Chapter 2. Corruption risks in the decision to extract

This chapter identifies corruption risks arising in the decision to extract, the patterns of corruption and parties involved. It further provides recommended mitigation measures for home, host governments, and donors. In this phase governments enjoy the opportunity to undertake a cost-benefit analysis weighing the costs, benefits and risks over the expected timeframe of extraction and beyond.1 It is in this phase that governments strike a balance between possible alternative use of lands and associated restrictions, preservation of the environment, protection of cultural sites and the rights of indigenous peoples and local communities.

Corruption schemes

Bribery of domestic or foreign public officials, collusion, trading in influence, political capture or interference, or extortion may be used to influence the decision-making process, and to circumvent or overlook rules regarding environmental preservation, protection of land rights and land access restrictions to protect important sources of livelihoods for local communities, including indigenous peoples.

Corruption schemes may also include policy or regulatory capture for the benefit of private investors or the political elite. Distortions in policy making typically aim at shaping policies, rules, licensing regimes and processes in ways to facilitate corruption in subsequent phases (UNDP, 2015).

Finally, governments or extractive companies may use bribery and other corrupt behaviours, including trading in influence and extortion, to obtain the consent from traditional chiefs on behalf of local communities to undertake extractive operations on their land, especially in countries under customary land tenure regimes.

Parties involved

The decision-making process may be influenced by political elites and private companies in order to maximise their benefits in the further development of the project. The presence of so-called “junior companies” in the exploration phase has intensified in recent years partly due to rising costs and risks associated with the initial phases of extractive projects. Risks of corruption may be higher where extractive activities are being carried out by small “junior” companies since they are less exposed to reputational risk than big multinationals (Beevers, 2015).

The beneficiaries of the bribe may be high-level public officials who receive bribes in exchange for granting the necessary authorisations, and circumventing or modifying existing laws and regulations. In one case, two companies were awarded concessions to undertake exploration in a protected area. A member of a national parliament allegedly admitted to taking monthly payments to lobby for the award of the concession to the company. A company is also alleged to have paid for an official government delegation to a UN meeting where talks were being held on whether explorations in the national park should be allowed. In another case, a former minister was found guilty of interfering in the granting of prospecting licences for personal benefit.

The receivers of the bribe may also be lower-ranking officials such as technical experts in charge of carrying out environmental impact assessments.

Finally, traditional leaders or members of local communities may receive bribes or extort money from companies in exchange for buying communities’ consent, avoiding social tensions or acting in their capacity as land owners or custodians and giving their consent for companies to start operations.

Corruption risks

On the government side

Insufficient resources and information to assess the country’s reserves

First, corruption risks affecting host governments in the decision to extract may include the lack of or inadequate information and technical capacity to evaluate the country’s resource base (geological potential, quantum of the resource, geographic distribution, etc.) and to address land tenure and distribution issues. For example, a participant in the Working Group on Corruption Risks reported that in his country hydrocarbon reserve calculations are made manually in an excel sheet by the competent department, without any specialised software for hydrocarbon reserves simulation.2

More specifically, the lack of pre-investment in geological and geophysical surveys often leads host governments to rely primarily, if not exclusively, on the information provided by extractive companies. When extractive companies do not or incompletely report on the evaluation process and methodology used for the determination of countries’ reserves and when there is no verification by governments of the information provided by extractive companies, governments may be prevented from making informed decisions. In such case, the asymmetry of information potentially opens the door to corruption.3

Political discretion and poor governance

Political discretion and poor governance may provide opportunities for corruption in the decision-making process leading to the authorisation to extract and the allocation of extraction rights in protected areas, at the expense of the livelihoods of local communities and indigenous peoples living in the vicinity.

The lack of co-ordination among relevant government authorities may account for the increased risks of corruption. For example, as reported by a participant in the working group, the lack of co-ordination between the authority responsible for granting prior authorisations and that responsible for awarding the licence may create opportunities for corrupt conduct. In this particular case, the Ministry of Energy and Mines ratified decrees awarding licences to explore and exploit hydrocarbons in protected areas, in violation of the legal obligation to obtain the prior favourable opinion of the responsible authority.4 Lack of co‐ordination and asymmetry of information between the national and subnational levels may also undermine decision making and increase exposure to corruption risks.

Specific risk factors associated with environmental and social impact assessments and land tenure

The process for undertaking environmental and social impact assessments and the granting of subsequent authorisations presents specific vulnerabilities. Risks include bureaucratic procedural delays in the approval of environmental and social impact assessments,5 a highly politicised process of approval as well as the lack of communities’ participation in the environmental impact assessment process (Beevers, 2015).

Ambiguous, outdated or unenforced legislation on the protection of socio-environmental rights may contribute to increase a country's vulnerability to corruption in the decision to extract. For example, unclear and opaque land tenure systems, in particular where customary land tenure regimes are prevalent, may encourage the use of corrupt practices to obtain the authorisation to extract on lands traditionally owned by local communities.

On the company side

High-risk investments

Vulnerabilities to corruption in the pre-investment phase could be explained by the type of contracts, the nature of the investment and the risk assumed by the investor in this initial phase. Risks vary depending on the company size and profile. In the case of multinational companies, vulnerabilities to corruption may result from the capital intensity required to make the initial investment. The low reputational risk of junior companies involved in the exploration phase and their high dependence on capital financing rather than production-derived cash flows may make them prone to take higher risks for higher returns.

Recommended mitigation measures

RISK FACTORS	RECOMMENDED MITIGATION MEASURES
Insufficient resources and information to assess the country’s reserves	What host governments can do Develop a medium- to long-term plan for conducting geological and geophysical surveys to build knowledge on available resources, thus reducing asymmetries of information.6 Carefully design and review requirements for extractive companies to report on the evaluation of the geological potential and put in place mechanisms to verify the information that companies provide.7 Make geological and geographic information publicly and freely available to provide investors and other interested parties with information about the location of exploration and extraction rights. What donors can do Provide technical and financial support to conduct studies/resource mapping. Support government agencies in charge of land registries through staff capacity building or the provision of equipment. Provide technical and financial support to develop national resource strategies and legislation (e.g. mining code) and facilitate partner countries’ access to lessons learned by peers. Support consultation processes with affected stakeholders, such as communities around extractive areas.
Political discretion and poor governance	What host governments can do Ensure clear alignment and consistency of the allocation strategy for extraction rights with broader national and local development objectives so as to limit political discretion and ensure government’s accountability to citizens (ICAC, 2013). Develop a set of pre-determined criteria to provide guidance in the allocation of extraction rights and require them to be explicitly and transparently considered in the decision-making process. Put in place governance mechanisms to improve co-ordination among different central and local authorities involved in the decision to extract and the awarding of licences while ensuring segregation of roles (evaluation/planning/impact assessment/authorisation). For example, governments could consider establishing inter-ministerial bodies to work as focal point for all the above activities (ICAC, 2013).8 Clearly define the roles of the national and local authorities in the approval process and in the granting of the relevant authorisations and permits.9 Set up effective controls to ensure independence in the granting of authorisations and the application of appropriate sanctions.
Specific risks associated with environmental and social impact assessments	What host governments can do Simplify bureaucratic and administrative procedures for environmental and social impact assessments in order to reduce the risk that public officials receive corrupt payments in exchange for accelerating the granting of extraction rights.10 Develop indicators to measure the environmental and social impact of extractive activities, set baselines against which to evaluate performance and provide for regular data collection, storage and analysis. Put in place a system to monitor environmental performance and sanction non-compliant companies (Beevers, 2015).
Specific risks associated with land tenure issues	What host governments can do Set and enforce laws, policies, rules and regulations for protected areas in order to limit discretion in the allocation of extractive rights that may threaten the integrity of protected areas (Beevers, 2015) or the livelihoods of local communities and indigenous peoples living in the vicinity of the extractive areas.11 Systematically map existing concessions, protected areas and community land rights including customary rights so as to avoid overlaps and risk of conflict uses (PWYP, 2014). In doing so, governments should encourage an open, transparent, inclusive and participatory spatial planning process involving local communities (OECD, 2015). Engage with affected local communities in order to provide meaningful opportunities for their views to be taken into account in relation to planned extraction operations. In particular, clarify expectations, commitments or legal requirements for engaging with indigenous peoples about resource development, in accordance with applicable international standards and principles (ILO, 1989).
High-risk investments	What home governments can do Encourage the design and implementation of ethical standards and codes of conduct specific to junior exploration companies operating abroad. What donors can do Raise awareness and sensitise small and junior companies about responsible mining. This may take the form of training on relevant national and international standards, including through extractive industries associations.

References

Beevers, D.M. (2015), “Large-scale mining in protected areas made possible through corruption: Options for donors”, U4 Brief, Anti-Corruption Resource Centre, June.

ICAC (2013), “Reducing the Opportunities and Incentives for Corruption in the State’s Management of Coal Resources”, Independent Commission against Corruption, New South Wales, October.

ILO (1989), International Labour Organisation Convention 169 on Indigenous and Tribal Peoples, www.ilo.org/indigenous/Conventions/no169/lang--en/index.htm.

OECD (2015), “Due Diligence Guidance on Meaningful Stakeholder Engagement in the Extractive Sector”, April, www.oecd.org/daf/inv/mne/OECD-Guidance-Extractives-Sector-Stakeholder-Engagement.pdf.

PWYP (2014), “PWYP Indonesia on using project-level data, 11 September 2014”, www.publishwhatyou pay.org/pwyp-resources/pwyp-indonesia-on-using-project-level-data/.

UNDP (2015), “A Practitioner’s Guide for Corruption Risk Mitigation in Extractive Industries”, March.

Notes

← 1. www.resourcegovernance.org/training/resource_center/backgrounders/value-chain.

← 2. Comments received from participants in the Working Group on Corruption Risks during the consultations between January and May 2015.

← 3. See note 2.

← 4. See note 2.

← 5. See note 2.

← 6. Comments received from participants in the Working Group on Corruption Risks during the consultations between September and November 2015.

← 7. See note 6.

← 8. See note 6.

← 9. See note 6.

← 10. See note 6.

← 11. See note 6.