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Written evidence submitted by Global Witness
1) Global Witness is a non-governmental organisation based in London that investigates
the links between natural resource extraction, corruption and conflict. Our
investigations and campaigning were a key catalyst in the creation of the Kimberley
Process, to tackle the trade in conflict diamonds, and the Extractive
Industries Transparency Initiative (EITI), to encourage transparency over
payments and receipts for natural resource revenues. We were co-nominated for a
Nobel Peace Prize in 2003 for our work on conflict diamonds, and were awarded
the 2007 Commitment to Development Ideas in Action Award, sponsored jointly by
Washington DC-based Centre for Global Development and Foreign Policy magazine.
2) We are aware that some of our colleagues in
development NGOs will respond to the first two questions posed by this inquiry
emphasising the importance of ensuring that aid flows to the developing world
are maintained despite the pressures on donor budgets, since many of the worst
effects of the financial crisis will be felt in the world's poorest countries.
The purpose of Global Witness's submission is to focus on the third and fourth
points posed by the inquiry: the impact of the economic downturn on public
support for development expenditure, and the effectiveness of DFID's strategy
for strengthening public support for its work.
3) Public support for development expenditure,
particularly at a time when there is pressure on public budgets, depends on a
public perception and understanding that the aid is necessary, and is
effective. DFID, along with all donor agencies, already has to deal with a
generalised public perception that aid money is itself subject to being looted.
What is even more damaging, however, is the growing public awareness that aid
can:
a) subsidise and legitimise the looting of state
revenues that ought to allow poor countries to stand on their own feet
independently of aid
b) be undermined by a failure to prevent the
financial system's facilitation of state looting
c) be undermined by the activities of UK
companies operating in conflict zones.
4) This submission will briefly outline the ways
in which these can occur, and propose a series of recommendations to help
prevent them occurring.
5) In many of the countries where Global Witness
undertakes its investigations, natural resources could provide significant
development potential. In 2007 exports of oil and minerals from Africa were worth roughly $260 billion, nearly eight
times the value of exported farm products ($34 billion) and nearly six times
the value of international aid ($43 billion).[1]
6) This huge transfer of wealth could be one of
the best chances in a generation to lift many of the world's poorest and most
dispossessed citizens out of poverty. But in too many cases, these revenues are
not contributing to development, but are being looted by those running the
state. Economist Paul Collier has noted that of the world's poorest one billion
people, a third live in resource-rich countries.[2]
7) The Doha Declaration on Financing for
Development, agreed by 160 states at the Follow-up International Conference on
Financing for Development to Review the Implementation of the Monterrey
Consensus in December 2008, agreed that 'Capital flight, where it occurs, is a
major hindrance to the mobilization of domestic resources for development.'
8) Research by Raymond Baker, author of Capitalism's Achilles Heel and director
of the Global Financial Integrity Program at the Center for International
Policy suggests that illicit capital flows out of developing countries reach,
at a conservative estimate, $850 billion to $1 trillion a year.[3]
Some of this figure is accounted for by transfer mispricing as corporations
avoid tax through the use of tax havens, a problem which could be curtailed
through a multilateral agreement on automatic exchange of tax information and
accounting standards which required companies to account for their activities
in each jurisdiction rather than aggregated by region as at present. But some
of this devastating outflow is accounted for by corrupt flows of money that has
been looted from state coffers.
9) Therefore one of the primary impacts that the
UK
and other developed countries can have on poverty reduction is to stop the
state's own resources being looted in the first place, so that these funds are
available for development. Unfortunately, donors rarely have real incentives to
confront bad governance and corruption, since their staff are rewarded largely
on the basis of managing a portfolio of projects and ensuring the money is
disbursed, leading to an overall tendency to try not to rock the boat. This
problem is magnified when the money is being disbursed by multilateral
institutions that are further removed from the taxpayers who have provided the
funds.
Aid subsidises and legitimises looting
of state resources
10) Whereas some developing countries are fortunate
enough to have a benevolent government which operates with the best interests
of its citizens in mind, others are not so lucky. What binds the resource-rich
countries that Global Witness has investigated is the emergence of a 'shadow
state', one where political power is wielded as a means to personal
self-enrichment and state institutions are subverted to those needs. Behind the
façade of laws and government institutions of such states is a parallel system
of personal patronage predicated around extraction of resource rents. Through
the wholesale subversion of bureaucratic institutions and control of force, the
leaders of such states are able to exploit their countries' resources in order
to enrich themselves, and to pay for the means to stay in power, both through
patronage and a bloated military and security apparatus. Meanwhile, in many
cases the country's international donors step into the breach, supporting the
basic functions of the state with their aid, which leaves the kleptocratic
rulers free to get on with the more lucrative business of stripping the state
of its assets.
11) To give an example: Global Witness's work on Cambodia
has systematically exposed high level corruption in the country's natural
resources sector. Our report Cambodia's
Family Trees: Illegal logging and the stripping of public assets by Cambodia's elite, published in June 2007,
provided extensive evidence that Cambodia is being run by a
kleptocratic elite that generates much of its wealth via the seizure of public
assets, particularly natural resources. The forest sector provides an
especially vivid illustration of this asset-stripping process at work. The
report showed how Cambodia's
most powerful logging syndicate is led by relatives of Prime Minister Hun Sen
and other senior officials, and that the army, military police, police and
Forest Administration are heavily involved in illegal logging. This report can
be downloaded at http://www.globalwitness.org/media_library_detail.php/546/en/cambodias_family_trees
12) In February 2009, Global Witness published a
follow up report, Country for Sale: How Cambodia's
elite has captured the country's extractive industries. It shows how,
having made their fortunes from logging much of the country's forest resources,
Cambodia's elite have now diversified their commercial interests to encompass
other forms of state assets, including land, fisheries, and the country's
emerging petroleum and mineral industries. Patterns of corruption and patronage
found in the forest sector, and documented by Global Witness over 13 years, are
now being duplicated in the extractive industries, as the same political elite
who squandered the country's timber resources are now responsible for managing
its mineral and petroleum wealth. Payments from extractive companies totaling
millions of dollars appear to have gone missing. The report can be downloaded
at http://www.globalwitness.org/media_library_detail.php/713/en/country_for_sale
13) The Cambodian government has never responded
substantively to any of these allegations, beyond threatening Global Witness
staff after the publication of Cambodia's
Family Trees, and issuing a bland
denial of the allegations in Country for
Sale from its embassy in London, accompanied by a
bizarre cartoon depicting one of Global Witness's directors as an unidentified rodent.
(See http://www.globalwitness.org/media_library_get.php/795/1238776689/media_release_royal_embassy_of_cambodia_5_february_2009_revised.pdf)
14) Meanwhile Cambodia's international donors
have continued to increase their aid provisions, without using the leverage
this aid gives them effectively to tackle the corruption. The donors have
refused to acknowledge the fact that the government is thoroughly corrupt and
does not act in the best interests of the population. As a result, billions of
dollars-worth of aid funded by western taxpayers has done relatively little to
improve the lives of ordinary Cambodians.
15) Donor countries now provide the equivalent of
over half of Cambodia's
annual budget. As such, they have considerable leverage and influence. Donor
support has failed to produce reforms that would make the government more
accountable to its citizens, however. Instead, the government is successfully
exploiting international aid as a source of political legitimacy. We would like
to draw your attention to the table on pages 56-57 of Country for Sale, entitled 'How
to give money and still not influence people.' The chart shows how each year,
repeatedly, basic governance and transparency reforms agreed by the Cambodian
government and its donors have not been implemented. Yet each year the amounts
provided by the donors have increased. The result is to encourage a culture of
impunity, in which Cambodia's
rulers can continue their corrupt practices with what is effectively
endorsement, as well as practical support, from the international donor
community.
16) The opportunity for leverage offered by aid
will not exist indefinitely; as Cambodia
begins to exploit its oil, gas and minerals it will be able to ignore donors'
provisions with increasing impunity and, on current form, will be heading for
fully-fledged resource curse status. So the limited window of opportunity that
currently exists to build transparency and good governance into Cambodia's
natural resource sector should be grasped by its donors. As a first step,
donors need to make further disbursement of non-humanitarian aid conditional on
the introduction of the basic governance and transparency requirements agreed
in previous donor-government consultations of the past 14 years.
17) DFID provided £22 million to Cambodia in
2007-8 and cites among its country priorities 'making aid effective',
'governance' and 'natural resources'.[4] Despite
this, DFID - alongside other donors - has not publicly called the government to
account on its failure to honour its commitments to human rights, transparency
and anti-corruption efforts. Neither has it called the government to account on
evidence presented by Global Witness and others on incidents of land grabbing,
illegal logging and the capture of Cambodia's extractive industries by
a small handful of individuals at the top of the political and military chain
of command. As such, the basic political economy which underpins the looting of
Cambodia's
state assets remains unchallenged and unshaken.
18) The Extractive Industries Transparency
Initiative (EITI) and budget support is a case in point. EITI is a basic
transparency instrument to support improved governance in resource-rich
countries through the verification and full publication of company payments and
government revenues from oil, gas and mining. As such, it is a first step
towards avoiding the resource curse in a high-risk country such as Cambodia.
In June 2007, Global Witness held a meeting with DFID in which we were told
that government endorsement of the EITI was to be made a non-negotiable
benchmark of a direct budget support package. In November 2007, Global Witness
attended a meeting at which DFID admitted that the requirement to endorse the
EITI had been watered down to an 'agreement to consider endorsing the EITI'. In
October 2008, it was announced that the government had decided not to join the
initiative. Global Witness has raised this with members of the donor community,
to be told that the government is now working towards the broad financial
principles of the initiative, but to use the term EITI is too politically
sensitive and they fear pushing the government too hard will lead them to walk
away from the table. The status of EITI in Cambodia
is currently unclear, but to date provides a worrying example of how Cambodia's
donors are unable or unwilling to effectively deal with government
intransigence on matters of natural resource governance.
Aid is undermined by a failure to
prevent the financial system's facilitation of state looting
19) It is increasingly recognised that corruption
cannot take place without the facilitating services provided by the financial
system and the pinstripe army of bankers, lawyers, accountants and trust and
company service providers. The amounts of money involved in state looting are so
large that they cannot be stolen in the first place unless there is somewhere
to put them.
20) Global Witness's latest report, Undue Diligence: How banks do business with
corrupt regimes, provides a number of alarming case studies showing how
some of the world's most objectionable dictators and warlords have done
business with some of the world's largest and most well known banks. By accepting
these customers, banks are contributing to corruption and poverty in some of
the poorest countries in the world. These are countries which are rich in
natural resources which could be used to lift their populations out of poverty,
but where these resources have been captured by a small minority for their own
benefit. The report can be downloaded from www.undue-diligence.org
21) The report explains how anti-money laundering
laws ought to be preventing this, by requiring banks to do 'due diligence' to
identify their customer and their source of funds. But these laws are not
working well enough. One of the reasons for this is a failure of the culture of
due diligence in banks, and a failure by regulators to police it properly.
Another reason is the lack of international cooperation in curtailing flows of
corrupt funds, particularly when national laws are impeded by bank secrecy laws
and the opacity offered by other jurisdictions including tax havens.
22) One of the examples in Undue Diligence shows how the son of the President of
Congo-Brazzaville, responsible for marketing the country's oil, used the
secrecy offered by a British tax haven, Anguilla, to set up a company and
disguise his ownership of it. He then opened a bank account for this company in
Hong Kong, into which Congolese oil revenues
were paid.
23) These oil revenues should have been used for
poverty alleviation in Congo.
Instead, he used this account to pay his personal credit card bills after
repeated designer shopping sprees totally hundreds of thousands of dollars in Paris, Monaco,
Marbella and Hong Kong.
Just one of his credit card bills, for June 2005, came to $32,000. This would
have paid for 80,000 Congolese babies to be vaccinated against measles, a major
cause of child death.
24) Another example in Undue Diligence shows how a branch of Barclays has been holding an
account for Teodorin Obiang, the son of the president of Equatorial Guinea, Africa's
third largest oil producer. Teodorin earns $4,000 a month as a minister in his
father's government, yet owns a $35 million mansion and a fleet of fast cars,
including a Ferrari which was paid for from the Barclays account. A U.S. bank,
Riggs, collapsed in a huge corruption scandal due to holding accounts for the
Obiang family. What due diligence has Barclays done to reassure itself that the
funds in this account are not the proceeds of corruption? Global Witness has
asked Barclays; it will not say.
25) It is inconsistent for the UK to be committing £5 billion in aid
internationally, and committing to make poverty history, when the UK's own
financial institutions and tax havens are instrumental in facilitating the
looting of state resources that could, if used properly in some of the affected
countries, render these countries independent of aid. But tackling the UK's financial services industry and tax havens
will not be enough; money moves globally, and so the UK must use its influence globally
to ensure that the anti-money laundering net is tightened across the board.
Aid is undermined by UK companies operating in conflict
zones
26) In
August 2008 the UK company
Afrimex was found by the UK
government to have breached the OECD Guidelines for Multinational Enterprises
by purchasing minerals from a war-torn region of the Democratic Republic of
Congo (DRC). The government upheld the majority of the allegations in a 2007
complaint lodged by Global Witness. The complaint alleged that Afrimex had made
payments to the rebel group Rassemblement congolais pour la démocratie-Goma
(RCD-Goma), which controlled the area and committed grave human rights abuses.
Global Witness also alleged that the company had bought minerals produced in
very harsh conditions, including forced and child labour. Global Witness's
complaint is available at http://www.globalwitness.org/media_library_detail.php/507/en/complaint_against_afrimex_uk_ltd_under_the_specifi
27) The UK
National Contact Point (NCP) - the British government body which considers
complaints brought under the OECD Guidelines - affirmed that Afrimex initiated
demand for minerals from a conflict zone and used suppliers who had made
payments to RCD-Goma. It concluded that Afrimex had failed to contribute to
sustainable development in the region and to respect human rights, and that it
applied insufficient due diligence to the supply chain, sourcing minerals from
mines that used child and forced labour. The NCP said that Afrimex's failure to
apply any conditions on its suppliers during the war was 'unacceptable
considering the context of the conflict and human rights abuses taking place.' The
NCP laid out steps that Afrimex should take to improve the human rights impact
of its activities in DRC, but Afrimex has not provided any information on
whether it has implemented these recommendations. The Final Statement by the
NCP is available at http://www.berr.gov.uk/files/file47555.doc
28) In addition, the Thailand Smelting and Refining
Corporation (THAISARCO), a subsidiary of the UK company Amalgamated Metal
Corporation (AMC), was cited along with Afrimex by the Final Report of the UN
Group of Experts in December 2008 as buying from comptoirs (trading companies)
who are 'directly complicit in
pre-financing négociants, who
in turn work closely with the FDLR..' The Forces Démocratiques pour
la Libération du Rwanda (FDLR) is one
of the main armed groups operating in eastern DRC and has been responsible for
grave human rights abuses against unarmed civilians.[5]
29) The UK is one of the largest bilateral
aid donors to the DRC. Its aid contribution to DRC is around £70 million, due
to rise to £130 million by 2010-2011.[6]
This is seriously undermined if British companies are able to do business in a
way that fuels the conflict in eastern DRC.
Recommendations
30) The simplest and most effective action the UK can take to
strengthen and ensure continued public support for development expenditure
during the downturn is to make it extremely clear that this aid is effective
and that taxpayer money is not being wasted. DFID needs to show that the
leverage it gains from its aid is being deployed effectively to prevent corruption
and promote good governance, and that its aid will not prop up corrupt regimes
that show no interest in reform. DFID also needs to work with other government
departments, and ensure that the UK cooperates internationally to
ensure that aid flows are not undermined by illicit flows that are facilitated
by transactions through our financial system, nor by the activities of British
companies operating in conflict zones. Fundamentally, this needs to be an
approach that is taken across government departments.
31) The following actions would help to make this
happen:
a) DFID should develop its overall
anti-corruption strategy to recognise explicitly not only the risk of its aid
to particular projects being siphoned off, but that no aid programme is
effective if it legitimises corruption elsewhere in an economy, and if state
looting is still made possible by failures in the anti-money laundering system.
b) DFID's anti-corruption strategy should work
with civil society to set out anti-corruption benchmarks that recognise how
susceptible natural resource extraction is to corruption and capture by corrupt
rulers. Aid disbursement programmes should all be attached to clear and
non-negotiable anti-corruption and good governance benchmarks, particularly
where natural resource are critical to the economy, and disbursement of aid
must be made conditional on achievement of these benchmarks (something that
Global Witness has not observed in the UK's aid to Cambodia).
c) DFID should take a lead role with the other
donor countries in the international community, including the EU and the World
Bank, to ensure that they adopt the same approach. A robust response to
corruption will of course not work unless it is a joined up effort by the donor
community. It is particularly important, in the case of countries where DFID
has taken a decision to reduce its direct contribution and instead funnel its
assistance through the multilateral institutions such as the World Bank, that
the UK uses its influence as a major donor to the World Bank to ensure the
Bank's aid is dependent on similar, enforced, anti-corruption benchmarks.
d) DFID should put pressure on other UK government departments, the Treasury in
particular, to ensure that the UK
uses its influence to improve international cooperation to tighten up the
global anti-money laundering framework to help curtail flows of corrupt funds. This
should begin by strengthening the Financial
Action Task Force (FATF), a little-known
inter-governmental body, of which the UK held the presidency last year.
It sets the standards for the anti-money laundering laws and evaluates its
member states' legislation, and could be hugely influential. But currently it
is a technocratic body, whose civil servant participants operate with little
parliamentary oversight, and which is not using its powers to name and shame
its own member states. Many of its key members do not reach its own standards.
The mandate to tackle FATF has been established by the recent G20 summit
communiqué; the annex noted that 'We agreed that the FATF should revise and
reinvigorate the review process for assessing compliance by jurisdictions with
AML/CFT standards, using agreed evaluation reports where available.'
The UK
should take a lead in reforming FATF to ensure that it:
i) Focuses
on corruption as strongly as it has focused on terrorist financing
ii) Names
and shames its own members who have not reached its standards, and who
are not enforcing them
iii) Publishes
a clearly accessible roster of each country's compliance status with each of
its recommendations, and the date by which that country has to comply
iv) Makes
its workings more transparent, including by voting in open sessions
v) Engages
more closely with other actors working on anti-corruption and development
issues
vi) Does
not permit the existence of bank secrecy laws that hinder both investigations
and customer due diligence.
e) DFID
should put pressure on other UK
government departments, the Treasury in particular, to use its influence to
push for each jurisdiction to publish open registries of beneficial ownership
of companies and trusts as a condition of FATF membership. These are the
most commonly used vehicles to hide ownership of corrupt money. This does not
just apply to the more commonly recognised tax havens; by allowing UK companies to cite nominee directors and
shareholders in company listings, the UK itself is allowing companies to
obscure their ownership.
f) DFID should put pressure on other UK government departments, the
Treasury in particular, to reform banks' culture of due diligence as part
of its overhaul of the financial regulatory system. The UK government should
require the UK's banks to conduct an audit of accounts held worldwide for
'politically exposed persons', as a first step towards reforming their culture
of due diligence. If the bank cannot demonstrate that the customer's source of
funds is not corrupt, the account must be closed.
g) DFID should ensure that the UK takes part
in the multi-stakeholder Task Force on Illicit Financial Flows that is being
funded by the Norwegian government.
h) DFID should ensure that the UK government submits to the UN Sanctions
Committee names of individuals and
companies registered in the UK
who are known to be buying or trading in natural resources produced by or
benefiting armed groups. UN Security Council Resolution 1857 includes in the
categories affected by sanctions 'individuals or entities supporting the
illegal armed groups in the eastern part of the Democratic Republic of Congo
through illicit trade of natural resources.'
i) DFID should ensure that the UK government
provides clear guidance to companies purchasing or trading in minerals from
eastern DRC or intending to do so in the future. Companies should be publicly
warned that they should proceed with caution, that the government will monitor
the implications of their activities, and that they could face a number of
liability risks if they are found to be assisting or facilitating human rights
abuses. The UK
government should insist that companies carry out the highest level of due diligence
regarding their entire chain of supply to ensure that their trade is not
contributing to financing any of the warring parties in eastern DRC
[1] World Trade Organisation,
'International Trade Statistics 2007- Merchandise
Trade By Product', p44; Organisation for Economic Co-operation and Development,
'African Economic Outlook 2007/2008', p665
[2] Paul Collier, The Bottom Billion: Why the Poorest Countries are Failing and What Can
Be Done About It, Oxford University Press, 2007, p39
[3] Global
Financial Integrity, Illicit Financial
Flows from Developing Countries: 2002-2006, December 2008
[4] Figure
for aid provided to Global
Witness by DFID; http://www.dfid.gov.uk/countries/asia/Cambodia-facts.asp
[5] Final
report of the Group of Experts on the Democratic Republic of the Congo
(S/2008/773), United Nations Security Council, 12 December 2008
[6] DFID, DRC Country Plan, May 2008
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