Beneficial ownership disclosure: The cure for the Panama Papers ills.

• Author: Radon, Jenik

Disclosing beneficial ownership is one of the few ways to prevent the loss of natural resource revenues and to mitigate--if not prevent--the resource curse. This article details how digital platforms can help the global effort to reverse the resource curse and plug revenue loss leakages in the mining sector through beneficial ownership disclosures.

As countries rich in natural resources develop their extractive industries through foreign investment and modernization of their regulatory regimes, some invariably have come to face the problem of the resource curse. Identified by social scientists as the phenomenon of poor economic performance and weak governance, the resource curse has confronted countries endowed with natural resources such as oil, gas, and minerals and has kept policymakers, academics, and practitioners busy in attempting to address the source of this phenomenon. (1)

Essentially, the macro causes of the curse, which are all quantifiable, can be narrowed down to certain key drivers, namely: (1) the strong currency of resource rich countries, which creates impediments for other exports; (2) high unemployment and little job creation by the extractive industries in the producing country; (3) unstable growth due to volatile resource prices; and (4) the failure to reinvest in schools, socially beneficial and high-quality infrastructure, and other development projects, and to make investments that are revenue generating. (2) Among all of these factors, it is the latter that is the most insidious. Lack of development investment masks the unquantifiable factors of lack of political will, corruption, and conflicts over natural resource revenue, which give rise to further institutional failures that exacerbate the poor economic performance of certain resource-rich countries. As such, the resource curse becomes a vicious circle. (3)

Revenues from the extractive industry are an essential source of income for many developing countries, without which they cannot help fund their most critical needs, such as schools, hospitals, and infrastructure. As countries and governments lose potential revenue from the exploration and exploitation of natural resources, they lose the capacity to sustainably develop and improve their economy. For instance, the Democratic Republic of Congo (DRC), between the years of 2012 and 2013, lost $1.36 billion in mining revenues, about twice the amount of the annual budget for health and education, because of the sale of undervalued mining assets to offshore companies with questionable ownership structures. (4)

While countries such as the DRC suffer from this loss of revenue, industry also suffers as the country is unable to invest in supporting infrastructure, other non-resource sector industries, and regulatory regimes to make investment attractive and low-risk for prospective investors. (5) Particularly in the mining sector, companies face potential costs when they fail to secure a "level of acceptance or approval by local communities and stakeholders" of companies in which extractive projects operate, that is the social license to operate. (6) This is also the case when there is no competent authority to set or enforce the environmental and social standards to protect the environment and communities in which the companies operate. The resource curse and the loss of natural resources revenue not only affects the public sector, but also has an adverse impact on the private sector, resulting in a vicious cycle.

In the case of mining, loss of revenue that contributes to the phenomenon of the resource curse can be traced to two culprits: corruption and revenue leakages. (7) Revenue leakages include such factors as impunity arising from a lack of beneficial ownership disclosure and inadequate legal instruments and enforcement mechanisms for tax collection that allow for transfer pricing, as well as inexplicable fiscal arrangements for mineral exploration and exploitation. (8)

The assessment of the causes of public revenue loss are non-exhaustive. However, there has been a global effort to focus on beneficial ownership disclosure as a key governance issue, particularly amidst the recent data leak through the infamous Panama Papers, exposing the loss of billions of dollars in natural resource revenue due to questionable ownership of sham mining and oil and gas companies. (9) Given these efforts, the authors of this article have focused on beneficial ownership disclosure as a crucial (sine qua non) means of plugging revenue leakages and stymieing the ensuing resource curse.

The article will address the case for beneficial ownership disclosure and the growing global effort to initiate such disclosures as a mechanism to combat revenue leakages. Further, it will recommend two measures on how to improve this global effort of beneficial ownership disclosure, namely: (1) employing stricter transparency standards for beneficial ownership disclosure, such as requiring all owners of private companies to be disclosed; and (2) using cyber technology, including the Internet and open database technological platforms, to improve the efficacy and transparency of beneficial ownership disclosure. As the authors are advisors on public sector reform in the oil, gas, and mining industries, they have chosen to concentrate on mining as a matter of illustration, even though the pervasive loss of oil and gas revenue experienced by energy-rich countries is also indicative of the resource curse. (10)

THE CASE FOR BENEFICIAL OWNERSHIP DISCLOSURE

Beneficial owners are all natural persons and legal entities that ultimately control or share in the profits from a company. (11) In particular to the mining sector, the case for disclosing and reporting on beneficial ownership is threefold: to reduce opportunities for loss of mining revenues by a state (either through corruption or otherwise); to hold beneficial owners (which includes parent companies as well as natural persons) liable for, among other things, environmental damage that arises from mining company operations; and to create a fully transparent roadmap of all owners of mining companies, so that regulators can make informed decisions about the reliability, veracity, and capability of the entities, and their controlling owners, to which the mining licenses are granted.

It is imperative to acknowledge that beneficial ownership disclosure by itself is not the complete answer to the corruption and revenue leakages dilemma. Beneficial ownership disclosure is most effective when accompanied by carefully drafted up-to-date criminal, mining, and tax laws; adequately compensated law enforcement; sufficient and up-to-date technology; and sustained political will. Regardless, it does present itself as a key tool, when available, to bringing accountability and recovering lost revenue and assets.

Loss of Revenue

Mining laws and mining contracts usually fail to adequately require the identification of beneficial owners, and when they do, they often provide an unclear definition of ownership interest, and even worse fail to require the beneficial owner to comply with legal and contractual obligations by which governments can hold beneficial owners accountable. (12) Transparency of the operating company and government payments is important for accountability, but reveals little about who in fact owns these companies and who ultimately benefits from the activities of these companies. (13) Often the identity of the real owners--the "beneficial owners"--of these companies is unknown, as they are hidden behind a murky chain of corporate entities.

For example, a mining company in Azerbaijan, partially owned by a UK-based company with an 11 percent stake, in turn was owned by companies that were controlled by daughters of the president of Azerbaijan. (14) To put the convoluted chain of ownership into perspective, about 70 percent of the mine was owned by a company, which in turn was owned by four shell companies, one of which was a UK-based company that was in turn owned by three companies incorporated in Panama and found to be controlled by the president's daughters. (15) Figure 1 is a pictorial representation of the ownership chain, to illustrate this murky ownership structure.

[FIGURE 1 OMITTED]

Without mapping out the ownership of the companies involved in developing this mine, as illustrated in Figure 1, it would not have been possible to trace the money trail of the Azerbaijan mine. The consequence? Local mining communities failed to reap the benefits from this mine that held "reserves of gold and silver estimated to be worth $2.5 billion," resulting not only in actual "social and economic costs," but also loss by the affected community of a share in "any windfalls." As such, the communities endured loss of land and accessibility to water resources and opportunities for local mining jobs. (16)

Opaque corporate ownership structures facilitate mining revenue getting "lost" in a complex scheme of corporate structures. Corporate entities are incorporated in jurisdictions with lax registration and disclosure regulations. The Panama Papers disclosures of 214,000 shell companies that were established in the British Virgin Islands and other tax havens between the 1970s and 2016 by Mossack Fonseca, one of the largest providers of offshore financial services in the offshore center of Panama, is probably the most illustrative of how the pervasive use of shell companies, as part of complex ownership structures, has afforded beneficial owners to hold assets without much regulatory oversight. (17)

In particular to the mining sector, the Panama Papers has helped to confirm the "externalization of billions of dollars" of mining revenue from the DRC, primarily by exposing individuals and the ownership structures involved in the initial sale and the subsequent "flipping" of Congolese mining assets at high margins of profit to offshore entities, all often registered in tax havens...