Chapter 5. Corruption risks in revenue collection

This chapter identifies corruption risks associated with the collection of taxes, royalties and fees or the trading of commodities, which can result in a loss of public revenues. It further elaborates on recommended mitigation measures designed for home and host governments, donors, and extractive companies to minimise risks in the public and private sectors.

Corruption in the collection of taxes, royalties and fees

Corruption schemes

Extortion, embezzlement and misappropriation of collected revenues

The collection of taxes, royalties and fees may be undermined by extortion, misappropriation and diversion of funds by public officials for private gain. Diverted revenues are usually transferred to bank accounts located in offshore jurisdictions with low tax liabilities and lax legislation on information disclosure on beneficial ownership.

Bribery to receive favourable tax treatment

Corruption in revenue collection can take the form of collusion and bribery between tax payers and tax officers for receive favourable tax treatment such as tax or royalty reduction, or favourable treatment in pending litigations related to tax matters. In six cases reported in the Trace Compendium database, bribes were paid to local tax officials in exchange for reducing the company’s tax assessment and minimising its tax obligations. For example, in one specific case, the bribe was intended to reduce the amount of expatriate employment taxes payable by the company. Payroll expenses were regularly underreported and improper payments mischaracterised in the company’s books and records. These types of schemes may involve the use of local agents by the company in charge of dealing with tax authorities.

Parties involved

Parties involved in corruption related to revenue collection are typically the tax payer, i.e. the extractive company (i.e. international oil companies or state-owned enterprises) and tax officials at the local and/or central levels, depending on the country’s institutional arrangements for levying taxes and collecting royalties and fees.

In certain cases, politicians or officials at higher level may be involved, particularly in cases of extortion, embezzlement, special exemptions, etc. For example, the literature points to the case of a state-owned enterprise engaged in large-scale corruption and tax evasion that was made possible with the complicity of top political circles (World Bank, 2007). Some corruption schemes involve collusion between the tax payer and the tax authorities such as bribery in exchange for favourable treatment in tax dispute resolutions, tax exemptions, VAT fraud, etc. In embezzlement, fraud and falsification of tax receipts, tax officers or high-level officials can be the only party involved. In addition to public officials, the auditors within the tax administration as well as the banks where the diverted revenues are transferred might play a role in the scheme.

Vehicles and mechanisms

Use of offshore bank accounts and companies

Parties to the corrupt scheme may use offshore companies with obscure beneficial ownership arrangements or alternatively offshore bank accounts to channel and launder illegal payments, or to conceal the proceeds of corruption or the funds misappropriated during the tax collection process.

Fraud and distortions in accounting and reporting

Misreporting practices mainly consist of distortions in accounting and reporting of various items used to calculate the company’s tax obligations. These include, for example, the underreporting of production volumes or diversion of production volumes to reduce royalties; or the under-reporting of turnover, and the over-reporting of costs (e.g. capital allowances and operating expenditures (Curtis, 2012) or treatment of customs duties and levies as “development costs”) to reduce taxable income and resulting tax liabilities. Unaccounted sales of crude oil or fuel to trading companies registered in foreign jurisdictions, which is often immediately resold in the international market, may also result in the loss of financial windfalls for producing countries as the profits of these transactions are (lightly) taxed in the jurisdiction where those trading companies are registered.

The underestimation of taxes may also concern other tax liabilities including value added tax, payroll tax, foreign withholding tax and various tax incentives or penalties. An example of taxes for this last category is the expatriate employment tax that is sometimes applied by resource-producing countries above a certain threshold to encourage local employment.

The Trace Compendium further reports a case in which false invoices from local vendors were created to offset VAT obligations.

Trade mispricing

Corruption through trade mispricing is the falsification of the price, quality and quantity values of traded goods for a variety of purposes including tax evasion and corruption. The most common occurrence is in under-invoicing for exports and over-invoicing for input imports, which leads to an artificial reduction in profit margins and revenues; or increase in the charges of the company’s subsidiary operating in the host country. In these types of transactions, affiliated entities registered in tax havens play the role of intermediaries and receive most of the profits in order to minimise taxes owed in the host country. This mispricing can facilitate tax base erosion, tax evasion, and money laundering, and can be used to conceal the international transfer of illicit financial flows.

Corruption risks

Inadequate legislative and regulatory framework for revenue collection

The lack of a clearly defined legal and regulatory framework for revenue collection may constitute a major driver of corruption. Indeed, legislative gaps and shortcomings may include:

Unnecessarily convoluted and complex accounting rules, tax and trade regimes including multiple discretionary exemptions, confusing and non-transparent procedures for tax compliance (World Bank, 2007; Kar and Spanjers, 2014);
Systemic under-taxation and tax concessions by-passing existing tax rules (Africa Progress Panel, 2013); loopholes in tax regimes or ill-designed and counterproductive tax incentives resulting in disincentives for companies to provide correct cost estimates;
Weak internal and external controls of revenue administrations (for example, allowing corrupt officers access to taxpayer files without authority or tracking; no review of tax assessments by parties connected to the initial assessment; weak controls over access to physical records and computer networks);
Excessive political or administrative discretion over fiscal settings without external review;
Excessive discretionary power and lack of independence of tax inspectors and auditors;
Inadequate reward and penalty structures sanctioning corrupt practices by tax or custom officers (Africa Progress Panel, 2013);
Ineffective mechanisms for officials to report corrupt behaviour (either within or outside the agency);
Insufficient centralisation and state control over local authorities in charge of revenue collection (OECD, 2012).

Weak technical, financial and human capacity in revenue administration

Weak technical, financial and human capacity may prevent local and central revenue administrations from assessing company tax and royalty obligations, effectively enforcing fiscal rules and securing tax compliance, monitoring quantities produced, sold or exported and detecting potential acts of fraud or corruption, and in particular mispricing practices (AUC/ECA, 2015; African Progress Panel, 2013). The lack of co-ordination between central and local revenue administrations may introduce further vulnerabilities to corruption and fraud (PH-EITI, 2015).

Lack of revenue-collection-related data transparency and access

The lack of updated, comprehensive, disaggregated, comparable and harmonised data on revenue collection may challenge tax administrations’ capacity to perform their tasks including conducting accurate and informed transfer pricing risk assessments, ensuring enforcement of tax rules, monitoring compliance, and detecting possible discrepancies, corruption and fraud. Data and information deemed relevant for tax purposes include data on transactional transfer pricing, geological potential, production, taxpayers (permit registry, cadastral system, taxpayer database, etc.), tax rules, liabilities and effective revenue payments. The lack of data transparency and public scrutiny over the revenue collection process may further increase exposure to corruption risks.

Inadequate tax-related corporate strategy and procedures

For the private sector, risks include aggressive tax planning facilitated by the extensive use of offshore companies and high levels of intra-company trade (Africa Progress Panel, 2013), inadequate procedures for the identification and appointment of tax consultants,1 weaknesses in internal financial reporting systems, lack of transparent and proper accounting of the payments made by the company to the host government in the company’s books and records.

Recommended mitigation measures

RISK FACTORS	RECOMMENDED MITIGATION MEASURES
Inadequate legislative and regulatory framework for revenue collection	What host governments can do Promote transparency and standardisation in tax codes and rules in order to facilitate enforcement and avoid discretionary behaviour, including for example, requiring a public ministerial declaration where changes are made to standard fiscal settings outlining the concessions provided, their cost and justification.2 In particular, promote standardisation of tax incentives, tax holidays and concessions in legislation rather than provisions in specific contracts and licences to reduce discretion, enable independent scrutiny by the legislature or other stakeholders and ensure that a typology of available tax concessions is publicly recorded.3 Favour clarity, simplicity and centralisation of the revenue collection process in agencies with appropriate revenue collection expertise and mandate to raise revenue. Revenues from extractive resources should be recorded as part of the normal budgetary system to facilitate oversight and accountability.4 Provide credible avenues for whistleblowing against corrupt practices for tax officials, either within or outside the tax administration. Put in place mechanisms for tax auditors and tax examiners to detect possible acts of bribery, corruption and money laundering and report to the appropriate law enforcement authority or public prosecutor. Such mechanisms may include selecting cases for tax audits based on appropriate technical risk-based criteria rather than at individual discretion, putting in place examination plans and compliance checks such as an examination of internal audit reports, a review of the taxpayer’s copies of reports filed with other governmental regulatory agencies, consideration of the use of foreign entities and operations, the terms of contractual or pricing arrangements, details of fund transfers, and the use of tax havens. Training may be available through the OECD’s International Academy for Tax Crime Investigation, which is a key component of the Oslo Dialogue.5 Ensure confidentiality and protection of tax auditors, examiners and investigators, reporting suspicions of possible bribery or corruption (OECD, 2013a). Adopt the FATF Guidance for Politically Exposed Persons (Recommendations 12 and 22) (FATF, 2013), put in place internal ethical codes and asset declarations and implement robust internal controls and independent external audit. Adopt the OECD Council’s 2010 recommendation to facilitate co-operation between tax and other law enforcement authorities to combat serious crimes, including that countries “establish, in accordance with their legal systems, an effective legal and administrative framework and provide guidance to facilitate reporting by tax authorities of suspicions of serious crimes, including money laundering and terrorism financing, arising out of the performance of their duties, to the appropriate domestic law enforcement authorities” (OECD, 2010).
Weak technical, financial and human capacity in revenue administrations	What host governments can do Strengthen the human and technical capacity of revenue administrations to assess production volumes, costs, quality of production, and apply commonly accepted transfer pricing principles that are based on the arm’s length principle.6 To the extent possible, foster automation of services in order to remove intermediaries and reduce direct interactions between companies’ representatives and tax officials (Davis and Fumega, 2014). Use physical audits of production volumes and benchmark-based valuations by trusted parties to mitigate risks of under-declaration and discretion. Put in place an internal control system for revenue administration based on robust risk management and adequate human, financial and technical resources. Provide capacity building for criminal tax investigators to detect and investigate tax and other financial crimes such as bribery and corruption, tax evasion and money laundering, and recover the proceeds of those crimes, by developing the skills of criminal investigators. Training is available through the OECD’s International Academy for Tax Crime Investigation. Develop the expertise of tax authorities to detect mispricing and false invoicing through the sharing of effective audit procedures or of methods for verifying mineral products pricing in transactions between related parties when no comparable data for benchmarking exists (OECD, forthcoming 2016). What donors can do Support the development of well-trained human resources in partner countries’ revenue administrations for example by developing university modules on revenue/financial administration studies specifically applied to the extractive sector.
Lack of revenue-collection-related data transparency and access	What host governments can do Publicly disclose information about tax rules, government revenue streams, contracts, licences, production in order to assist tax authorities with enforcement and enable more efficient public scrutiny. In particular, require the public disclosure and reconciliation of disaggregated information on payments made by extractive companies to the government and on revenues collected by the government from extractive companies, taking advantage of existing national or international mechanisms, such as the EITI.7 Promote the adoption of a standardised payment reporting process for all companies operating in the country. Synchronise data on payments received and revenues collected at the national vs. sub-national levels to ensure that the figures reported by central government and local government match (PWYP, 2014). Participate in international tax information exchange by adopting the legal frameworks required and then build administrative systems and capability to enable information exchange.8 Require companies to provide transactional transfer pricing documentation in the tax jurisdiction in which they do business, identifying relevant related party transactions, the amounts involved in those transactions, and a clear explanation of the company’s methodology for the transfer pricing determinations they have made with regard to those transactions. Require companies to engage in co-operative discussions and provide access to all relevant information to tax administrations, consistent with applicable national laws, to enable an accurate and informed transfer pricing risk assessment (such as transfer pricing forms, transfer pricing mandatory questionnaires focusing on particular areas of risk, general transfer pricing documentation requirements identifying the supporting evidence necessary to demonstrate the taxpayer’s compliance with the arm’s length principle). Empower tax administrations to have ready access to relevant information at an early stage to conduct a transfer pricing risk assessment and make an informed decision about whether to perform an audit. In addition, it is important that tax administrations be able to access or demand, on a timely basis, all additional information necessary to conduct a comprehensive audit once the decision to conduct such an audit is made. Require companies to provide access to relevant information on the operations, functions and financial results of associated enterprises with which the company has entered into controlled transactions (including related party interest payments, royalty payments and especially related party service fees), information regarding potential comparables, including internal comparables, and documents regarding the operations and financial results of potentially comparable uncontrolled transactions and unrelated parties. What home governments can do Require companies to articulate consistent transfer pricing positions in accordance with the arm’s length principle and provide tax administrations with useful information to assess transfer pricing risks. In particular, participate in international information exchange on tax matters. This includes requiring companies to provide tax administrations with high-level information regarding the company’s global business operations and transfer pricing policies in a “master file”, made available to all relevant country tax administrations.9 What companies can do Identify each entity within the group doing business in a particular tax jurisdiction and provide home and concerned host countries’ tax administrations with an indication in reasonable detail of the business activities each entity engages in. Report annually to each tax jurisdiction in which they do business: the amount of revenue, profit before income tax and income tax paid and accrued; their total employment, capital, retained earnings and tangible assets in each tax jurisdiction, in accordance with existing international standards such as EITI.
	Provide, consistent with national laws, transactional transfer pricing documentation to the tax jurisdiction in which they do business, identifying relevant related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions. Engage in co-operative discussions and provide access to all relevant information to tax administrations in accordance with applicable national laws, to enable an accurate and informed transfer pricing risk assessment (such as transfer pricing forms, transfer pricing mandatory questionnaires focusing on particular areas of risk, general transfer pricing documentation requirements identifying the supporting evidence necessary to demonstrate the taxpayer’s compliance with the arm’s length principle). Where national laws require that a transfer pricing audit is carried out, provide tax administrations with access to all relevant documents and information in accordance with applicable laws. What donors can do Support better co-ordination for automatic data exchange among all relevant government agencies for revenue collection at both the local and central levels (for example, those involved in production, customs clearance, tax collection, etc.) Support the harmonisation of fiscal frameworks at the regional level in order to mitigate the potential for resource smuggling. Support efforts in their respective home countries to participate in international information exchange on tax matters
Inadequate tax-related corporate strategy and procedures	What companies can do Define adequate procedures for the identification and appointment of tax consultants, which should include performing thorough due diligence on potential candidates with particular focus on technical skills, ethical profile and conflicts of interest.10 Perform periodical analysis of the internal financial reporting system in order to identify and overcome any potential reporting gaps.11 Define a clear set of principles and rules to be followed when making payments to the host government, including proper accounting rules for and adequate maintenance of books and records.

Corruption in commodity trading

In principle, producer countries, in particular oil producers, can derive a large portion of their revenue from selling the share of oil produced by their joint venture partners or the share of production of their state-owned enterprises. Revenue streams can be significantly reduced due to corrupt conduct such as bribery or extortion and kickbacks offered to secure deals, commodity export trading and laundering, diversion of resources and embezzlement or commodity trade mispricing.

Corruption schemes

Bribery or extortion and kickback schemes to secure deals

The UN Oil-for-Food Programme is a particularly striking illustration of this kind of corruption. The United Nations allocated certain volumes of crude oil for sale on international markets and determined a “fair market price” at which Iraqi crude oil could be sold. This price happened to be below international market prices, creating an immediate premium for access to Iraqi crude and incentives for corruption. Indeed, Iraqi government officials started extorting kickbacks and illicit payments from oil purchasers (trading companies, processing companies, etc.). The programme mandated that the proceeds of oil sales be deposited in a UN bank account in order to purchase humanitarian goods and services. The illicit ’surcharges’ never reached the UN bank account but were instead transferred to Iraqi-controlled banks in Jordan and Lebanon or selected Iraqi embassies (World Bank, 2007).

Misappropriation of funds and embezzlement

Another common corruption scheme in commodity trading consists of diverting licit resources and/or misappropriating revenues generated from commodity sales. For example, the press reports a case of substantial oil revenues, intended to be remitted to the national budget, allegedly being misappropriated in the context of the sale of the state’s share of oil by the national oil company, which claimed a subsidy deduction. Other suspicious transactions suggest the diversion of rents by intermediary trading companies turning a blind eye to the misappropriation of rents through legitimate means (cashing dividends on behalf of politically exposed persons) or contributing to the creation of complex and opaque structures of corporate vehicles rendering the identification of beneficial owners more difficult.

Bribery related to commodity trade mispricing12

Mispricing in commodity trading usually consists of under-reporting volumes or under-invoicing the value of the resource sold, allowing its purchaser to resell it at an inflated margin. A share of the windfall usually serves to pay bribes. One case in the Trace Compendium database features a typical situation where bribery payments were made by the foreign trading company to secure below-market discounts on the purchase of raw materials from the state-owned enterprise. The UN High Level Panel on Illicit Financial Flows from Africa reports at least five African countries having been affected by such practices on a large scale either in the oil, mineral or timber sector (AUC/ECA, 2015).

For the company, in addition to securing good deals, trade mispricing practices allow a reduction in the amount of customs duties owed to the exporting country.

Parties involved

On the seller’s side, the parties involved in corrupt transactions in commodity trading are typically politicians or high-level officials from ministries or state-owned companies.

In oil producing countries in particular, the national oil companies are usually at the centre of oil transactions, either selling their share of production resulting from their own activities or selling the state’s share on behalf of the government. As a result, national oil companies may also be central to corruption in oil trading (Gillies, 2012). It is quite common in the business of oil trading to see national oil companies create separate subsidiaries for their trading activities. The complex and often opaque ownership structure of these entities and the lack of information on shareholding and beneficial ownership may facilitate corrupt practices (Global Witness, 2013).

On the purchaser side, parties involved can be end user companies such as companies converting resources into usable products or commodity traders, i.e. major trading companies, investment banks active in commodity trading, small trading companies with little logistical and financial capacity often acting as first purchaser from the government and immediate onward seller to larger trading companies. The latter tends to render the transaction more opaque, money flows tend to be more difficult to track (Guéniat, 2015).

It is also common that corruption in commodity trading, in particular commodity trade mispricing and stolen resource trading, involve intermediaries or “big men”, which are defined by the World Bank (World Bank, 2007) as powerful individual influence peddlers operating through local and international trading networks (active in particular in the trade of oil [World Bank, 2007] and diamond [OECD, 2012]), involving players from both consuming and producing countries.

Vehicles and mechanisms

Use of offshore companies

As described above, offshore companies may serve as a vehicle for corrupt practices in commodity trading by enabling concealment of beneficial owners. Offshore companies may also take part for example in the ownership structure of the trading subsidiary of a state-owned company.

Offshore companies may also be used by private trading companies to hide their involvement in opaque or corrupt trading activities such as over-invoicing imports to get the cash off-shore as in the case of the Oil-for-Food Programme (Berne Declaration, 2011).

Back-to-back sales, immediate re-sales, crude-for-refined-products swap contracts

In principle, the sale proceeds of domestic crude, net of processing costs, represent an important source of remittance for the national budget. However, in practice these revenue streams can be considerably reduced when sold to small trading companies with no logistical or financial capacity. Often these companies act as mere intermediaries or brokers that purchase crude oil or oil products from a state-owned oil producer or refinery on favourable terms and then resell them with a significant profit margin to third parties on the international market. The opacity of such transactions, the absence of tangible and obvious value added for the vendor, the observed discrepancies between benchmark estimates and actual revenues generated for the government suggest that these types of transactions may serve as mechanisms to create and conceal pockets of funds that may be used for corruption purposes (i.e. bribery, misappropriation of oil rents, etc.).

Crude-for-refined-products swap contracts

Crude oil trading may take the form of non-monetary transactions known as crude oil swaps, which involves oil producing countries swapping oil with commodity traders in exchange for refined fuel imports such as gasoline and gas oil of the equivalent value. In other cases, the deal may provide for the exchange of commodities in return for the provision of infrastructure (e.g. roads, hydroelectric power stations, health centre, etc.). Though not illegal per se, this type of swap may offer opportunities for corruption and misappropriation of oil rents as suggested by large discrepancies observed between benchmark estimates and actual figures for government revenues in certain oil producing countries. The absence of money transfer and the secrecy surrounding contractual clauses make corrupt behaviours difficult to detect.

Stolen commodity export trading and laundering

Illegally extracted or stolen resources are usually laundered in the trading process by being loaded onto freighters transporting other resources or by being sold to trading or producing companies, which turn a blind eye to the illicit origins of the traded resources.

Corruption risks

Opacity of commodity trading transactions

The lack of transparency and oversight in the trade of government’s share of production, provide opportunities for corruption. The lack of open and competitive public tender for the sale of commodities and the use of inappropriate commodity pricing benchmarks may lead to suboptimal allocation and overly favourable contractual terms for the purchaser at the expense of the seller. This may occur in particular when the trading company offers little value added and acts as a mere intermediary between the public entity or its marketing agent and a second-tier purchaser. The literature reports the case of suspicious transactions where a small trading company with no credentials in the trading business was offered very generous contractual terms to trade refined products, despite the fact that it would provide no logistical or other reasonable service. Contractual provisions included unusual long-term repayment periods, and payments in open credit with no financial guarantee led to unbalanced terms where the seller assumed substantial risks of default.

Opacity over the ownership and governance structures of key actors involved in commodity trading

The complex and opaque ownership and governance structures of agents in the commodity trading sector may constitute a factor conducive to corruption. This may be observed for example in the case of national oil companies that create subsidiaries for oil trading activities in purchaser and consumer countries; or in the case of commodity trading firms using multiple entities with holdings and subsidiaries registered in different jurisdictions, front companies or front men to conceal beneficial owners (Global Witness, 2013).

Lack of transparency on commodity-trading-related data

Corruption may thrive where there is no full disclosure by host governments of disaggregated data on: oil volumes received by national oil companies; oil sales by national oil companies (i.e. buyer, volume, crude grade, price and date for every cargo); revenue streams and financial transfers to and from the national oil companies and to and from the government (Gillies, 2012).

With regard to the home countries of trading companies, risks may include: the lack of requirements for payments disclosure by commodity traders and their business partners where these companies are registered or listed (i.e. annual reporting on the price, volume, grade and date for each transaction) (Gillies, 2012); the lack of harmonisation across national jurisdictions with regard to disclosure requirements, including information on commodity trading related payments and beneficial ownership (Global Witness, 2013); and insufficient international co-ordination to allow cross-checks and matching of information on export and import reporting (Berne Declaration, 2011).

Lack of or insufficient corporate due diligence

The lack of due diligence and compliance procedures by financial institutions, banks, trading companies and their business partners involved in commodity trading renders the effective prevention and detection of corruption risks more difficult (Guéniat, 2015).

Recommended mitigation measures

RISK FACTORS	RECOMMENDED MITIGATION MEASURES
Opacity of commodity trading transactions	What host governments can do Create a transparent and competitive tendering process for the selection of commodity trading companies, based on performance against select anti-corruption compliance criteria with regard to ethical standards, conflicts of interest, involvement of PEPs, beneficial ownerships, etc.13 Provide a transparent price system for commodity trading companies engaged in commodity import/export using internationally recognised benchmark pricing supplemented by in-house technical expertise and ensuring independent authorities to monitor such activity. What home governments of companies involved in commodity trading can do Establish suitable oversight mechanisms on material transactions in commodity trading (Déclaration de Berne, 2014).
Opacity over ownership and governance structures of key actors involved in commodity trading	What host governments can do Clearly define and disclose the institutional arrangements and practices governing the state’s role in the extractive industries, ranging from the legal framework and fiscal regime to the financial relationship between the government and the state-owned enterprises (e.g. on transfers of funds, retained earnings, reinvestment and third-party financing) (EITI, 2015b). Require private and public producing companies to publicly report on their corporate structure, including the location of any of their subsidiaries in other countries serving as the trading arm of the company.14 What home governments of companies involved in commodity trading can do Require companies active in commodity trading to publicly disclose beneficial ownership information related to businesses involved in transactions, including the direct or indirect involvement of any politically exposed persons.
Lack of transparency in commodity-trading-related data	What host governments can do Where the state share of production or other revenues collected is material, require state-owned enterprises or other government entities to publicly report on volumes produced/received, volumes sold and revenues received disaggregated by individual company, government entity, revenue stream and project. Require state-owned enterprises or other government entity to further disaggregate the data shipment by shipment, by type and grade of product, price, market and sale volume, date of sale (EITI, 2015a; EITI, 2015b; NRGI, PWYP, BD, Swissaid, 2015). Publish the name of commodity buyers and require them to disclose payments related to the commodity transaction made to governments or state-owned enterprises (at the same level of disaggregation) to allow for reconciliation of state and company data (EITI, 2016; EITI, 2015a; EITI, 2015b). Reconcile data received from buyers and disclosures from the government and state-owned enterprises (EITI, 2015a). Ensure independent audit and oversight over financial flows between the state-owned company and the state general budget. Increase engagement with downstream actors, i.e. transit countries, where refineries are located, as well as final destination countries. What home governments of companies involved in commodity trading can do Require companies active in commodity trading to disclose all payments to governments (NRGI, PWYP, BD, Swissaid, 2015; Africa Progress Panel, 2013; ECDPM, 2014). What companies involved in commodity trading can do Disclose payments to governments, also where not required by an EITI implementing country (RCS Global, 2015).
Lack of or insufficient corporate due diligence	What host governments can do Strengthen control, monitoring and oversight over state-owned companies’ activities in commodity trading. What home governments of companies involved in commodity trading can do Require companies active in commodity trading to carry out rigorous due diligence on their business partners, to prevent illicit transactions with politically exposed persons or other intermediaries (UK Financial Conduct Authority, 2014). Require companies active in commodity trading to carry out rigorous due diligence on their supply chain to verify the origin of the commodities, and the conditions under which they are acquired, in particular when sourcing from high-risk areas (OECD, 2013b). What companies involved in commodity trading (private and public) can do Adopt, commit to and clearly communicate to suppliers a supply chain policy for identifying and managing risks, including corruption risks. Companies should ensure that an anti-corruption policy extends across the supply chain of commodities, incorporating the standards against which due diligence is to be conducted (OECD, 2013b). Structure internal management systems to support supply chain due diligence (OECD, 2013b). Establish a system of controls and transparency over the supply chain. This includes a chain of custody or a traceability system or the identification of upstream actors in the supply chain (OECD, 2013b). Strengthen company engagement with suppliers and incorporate due diligence standards and requirements into contracts and/or agreements with suppliers and other business partners (OECD, 2013b). Identify and assess corruption risks in the supply chain.
	Strengthen company engagement with suppliers and incorporate due diligence standards and requirements into contracts and/or agreements with suppliers and other business partners (OECD, 2013b). Identify and assess corruption risks in the supply chain. Devise a strategy to respond to identified risks, by either: i) continuing trade throughout the course of measurable risk mitigation efforts; ii) temporarily, if appropriate with reference to the kind of risk, suspending trade while pursuing ongoing measurable risk mitigation; or iii) disengaging with a supplier after failed attempts to eliminate a risk or where the company deems risk mitigation not feasible or not acceptable (OECD, 2013b). Carry out independent third-party audit of supply chain due diligence (OECD, 2013b). Publicly report on supply chain due diligence policies and practices, for example by expanding the scope of sustainability, corporate social responsibility or annual reports to cover additional information on commodity trading supply chain due diligence (OECD, 2013b).

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Notes

← 1. Comments received from participants in the Working Group on Corruption Risks during the consultations between January and May 2015.

← 2. See “Principles to Enhance the Transparency and Governance of Tax Incentives for Developing Countries developed by Task Force on Tax and Development”, www.oecd.org/ctp/tax-global/transparency-and-governance-principles.pdf.

← 3. See note 2.

← 4. See note 2.

← 5. Further information on the Academy and the Oslo Dialogue is available at: www.oecd.org/ctp/crime/tax-crime-academy.htm and at OECD (2013), Bribery and Corruption Awareness Handbook for Tax Examiners and Tax Auditors, OECD Publishing, Paris, https://doi.org/10.1787/9789264205376-en.

← 6. The OECD is currently developing toolkits to assist developing countries to apply these commonly accepted transfer pricing approaches. Further information is available at: www.oecd.org/tax/tax-global/work-on-transfer-pricing-and-beps-in-developing-countries.htm.

← 7. Commentsreceived from participants in the Working Group on Corruption Risks during the consultations between September and November 2015.

← 8. Further information on the new global standard on automatic information exchange is available at: www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-information-in-tax-matters.htm. Further information on the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (as amended by the 2010 Protocol) is available at: www.oecd.org/ctp/exchange-of-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm.

← 9. This is Action 13 of the OECD/G20 Base Erosion and Profit Shifting Project. Further information is available at: www.oecd.org/ctp/beps-actions.htm.

← 10. See note 7.

← 11. See note 7.

← 12. Trade mispricing practices have already been detailed in the previous sub-section on corruption in revenue collection. The present section provides specific examples in commodity trading. Refer to the section above for general information on the vehicles and mechanisms used in trade mispricing (fraud, underreporting, etc.).

← 13. Seenote 7.

← 14. See note 7.