equivalents. Companies from countries not in the Organisation
for Economic Co-operation and Development (OECD) are
even less likely to be exposed to the debate about company responsibilities
for human rights or the issues surrounding constructive engagement
with controversial regimes.
• Past experience. Senior Shell executives acknowledge that the
1995 protests against the company for its disposal of Brent Spar and
its presence in Nigeria prompted it to rethink both its overall strategy
and its communications with outsiders (for example, Herkströter
1996). Shell has not withdrawn fromNigeria, but it has sought to change
how its activities are managed.
However, the most important influences on company strategy are
size and market position, stock market listing, and regulatory reforms.
Implications of Size
Historically, junior companies have been more willing than major
companies to take risks in countries that are vulnerable to conflict or
have poor standards of governance. This fits in with their investment
strategies as sold to their financial backers: high risks in the hope of
high returns. It is generally understood that easy places are already
taken, and thus the most cost-effective means for a small company to
make an impact is to work in high-risk regions. The classic approach
of a junior—whether in the mining or the petroleum industry—is to
explore, develop a deposit until its commercial viability is proven, and
then sell part or all of its stake to a major.
Cairn Energy, which discovered and developed the Sangu gas field
in Bangladesh, is regarded as a positive—and profitable—example.
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Cairn has now transferred the operation of its interests in two blocks
in the field to Shell and signed production-sharing contracts with Shell
in two further blocks.7 Meanwhile, it is extending its offshore exploration
activities to India.
An executive working for another petroleum junior explains his
company’s strategy: “We are a niche player. We look for places where
there are good subsurface prospects combined with difficult surface
risks. The geology is crucial: the rest we can manage.”8
Surface risks may include an uncertain legal environment. Juniors
are more likely than majors to begin exploration before a satisfactory
legal framework is in place—indeed they may see a competitive advantage
in doing so. While exploring, they may hope to establish a degree
of influence with government officials, in the hope of encouraging them
to institute more favorable legal regulations when the time comes to go
into production.
The reputation of the whole junior mining sector suffered as a result
of the 1997 Bre-X scandal when a Canadian company was found
to be “salting” an Indonesian mine (falsifying geological data) in order
to mislead investors. The Bre-X scandal, now combined with the general
economic slowdown, has made it more difficult for juniors to raise
funds either on the Canadian or on other stock markets.
Juniors typically have limited financial resources, and their survival
often depends on the success or failure of one particular project. There
may therefore be a greater temptation to take unacceptable shortcuts—
whether by economizing on social programs or by paying bribes. At
an MMSD seminar on armed conflict and natural resources, one participant
commented that large mining companies were moving out
of Papua New Guinea only to be replaced by smaller ones: “These
are not the sort of guys who’ll come and sit round a table like this”
(MMSD2001). The implication is that smaller companies are less likely
to have the time or resources to discuss important social or ethical
issues.
The juniors argue that they fulfill an important social as well as a
commercial function by taking on the high-risk areas that the majors
will not touch and thus promoting development in otherwise neglected
areas. Like the majors, the juniors have become more sensitive to social
issues in the last 10 years, and this is for self-interested reasons as
well as altruism. It will be more difficult for them to sell the properties
they have developed if these are associated with unresolved social controversies
and even legal liabilities.
As is seen in the case studies in appendix 7.1, Premier and Talisman
are examples of smaller companies that have responded to social and
political controversy by investing in social programs in Myanmar and
attracting reputable companies 301
Sudan, respectively. They have not succeeded in defusing the controversy,
but they have demonstrated that concern with social issues may
extend to juniors as well as majors.
Majors are more sensitive to their reputations than juniors because
they have more to lose. By the fact of having a “big name,” they are more
exposed to public scrutiny, and their commercial health matters to more
people. They generally are unwilling to jeopardize their reputations—
and their share prices—through exposure to actual or potential zones of
conflict.
This greater sensitivity to reputation has mixed implications. On
the one hand, it means that majors are less likely to take on difficult
projects in the first place. On the other hand, once they take on a project,
they have greater financial and technical resources and are better
placed to manage problems than are juniors. Their greater financial resources
mean that they can play a long game, waiting for the right conditions
to make major investments rather than being in a hurry to
make quick returns.
One reason why juniors can afford to take greater risks is that they
focus on the exploration and initial development stages of the investment
cycle, and these require comparatively low capital sums. By contrast,
world-class companies look for world-class deposits. As an executive
from a major minerals company explained, this is likely to mean an
open-pit mine that has a projected life of some 40 to 50 years.9 If a company
is to invest the tens or hundreds of millions of dollars needed to
develop this kind of mine, it will need to be confident of a reasonably
stable political and legal environment.
The same executive stated that his company would rarely consider a
country that lacked a well-drafted mining code. High levels of corruption
would be a major disincentive, and the company would not even
look at a controversial country such as Myanmar. Low prices for metals
mean that the company has a smaller exploration budget than
before. It already has a portfolio of mining properties that are “ready
to go” once prices rise again.
In cases where majors have become involved in conflict, this is
often because violence has flared up after they have been operating in
the country for many years. Shell’s experience in Nigeria is an obvious
example. As the company now acknowledges, it neglected the warning
signs that led up to unrest in the Niger peninsula. It is now trying to
apply the lessons both in Nigeria and elsewhere.
However, conflict is not an absolute deterrent even to majors, as
long as the resources are attractive enough and they believe that they
can manage the risks. Angola evidently qualifies on both counts,
although the fact that the companies are able to operate offshore in
302 john bray
comparative safety does not remove their exposure to the reputational
risks of involvement with a controversial regime.
Implications of Stock Exchange Listing
Shareholders demand transparency from listed companies so that they
can understand the potential risks to their investments. The overall
trend is toward higher standards on a wide range of corporate governance
issues—including open disclosure of the extra risks involved in
investing in conflict regions or weak states.
Corporate Codes and Stock Exchange Regulations. In the United
Kingdom the directors of companies listed on the London Stock Exchange
are expected to comply with the risk guidelines outlined in the
1999 Turnbull report, officially known as Internal Control: Guidance
for Directors on the Combined Code (Institute of Chartered Accountants
of England and Wales 1999). Turnbull is the latest in a series of
corporate governance reports. Its objectives are, first, to ensure that
companies establish systems of internal control to assess and manage
risks effectively and, second, to ensure that they publish regular reports.
Similar guidelines have been issued in Canada, France, Germany,
South Africa, and the United States.10
Turnbull does not encourage companies to avoid risks, but rather to
understand what the risks involve, to manage them, and to give a public
account of how they have done so. The report specifically includes
reputational risks such as a company might incur from investing in a
country with a poor human rights reputation. Again, it does not take
a view on whether companies should or should not operate in such
countries. Rather, the report aims to ensure that companies assess risks
systematically, make appropriate choices in line with their overall
strategies, and explain those choices to investors.
The Enron affair led to further pressure for corporate governance
reforms on both sides of the Atlantic. The U.S. Sarbanes-Oxley Law,
which was introduced as a result of the Enron scandal, imposes tighter
corporate governance rules on all companies listed on U.S. stock
exchanges, even if they are based outside the United States. The act
requires a company that issues quarterly and annual reports to the U.S.
Securities and Exchange Commission to have its principal executive
and financial officers each certify financial and other information in
the reports. In a similar spirit, in the United Kingdom the Higgs report,
published in January 2003, tightens the requirements on nonexecutive
directors to ensure that they are actively engaged in monitoring their
company’s activities (Higgs 2003).
Commenting on the Enron affair, British Petroleum Chief Executive
Lord Browne points out: “The current crisis in corporate governance
attracting reputable companies 303
has involved only a small minority of companies, but it has damaged
trust in the entire corporate world. Restoring trust must be the top priority
for major businesses. . . .Transparency is the key to restoring trust”
(Browne 2002, p. 34). The need for transparency applies to companies’
activities both in developing countries and inWestern markets.
Activist Shareholders and Socially Responsible Investment. The
rise of the market for socially responsible investment since the 1990s
has given greater weight to shareholders’ ethical concerns, including
human rights.
Early ethical investment funds in the 1980s tended to operate on the
principle of screening out “unacceptable” companies, for example,
those involved in the tobacco business. The current trend is more for
ethical investment fund managers to engage with target companies and
encourage them to improve their policies. Fund managers have argued
that they have both a right and a duty to engage with companies
whose policies—or lack of them—may incur ethical problems, which
in turn may incur risks to their investments. The size of the funds’
shareholdings gives them influence. One asset manager comments that
companies may not welcome her calls, “but at least they pick up the
phone.”11
In December 2001 a group of eight fund management companies,
who between them managed some £400 billion, issued a joint statement
expressing concern about companies with investment in Burma
(Myanmar).12 Many of the issues raised apply to other countries as
well. They included the possibility that “companies operating in unstable
political climates can be exposed to loss of shareholder confidence,
negative press and publicity campaigns, safety risks, and corruption.”
The statement did not call for divestment, but it did call on companies
to establish “effective policies and procedures” to manage the risk, for
example, by publishing verified social impact assessments.
A more recent initiative by ISIS (formerly Friends, Ivory, and Sime)
includes the copublication of a report in July 2002 entitled Changing
Oil: Emerging Environmental Risks and Shareholder Value in association
with the World Resources Institute (ISIS and World Resources
Institute 2002). The report argues that oil and gas companies are
giving insufficient attention to their exposure to environmental risks
and that this will result in diminished shareholder value over the next
decade unless they take prompt action.
While the general trend among ethical investment funds is toward
engagement rather than screening, managers retain the option of withdrawing
investments from companies that are judged to fall below standard.
In January 2003 Henderson Global Investors, which manages
assets worth some £120 billion, withdrew its ethical investment funds
304 john bray
from British Petroleum out of concern for the company’s poor safety
record in Alaska (Gumbel and Woolf 2003). Companies involved in
major controversies in conflict zones could face similar pressure.
Shareholder interest in companies’ performance on social issues
has led to a demand for rating systems. The FTSE Group, which compiles
stock exchange and other financial indexes, has responded by
developing the FTSE4Good Socially Responsible Investment Index,
which provides ratings assessing companies’ performance in three
areas: environmental sustainability, relationships with shareholders,
and support for universal human rights.13 The index has a limited
number of exclusions, for example, companies working in the nuclear
industry, but does include major petroleum and mining companies. In
the human rights field, FTSE4Good assesses companies on their policy
statement and their participation in initiatives such as the UN Global
Compact.14
The index is still at an early stage in its development, but its emergence
is a significant sign of the times. More and more investors in
Western markets are looking for tools to help them integrate judgments
on companies’ social and environmental performance into their
investment decisions.
Voluntary Codes
In assessing companies’ social credentials, analysts look both at their
voluntary internal policies and practices and at their compliance with
external regulations.
The UN Global Compact, which was introduced by UN Secretary
General Kofi Annan in 2000, is a high-profile example of a voluntary
initiative designed to raise company standards. The compact calls on
signatory companies to uphold nine broad principles in the areas of
human rights, labor, and the environment. Other guidelines such as the
OECD’s Guidelines for Multinational Enterprises or the Global Sullivan
Principles of Social Responsibility provide similar benchmarks of good
corporate conduct.15
Most major international companies now have their own individual
codes or statements of business principles. In 1997 Shell became the
first large oil company to make a specific commitment to uphold human
rights “in line with the legitimate role of business.” Some 40 major
companies now have their own codes referring to human rights.16 Similarly,
the Control Risks Group survey found that 94 percent of the U.K.
companies and 92 percent of the U.S. companies surveyed now had
codes that forbade the payment of bribes to obtain business (Control
Risks Group 2002, p. 30).
attracting reputable companies 305
The spread of corporate codes has led to a debate on the merits of
voluntary guidelines versus regulation. Broadly, companies tend to
prefer voluntary adherence to principles governing their international
activities. They argue that legal regulations can lead to excessive
bureaucracy and are hard to enforce. By contrast, nongovernmental
organizations look for formal regulation, arguing that there is little
reason to trust companies’ commitment to voluntary principles. In this
view, codes amount to little more than whitewash (or, in the case
of the Global Compact, “bluewash”), giving companies an easy alibi
without imposing any real pressure to change. A recently published report
by three Canadian authors takes Talisman’s operations in Sudan
as an example and argues that international companies operating in
conflict regions abroad “are not accountable under international law
or in most home state jurisdictions for complicity in human rights
abuses” (Gagnon, Macklin, and Simons 2003, p. 4).
Legislation and Regulation
Voluntary principles may in due course lead the way to regulation. So
far, the international legal regime is much more highly developed with
regard to corruption than to corporations’ possible involvement in
human rights abuses.
Anticorruption Laws
In 1977 the United States introduced the Foreign Corrupt Practices Act.
The act makes it possible to prosecute U.S. companies in U.S. courts for
paying bribes to foreign officials, even if the transaction takes place
abroad.17 The U.S. Department of Justice and the U.S. Securities and
Exchange Commission have joint responsibility for enforcing the act,
which applies to all companies listed on the New York Stock Exchange,
whether they are based in the United States or not. The “books and
records” sections of the act impose strict accounting requirements to
prevent companies from disguising bribes under other headings. The
United States actively enforces the Foreign Corrupt Practices Act—
the Department of Justice has prosecuted 34 foreign bribery cases
and pursued a further seven civil actions—and, although the number
of prosecutions is relatively small, they serve as a deterrent to other
companies.
For two decades, U.S. companies complained that the act put them
at an unfair advantage when competing with foreign companies that
were not bound by the same restrictions. These concerns were partially
addressed in December 1997, when 29 OECD member states and five
others signed the Convention on Combating Bribery of Foreign Public
306 john bray
Officials in International Business Transactions. Under the terms of the
convention, which came into force in early 1999, signatories agreed to
introduce legislation similar to the Foreign Corrupt Practices Act.18
In principle, companies from all the major industrial nations in the
OECD are competing on the same terms as far as bribery is concerned.
However, so far no prosecutions under the new laws have been introduced
in other countries as a result of the convention. Their willingness
to enforce the new laws therefore remains to be proven. The laws nevertheless
establish a clear legal boundary that good companies respect.
International Human Rights Legislation. The international legal
regime governing the human rights responsibilities of companies is
poorly developed, although this may change. The nascent International
Criminal Court is mainly concerned with governments and government
employees. However, legal specialists suggest that it could ultimately
extend jurisdiction over companies accused of complicity in human
rights abuses.
Meanwhile, a U.S. legal expert is drawing up a draft set of human
rights principles for business (with the official title Responsibilities of
Transnational Corporations and Other Business Enterprises with Regard
to Human Rights) for submission to the UN General Assembly.
The most recent draft of the text was agreed by theWorking Group on
Transnational Corporations (of the UN Subcommission on the Promotion
and Protection of Human Rights) when it met in late July and early
August 2002. On August 14, 2002, the fullUNsubcommission decided
to discuss the draft again at its next session in July-August 2003.
The principles will serve several roles. As with the OECD Guidelines
for Multinational Enterprises, they will provide a basis for individual
companies drawing up their own codes. They also will provide
a reference point for international lawyers concerned with the human
rights obligations of companies.
The U.S. Alien Torts Claims Act. The Alien Torts Claims Act is a
U.S. law dating back to 1789 whose original purpose was to empower
American courts to pass judgment on piracy committed on the high
seas. Since 1996, human rights activists have made use of the law to
bring cases against companies accused of complicity in human rights
abuses committed outside the United States. So far, none of the cases
has led to a conviction, but several are still outstanding, including
cases against Unocal for its role in Myanmar and against Talisman for
its role in Sudan (see the appendix).
The law applies only to companies that are connected to the United
States either because they are registered there or because they are listed
attracting reputable companies 307
on U.S. stock exchanges. From an activist point of view, the cases have
the merit of drawing public attention to alleged abuses and forcing
companies to give detailed explanations of their actions. They impose
a heavy cost on companies both in legal fees and in management time.
Publish What You Pay. In 2002 a coalition of nongovernmental
organizations, with the backing of international financier George Soros,
launched the Publish What You Pay campaign to encourage companies
in the extractive sectors to make public disclosures of the signature
bonuses as well as regular revenues paid to foreign governments.19 They
argue that this disclosure should be a mandatory requirement for companies
listed on major stock exchanges. The U.K. government is currently
leading a related initiative to seek international consensus on
public disclosure of the payments that extractive industries make to
governments.
Part of the motivation behind Publish What You Pay is concern
about the nature of government expenditure in resource-rich states.
In practice, much of the state’s income tends to be spent on socially
unproductive ends—such as financing weapons purchases or contributing
to the personal enrichment of individual leaders. Having companies
disclose their payments is the first step toward improving accountability
in the government. Collective action is one of the principles underlying
the campaign. Individual companies are likely to be penalized if
they disclose revenue payments without authorization of the host government.
Making disclosure a formal legal requirement would give
them an “alibi.”
The industry has responded somewhat cautiously. The International
Association of Oil and Gas Producers has stated that it welcomes transparency
but that this should allow for “protection of proprietary information
and be within the laws of host countries as well as contractual
obligations.”20 One of its particular concerns is to ensure consistency
so as to avoid a situation where some, but not all, companies in a particular
country (or even worldwide) might suffer an unfair competitive
disadvantage.
Competition and the Costs of Compliance
The statement of the International Association of Oil and Gas Producers
points to a wider concern about competitive pressures. New
domestic and international laws, stock market regulations, and voluntary
codes are intended to secure agreement on common standards.
However, many companies worry that they may be at a disadvantage if
they comply with those standards, but their competitors do not. This is
308 john bray
more likely to be the case if the competitors are not covered by the same
legislation, are not listed on the stock market (for example, if they are
state-owned companies), or are simply less scrupulous.
Control Risks Group’s 1999 and 2002 surveys on business attitudes
to corruption (which is one aspect of a wider set of integrity problems
that are likely to affect companies in weak states and conflict zones)
show that international executives are still concerned about uneven
levels of compliance between companies based in different countries.
Respondents were asked to rate companies’ likely compliance with the
Foreign Corrupt Practices Act and similar anticorruption legislation
according to the following four-point scale:
1. Companies have strict compliance.
2. Companies have generally high standards of compliance, but
occasional lapses.
3. Companies prefer to comply but pay bribes if competitors are
doing so.
4. Companies always pay bribes if it is customary to do so in the
host country.
The results show a broad range of expectations (Control Risks
Group 2002, p. 64). Companies from the leading OECD countries are
perceived to have relatively high levels of compliance with anticorruption
legislation (table 7.3). However, they now face competition from
“new multinationals” based in a number of emerging markets. Among
non-OECD countries, Singapore and, to a lesser extent, Hong Kong
(China) rate highly, but respondents believe that companies from
Table 7.3 Standards of Compliance among Companies from
Top-10 OECD Exporters, 1999 and 2002
Country Average in 1999 Average in 2002
Canada 1.6 1.81
Germany 1.9 1.82
Netherlands 1.8 1.86
United Kingdom 1.7 1.95
United States 1.8 2.03
Belgium and Luxembourg 2.0 2.09
Japan 2.3 2.26
France 2.2 2.38
Italy 2.7 2.96
Korea, Rep. of 2.7 2.94
Source: Control Risks Group (2002).
attracting reputable companies 309
Table 7.4 Standards of Compliance among Companies from
Select Non-OECD Countries, 1999 and 2002
Country Average in 1999 Average in 2002
Singapore 2.3 2.11
Hong Kong (China) — 2.47
Malaysia — 3.10
South Africa 2.6 3.10
China 2.9 3.19
India — 3.29
Brazil 3.1 3.41
— Not available.
Source: Control Risks Group (2002).
other leading non-OECD economies are more likely to pay bribes if
their competitors are doing so (table 7.4).
From a strategic point of view, large Western companies have no
choice but to comply with domestic and international legislation (even
if individual executives may fall short). Although there may be questions
about implementation, these companies are in practice increasingly
bound by voluntary ethical guidelines as well.
This does not mean that good companies are unable to operate in
countries where such standards are not respected, but it may be more
difficult. For example, through patient and persistent application, it
may be possible to obtain a license honestly even if companies are normally
expected to pay a bribe. However, the process is likely to take
longer. Senior executives may decide that the high transaction costs—
as measured in management time—are not justified, and the company
will leave the field to smaller companies with lower standards.
Managing the Investment Cycle: What Companies Need
Extractive-industry companies face different risks at different stages of
the investment cycle. This section analyzes the four main stages of a
project’s life—investment, construction, operation, and closure. It discusses
the risks that companies face and what they need to make their
projects successful. What companies most need is predictability. Effective
government structures provide a framework for decisionmaking
and a means of resolving disputes. However, particularly in zones of
actual or potential conflict, commercial development is unlikely to be
smooth. The next section analyzes the part played by different external
actors in greater detail.
310 john bray
Exploration
Exploration involves several substages. The first takes place outside the
country: the company undertakes a desktop review of all publicly available
geological information to assess whether exploration is even worth
considering. The next stage is to obtain an exploration license and carry
out an initial geological survey. Initially, this may involve minimal disturbance—
much of the information can be obtained through surveys
from the air. Later on, the exploration teams may want to drill exploratory
holes or to undertake seismic testing. By this point, the presence
of the exploration team is highly visible in country.
The national government administers exploration licenses, and regional
and local administrations may require further permits. Companies
look to the government to ensure a safe operating environment,
while taking responsibility for day-to-day security.
Exploration carries significant costs, particularly when it comes to
drilling or seismic work, but these are much lower than the costs of
development or operations. The financial stakes are higher for juniors,
which are likely to have a limited number of projects in their portfolio
and are more dependent on the success or failure of independent
ventures.
Majors have a broader spread of assets. They expect no more than a
limited number of explorations to lead to commercial discoveries. They
can therefore more readily afford to abandon exploration ventures
that, although somewhat promising, fall short of their requirements. At
this stage, they have fewer financial hostages. Petroleum and mining
companies, however, emphasize that relatively few explorations lead to
commercial discoveries. At this stage, their prime concern is with geology
rather than politics.
Their second concern is with physical safety. By the nature of their
work, exploration teams need to travel to remote areas, often carrying
expensive equipment. It may not be safe or practical to operate in regions
that are affected by insurgency or political unrest. Smaller junior
companies are often prepared to take greater risks than the majors.
For most companies, politics and social issues come third. Particularly
among juniors, the prevailing view is “Let’s deal with the geology
first. The politics and the legal framework can come later—if we find
anything.” The majors tend to be more stringent. Some refuse even to
enter countries with a reputation for high levels of corruption or
political instability. The larger companies typically commission political
risk assessments before they enter a country for the first time. Country-
level political risk analysis is available through published sources or
by subscription, for example, from the Economist Intelligence Unit,
Political Risks Services, or Control Risks Group.
attracting reputable companies 311
The physical impact of exploration is limited, but the quality of the
exploration company’s relationships with other interest groups has a
critical impact on the future success of any project that may result.
This issue is discussed in greater detail in the next section.
Construction
This is the time when the company decides whether to commit itself or
not. It decides whether or not to go ahead on the basis of a feasibility
report. The feasibility report also serves as a basis for negotiations
with potential joint venture partners and financial backers. The report
assesses the geological prospects, the commercial viability, and the
political environment.
The company’s environmental impact becomes more apparent
during construction. At this stage, it is often necessary to build further
roads and a camp for the construction force, and these need to
be protected. The operators have to provide processing and wastedisposal
facilities. They also need to consider how the product is
going to be transported either to a smelter (in the case of metals) or to
a refinery.
Companies look for predictability and security of tenure. If they cannot
find these, they seek commercial agreements that provide greater
compensation for what they regard as higher risks. The overall principle
applies whether the company is paid through tax, royalties, or—as
is becoming more common—a production-sharing agreement. Important
considerations include the possibilities for arbitration in case of
dispute.
This is the point at which risk assessment and planning are most
important. The full impact of future operations is not yet apparent: it
is still possible to take preemptive action to mitigate risks. Risk assessment
therefore needs to take account not only of the current situation
but also of how the project will change it.
Political and social analysis is often seen as a “soft” topic because it
does not lend itself to precise measurement. The engineers who dominate
the senior levels of the extractive industries tend to prefer dealing
with objects that are—sometimes literally—more concrete. However,
there is a general trend toward more systematic analysis, partly in the
light of painful experience. Looking back at an earlier, uninformed
decision to enter a conflict zone, a senior executive in a middle-size
company recently commented: “Let’s be honest. We just jumped into
it.”21 The decision was taken on the basis of an overall assessment of
the geological prospects combined with a misplaced confidence that
the company’s project partner would manage the political and social
risks. He was not keen to repeat the experience.
312 john bray
Political risk forecasting is an art rather than a science: there are too
many variables to make pinpoint predictions plausible. Scenario exercises
help companies to assess the range of possibilities and plan for
the unexpected. Royal Dutch Shell has been a leader in the scenario
field.22
Environmental impact assessments are now an accepted part of the
planning process, and they are often required by external lenders and
insurers. There is also a growing demand for social impact assessments.
This is a relatively new field, and it suffers from some of the
same challenges as political risk analysis in that it does not lend itself
to readily quantifiable predictions. However, particularly in light of
the debate about the “natural resource curse,” there is no doubt that
it is needed. The International Association of Oil and Gas Producers
and the International Petroleum Industry Environmental Conservation
Association have recently produced a joint report on the management
of social issues (IPIECA and OGP 2002).
Conflict risk assessment is also emerging as a separate subfield.
From an aid sector perspective, the U.K. Department for International
Development has recently produced a handbook on the issue (U.K.
Department for International Development n.d.). The UN Global
Compact (2002) has prepared a business guide for conflict impact
assessment and risk management. Both texts provide overviews of the
questions to ask rather than detailed manuals.23 As with other aspects
of risk analysis, the key questions include not only what is happening
now but also how the petroleum or mining project will create new
rivalries, tensions, and—in the worst case—pretexts for violence.
The management of the company’s relationship with local communities
is critical: mistakes made at this point may never be repaired.
The key requirements are to secure the “informed” consent of the people
who are most affected and to ensure compensation for those with
land or customary rights to the area where the project will take place.
Again, these issues are far from straightforward and are discussed in
greater detail in the next section.
Operations
At the operations stage, both the “winners” and the “losers” are readily
apparent. If all goes well, the project is producing revenue. Both the
government and the company are profiting accordingly. The main
“losers” are local people whose natural environment has changed radically
and for the most part irrevocably. The environmental impact of
the project is highly visible. This is particularly true of open-cast mines
but also applies to oil and gas projects, especially on land. The flaring
attracting reputable companies 313
of unprofitable gas may cause air pollution. Damage to pipelines—
whether caused by genuine accidents or by sabotage, as in Colombia—
causes ground pollution. It is not surprising that the main conflicts
occur at this stage.
The host government is the guarantor of the operating environment,
but its interests may diverge from those of the company. The
political risks are high, particularly if the government believes that the
company’s profits are “excessive.”
The security risks also are higher than at any other point. The company
will have to defend vulnerable fixed assets, and there is likely to
be considerable movement to and from the site. As Colombia’s experience
shows, it is almost impossible to ensure full security to oil and gas
pipelines. In such circumstances, companies concentrate on providing
rapid repair services when pipelines are damaged.
The company’s relationships with government security forces are
particularly important and particularly sensitive. Companies have faced
severe criticism when security forces are accused of human rights
abuses while protecting their assets. Companies are typically held accountable
even when—as is usually the case—the security forces are
operating outside any kind of company control.
Large projects attract people looking for work, whether or not they
find it. New roads may open up new parts of the country to settlement.
And economic development attracts different kinds of rent seekers,
whether these are corrupt officials hoping to take a share of government
taxes or guerrillas seeking to levy their own “revolutionary taxes.” Disputes
over the proceeds of the development are common even if there
was no conflict in the region in the first place. The combination of sensitive
environmental issues, delicate political relationships, and security
problems makes the company all the more vulnerable to criticism.
The financial risks to the company decline as income flows in, and it
comes closer to payback. Once it reaches payback, it wants to benefit
from the flow of profits for as long as possible, unless it receives a particularly
good purchase offer. Normally, it withdraws only if the project
becomes commercially unviable—for example, because of a fall in
commodity prices—or the political and security situation becomes
untenable because of a government takeover or a sustained threat to
the lives of employees.
Closure
The main questions at this stage are environmental rehabilitation and
the project’s social legacy. It may not be possible to restore an opencast
mine site to its original pristine state, but the site should at least
314 john bray
be made safe. The prime outstanding risk to the company is reputational.
The project is over, and the company wants to leave an acceptable
legacy, not least so that it has a favorable chance of beginning new
projects in the same region.
From a social point of view, the main question is the future employment
of people whose livelihoods have depended on the project
either directly or indirectly. That question is easier to answer if the
government and the operating company have helped to develop other
forms of employment, perhaps via a regional development plan or a
foundation. Best practice is to plan for the closure of the mine or oil
project, with this and other considerations in mind, from the inception
of the project.
Strategic Relationships: Helping and Hindering
The question of how much influence companies have, or should have,
on national and regional governments is an issue not only of power
but also of legitimacy. Business associations may lobby governments
over, for instance, tax policy. However, individual companies can
scarcely claim a mainstream political mandate. Few business people
point publicly to the deficiencies of government. Business arguably has
more legitimacy when its voice is raised in association with that of
other actors. This section discusses the part played by both formal and
informal actors, within the host country and abroad.
The National Government
The most important relationship is with the host government. Companies
cannot operate without government approval, and governments
are responsible for the overall political, legal, and, to some extent,
social environment within which companies work.
After geological prospectivity and commercial viability, the quality
of a country’s governance is therefore the single biggest factor in investment
decisions. To the extent that governments can raise standards,
they automatically improve the environment for foreign business and
make it easier to negotiate investment from reputable companies on
more favorable terms.
Relative Bargaining Positions. The balance of power between
governments and companies is widely debated, with many nongovernmental
organizations arguing that the largest multinationals have
greater resources than small or even medium-size governments. In
practice, the balance of power between them varies, but governments
attracting reputable companies 315
enjoy what amounts to a trump card because they retain the ultimate
sanction of withdrawing a company’s license.
Companies are in a stronger position when the government believes
that their services are essential rather than optional (as in Chad) or
when they have access to sophisticated technology that is not readily
available elsewhere (as may be the case in offshore West Africa). They
are also in a stronger position before they make an investment, because
at this stage they still retain the option of walking away. They
lose this negotiating advantage once the investment is made and their
costs are sunk in fixed assets.
Companies can afford to take a more relaxed view of governance issues
at the exploration stage. If they find something, it takes several
years for them to turn that discovery into a commercial project, and
over that period the situation may improve. By contrast, the stakes, and
the political risks, are much higher when they move into production.
The question of how much influence companies really enjoy has
been an important part of the debate about the resource curse in
Angola and the question of whether companies should publish what
they pay to government. In principle, the companies are in a stronger
position because relatively few firms have the skills to operate offshore.
However, both in public and in private, company representatives constantly
refer to the pressures of competition. If they antagonize the
government, it may revoke their contract and invite a competitor to
replace them. In practice, most governments hesitate to expel a mainstream
Northern company in this way, but no company wants to call
a government’s bluff.
In making a deal with a foreign company, the government faces
political risks of its own. Natural resources are part of a country’s
“patrimony.” Selling those resources to foreigners can be portrayed as
a betrayal. In practice, this kind of nationalism is often a form of protectionism
put forward by the local commercial interests that have
most to lose from foreign competition. This is at least one of the factors
in the ongoing debate about the role of international mining companies
in the Philippines.
Political leaders are conscious of the need to look after their domestic
power bases if they are to retain their positions. Domestic realpolitik
may or may not be consistent with liberal development strategies.
National or Personal Interests? Companies rightly point out that
their commitment is to a country or to the government as a collective
entity rather than to the party or individual who happens to be in power
at any particular point. Rulers come and go, whereas the company
aspires to stay for decades. Western companies operating in Nigeria
316 john bray
emphasized this point in the face of calls to disinvest following Ken
Saro-Wiwa’s execution in 1995.
Their dilemma is that governments in developing countries are
often dominated by personal or family interests. There may be little
concept of the national interest, particularly long-term national interest.
A representative of a major mining company recently discussed his
frustrations from negotiating with an African government.24 He argued
that over a period of some 15 years or more the project would bring
long-term benefit to the wider region through the construction of roads
and other infrastructure. He felt that his counterparts were interested
only in quick returns and personal benefits.
The overlap between personal and national concerns applied even to
the relatively sophisticated government of Indonesia during the Suharto
era. In that case, the Suharto family’s personal interests were at least
partially balanced by the planning skills of U.S.-trained economists—
the so-called Berkeley Mafia. In the eyes of both local and international
public opinion, it may be difficult for companies to dissociate themselves
from sectional interests in their host countries.
The companies’ dilemma is compounded when rulers fail to distribute
the revenue derived from oil or mineral wealth equitably. In a
series of interviews in October 2002, senior oil executives claimed little
detailed knowledge of how governments actually spend resource
revenues—the financial decisions of sovereign governments were outside
their remit. However, they may suffer from the consequences of
those decisions. If revenue distribution is perceived to be unfair, or to
contribute to conflict, the companies are believed to share some of the
blame. So, for example, nongovernmental organizations have accused
foreign oil companies of helping to fuel the conflict in Sudan (see the
appendix).
Provincial and Local Administrations
In the first instance, companies deal with national governments, but
the quality of regional or local administrations is almost as important.
If the regional government fails to give its consent, or is ineffective, the
project may not be viable.
Regional administrations often argue that they receive little benefit
from natural resources produced on their territory; this has been a
constant theme in the strained relationship between successive provincial
administrations in Baluchistan and the Pakistan national government
in Islamabad. Relationships between the national and regional
administrations are all the more complex when they are dominated by
different ethnic groups.
attracting reputable companies 317
In Nigeria the federal government sought to address accusations of
neglect in the Niger Delta by establishing a Niger Delta Development
Commission. The commission’s mandate is to ensure that a proportion
of oil revenue from the region is spent on local development.
However, a recent report by Human Rights Watch finds that there is
“virtually no control or proper audit over spending by state and local
authorities” and that the commission has made little impact (Human
Rights Watch 2002, p. 23). Human Rights Watch is critical both of the
companies and of the government but points out: “Fundamentally, it
is the failure of government to take up its responsibilities, including
responsibilities to regulate corporate behavior, that has placed the oil
companies in a position where they effectively substitute for government,
with all the negative consequences that this report and others
have illustrated” (Human Rights Watch 2002, p. 32).
If national or local governments do not deliver, then people may look
to companies to fulfill some of their functions, for example, the provision
of schools and medical care. However, this in itself creates problems.
Companies argue that their expertise does not equip them to serve
as development agencies. Also, if local people’s expectations are unrealistic,
they may resort to force to demand what they regard as their rights.
Local Communities
Experience underlines the need for a social “license to operate” from
local communities. Again, governments often promise to look after
this, but they cannot always deliver. Companies need to undertake their
own consultations, but they may find it difficult to identify clear negotiating
partners. For example, in the aboriginal societies of Australia
decisions made by one leader may not be recognized by the community
as a whole. Similarly, in the southern Philippines,Western Mining
Corporation and its successors have had to deal with five subgroups of
the indigenous Bla’an tribe rather than with a single entity.25
Current industry best practice emphasizes that good community relations
are essential from the outset. For example, in a recent issue of
the Rio Tinto Review, the company explains how it sets about diamond
exploration in southern India (Morrisey 2002). Rio Tinto’s
exploration team made a point of visiting local villagers in advance to
explain why they wanted to fly low over their fields “with two large
objects that look like missiles suspended from their helicopter”—the
“missiles” were special geological sensors. If people know what to
expect, they are less likely to react with hostility.
The company cannot take it for granted that the government is
looking after community relations, even if it promises to do so. A
318 john bray
security manager working for an exploration company in Asia tells of
a recent incident where reliance on the government proved to be a
fatal mistake.26 An exploration team was ambushed, and a geologist
was killed. At first sight, it was not obvious where the attack came
from. The company considered whether the ambush stemmed from a
dispute between company employees who came from rival ethnic
groups or was the work of refugee guerrillas from a neighboring country.
It turned out that the attack had been ordered by a local tribal
leader. He was not opposed to exploration per se, but he expected the
company to pay due deference by coming to see him before it began to
operate in his territory. The ambush was a demonstration of his power
in his own territory.
During the construction period, the company will need to employ
a substantial work force. Ideally, a large proportion of employees
should be locals, but it is usually also necessary to import skilled labor
from other parts of the country or abroad. It is important to provide
them with adequate security, while minimizing the social tensions that
may arise from their presence. In Papua New Guinea the presence of
workers from other parts of the country—who are often regarded as
“foreigners”—has been a major source of tension and has led to violence
and blockades of mining sites. This is one of the factors that led to
closure of the Bougainville copper mine in 1989, and it has been an issue
at the Ok Tedi mine near the Papua New Guinea–Indonesian border.
Land rights also are a major concern, and again Papua New Guinea
is a prominent example. It may be difficult to identify precisely who is
genuinely entitled to customary land rights and therefore to compensation,
particularly in a society where land rights belong to clans
rather than to individuals. Customary land rights may not be formally
registered, but people who believe their land rights have been infringed
upon may react violently. Similar issues arise in Africa and in many
other societies where access to land is the most important source of
wealth and prestige. The company needs to ensure that it has addressed
the concerns of everyone who has a genuine entitlement.
Some of the most sensitive community issues involve small-scale
miners: local companies or individuals who use simple technology
(picks and shovels) to exploit surface deposits. In many cases these
may cause more environmental damage than more mainstream commercial
mining, for example, when they use mercury—which then
pollutes local water supplies—as part of the gold extraction process.
Conflict is most likely to arise if the company claims exclusive mining
rights and tries to dislodge small-scale miners from what they regard
as their territory.
attracting reputable companies 319
International Interests
Northern governments are a source of support for Northern companies
in developing countries with poor governance but also present risks of
their own. As with commercial companies, there may be questions
about the extent to which external political influence is legitimate.
The greatest risk—particularly for U.S. companies—is the possibility
that their “home” government may impose sanctions on the country
where they are operating or hope to operate. The impetus for sanctions
usually comes not so much from the executive branch of government as
from members of Congress and their supporters. Diplomats are more
likely to argue that sanctions create an unwelcome check on their
freedom of maneuver.
Diplomatic representatives help companies by identifying people of
influence in the host country and by giving guidance on how the local
system works and the chances of success. They may also exercise
political pressure to help their companies gain commercial advantage.
In Control Risks Group’s 2002 survey, there was a general perception
that both the United States and other OECD countries resorted to this
approach either “occasionally” or “regularly” (table 7.5; Control Risks
Group 2002, p. 58).
Another issue is tied aid. In the past, Northern governments have
linked development aid to commercial opportunities for their companies.
They may do so by offering tied aid, where development funds are
specifically designated for companies and experts from the donor country.
Alternatively, they may offer the prospect of substantial aid grants
in return for contracts in another sector. As Control Risks Group’s survey
shows, there is a widespread perception that both the U.S. and other
OECD governments resort to such strategies either “occasionally” or
Table 7.5 How Often Do International Companies Use
Political Pressure from Their Home Governments to Gain
Business Advantage?
(percent)
Companies’
home Nearly Don’t
government Never Occasionally Regularly always know
United States 7.6 48.4 25.2 6.0 12.4
Other OECD
countries 9.2 54.8 25.6 2.0 8.4
Source: Control Risks Group (2002).
320 john bray
Table 7.6 How Often Do International Companies
Use Tied Aid to Gain Business Advantage?
(percent)
Companies’
home Nearly Don’t
government Never Occasionally Regularly always know
United States 12.4 48.0 22.8 2.8 14.0
Other OECD
countries 8.0 58.4 22.8 1.2 9.6
Source: Control Risks Group (2002).
“regularly” (table 7.6; Control Risks Group 2002, p. 58). Again, the
legitimacy of such strategies is open to question—however effective
they may be.
Improving governance is often an important component of bilateral
aid programs. For example, in a recent speech to U.S. oil companies,
U.S. Assistant Secretary Walter Kansteiner argues that the best way for
the U.S. government to assist them in West Africa is by taking measures
to curb corruption (Kansteiner 2002). Anticorruption initiatives
are an increasingly important part not only of U.S. Agency for International
Development programs but also of other bilateral programs,
including those from Germany, Scandinavia, and the United Kingdom,
and multilateral programs of international financial institutions, including
the World Bank.
However, there are limits to the influence of any external agent unless
there is a degree of local “buy-in.” As Robert Ebel, energy program
director of theWashington-based Center for Strategic and International
Studies, comments with regard toWest Africa, “Political jawboning and
strong rhetoric can only go so far before some of the countries begin to
resent the constant pressure to measure up to our standards” (cited in
Vieth 2003, p. A1).
Finally, governments can also assist by helping to train hostgovernment
security forces. Currently, the most obvious example is
Colombia, where U.S. armed forces are training Colombian troops to
guard the Cano-Limón pipeline, which carries oil from fields developed
by the U.S. company Occidental. U.S. assistance to the Colombian
armed forces, however, is controversial, both in the country and abroad.
Multilateral agencies such as the World Bank or United Nations
Development Programme (UNDP) face fewer political sensitivities than
individual governments but nonetheless run the risk of unwarranted
interference in the affairs of host governments. The International
Monetary Fund (IMF), the World Bank, and UNDP all emphasize the
attracting reputable companies 321
importance of good governance in their country programs. In the long
term, by enhancing governance these activities should improve the
operating environment for business.
Finally, relationships between companies and nongovernmental
organizations remain diverse and complex, with both sides often exhibiting
a deep distrust of the other. Nevertheless, in recent years there has
been greater interest on both sides in engagement and even partnership.
The U.K.-based environmental group Living Earth is an example of a
nongovernmental organization that has worked with Royal Dutch Shell
in Nigeria—with difficulties and benefits on both sides (Heap 2000,
pp. 192–213). Many other nongovernmental organizations and pressure
groups continue to argue that any formal relationship with companies
would compromise their independence.
Risk Sharing and Transfer
The task of the operator is to manage risks as effectively as possible
on the ground, but it is obviously impossible to eliminate risks, and in
any case the company may well need external sources of finance. The
operators typically share or transfer risks to joint venture partners,
external lenders, and insurers. Without the involvement of these parties,
it may be difficult for the project to go ahead, but their participation
raises new costs and demands. On the one hand, they have an
interest in the financial success of the project and therefore wish to minimize
costs and maximize returns. On the other hand, they may have
their own standards—and face their own external pressures—on issues
such as social and environmental responsibility. This section discusses
the role of these third parties and the influence that they exercise.
Joint Venture Partnerships
Petroleum and mining companies enter joint venture partnerships for
a variety of reasons. The first is that, in many jurisdictions, they are
obliged to work with the state-owned oil or mining company. In some
cases—as in the case of the Shell Petroleum Development Company in
Nigeria—the state partner has majority ownership. In others, for example,
Sudan, the state company may own no more than 5 percent. In
either case, the participation of the state company enables the host
government to maintain a higher degree of influence or control. The
second main reason is that they need to raise finance and to spread the
risks. Major operations in developing countries typically have two
or three foreign partners. The operator is responsible for day-to-day
322 john bray
management. External partners share the commercial risks and—as is
seen in the case of Unocal in Myanmar—the reputational hazards. The
third reason is that they want to gain access to technical expertise.
In all these cases, the participation of external partners can create
reputational and political risks. An essential part of risk management
is to conduct due diligence checks, both on potential partners’ financial
resources and on their reputation for integrity.
The involvement of state-owned partners is particularly likely to restrict
the operator’s freedom of maneuver, and the private company may
be tainted by association with the host government, for example, if the
latter is accused of human rights abuses. In extreme cases the stateowned
partner may use its influence to take over control of the project.
The involvement of private partners also may lead to reputational
risks that have to be managed. Companies seek joint venture partners
that are well connected, often by virtue of senior executives’ personal
connections with political leaders. Those connections may backfire if the
political leaders have a reputation for corruption or if the local partner
takes advantage of local contacts to try to seize control of the venture.
Commercial codes of conduct now typically contain a phrase to
the effect that the company will seek to ensure that its own standards
are applied in joint venture operations. However, companies acknowledge
that it is difficult to do more than influence projects where they
do not have majority control.
Project Finance
Companies may raise external finance either from private financial
institutions or from multilateral agencies such as the World Bank’s
private sector affiliate, the International Finance Corporation (IFC). As
in the case of the Chad-Cameroon pipeline discussed in the appendix,
companies value the involvement of influential multilateral agencies
because they believe that host countries are less likely to back away
from agreements involving institutions that give them valuable support
in other areas. If the World Bank institutions are involved, projects
must comply with their social and environmental guidelines.
The disadvantage of raising funds through project finance is that deals
are often time-consuming, raise costs, and add complexity (MacDonald
1998). Companies regard them not so much as a panacea as one among
several tools for mitigating risks.
Insurance
The combination of the global economic downturn with the aftermath
of the September 11 terrorist attacks has led to a significant hardening
attracting reputable companies 323
of the insurance market. The global capacity of the main reinsurance
companies has shrunk from some $800 billion to $600 billion.27 In all
classes of insurance, clients are asked to carry a higher proportion of
potential losses than before; they are required to present more detailed
evidence of measures taken to mitigate risks; and their policies are more
tightly worded. Against this background, it is more difficult to obtain
risk cover for projects in developing countries, particularly where there
is a high risk of conflict.
Political risk insurance has traditionally focused on three main
areas:
• Expropriation, including arbitrary governmental renegotiation
of contracts as well as outright confiscation
• Currency transfer
• War and civil disturbances.
Insurance is not available for many other kinds of risk that might be
classified as “political,” for example, reputational damage arising from
the campaigns of nongovernmental organizations.
Larger companies such as British Petroleum increasingly manage
their own insurance requirements, either through captive companies
or through some other financial provision. Other companies comment
that political risk insurance is an extra cost that they prefer not to
incur. However, they may be forced to do so by the demands of external
lenders.28
Private Political Risk Insurance Market
Lloyd’s of London provides the largest market for political risk insurance
and services brokers acting for a wide variety of international
clients. Political risk insurance is also available on U.S. markets, notably
via the AIG Group.
The availability of insurance cover is often determined—somewhat
arbitrarily—by the amount of capacity assigned to individual countries
or classes of risk by insurers and reinsurers. However, a senior
Lloyd’s broker interviewed for this chapter insisted that there were
“bags of capacity” for “good projects,” including, for example, a welldesigned
oil or mining project in Africa. From an underwriter’s point
of view, the definition of a good project is often one that involves a
well-known company with a favorable record. Typically this means a
large Western firm. An application for insurance from a junior or less
well-known company requires closer scrutiny. He added that insurers
might influence the financial structure of a deal but seldom have the
power to decide whether it goes ahead or not: “If a project is going to
happen, it’s going to happen.”
324 john bray
Public Insurance Market
In the late 1990s, it was widely argued that there was now less need for
official insurance agencies because their role had been supplanted by
the private market. This is scarcely heard after September 11. It is now
generally accepted that public sector insurance has an important role in
supplementing the limited capacity of the private market. This is particularly
important in, among other areas, insurance for new projects
in high-risk developing countries.
Corporate responsibility issues relating to the environment, corruption,
and social impact are increasingly on the agendas of all the public
insurers, and they are passing on this concern to their clients.
Multilateral Investment Guarantee Agency. TheMultilateral Investment
Guarantee Agency (MIGA) is the insurance arm of the World
Bank. Since its inception, it has issued more than 600 guarantees in
82 countries for a total of $11 billion in coverage and facilitated an
estimated $47 billion of foreign direct investment (MIGA News,
November 26, 2002). Companies say that applications to MIGA are
more complicated and time-consuming than working with the private
sector. However, as with the International Finance Corporation, they
value MIGA’s involvement because of the extra political weight carried
by the World Bank Group.
MIGA typically offers longer coverage—15 to 20 years—than is
available on the private market. However, its particular value to its
commercial clients lies less in the actual amounts that it insures than in
the political influence that it exercises via the World Bank. It is understood
that host countries are reluctant to antagonize the World Bank
by threatening MIGA-sponsored projects, and, throughout the organization’s
history, there has been only one claim. In other cases, MIGA
has mediated between its clients and host governments to resolve
problems that might otherwise have led to claims. MIGA actively promotes
collaboration with private sector insurers, and these are generally
more willing to insure projects once MIGA has taken the lead.
MIGA has played a role in promoting investment in post-conflict
regions—it is currently seeking to work with would-be investors in
Serbia. Among African countries, Mozambique is widely regarded as
a post-conflict “graduate,” and MIGA is proud of its role in promoting
investment there. The projects with which it is associated include
the $1.3 billion Mozal aluminum smelter, which is a joint venture of
South Africa’s Industrial Development Corporation, BHP Billiton, and
Mitsubishi Corporation (“Encouraging FDI in Mozambique” 2002).
MIGA is providing $40 million in coverage for loan guarantees issued
by the Industrial Development Corporation. It has also extended
attracting reputable companies 325
$70 million in guarantee coverage to Eskom, the South African electricity
company, for new facilities supplying electricity to Mozal. The
Mozal project has demonstrated a concern for corporate citizenship by
setting up the Mozal Community Development Trust, a trust fund that
supports communities around the smelter.
Some 9 percent of MIGA’s portfolio goes to mining projects, and it
has been particularly active in promoting new mining ventures in Africa,
for example, by sponsoring investment conferences. MIGA’s links with
the mining sector have led to criticism from the U.S. wing of Friends of
the Earth on the grounds of sponsoring industries that are environmentally
damaging. MIGA has countered by pointing out that the mining
sector was the most promising avenue for development in many African
countries and emphasizing that it follows World Bank guidelines
designed to mitigate social and environmental impact. MIGA’s involvement
may lead to higher standards being applied in these areas than
would otherwise be the case.
MIGA is currently putting particular emphasis on promoting investment
by small and medium-size enterprises and international companies
based in developing countries. It is putting a particular focus on Africa.
African Trade Insurance Agency. The African Trade Insurance
Agency came into existence in January 2001 and has its headquarters in
Nairobi. Its purpose is to supplement the private sector by facilitating
or providing political risk insurance for “trade, investments, and other
productive activities” in African countries where it would otherwise
be difficult to find cover. The risks it covers include war and civil disturbances
as well as currency inconvertibility, expropriation, and other
forms of government interference.
The agency is independent, but its startup expenses were covered by
the International Development Agency and the European Union, as
well as $105 million lent by the seven participating countries: Burundi,
Kenya, Malawi, Rwanda, Tanzania, Uganda, and Zambia. The first
layer of any losses will fall on the capital loaned to participating countries
by theWorld Bank, and it is hoped that this will give them a strong
incentive to prevent and mitigate the causes of claims.
The rationale for setting up the agency is to boost confidence among
companies that see commercial opportunities in Africa but are worried
about political risks. African Trade Insurance Agency Chairman
Hakainde Hichilema has commented, “In Africa we realize that if we
are to achieve the growth rates of 7 percent per annum over the next 10
to 15 years that will be required to achieve significant and sustainable
poverty reduction, we need a vibrant private sector that is willing to
invest in Africa’s future” (Bolger 2001). The agency currently covers
326 john bray
trade insurance rather than investment—it would be able to cover the
risks of failure to pay for expensive equipment imported for a mine, but
not the mine itself.
Export Credit Agencies. Most OECD countries have their own
export credit agencies: the Export Credit Guarantee Department
(ECGD) in the United Kingdom, Hermes in Germany, COFACE in
France, the Overseas Private Investment Corporation in the United
States, and Export Development Canada in Canada. The export credit
agencies’ relationships with their respective governments differ. For
example, ECGD is partially privatized, whereas the Overseas Private
Investment Corporation is still wholly owned by the U.S. government.
However, the Overseas Private Investment Corporation expects to
cover its costs through premiums and to that extent operates in the
same way as a commercial corporation. There has often been tension
between export credit agencies’ dual role as quasi-commercial entities
and official agencies whose activities are expected to reflect government
policy.
Partly as a result of this tension, the role of export credit agencies has
come under scrutiny from nongovernmental organizations and politicians
in both Europe and North America: To what extent do they promote
responsible businesses? Or are they more likely to be associated
with companies that are corrupt or damage the environment? If so, are
their activities acceptable for public bodies financed by taxpayers? They
have responded by introducing codes of conduct and by imposing tighter
requirements on client companies to ensure that they have not been
involved in corruption and that they conduct proper environmental
impact assessments.
Export Development Canada is widely considered to be a leader in
this field. It has introduced strict requirements for companies to guarantee
that they will not pay bribes to win contracts abroad, and it expects
them to conduct detailed environmental impact assessments for major
projects. Its concern for sustainable development also covers the social
impact of projects. However, it is not quite so explicit in its requirements
on social issues, possibly because the methodology for social, as distinct
from environmental, impact assessments is less developed.
Similarly, ECGD in the United Kingdom has indicated that it will,
“when considering support [for a project], look not only at the payment
risks but also at the underlying quality of the project, including
its environmental, social, and human rights impacts” (ECGD 2000).
However, it will not take an absolutist approach. It goes on to say that
ECGD’s approach in determining whether to support a project will be
attracting reputable companies 327
“one of constructive engagement with a view to achieving necessary
improvements in the project’s impacts.”
The export credit agencies are backed by the states in which they
operate, but they function like private sector institutions in that they
are expected to be self-financing. They are expected to insist on high
social and environmental standards, but there may be tension between
this role and the task of meeting their commercial objectives.
Incentives for Collective Action
The Sudan and Myanmar case studies offer discouraging lessons for
Northern companies that are considering new investments in conflictaffected
countries (see the appendix). Almost by definition, such countries
are likely to have weak governments, and there is a high risk—
particularly for oil or mining companies—of being caught in controversy
over corruption, poor governance, or conflict. The current debate
on the natural resource curse will lend weight to the controversy.
In late 2002 the British company Premier Oil announced plans to
withdraw from Myanmar, and the Canadian company Talisman Energy
said that it would sell its assets in Sudan. Both companies were
able to claim that their ventures and their eventual sales had been profitable.
However, Talisman explicitly pointed to the disproportionate
impact of Sudan’s high political risk rating on its share price. Both companies
introduced community development programs, but these were
not sufficient to defuse criticisms that the national impact of their
presence—their contributions to supporting controversial regimes—
was more important than any local impact that might or might not have
been alleviated by their social programs.
The Chad-Cameroon case study is more hopeful, but its success remains
unproven (see the appendix). If all goes well, it may prove to be
a model for similar projects. However, it will be difficult to repeat
some of the conditions that have allowed the project to take its present
form. In particular, the World Bank gained greater leverage from the
fact that the project was completely new and that Chad badly needed
the income it would bring. ExxonMobil and its partners made clear
that they would not proceed without Bank participation. This kind of
leverage may not be available elsewhere, and in any case, the negotiating
advantage that the World Bank and the companies now enjoy will
diminish as the project proceeds. Ultimately, the success of the Chad-
Cameroon project depends on the integrity and vision of the Chad
government and, no doubt, its Cameroonian counterpart.
328 john bray
Collaborative Initiatives to Promote Best Practice
As the Chad, Myanmar, Sudan, and case studies show, it is difficult for
international companies to justify their presence in countries with poor
governance records unless they can demonstrate that they are a positive
force for change. However, this raises questions about the extent
to which companies have a mandate to influence host governments and
societies beyond their immediate commercial responsibilities. Recent
experience suggests that companies can play a valuable role in building
up local technical and commercial capacity (see Nelson 2000).
However, their role is most likely to be accepted if they work in partnership
with other actors. There are now a number of examples of such
collaboration.
The U.S.-U.K. Voluntary Principles on Security and Human Rights.
One of the most important facets of governments is that they have convening
power. The U.S.-U.K. voluntary principles provide an example.
The U.S. State Department and U.K. Foreign and Commonwealth
Office together convened a series of meetings involving leading human
rights nongovernmental organizations and companies in the extractive
industries.29 The participants agreed on a set of voluntary principles
covering risk assessments and guidelines for company relationships with
both government and private security forces. Among other undertakings,
companies will inform the authorities of any “credible allegations
of human rights abuses by public security” and use their influence to
prevent any recurrences.
The two governments played a particularly important role in convening
the meetings.Without their authority, it is questionable whether
they would have taken place so quickly or so successfully. Some nongovernmental
organizations have questioned the value of principles
that are voluntary rather than statutory. However, they set an important
benchmark, and it would have been difficult to secure agreement
so quickly if they had not been voluntary.
The Dutch and Norwegian governments are participating in followup
discussions, and Exxon has signed up to the principles.Nowthe most
important challenge is to put the principles in practice and to secure the
cooperation of host governments. The participants are focusing on
Colombia, Indonesia, and Nigeria as test cases.
International Alert: Business Diversification in Azerbaijan. In 1999
International Alert, a London-based not-for-profit organization, began
an initiative to engage multinational companies investing in Azerbaijan
in a multiple-stakeholder dialogue (Killick n.d.). Azerbaijan is expected
to receive some $10 billion of investment over the next few years,
attracting reputable companies 329
much of it in the oil and gas industry. Investment on this scale has the
potential to stimulate social and economic growth but may also
deepen inequalities and increase the risks of corruption. The dialogue
is designed to find ways of preventing oil investment from triggering
conflict.
One of the themes identified by the project is the need for business
diversification so that the economy is not overly dependent on petroleum.
Participants have set up the Business Development Alliance
to promote the growth of the private sector. The Business Development
Alliance is a network of international and local companies and business
associations, government, international and local nongovernmental
organizations, and international development agencies. It serves to
enhance coordination between different initiatives, identify gaps in
Azerbaijan’s economic development, and develop strategies to address
them.
The Business Development Alliance is keen to promote local entrepreneurship.
Among other activities, it has set up a supplier database
to provide an instant connection between buyers and sellers, and it is
encouraging the creation of new institutions to increase the availability
of credit to local companies.
Danish Industries: Capacity Building through Chambers of Commerce.
A valuable example of a set of bilateral initiatives comes from
Danish Industries, the Danish employers’ federation, which has been
working with its counterparts in China, Ghana, Lithuania, Tanzania,
Uganda, and Zimbabwe to build up their technical capacity (Danish
Industries 2001). Among other measures, Danish Industries has been
advising its international counterparts on advocacy strategies. In turn,
the local chambers have been advising their own governments on
best practice, for example, on commercial law reform, an issue with
important implications for the fight against corruption.
Statoil: Sponsorship of Judicial Training in Venezuela. In 1999
Statoil Venezuela, a subsidiary of the Norwegian company Statoil,
formed a partnership with UNDP, the local branch of Amnesty
International, and the Consejo de la Judicatura, which is the branch
of the judiciary responsible for training and administration.30 In the
first phase of the project, which began in 1999, Statoil sponsored a
series of training-the-trainers sessions on human rights issues. The
sessions involved 24 specially selected judges and were conducted
by Amnesty International in collaboration with the judiciary. In the
second phase, which began after some delay in 2001, the original
trainees conducted a series of follow-up training sessions for judges in
two states.
330 john bray
Statoil’s main contribution was financial, and it was not directly
involved in the actual training. The course nevertheless demonstrated
Statoil’s commitment to human rights values and contributed to capacity
building in the host country.
Policy Recommendations
So far the main participants in the debate about the natural resource
curse have been large Northern companies, Northern governments,
international nongovernmental organizations, and multilateral institutions
such as the United Nations, United Nations Development Programme,
and the World Bank. Given the high reputational risks, the
companies that are most likely to work in conflict zones are juniors and
Southern companies, which hope that their willingness to take high
risks will enable them to catch up with the more established Northern
majors. This underlines the need to involve a variety of different actors—
including Southern governments and smaller companies from both
North and South in the search for solutions to the problems of poor
governance.
Engage Juniors and Southern Companies
A variety of levers can be used to influence both Northern juniors and
Southern state-owned companies.
Juniors rarely have the resources to develop major finds. Sooner or
later they seek partnerships with larger companies. They have less
chance of finding the right partners if their project is caught up in controversy.
As Talisman’s experience shows, human rights controversies
influence their stock market listings.
Companies that are wholly or partially state-owned are in principle
free from the pressures of the stock market (although some are in the
process of being wholly or partly privatized). However, they may be
open to other forms of influence. Governments, like companies, should
wish to avoid being implicated in human rights controversies.
One of the main arguments of this chapter concerns the importance
of partnerships. It may be difficult to persuade nongovernmental organizations
and even members of multilateral agencies to work with controversial
companies. Apart from other considerations, they may well
be concerned about the implications for their own reputations, and
they may suspect the companies of trying to “buy” respectability.
It is not possible or practical to engage all types of companies. However,
it will be difficult to make progress unless all parties are prepared
attracting reputable companies 331
to take on tough cases, including companies that have been involved in
past controversies and even causes celebres but now wish to learn from
their mistakes.
Engage Southern Governments
The U.S.-U.K. Voluntary Principles on Human Rights and Security
involve Northern rather than Southern governments. The participants
in the voluntary principles process are conscious of the need to
involve their Southern counterparts, and there have been initiatives
in this direction in Colombia, Indonesia, and Nigeria, but these are
still at an early stage. Similar initiatives need to be pursued in other
arenas.
Publicize the “Self-Interest” Argument
The role of business in conflict regions has moral and legal as well as
very practical aspects. Bad practice—for example, the failure to consult
local communities—often has direct, physical consequences that may
make the project totally unviable as well as threaten the lives of company
and government employees. Bougainville in Papua New Guinea
is one of the starkest examples of a profitable project that has been
forced to close down completely. This argument is powerful and still
not widely understood. It may be one means of engaging Southern
governments.
Develop Expertise in Social and Conflict Risk Assessment
Companies are familiar with geological, financial, and engineering risk
assessments. However, the field of social impact assessment is much
less well developed, partly because there are too many variables for
assessments to lend themselves to pinpoint predictions.
Past failures to anticipate complex problems arising from extractiveindustry
developments demonstrate the need for more sophisticated
social impact and conflict risk assessments. The UN Global Compact
has made a beginning with its business guide to conflict impact assessment
and risk management, and the International Association of Oil
and Gas Producers and the International Petroleum Industry Environmental
Conservation Association have recently published their report
on managing social issues in oil and gas projects. However, there is a
clear need for more work to refine expertise in this area. This developing
field is one area where it would be worthwhile to engage Southern
actors—companies, governments, academics, and nongovernmental
organizations.
332 john bray
Involve the Insurance Sector
Export Development Canada and other export credit agencies are
already requiring environmental and social impact assessments. They
have an interest in developing effective tools to ensure that these are carried
out effectively. Both the private and the public sectors should be
more explicit in offering lower premiums to companies that carry out
detailed risk assessments and take steps to mitigate the risks that are
identified. MIGA is specifically promoting South-South investment. It
should use its influence to promote high standards among the companies
that it sponsors.
Promote Economic Diversification
One aspect of the resource curse is the lack of economic diversification,
and this can lead to outright conflict as well as a distorted economy.
The need for diversification is one of the issues that emerge
from risk assessments. Companies, governments, and local civil society
should work together to develop integrated regional development
strategies.
Promote Transparency
There is now an emerging national and international legal regime covering
companies that pay bribes outside their home countries. It is essential
to ensure that laws are implemented in the North and to build capacity
in the South. In particular, Northern governments need to demonstrate
that they are meeting their side of the bargain by implementing the new
anticorruption laws passed as a result of the 1997 OECD convention.
This means publicizing the laws, distributing them to their own business
constituencies (surveys by both Transparency International and Control
Risks Group demonstrate high levels of ignorance and complacency
about the new laws), and prosecuting offenders. So far, no country apart
from the United States has prosecuted offenders under the new anticorruption
laws. At the same time, it is important to help build government
and judicial capacity in the South. Anticorruption initiatives are now an
important feature of many multilateral and bilateral aid programs. This
trend should continue.
Business people express concern that the Publish What You Pay
transparency initiative is flawed because it does not cover all types of
companies. However, this is not a sufficient reason not to promote the
initiative. As with anticorruption legislation, it is useful for companies to
have an “alibi” so that they can tell officials that they have no choice but
to comply.
attracting reputable companies 333
Local civil society organizations may play an important role in monitoring
both public and private projects and identifying serious problems
at an early stage. If they are to play this role effectively, they may need
training to build up their expertise.
Promote Government and Public Understanding of Business
One by-product of greater transparency may be a greater public understanding
of business risk. Companies frequently complain that government
officials do not understand the principles of business. Both
governments and companies have a role to play in explaining why and
how companies make decisions.
Support the Refinement of Laws on Human
Rights and Business
Many nongovernmental organizations and other observers point to
the apparent contradiction that the legal principles covering transnational
corruption are now well covered in international law, whereas
there is much less clarity on the arguably more important (and diffuse)
topic of business responsibility for human rights. Developing an
international legal consensus is a complex process, but the draft UN
document “Responsibilities of Transnational Corporations and Other
Business Enterprises with Regard to Human Rights” is an important
step.
Companies tend to resist new regulation. Trade ministries and
business associations need to put greater emphasis on the argument
that clear legal regulation strengthens rather than impedes good
companies.
Work with Industry Groups
Industry associations and chambers of commerce have an important
role in disseminating best practice. One disadvantage is a tendency—
like armies—to proceed at the pace of their slowest members in the
hope of achieving consensus.
An alternative approach is to set up ad hoc self-selected groups of
best-of-class companies in the hope that they will pave the way for
other companies in their sector. This kind of approach has had some
success in international banks’ development of the Wolfsberg principles
against money laundering as well as the U.S.-U.K. voluntary principles.
It would be helpful to set up a similar group, involving Southern
companies from the start, to look at other conflict-related issues.
334 john bray
Involve Business in “Track 2” Post-Conflict Diplomacy
Companies do not have—and should not expect to have—a seat at
post-conflict conference tables. That would rightly raise questions of
political legitimacy. However, they may be able to play a role on the
sidelines, giving technical advice on economic issues or, more broadly,
opening up alternative visions of the future. Public sector actors should
encourage this.
In the final stages of apartheid in South Africa, a mixed group of
private, government, and opposition participants worked together to
develop influential alternative scenarios of the future at Montfleur
(near Cape Town), using scenario techniques refined by Shell. Similar
processes and techniques may be applicable in other conflicts.
Take Time
Once mining and petroleum projects get under way, they take on a
momentum of their own. Companies have put in large initial investments
and are keen to get a return as soon as possible. Otherwise, they
“might as well put their money in the bank” (a much-repeated cliché in
the extractive sectors). However, people need time to absorb what may
be momentous social and environmental change. It may be better to
proceed slowly—and reduce the risk of conflict—than to press ahead
rapidly and risk losing the project.
Appendix: Case Studies
Sudan
Sudan is the largest country in Africa and one of the poorest. International
oil companies began exploration in the early 1980s, and oil first
came on stream in the late 1990s. The country is understood to have
substantial oil reserves that are as yet untapped. In principle, petroleum
could provide the economic development needed to lift Sudan
out of poverty.
However, Sudan has been divided by a fierce north-south civil war.
The main oil reserves are in the south, but protected by the north, and
both Sudanese opposition figures and international nongovernmental
organizations have accused foreign oil companies of collusion with the
Khartoum regime. There are two main concerns. The first is the extent
to which international companies have been directly or indirectly
attracting reputable companies 335
associated with civil rights abuses in and around their main operating
areas. The second is the accusation that oil is “fueling” the civil war by
helping to finance purchases of military equipment.
The Canadian company Talisman faced particularly severe criticism,
both in Canada and in the United States. Talisman vigorously defended
its position, but in October 2002 it announced plans to sell its Sudan
operations to an Indian company, ONGC Videsh. The Sudan case
study illustrates both the controversies encountered by international
companies operating in conflict zones and the contrasting exposure of
Western and non-Western companies.
Opportunities. Sudan is classic territory for junior companies.
There is general agreement both on its geological potential and on its
currently high political risks. Companies that take the risk of operating
there are well placed to make substantial profits if they can produce
oil in difficult conditions and still better placed if the political situation
improves.
Two international consortia are active in Sudan. The first is the
Greater Nile Petroleum Operating Corporation, which consists of China
National Petroleum Corporation (40 percent), Petronas (Malaysia,
25 percent), Talisman (Canada, 25 percent), and Sudapet (Sudan, 5 percent).
The Greater Nile Petroleum Operating Corporation is producing
oil in the Unity (Block 1) and Heglig (Block 4) fields and is
exploring in Block 4. These are north of the Bahr-el-Ghazal. The consortium
members operate the fields jointly and in 2001 produced a
total of 32.1 million barrels of oil worth $674 million (Talisman
Energy 2001, p. 26).
The second consortium consists of Lundin Petroleum (Sweden,
40 percent), OMV (Austria, 26 percent), Petronas (Malaysia, 26 percent),
and Sudapet (Sudan, 5 percent); these operate in Block 5A, south
of the Bahr el-Ghazal. Lundin, the operator, made a significant initial
discovery in 1999 and sank two further appraisal wells in 2001. However,
further exploration has been suspended since January 2002, as
most of the block has been inaccessible for security reasons.
The French company TotalFinaElf has a stake in an exploration
block in the south of the country, but this is currently in force majeure.
Political Context. Sudan’s first north-south civil war broke out
soon after independence in 1956 and continued until 1972. Fighting
broke out again in 1983 and continues today. An estimated 2 million
people are believed to have been killed as a result of the fighting. The
social repercussions of the conflict include the widespread displacement
of refugees, both in Sudan and in neighboring countries, as well
336 john bray
as increased malnutrition and mortality from infectious diseases (see,
for example, Médécins sans Frontières 2002).
The issues dividing north and south include religion, ethnicity, and
the distribution of resources. Both halves of the country are ethnically
diverse, but the north is predominantly Muslim, with close cultural
links to North Africa and the Middle East. By contrast, most southerners
are either Christian or animist and have closer cultural affinities
with neighboring Sub-Saharan African countries to the south. Successive
southern leaders have argued that their region has been marginalized
by northern rulers.
The present Khartoum government came to power in 1989 as a
result of a military coup and, particularly in its early years, adopted a
strongly Islamist political stance. However, it is now keen to develop
closer relations with Western countries.
The neighboring countries of Djibouti, Eritrea, Ethiopia, Kenya, and
Uganda are taking part in the Inter-Governmental Authority on Development
peace process under Kenya’s chairmanship. In July 2002 negotiations
between the Khartoum government and the southern-based
Sudan People’s Liberation Army (SPLA) led to the signing of the
Machakos protocol. The protocol outlined provisional agreement on
the south’s right to self-determination. After the formal peace treaty is
signed, there will be a transitional period of six years during which the
states in the south will enjoy a degree of autonomy, followed by an
internationally supervised referendum on the status of the south. This
will include the option of independence. Sharia (Islamic law) will apply
in the north, but not in the south. There have been further rounds of negotiations
since July, but at the time of writing (February 2003), no
final agreement.
The United States imposed commercial sanctions on Sudan in 1996
because of the country’s reported links with international terrorists,
and no U.S. companies operate in Sudan. However, in 2001 the U.S.
government appointed former senator John C. Danforth to serve as a
special envoy to promote the Sudan peace process. In October 2002
U.S. President George Bush signed the Sudan Peace Act, which commits
the U.S. government to support the Sudan peace process but also
to impose sanctions on the government if it “has not engaged in good
faith negotiations to achieve a permanent, just, and equitable peace
agreement or has unreasonably interfered with humanitarian efforts.”
Potential sanctions include a U.S. veto on loans to Sudan by international
financial institutions, the downgrading of diplomatic ties with
Sudan, and U.S. initiatives to seek a UnitedNations (UN) arms embargo
against Sudan.
attracting reputable companies 337
Norway and the United Kingdom have appointed their own special
envoys, and France has announced plans to do so as well.
Oil Development. The conflict began before the discovery of oil
in commercial quantities. Oil is therefore not a prime cause of the conflict,
but the future distribution of oil revenue is one of the main outstanding
issues in the Inter-Governmental Authority on Development
peace negotiations.
Oil exploration in Sudan began in the late 1950s, but the first significant
discoveries were made by the U.S. company Chevron in southern
Sudan in the early 1980s. In 1984, soon after the resumption of
the civil war, southern rebels kidnapped and killed three expatriate
Chevron employees. The civil war prevented development of the newly
discovered fields, and Chevron pulled out in 1990.
The most recent phase in the country’s petroleum development
began in 1997 following the signing of the Khartoum Peace Agreement
between the government and six ethnic Nuer rebel groups who
had broken away from the SPLA. The Khartoum agreement brought a
temporary peace to the areas of Unity and Western Upper Nile
Province immediately north and south of the Bahr-el-Ghazal River and
made it possible to resume oil exploration. The Khartoum agreement
brought no more than a temporary local peace, as some of the leaders
who signed the agreement defected back to the SPLA.
Activism of Nongovernmental Organizations. Sudan attracts the
attention of international nongovernmental organizations with a variety
of mandates, including the following:
• Secular aid and relief agencies. Action Contre la Faim, CARE,
German Agro-Aid, Médécins sans Frontières, Oxfam, Red Cross/Red
Crescent, Save the Children Fund.
• Church-related organizations. Christian Aid, Christian Solidarity
International, DanChurch Aid, Norwegian Church Aid, Pax Christi,
Samaritan’s Purse (United States), Sudan Focal Point (currently based
in South Africa), Tear Fund, World Vision.
• Human rights. Amnesty International, Human Rights Watch,
Justice Africa (antislavery organizations such as the American Anti-
Slavery Group form an important subcategory of human rights
groups).
• Policy and conflict resolution. International Crisis Group.
Sudan attracts attention first and foremost because of the humanitarian
impact of the war. The churches in the south of the country have
been able to build links and publicize their concerns via Christian
338 john bray
organizations in Western Europe and North America. One of those
concerns is the role of international petroleum companies.
The Campaign against International Oil Companies. International
attention has focused on Talisman more than on any of the
other companies. Talisman is listed on the Toronto and New York
stock exchanges, and Sudan-related nongovernmental organizations
are more active in Canada and the United States than in any of the
other companies’ home countries. Their campaign tactics have included
calls on individuals and institutions to divest shares in the company,
questions at the company’s annual general meetings, and political
pressure.
In 2000 the Canadian government published a formal inquiry on
human security in Sudan, known after its chairman as the Harker
report. The report was critical of Talisman’s role in Sudan, but the
government subsequently decided to take no formal action. In the
United States, members of Congress called for the Sudan Peace Act to
contain a clause banning companies active in Sudan from raising funds
on the New York Stock Exchange. The final wording of the act left out
this requirement. However, Talisman faced a class-action lawsuit
under the Alien Torts Claims Act because of allegations that it asked
the Sudanese government to remove villagers from the vicinity of its oil
fields in 1999.
Talisman vigorously defended its record in Sudan but in October
2002 announced plans to sell its 25 percent stake in Greater Nile
Petroleum Operating Corporation to the Indian company ONGC
Videsh. Talisman chief executive officer Jim Buckee’s comment on the
sale was to reaffirm that the company’s presence in Sudan had been a
force for good—he alluded to the company’s social projects—and to
assert that the ongoing peace process raised hopes for the future.
However, he also stated that controversy over the company’s presence
in the country had had a damaging impact on its share price:
“Talisman’s shares have continued to be discounted based on perceived
political risk in-country and in North America to a degree that
was unacceptable for 12 percent of our production. Shareholders have
told me they were tired of continually having to monitor and analyze
events relating to Sudan” (Talisman Energy 2002).
ONGC Videsh is a part state-owned company. Its proposed acquisition
of Talisman’s share in Sudan received Indian cabinet approval
in line with New Delhi’s strategic objective of improving access to
vitally needed oil supplies (Watts 2002). In early 2003 Romanian and
Turkish companies also expressed interest in entering the country
(Kerr 2003; “Turkish Companies Interested” 2003).
attracting reputable companies 339
Issues. The controversy over the presence of Western oil companies
in Sudan, and Talisman’s eventual sale, highlights many of the questions
raised in this chapter. In particular, what is the extent of oil
companies’ responsibilities toward a sovereign government in a region
of conflict?
After Chevron withdrew, Sudan was unable to attract any of the
major companies despite its favorable geological prospects. The political,
security, and reputational risks made the costs of entry too high. By
contrast, the country was able to attract interest from smaller Northern
companies and from Southern companies that are wholly or partially
state-owned.
Of all the companies operating in Sudan, Talisman has attracted the
most attention. Its listing on the U.S. and Canadian stock markets
meant that it was more exposed to nongovernmental organization
pressure and political activism in those countries. Canadian churches
and other organizations were able to claim a special sense of responsibility
because a company from their own country was involved in a
war zone. Lundin and OMV have also faced criticism from churches
and nongovernmental organizations in their own countries, but on a
smaller scale.
The criticisms levied against the oil companies have been partly
“local” and partly “national.” At a local level, Talisman was accused of
benefiting from military operations to depopulate the regions immediately
surrounding the oil fields (see, for example, Christian Aid 2001).
At the national level, the company was accused of helping to finance the
conflict through the revenue that it produced.
In its report Corporate Social Responsibility 2001, Talisman
pointed to its limited ability to influence the government on security
issues. It had advocated the signing of a security agreement between
the government and Greater Nile Petroleum Operating Corporation.
Among other provisions, the draft agreement stipulated that the government
would adhere to the UN Code of Conduct for Law Enforcement
Officials and the UN Basic Principles on the Use of Force and
Firearms by Law Enforcement Officials. However, the government
rejected the draft agreement, arguing that “the provision of security
is the prime responsibility and prerogative of governments and that
these issues were not appropriate to be addressed by a company residing
in and operating under the laws of Sudan” (Talisman Energy
2001, p. 17).
More positively, the company managed to secure the government’s
agreement to publish a summary of oil revenues and said that it would
“continue to advocate for the expenditure of oil-related revenue for
peaceful purposes” (Talisman Energy 2001, p. 26). However, it added
340 john bray
that speaking to the government on its own was not enough to facilitate
the desired changes; there must be involvement by other institutions,
including international financial institutions.
In 2001 Talisman budgeted $2 million for community development
projects: not all of it was spent, but the balance was put into trust to be
allocated when appropriate projects were identified. Greater Nile Petroleum
Operating Corporation as a collective entity spent $1.8 million on
upstream community projects and a further $850,000 on downstream
projects along the oil pipeline to Port Sudan. Talisman undertook to
ensure the continuity of its own projects at least until 2005, whether
the sale of its assets to ONGC Videsh went ahead or not. Community
development projects may be good in themselves, but critics of the oil
companies say that they are of little weight in the wider context of
civil war.
Questions for the Future. The most important question is the outcome
of the Sudan peace process. If the government and the SPLA are
able to agree on a cease-fire and a political framework to decide the
country’s future, then many other problems will become much easier to
solve. Reports of the negotiations in February 2003 were relatively optimistic
(for example, Rosenberg 2003). Even if an agreement is signed,
this will be the beginning of a new stage rather than the end of the
peace process. Both sides will require years to build up the institutions
needed to bring lasting stability.
Myanmar (Burma)
Myanmar has many issues in common with Sudan. Both countries have
a history of conflict between an authoritarian regime and ethnic minorities,
and in both cases petroleum is emerging as one of the prime
sources of foreign exchange.Western petroleum companies have faced
vigorous campaigns calling on them to withdraw, particularly in the
United States and the United Kingdom. The U.S. company Unocal faces
a long-standing legal case under the Alien Torts Claims Act on account
of accusations that it is complicit in human rights abuses inflicted by
the Myanmar army.
Opportunities. Commercial development of Myanmar’s oil industry
began during the British colonial period in the nineteenth century.
However, from 1962 until 1988, the country’s military regime
adopted the so-called Burmese Path to Socialism. Foreign oil companies
were nationalized, and Myanmar aspired to a policy of economic
self-reliance. This policy changed in late 1988 following a series of
attracting reputable companies 341
bloody popular protests demanding democratic reform. These led to
the seizure of power by a new military junta, the State Law and Order
Restoration Council (SLORC), which began to open up the country to
foreign investment once more.
International companies saw a combination of political and technical
opportunity. In the late 1980s and early 1990s several international
companies took advantage of the country’s new economic policies to revive
onshore oil and gas exploration. They hoped that new technology
would enable them to find and develop reserves that had been neglected
during the colonial period. Onshore exploration proved disappointing,
but there have been significant offshore gas finds. The main market for
the gas is in neighboring Thailand.
Currently, there are two offshore gas fields. The Yadana field is operated
by the French company TotalFinaElf (31 percent), Unocal (United
States, 28 percent), PTT Exploration and Production (Thailand, 26 percent),
and Myanmar Oil and Gas Enterprise (15 percent). Investment in
the field is on the order of $1.2 billion, and it is expected to bring the government
annual royalties of some $100 million. The Yetagun field is operated
by a joint venture of Petronas (Malaysia), Nippon-Mitsubishi Oil
(Japan), and Myanmar Oil and Gas Enterprise. The field was originally
operated by the U.S. company Texaco, which withdrew in 1998. Premier
(United Kingdom) then took over, but itself withdrew in 2002.
Political Risks. International companies in Myanmar face a variety
of risks arising from the country’s unresolved political dilemmas.
There are two overriding issues: the prospects for national democratic
reform and the relationship between the majority Burman population
and the country’s many ethnic minorities, who together make up some
35 percent of the population. Political uncertainty will continue to
hamper economic development until these issues are resolved.
SLORC promised to introduce democratic reform and held multiparty
parliamentary elections in 1990. The opposition National League
for Democracy won a sweeping majority. However, SLORC prevented
the new Parliament from convening, and opposition leader Aung San
Suu Kyi was placed under house arrest. More recently, intermittent
talks have been taking place between Aung San Suu Kyi and the
military leadership (now renamed the State Peace and Development
Council). Both sides have expressed optimism that it will eventually be
possible to achieve some kind of settlement but, at the time of writing
(February 2003), there had been no breakthrough.
The unresolved national political debate creates risks for international
companies at several levels. First, a future democratic regime may
342 john bray
question agreements signed while the armed forces were in power.
Second, the current government’s arbitrary approach to the law has
commercial as well as human rights implications: if there is a dispute,
companies have no recourse to independent arbitration. Third,
notwithstanding the government’s promises of reform, the economy
has far to go before it is truly liberalized. And fourth, international
companies have come under varying degrees of pressure from nongovernmental
organizations that argue that the profits they bring help
to sustain an illegitimate regime. This argument has greater force in
Myanmar than it might in other countries because gas sales are emerging
as the country’s prime source of foreign exchange.
Conflict between the national government and the ethnic minorities
began soon after independence in 1948, and by the 1980s the country
faced more than a dozen insurgencies. From 1989 onward, the military
regime signed a series of cease-fires, first with the successor groups
to the Burmese Communist Party in the north of the country and then
with others along the eastern border with Thailand. However, sporadic
fighting continues, notably with the Shan State Army and the
Karen National Union.
The Yadana joint venture exports gas to Thailand by means of a
pipeline that comes onshore in Tenasserim Division and then crosses
some 39 miles of mainland Myanmar before reaching the Thai border.
This region has been affected by insurgency from the Karen National
Union, which is still active, and the New Mon State Party, which signed
a cease-fire with the government in 1995. In March 1995, guerrillas
attacked a TotalFinaElf survey team, killing five Myanmar employees
and wounding 11. Apart from this, there have been no major security
incidents. The pipeline nevertheless benefits from security provided by
the armed forces, and this raises the issue of whether the operating
companies are complicit in alleged human rights abuses committed by
government forces. There are two main concerns: reports of the security
forces’ use of forced labor and claims that military action has
forced local villagers to flee into Thailand.
International Pressures and Company Responses. Companies
operating in Myanmar have faced pressure from several different
sources and to varying degrees, depending on which country they
come from. In 1997 the U.S. government imposed limited commercial
sanctions on Myanmar, barring new investment by U.S. companies
but allowing existing operations to continue. Texaco withdrew the
following year; Unocal has retained its investment. In 1999 the U.K.
government publicly called on Premier to withdraw, but stopped
short of passing legislation to force it to do so. However, the most
attracting reputable companies 343
severe pressure has come not from governments but from nongovernmental
organizations. These have been most effective in the United
States, followed by the United Kingdom and, to a much lesser extent,
France.
In the United States the Free Burma Campaign has been one of the
pioneers of Internet activism, using websites and e-mails to coordinate
the activities of hundreds of support groups, notably in colleges and
universities across the country. The strategies of the Free Burma Campaign
and its allies have included the following:
• Shareholder activism. Both individuals and pension funds have
raised questions at company annual general meetings in the United
States and threatened to withdraw their investments. In Europe, activist
fund managers have put pressure on companies to adopt a set of
minimum standards if they are to continue operating in Myanmar.
• “Selective purchasing”campaigns. U.S. activists called on city
and state administrations to pass resolutions refusing to do business
with companies active in Myanmar. The best known of these was the
1996 Massachusetts Burma Law, which said that any company doing
business in Myanmar must pay a 10 percent surcharge when doing
business with the state government. However, in 1998 the Tenth District
Court struck down the law, arguing that it infringed on the U.S.
government’s ability to conduct its foreign affairs. The Supreme Court
confirmed this ruling in 2000.
• Legal action. In 1996 lawyers acting on behalf of Myanmar
refugees issued a legal case against Unocal under the Alien Torts
Claims Act. The legal cases are supported by EarthRights International,
the International Labor Rights Fund, and the Center for Constitutional
Rights. The case is still outstanding. Whatever the outcome, the
case will take up immense amounts of management time before it is
resolved.
The companies have defended their position. First, they argue that
their presence in Myanmar amounts to a form of constructive engagement:
they are contributing to the country’s social and economic development,
and in the long run this is likely to prove the most effective
agent of change. Second, they insist that they follow international standards
in their employment practices: Myanmar employees receive
higher-than-average wages, and there is no question of the companies
using forced labor. Third, they argue that they bring wider economic and
social benefits to people living in and around their projects through their
social development programs. Premier has made a point of ensuring that
its programs are audited by specialists from the Warwick Business
School in the United Kingdom.
344 john bray
One of the main dilemmas facing companies operating in countries
such as Myanmar concerns the extent to which they are responsible,
directly or indirectly, for the activities of government security forces,
which by definition operate under the command of the authorities and
not the company. This is one of the key issues in the Alien Torts Claims
Act legal case against Unocal. Lawyers acting on behalf of the plaintiffs
argue that the company was aware of and benefited from the
army’s operations in the pipeline region. They maintain that this awareness
amounted to a form of complicity. The companies do not accept
this argument, but Premier acknowledges the importance of human
rights in its code of conduct and has sponsored human rights training for
members of the Myanmar armed forces and the police (Murray 2002).
Questions for the Future. In late 2002 Premier announced that it
was selling its assets in Myanmar to Petronas. Its decision to sell was
motivated by commercial considerations, and the sale fits the pattern
whereby junior companies concentrate on exploration, develop projects
to a certain stage, and then sell out to other countries at a suitable profit.
Whatever the case, the company’s withdrawal from Myanmar lifts a
reputational burden. The outcome is similar to the Sudan case in that a
Western junior has sold out to an Asian company that is far less exposed
to pressure from nongovernmental organizations.
One question for the future concerns Petronas’s continuing commitment
to the social projects that Premier has started. Petronas’s website
affirms its commitment to community initiatives in its home country,
and this experience should provide a good basis for a similar commitment
in its international operations.
The wider questions concerning Myanmar’s political future, and the
role played by commercial constructive engagement, remain unresolved.
It would, in any case, be unrealistic to expect companies to be prime
movers. They may help or hinder, but the country’s political leaders—
whether civilian or military—will be the prime decisionmakers.
Chad-Cameroon Pipeline
The Chad-Cameroon Petroleum Development and Pipeline Project is
one of the largest in Africa. It differs from the Sudan and Myanmar
examples in that it has yet to come into production. Its sponsors hope
that they will learn from the experience of other countries and avoid the
problems associated with a sudden “resource boom.” The project involves
investment in the development of oil fields at Doba in southern
Chad at a cost of $1.5 billion and the construction of a 1,070-kilometer
pipeline to offshore oil-loading facilities on Cameroon’sAtlantic coast at
a cost of $2.2 billion (World Bank 2002). The project could earn as much
attracting reputable companies 345
as $2 billion in revenues for Chad (averaging some $80 million a year)
and $500 million for Cameroon (averaging some $20 million a year).
The private sector participants in the project are ExxonMobil, with
40 percent of the private equity, Petronas (35 percent), and Chevron-
Texaco (25 percent). The World Bank’s International Finance Corporation
(IFC) is cofinancing the project. Revenue from the project will
be placed in special managed accounts, and priority will be given to sectors
such as health and education. The Chad-Cameroon project
is therefore a test case for international collaboration to defuse the
“curse of resources” by ensuring that a broad section of the population
benefits from oil revenue. The pipeline will begin to come on stream in
late 2003 or early 2004.
The Opportunity. The first proposals by Exxon (now ExxonMobil)
to develop the Doba fields date back to the 1980s. Exxon’s initial
partners were Royal Dutch Shell and Elf Aquitaine (now part of
TotalFinaElf), but these companies withdrew in 1999. ExxonMobil
operates the project under the name EssoChad.
Chad is one of the world’s poorest countries, and there is a clear
economic rationale for a project that will increase the country’s revenue
45–50 percent once the oil comes on stream (World Bank 2002).
The extra funds are to be used for investments in health, education,
environment, infrastructure, and rural development. However, Chad’s
record of political instability has discouraged investment. The country
has a record of north-south divisions and conflict. This is roughly
analogous to Sudan in that the north has a history of cultural and
religious links with North Africa and the Middle East, while the south
is mainly Christian and has closer cultural affinities with neighboring
Sub-Saharan African states. North-south tensions have not been as
severe as in Sudan but have nonetheless led to the emergence of a
series of southern rebel movements. These have now subsided, but
tensions remain, and there is still a long-term risk of renewed conflict.
President Idris Déby came to power by means of a military coup in
1990 but has since emphasized the need for democratic reform. He led
the way to democratic presidential elections in 1996 and again in 2001,
returning to power each time. Despite some problems, the perception
that Chad is now significantly more stable has helped to justify the
expenditure needed to launch the Chad-Cameroon project. However,
the political and social risks are far from eliminated.
Political Risks. The Chad-Cameroon negotiations illustrate the
strong position that companies and external lenders typically enjoy at
the outset of a major project. There was no doubt that Chad needed
the revenues that the project would bring, and the government was
346 john bray
willing to accept tough conditions, including requirements for international
oversight that arguably impinge on the country’s sovereignty.
However, there is a risk that the politics of the “obsolescing bargain”
will come into place as the project proceeds. Once the external participants
have built the pipeline and other infrastructure, and therefore
sunk their costs into fixed assets, the balance of power will shift in
favor of the government.
In November 2000 the Chad government used part of a $25 million
oil contract bonus to purchase $4.5 million worth of weapons. President
Déby justified the purchases as being consistent with the demands
of national security and the need to protect development. However,
the episode raised concern over the possibility of further controversial
decisions once the project gets under way and the government enjoys
greater freedom of maneuver.
The involvement of the World Bank and other external lenders is
part of a strategy to mitigate both the political and the social risks incurred
by the project. The private sector partners are financing some
$3 billion, or 81 percent of the project costs, from their own resources.
TheWorld Bank is providing $92.9 million in loans—$39.5 million to
Chad’sTOTCO(T’Chad Oil Transportation Company) and $53.4 million
to Cameroon’s COTCO (Cameroon Oil Transportation Company)—
to help finance these countries’ participation in the project
(World Bank 2002). The IFC is providing loans of $14.5 million to
TOTCO and $85.5 million to COTCO. The IFC’s involvement has
also mobilized another $100 million in commercial lending. TheWorld
Bank’s participation, in turn, has made it easier to secure additional
contributions of $41.5 million from the European Investment Bank,
along with additional borrowing of $200 million from COFACE and
$200 million from the U.S. Exim Bank.
In overall percentage terms, the contribution of the World Bank and
the other public sector lenders is relatively small. However, their participation
affords a degree of political risk protection because, at least
in principle, the Chad and Cameroon governments will be reluctant to
jeopardize their relationships with the international financial institutions
given their indebtedness and reliance on foreign aid.
The World Bank insisted on an environmental impact assessment,
and this includes a review of social issues linked to the project.31 Ancillary
projects have been designed to mitigate the environmental impact
of oil development and to build local capacity, for example, by developing
small and medium-size enterprises.
A combination of internal and external oversight is intended to
ensure that revenue spending is consistent with the developmental objectives
that, in principle, have been agreed by all parties. The 1998 Law
attracting reputable companies 347
Governing the Management of Oil Revenue resulted in the creation of
a revenue management plan (see Rosenblum 2002). The revenue management
plan reserves 80 percent of oil revenue for spending on public
health, social services, education, and rural development. It will be
monitored by an independent body, the Committee for the Oversight
and Monitoring of Oil Revenue, which, in turn, will be subject to the
scrutiny of Chad’s increasingly active civil society.
Meanwhile, an independent advisory group of five external experts
will report to the World Bank on the implementation of the project.
The group will meet twice a year, and its reports are publicly available
on its website.32
The project has proved controversial among international nongovernmental
organizations, which claim that it will prove socially and
environmentally destructive, particularly in the forests along the pipeline
route. They have little confidence in the willingness of Chad’s government
to abide by its promises and argue that there is a strong risk of
continuing and deepening corruption as a result of the project. Much of
their criticism and their lobbying has been directed against the World
Bank rather than the companies.
Questions for the Future. The main outstanding concerns relate to
the effectiveness of the project’s oversight mechanisms. For example,
Peter Rosenblum of the Harvard Law School Human Rights Program
has questioned whether the oversight committee has as much independence
from the government as it needs and called for measures to
strengthen its authority, including the hiring of full-time staff and the acquisition
of technical expertise (Rosenblum 2002).He also seeks a more
permanent role for the independent advisory group so that it can interact
with the local population continuously rather than only twice a year.
Although these measures would undoubtedly help, Rosenblum comes
to the “inescapable conclusion” that the success of the Chad-Cameroon
project “depends on the integrity of those in power and their willingness
to engage in a truly transparent and politically open process.” That
remains a major challenge, but not a hopeless one.
Notes
1. Personal interview, January 2003.
2. For a discussion of the dynamics of the obsolescing bargain, see Moran
(1998, pp. 7–14).
3. Personal interview, February 2003.
348 john bray
4. The survey results are available as a separate document on www.
crg.com.
5. The proportion of companies deterred might have been smaller if the
sample had included juniors.
6. For an overview of emerging trends, see Keay (2002).
7. See the company’s website at www.cairn-energy.plc.uk.
8. Personal interview, January 2003.
9. Personal interview, January 2003.
10. For a summary of international corporate governance codes, see www.
worldbank.org/html/fpd/privatesector/cg/codes.htm.
11. Personal interview, December 2001.
12. Institutional Investors (2001). The eight companies were Co-operative
Insurance Society; Ethos Investment Foundation; Friends, Ivory, and Sime;
Henderson Global Investors; Jupiter Asset Management; Morley Fund Management;
PGGM; and the Universities Superannuation Scheme.
13. See www.ftse4good.com.
14. See www.unglobalcompact.org.
15. On the OECD Guidelines for Multinational Enterprises, see www.
oecd.org. For the Global Sullivan Principles of Social Responsibility, see www.
globalsullivanprinciples.org. Reverend Leon Sullivan played a prominent role in
advising on the limits of U.S. corporate engagement with apartheid South Africa.
16. For samples, see www.business-humanrights.org.
17. For the historical background of the Foreign Corrupt Practices Act, see
Noonan (1984).
18. For the background to the convention and a discussion of how it works
in practice, see Control Risks Group (2002).
19. See www.publishwhatyoupay.org.
20. See www.ogp.co.uk.
21. Personal interview, November 2002.
22. On this topic, see Schwartz (1996). Schwartz is a former head of
scenario planning at Shell.
23. The World Bank has developed a conflict analysis framework that
allows country teams to consider factors affecting conflict when formulating
development strategies, policies, and programs.
24. Personal interview, January 2003.
25. The case study of Western Mining Corporation is discussed in Amnesty
International, Prince of Wales Business Leaders Forum (2000, pp. 98–101).
26. Personal interview, April 2002.
27. Interview with Swiss reinsurance broker, January 11, 2003.
28. Private interview, January, 2003.
29. The original participants were Amnesty International, British Petroleum,
Business for Social Responsibility, Chevron, Freeport McMoRan, Human Rights
attracting reputable companies 349
Watch, International Alert, International Business Leaders’ Forum, Shell, and
Texaco.
30. See www.wbcsd.org/casestud/statoil/index.htm.
31. See www.essochad.com/eaff/essochad/documentation/english/summary/
index.html.
32. See www.gic-iag.org.
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chapter 8
Dampening Price Shocks
Patrick Guillaumont and Sylviane
Guillaumont Jeanneney
THE INTEREST RECENTLY SHOWN IN GLOBAL policies on natural resources
and raw materials in the effort to improve governance and reduce
conflicts is shedding light once again on the long-standing problem of
the international price fluctuations affecting developing countries. This
renewal of interest comes after a lengthy period during which the very
idea of a global policy for dealing with price shocks was out of favor
because of measures that failed to take due account of market mechanisms.
During this period, the magnitude of international price shocks
did not diminish, and indeed increased, and a number of countries
obviously remain vulnerable to them. In consequence, after two decades
of market liberalization, the question of determining how the international
community might contribute to dampening price shocks has once
again come to the fore.
The purpose of this chapter is to examine global measures that
might be taken efficiently in order to help developing countries overcome
price shocks while avoiding past errors—that is, while respecting
long-term market trends. We first review the reasons why dampening
price shocks has once again become a reasonable objective of development
cooperation policy. We then indicate why the measures taken
previously proved inadequate. Finally, we examine the rationale for
international mechanisms to provide insurance or guarantees against
price shocks, perhaps in connection with external debt management.
353
354 guillaumont and guillaumont jeanneney
Why Dampen Price Shocks?
It is difficult to design rational measures for dampening price shocks
without inquiring about the reasons why such shocks can jeopardize
development. There is clear evidence of the negative effects of export
instability on growth (see, for example, Collier, Gunning, and Associates
2000; Combes and Guillaumont 2002; Dawe 1996; Fosu 1992;
Guillaumont 1987, 1994; Guillaumont, Guillaumont Jeanneney, and
Brun 1999).
On the microeconomic level and in the agricultural area, when
international price instability is transmitted directly to agricultural
producers, its effects are more damaging to agricultural supply when
producers are poor and unable to obtain insurance. In such circumstances,
farmers are inclined either to scale back their investment and
innovation owing to their apprehension about using riskier techniques
or, even in a period of price drops, to forgo educating their children,
which is difficult to reverse.
Unstable international prices, because they lead to instability in export
earnings, are also a factor in real exchange rate instability—that is,
instability in the relative price of tradables and nontradables, which occurs
regardless of the nature of the exchange arrangements in place. By
disrupting signals about long-term market trends, this instability leads
to poor resource allocation and hence to lower factor productivity.
Moreover, if a rise in export earnings leads to an appreciation of the
real exchange rate in a boom period and a loss of competitiveness for
the tradable goods sectors not benefiting from the boom (commonly
referred to as the “Dutch disease”), a decline there does not necessarily
have a symmetrical effect on the real exchange rate. In a fixed exchange
arrangement, there may be less depreciation, with insufficient gains in
competitiveness, while in a floating exchange arrangement, depreciation
may be greater, perhaps at the cost of inflation triggered by nominal
depreciation.
Third, the instability of export earnings induces a fiscal instability
that generates serious problems. During an expansionary period, the
growth of tax receipts, as well as the ease of recourse to external borrowing,
leads to an increase in public expenditure. This triggers deficits
during a period of declining prices. These deficits are difficult to absorb
owing to the downward rigidity of expenditure, particularly in the case
of wages and salaries. As a result, there is a chronic problem of inflation
and public indebtedness.
While public investment constitutes a more flexible component of
public expenditure, its instability, induced by that of exports, is a factor
in lower average profitability (Guillaumont, Guillaumont Jeanneney,
and Brun 1999).
Finally, the instability of export earnings, through the various effects
referred to above and relative price instability in particular, is a
factor in political instability, owing largely to the sudden changes it
induces in absolute and relative incomes. Through this key channel, it
undermines the sustainability of growth.
Recognizing the harmful nature of commodity price instability on the
economies of exporting countries contributes toward justifying external
assistance for such countries. Such aid is all the more justified in that,
specifically in vulnerable countries (those subject to highly unstable
world prices), aid has proven to be more effective in terms of growth
than it has been in countries that are less vulnerable economically. As
much as sound policy, vulnerability makes aid more effective, or, what
amounts to the same thing, aid attenuates the negative consequences of
the vulnerability (Chauvet and Guillaumont 2002; Guillaumont and
Chauvet 2001). In particular, aid is marginally more effective when it is
provided during periods of declining commodity prices (Collier and
Dehn 2001). The various studies referred to here show both the negative
effect of instability or price declines (an additive variable in econometric
estimates) and the attenuation of this effect thanks to aid (multiplicative
variable).
A rapid review of the various channels whereby international price
instability affects development clearly reveals that dampening price
shocks has both microeconomic implications (for economic agents in
the sector affected by the international price change) and macroeconomic
implications (through the central government budget, the real
exchange rate, and political stability).
The expression “dampening price shocks” most often refers to dampening
price drops. However, price shocks may be positive as well as
negative. One clear lesson from the past 30 years is that rapid rises in
international prices have drawn economies into situations that were
particularly difficult to manage when prices later fell. Hence the occurrence
of positive and negative shocks in succession—in other words,
price instability—is at the root of the problem. It is illogical to devise a
policy for dampening price drops that fails simultaneously to improve
the management of export earnings booms.
An international commodity price shock calls for different responses
depending on whether it is temporary or permanent. Only if the
shock is permanent does it justify a reallocation of production factors,
in other words, a change in the structure of production—that is, in
specialization. The same does not hold in the case of temporary shocks,
dampening price shocks 355
which are assumed to be reversible and are the shocks that are of interest
for the concept of instability.
Why Have the Solutions Adopted Proven Inadequate?
Over 40 years of debate about the effects of export instability, various
attempts have been made to deal with it. They have often proven inadequate,
to such an extent that debate on the very advisability of new
measures has been made more difficult, as they are regarded from the
outset as a return to outdated positions. Four major categories of measures
have been tried.
International Price Agreements
A first category of measures is intended to have a direct impact on
international prices. This is the case of the international commodity
agreements aimed at stabilizing the international price of a given commodity
by involving both producer and consumer countries. The functioning
of such agreements entails the use of a buffer stock or, in some
cases, recourse to flexible production quotas. In 1976, at the height of
the popularity enjoyed by such agreements, the resolution on the Integrated
Programme for Commodities adopted at United Nations Conference
on Trade and Development IV contemplated the introduction
of such agreements for all (about 20) major commodities. A Common
Fund for Commodities was even established with a view to financing
this program. In any event, international commodity agreements of
interest to the developing countries have remained limited in number
(cocoa, coffee, sugar, tin, and natural rubber—the last being the only
agreement concluded after 1976), and their effectiveness has been limited.
Not only have such agreements been difficult to negotiate, but,
more important, once agreements have been reached they have met with
only temporary success in warding off major price spikes and, in particular,
sharp drops. At present, none of these agreements is effectively
being implemented.
The very principle of international price stabilization agreements
has been the subject of a sizable body of critical literature (in particular,
Newberry and Stiglitz 1981). Experience suggests that the main
reason for their failure is that they limited their aims to price stabilization
around the long-term market trend and, to one extent or another,
ran up against that trend when attempting to affect it. It is symptomatic
that the agreement that has best resisted this phenomenon is
356 guillaumont and guillaumont jeanneney
the agreement on natural rubber, specifically because the reference price
used as the trigger for buffer stock intervention was regularly adjusted
in terms of earlier prices. But in all cases it remains difficult to single out
those aspects of international price movements that correspond to a
trend and those that constitute a deviation from a trend and then to
reach international agreement on financing the buffer stock required.
Stabilization Funds and Marketing Boards
In view of the high volatility of international commodity prices, and
even before ineffective attempts were made to reduce this volatility by
means of international agreements, many exporting countries, each at
its own level, implemented internal price stabilization policies. The instruments
of these policies are known by names such as stabilization
fund and marketing board. While the use of such instruments has declined
considerably, for many years it did ensure some stability in the
prices paid to agricultural producers.
However, the effectiveness of this approach has been strongly contested
for three main reasons. The first, but not the most general, reason
is that these organizations have had a tendency to move well beyond the
stabilization function and to become instruments for agricultural interventionism:
after assuming responsibility for product marketing, the
distribution of inputs and equipment, and agricultural credit and extension
work, they often were inefficient and sometimes even predatory.
The two other reasons are more general and fundamental. On the
one hand, institutions of this kind were a way of taxing agriculture,
with the surpluses recorded in periods of high prices largely being used
to finance public expenditure. On the other, the price paid to producers
was often stabilized without regard to the long-termmarket trend. As a
consequence, when the long-term trend was downward, the gap between
the international price and the corresponding producer price
(taking transportation and marketing costs into account) gradually
narrowed and then became negative, which led to a breakdown in the
system owing to the lack of reserves or fiscal support. Like the commodity
agreements, the stabilization funds ran aground on the longterm
market trend.
Naturally, adjustment policies targeted the agricultural intervention
agencies that were supported by stabilization funds as well as the excessive
taxation of agriculture. At the same time, this led to the abandonment
even of efforts to identify institutions that might be able to
dampen price shocks domestically, while respecting market trends and
sheltering their assets from being taken over by the public treasury.
dampening price shocks 357
Recourse to Forward Markets
To be sure, a partial response to the problem that international price instability
raises for stakeholders in the sector concerned could be sought
in having recourse to the forward market for export products. This
solution is limited in scope, not only because such markets do not exist
for all products and not all the developing countries concerned have
the capacity to intervene in such markets but also because forward
cover cannot generally exceed 12 to 18 months. Hence, although this
approach makes it possible to cover price risk within a given year, it
does not address the year-to-year instability that is at the root of the
major difficulties. Work to develop the use of forward markets and
promote the corresponding domestic insurance mechanisms is being
carried out, at the initiative of the World Bank, in the context of the
International Task Force on Commodity Risk Management in Developing
Countries (see International Task Force on Commodity Risk
Management in Developing Countries 1999).
Financial Compensation of Shocks: Compensatory
Financing, Stabex
In light of the problems posed by any effort to affect international
prices and of the financing requirements of any domestic effort to address
price shocks, a third category of measures are international efforts
to provide financial compensation to countries affected by such shocks.
The two mechanisms in this area are compensatory and contingency
financing, which was created by the International Monetary Fund
(IMF) in 1963, and the export receipts stabilization system, or Stabex,
which operated under the Lomé conventions for the period 1975–2000.
While both aimed at compensating for drops in export earnings attributable
to changes both in international prices and in the volume of exports,
the two mechanisms are very different in design. Compensatory
financing is a drawing on the International Monetary Fund authorized
in the event of a decline in overall exports (or a price spike for imports)
within the framework of a negotiated program. It is designed to help
a country experiencing a balance of payments problem. Stabex was
European assistance in the form of a grant or a loan, and subsequently
grants only, provided to the African, Caribbean, and Pacific group of
states in a manner initially planned to be automatic, so as to compensate
for a decline in proceeds from agricultural exports to the European
Community. Such agricultural exports were considered on a productby-
product basis for a certain number of eligible commodities.
These two mechanisms both evolved considerably over time and
ultimately failed to ful