House of Commons - Treasury - Written Evidence

Offshore Financial Centres - Treasury Contents

Memorandum from Global Witness

EXECUTIVE SUMMARY

1. The Treasury Select Committee is soliciting submissions on various transparency issues in relation to offshore financial centres. However, these questions do not mention the crucial role of offshore financial centres in facilitating corruption and mismanagement of public revenues in developing countries rich in natural resources, and consequently their negative impact on development objectives and poverty reduction.

2. Global Witness believes this is a serious oversight, given that the UK has made a strong commitment to address transparent and accountable management of public revenues from natural resources in its foreign and development policies, and we hope our submission will encourage the Committee to include the facilitation of corruption in its survey of the impacts of offshore financial centres.

3. Our submission outlines one specific country study illustrating the crucial role of offshore mechanisms, including UK offshore centres—but also UK onshore entities—in providing the means for mismanagement and looting of state oil revenues in the Republic of Congo (Congo).

4. This case study details three aspects of how such offshore structures were used, namely:

— How oil-backed loans were contracted in contravention of agreements with the IMF and disbursed through untransparent offshore structures, in several cases with the assistance of Western banks and international oil companies.

— How senior Congolese officials diverted oil revenues using discounted sales through offshore shell companies in a complex structure that at one point involved a UK registered company (Sphynx UK), and the role played in this structure by French bank BNP Paribas and international oil traders.

— How state oil revenues channelled through these offshore structures appear to have been transferred to shell companies owned by the President's son and subsequently used to pay his personal credit card bills.

5. We suggest that the UK government's commitments to development and poverty reduction are meaningless, and the money being spent on development wasted, if in practice offshore financial centres are being used to structure transactions that permit public officials in countries such as Congo to hide lending from international financial institutions, disguise ownership of assets, evade creditor judgments, and divert public revenues into private hands.

6. Finally, we suggest some specific steps the UK government could take to improve the transparency of offshore transactions and hence begin to address the abuse of such structures by irresponsible or corrupt officials.

INTRODUCTION

7. Global Witness investigates the link between natural resources and the funding of conflict and corruption (see www.globalwitness.org). We aim to promote improved governance and transparency in the natural resource sector to ensure that revenues accruing from resources such as oil, gas, mineral and forests are used to promote peaceful and sustainable development. Our work was a driving force behind the Kimberley Process, which aims to curb the trade in conflict diamonds, and the Extractive Industries Transparency Initiative, which sets a global standard for greater transparency in the extractive sector by encouraging companies to publish revenue flows to governments and governments to disclose what they receive.

8. Global Witness was co-nominated for the 2003 Nobel Peace Prize for its leading work on conflict diamonds, and awarded the 2007 Commitment to Development Ideas in Action Award, sponsored by Washington DC-based Center for Global Development and Foreign Policy magazine.

9. For many of the poorest countries in Africa, South America, and Asia, the biggest inflow of wealth for the foreseeable future will be payments for oil, minerals, and other natural resources. In 2006, according to the World Trade Organisation exports of oil and minerals from Africa were worth roughly $249 billion, nearly eight times the value of exported farm products ($32 billion) and nearly six times the value of inflows of international aid ($43 billion), according to the UNDP. With the price of oil and many other minerals reaching record highs, this gap will only widen over the next decade.

10. This huge transfer of wealth could be one of the best chances to lift many of the world's poorest and most dispossessed citizens out of poverty. Yet in the countries where Global Witness has worked—such as Angola, Sierra Leone, Liberia, Republic of Congo, DR Congo, Cambodia, Kazakhstan and Turkmenistan—natural resources have led to impoverishment, rent seeking and greater institutional corruption, authoritarian government, and in some cases, conflict.

11. What unites all these resource-rich countries is the emergence of a "shadow state"; one where public office becomes the means to personal self-enrichment and where state institutions are subverted to maintain the power of a corrupt elite. Behind the façade of laws and government institutions lies a parallel system of rule by patronage and crony capitalism. Through the wholesale subversion of civic institutions and the use of coercion, the leaders of such states divert state wealth for personal gain or use it to fund a bloated military and security apparatus.

12. Kleptocratic elites generate much of their illicit wealth by the expropriation of the natural resource wealth which belongs to the country's population, with catastrophic long term impacts on the country's economy. Asset stripping at this level is thus not just a criminal activity but a violation of the basic human rights of the population, as social and economic breakdown inevitably follow when vast amounts of capital are siphoned off by unaccountable officials into overseas private bank accounts. Mismanagement and outright looting of natural resources fundamentally undermines the ability of the state to provide basic services for its people, diverts funds that should go towards economic and social development, and destabilises whole societies. In the worst cases, it leads to conflict and failed states.

13. In its 2006 report The Other Side of the Coin, the Africa All-Party Parliamentary Group recognised the role of developed country economies and financial systems in contributing to corruption in the developing world. Private sector banks play a role but an equal part is played by offshore financial centres, which provide a crucial "veil of secrecy" behind which corruption can flourish.

14. The submission to this inquiry from our colleagues at the Tax Justice Network (TJN) sets out in detail the various mechanisms by which offshore financial centres contribute to corruption and poverty. Our submission should be read in conjunction with TJN's, providing analysis of a specific example of how use of offshore mechanisms lies at the heart of oil sector mismanagement in one African resource rich country. The Republic of Congo is a clear example of the way mismanagement of oil wealth not only leads to lack of economic and social development, but can entrench corruption, lack of democratisation and instability.

15. Finally, we suggest some steps the UK government could take to ensure that its Overseas Territories do not provide safe haven to looters of public assets.

The role of offshore financial centres in facilitating mismanagement and diversion of Congo's oil revenues

16. Congo is Sub-Saharan Africa's fourth largest oil producer, with estimated earnings from oil of around $3.6 billion dollars in 2006.[393] It is a classic petro-dictatorship whose current leader, President Denis Sassou Nguesso, who first came to power 1979 and, after a brief period of democracy from 1997, was returned to government after a brutal civil war in 1997.

17. Corruption and mismanagement in Congo's oil sector is well documented. Despite decades of oil production, it remains one of the poorest and most indebted countries in the world, and the struggle to control its oil wealth has been a major factor in the country's several bloody civil wars.[394] It is also one of the countries most associated with the "Elf system", a series of corruption mechanisms instigated by the ex-French state oil company (later privatized as part of oil company Total) designed to maintain its control over the leaders of African oil producers.[395]

18. In March 2006, the country was controversially granted access to debt relief through the Heavily Indebted Poor Countries (HIPC) programme. This was despite what the IMF and World Bank called "serious concerns about governance and financial transparency" focused on mismanagement of its national oil company, Société Nationale des Pétroles du Congo (SNPC).

19. Ironically, SNPC was created in 1998 to market oil on behalf of the state and to represent Congo's interests with the private operators more effectively.[396] However, lack of transparency and accountability at SNPC has led not to improved management of the country's oil but to strong suspicions that public wealth is being transferred to private hands.

20. Global Witness and Congolese anti-corruption activists have long campaigned for reform of SNPC, because its opacity raises the risk of Congo's oil wealth being mismanaged and misappropriated. In return for debt relief, reform of the oil sector was put at the top of Congo's development agenda. The country explicitly committed to "bringing the internal controls and accounting system of [SNPC] up to internationally recognized standards; preventing conflicts of interests in the marketing of oil; requiring officials of SNPC to publicly declare and divest any interests in companies having a business relationship with SNPC".[397]

21. In fact, since 2003, there have been some improvements in transparency. SNPC has, under pressure from the IMF and civil society, published a large amount of data describing its management of the country's oil wealth.[398] However, issues of the accuracy and completeness of data provided to independent auditors remain. What the increased scrutiny has revealed, in fact, is huge amounts of state revenue unaccounted for.[399] It is telling that auditors KPMG, while finding improvements in SNPC's accounting standards, will still not sign off on SNPC's accounts, despite several years of audits.[400] For the last year of published accounts, 2005, auditors still had no access to the books of Cotrade, SNPC's marketing arm. Cotrade is cited as having a lack of internal controls, lack of documentation for most commercial operations, lack of supervision, governance and reporting structures, with a subsequent risk of fraud. Overall, the auditors found it "impossible" to understand the revenue flows to the state.[401]

22. Congo's record on oil sector governance remains poor: the country has failed to meet the targets of the HIPC programme and still has not performed well enough to get back on track with an IMF programme. Much of the poor performance relates to the country's failure to implement agreed transparency reforms in oil sector and public revenue management, including huge budgetary overruns and the racking up of hundreds of millions of dollars in new debt.[402]

23. In fact, many of the discrepancies and questions concern the black hole of Cotrade, and the poor performance of SNPC in marketing the state's oil, which has been sold consistently at a large discount to the market price. Moreover, both the government data and evidence from court cases taken by litigating creditors suggest that Congolese officials use offshore centres to structure—or obscure—oil sales and associated lending. This not only prejudices the public purse but also reveals officials reaping personal benefit, aided and abetted by commercial actors in the North.

24. Such were the concerns raised when Congo was due to receive debt relief that the international financial institutions insisted on an independent diagnostic of SNPC's method of marketing oil, as one of their key conditions. In June 2008, the IMF summarized the findings thus: "As for SNPC, a diagnostic of its marketing operations shows institutional and procedural deficiencies that have led to substantially lower oil revenue over the recent past, and raises serious governance concerns".[403] The analysis confirmed that for the period 2003-05 Congo's oil was sold at an exceptionally low price and estimated the use of pre-payments or short term advances on cargos from buyers with very high rates of interest and fees to have cost Congo 13.1% of its net oil revenues, just over US$533 million (225.8 billion FCFA).

25. This case study details the use of such offshore structures, namely:

— How oil-backed loans were contracted in contravention of agreements with the IMF and disbursed through untransparent offshore structures.

— How state oil revenues channelled through these offshore structures appear to have been transferred to shell companies owned by the President's son, Denis Christel Sassou Nguesso and another top official, and were subsequently used to pay credit card bills used to purchase designer goods.

Disbursement of oil-backed loans through untransparent offshore structures

26. A major factor in Congo's huge indebtedness is its use of oil-backed loans. These are loans given by commercial banks to governments or parastatals (such as state oil companies) that are repaid from the revenues from future oil production. The IMF and World Bank have condemned such lending, since it contributes to the opacity of the government's fiscal management, usually has high associated costs and fees, and because fluctuations in oil prices can render oil-backed loans a very bad deal for the country concerned.[404]

27. Oil-backed lending was first instigated in Congo under the Elf system (see para 17) in order to create conditions of deliberate indebtedness that increased the company's leverage over political leaders. Ultimately such lending destabilized the country's fiscal management and even financed civil conflict.[405] The main lender to Congo more recently has been the French bank BNP Paribas: between 1999 and 2003 it has been estimated that loan agreements with BNP Paribas totaled $650 million, costing Congo $1.4 billion in repayments.[406]

28. Offshore tax havens appear to be integral to oil-backed loans given that the revenues usually flow into an offshore account outside the borrower country. One reason may be the tax planning requirements of the lender, but this offshore structure also means that such loans are inherently open to abuse by borrower countries because of their opaque nature, falling outside any public oversight afforded by the normal budgetary process.

29. Under numerous IMF programmes, Congo repeatedly promised not to contract any new oil-backed loans (with "loans" being defined in this case as any debt that is contracted but not repaid within the same calendar year).[407] Congo also claimed to have ceased short-term pre-financing of oil sales ("prepayments") in July 2004.[408] However, according to analysis by KPMG, such prepayments continue unabated despite Congo's promises.[409]

30. The inclusion of prepayments is important because such short-term loans have extremely high associated costs in interest and commissions, as successive audits and the marketing diagnostic found. In 2004 alone, for instance, comparing data published by the Congolese Ministry of Finance with loan data analyzed by the independent auditor (KPMG), Global Witness estimated that the annualized cost of such short-term advances to Congo was 40%. In 2003, the cost was even steeper, a staggering 170%, with an average loan term for both years of approximately 27 days.

31. Analysis by GW has also revealed a pattern of increasing secrecy and complexity in the structures through which both long and short-term oil-backed loans are routed, with funds often being channelled through shell companies or Special Purpose Vehicles (SPVs) registered in offshore financial centres. This complexity appears partly to have been an attempt to avoid Congo's assets being seized by aggressive private creditors (pejoratively termed "vulture funds") who bought discounted sovereign debt and then pursued their claims through the UK, US and French courts.[410] Most of these creditors have now settled with Congo but the litigation they initiated has brought into the public domain an additional wealth of information about mismanagement of Congo's oil wealth.

32. Indeed, apart from their high costs, such inherently opaque lending arrangements greatly increase the risk of public revenues being mismanaged and misappropriated. Pre-paid oil sales, as will be seen below, are being routed through offshore shell companies controlled by Congolese officials, with evidence of personal enrichment by the officials in question. Thus in terms of both cost and governance risks, there appears little commercial justification for such long or short term loan structures.

33. Congo's oil marketing practices will be discussed further in the next section. This section raises questions regarding the use of offshore structures for long-term oil-backed lending—instigated when Congo had on paper committed to ceasing such borrowing—and whose negative impacts on Congo's public finances are still being felt today.

The Likouala deal: use of offshore structures to shift assets off-balance sheet and hide oil-backed lending from public scrutiny?

34. In 2003, Congo reached a global settlement with French oil company Total over a longstanding dispute (the "Accord Général Transactionnel" or AGT in its French acronym). Part of the settlement involved transfer of Total's 65% interest in the Likouala oilfield, valued at $160 million, to Congo. However, the interest was then immediately transferred on to a shell company, Likouala SA, registered in Congo, which paid the government $80 million with the option of a further $80 million for the asset. These funds were provided to Congo via an oil-backed loan taken out by Likouala SA. At the time, the Congo had committed to the IMF to abstain from contracting any new long-term oil-collateralized debt.[411] It is clear that if Congo were the owner of Likouala S.A., then this deal would have directly contravened the country's commitments to the IMF not to seek any further oil-backed loans.[412]

35. However, the lack of transparency and public information about the deal raised governance concerns. Firstly, it still remains to be determined whether the original valuation of the oilfield share at $160 million was correct. Secondly, there is also no public information about what revenue flows are being used to service the loan taken out by Likoula SA, nor what the total value of all the revenues from the Likouala shareholding are, and finally there are questions over the destination(s) of this revenue stream, given the fact that the ownership of Likouala SA is unclear.

36. According to a Congo government press statement,[413] Likouala SA was not a standalone company but belonged to either to Congo, SNPC or Total. If this is correct, it would not be an independent private company and this deal cannot have been an arms-length transaction. For its part, Total stated that it had "assigned its 65.0% interest in the Likoula concession" its 2003 Annual Report[414] and in its submission to the US Securities and Exchange Commission for the year ending 2005 stated that "[u]nder an agreement signed in 2003 with the Republic of Congo, Total sold its 65% interest in the Likouala concession".[415] The company later confirmed by letter to Global Witness that it "holds no interest in Likouala SA".[416]

37. At the time, Global Witness believed that these statements by the Congolese government and Total suggested that the Congolese government must be the owner.[417] Additional support for the hypothesis that the loan to Likouala SA was really a loan to the Congo government comes from a draft of the agreement between Total, Congo and Likouala SA obtained by Global Witness. This draft states that Congo's share of excess oil has been assigned to Likouala SA for the purposes of repaying this loan.[418]

38. Nevertheless, the deal was done with the knowledge of Total, the original shareholder. Indeed, Total continued to be operator of the field, and a Total employee, Andre Bahoumina, was appointed Sole Managing Director of Likouala SA.

39. Further investigation by Global Witness leads us to believe that the Likouala transaction was structured through companies based in offshore financial centres, including the UK offshore centres Jersey and the BVI. Given that the questions about the Likouala deal which Global Witness identified in 2004 have still not been resolved, including who the beneficial owner of Likouala SA is, we believe it is imperative to find out what exactly these offshore structures were, and what role they played in the deal.

Using offshore structures to market the state's oil

40. In 28 November 2005 in the "Nordic Hawk" case, the UK High Court issued a judgment in favour of a US creditor of Congo, Kensington, which was attempting to seize proceeds of an oil cargo in payment of their debt.

41. The case revealed that senior Congolese officials, including the head of SNPC, Denis Gokana, and the President's son, Denis Christel Sassou Nguesso (head of Cotrade, the marketing branch of SNPC) were involved in selling the state's oil through an elaborate web of offshore trading companies. According to the judgment, at least US$472 million of Congo's oil revenues had passed through two shell companies, Sphynx Bermuda and Africa Oil and Gas Corporation (AOGC).

42. The sales were under market price and according to the judgment, the profits ended up in the bank accounts of AOGC. This system of front companies was single-handedly controlled by Denis Gokana, both while he was a special adviser to the Congolese President and in his current position as CEO of SNPC, a blatant conflict of interests that is prohibited by SNPC's byelaws.

43. The judgement stated that:

"Mr Gokana orchestrated the chain of transactions between Sphynx Bermuda and SNPC. He had control over all the entities concerned and directed what should take place, including the creation of contractual documents and invoices which were intended to present the appearance of commercial transactions between independently operated companies. This was a fiction".

44. The judgment found that the primary aim of this structure was to keep oil revenues out of the hands of creditors.[419] However, it also highlighted that "the assets of AOGC, and particularly its cash assets, remained shrouded in mystery".

Who is benefiting from this "fiction"?

45. However, Global Witness believes there are two important pieces of evidence that mean that it cannot be discounted that monies reverting to AOGC from sales through offshore structures could have been siphoned off for personal enrichment.

46. Firstly, if the only reason for using offshore companies was to conceal the sale of oil sales by the Congolese state from its creditors, then why would it be necessary to sell that oil to such companies at heavily discounted prices, which is detrimental to the Congolese state? Why did SNPC not take the much simpler route of selling the oil to front companies at a market price? During 2003, Global Witness estimated that Sphynx paid on average 9.6% below the official Congolese tax price (resulting in lost revenue of around US$15 million compared with sales at market price).[420]

47. Indeed, to do so would simply complicate the return of the funds to the SNPC, which is now audited and would need to account for the source of this money to its auditors. As previously stated, the judgment notes the anomalies in price between the sales contracts produced during the case and the figures reported to the auditors. Indeed, it is our view that selling the oil to the shell company at a market price would be an easier and more effective way to avoid creditors seizing the monies, whilst ensuring that SNPC got full value for the oil.

48. On the basis of extrapolation from the profit made on one cargo sold by the SNPC to a Gokana vehicle which then sold it on to an independent trading company in June 2005, Global Witness estimates some US$30-40 million in value at least may have been transferred to these companies. In addition, Gokana-controlled companies made short term loans to the SNPC at very high costs, further draining the state's resources.[421]

49. Indeed, Gokana himself admitted in his testimony to personally profiting from the sales, despite his companies adding no value to the transactions and running no commercial risks. For instance, in 2003 AOGC generated net earnings of around $2 million and in 2004, Gokana obtained a return of around 157,800% on his initial capital investment. Indeed, it was necessary for Gokana to admit that he personally benefited from these deals in order to make the argument that the "façade" was not a state-sponsored mechanism, as was being claimed by the litigating creditor.[422]

50. Secondly, according to press reports, AOGC has been awarded a 10% interest in Marine Block XI, an offshore oil concession in the Republic of Congo. Essentially, Gokana, head of the national oil company, awarded AOGC, his own private company, part of a state asset, a blatant conflict of interest. There is no public information about the terms on which AOGC participates in the block, which is to be operated by consortium led by the UK-AIM registered trading company SOCO International. Soco has a 75% interest in the block and SNPC the remaining 15%.[423] If the aim of creating a convoluted series of shell companies is simply to avoid seizure of oil by creditors, it is unclear why AOGC would be awarded an interest in an oil concession.

51. SOCO will in fact own only 85% of its 75% share in the block through its subsidiary SOCO Exploration and Production Congo (SOCO EPC). There is no public information about the beneficial owners of the other 15% of SOCO EPC.[424] In addition, Soco's press release states that "The Group is in discussions with various parties to farm-out a portion of its interests in Marine XI": according to press reports, this portion could be transferred to Vitol and the Swedish Lundin group.[425]

52. The Chairman of SOCO International was the now deceased Patrick Maugein and one of its Directors is Rui de Sousa. According to SOCO's 2004 annual report, de Sousa is a director of Quantic Limited (Quantic), registered in the Bahamas. Maugein and de Sousa each held a 25% shareholding in Quantic,[426] which is also listed in KPMG's analysis of sales as buying cargoes at under market price from the SNPC.[427]

53. An audit of the Marine XI concession and Congo's awarding of concessions in general was subsequently carried out under the IMF programme. In 2007, the audit report found a lack of clear regulatory framework, controls and potential conflicts of interest among SNPC officials.[428] Gokana claims to have subsequently divested himself of his interest in AOGC and was never sanctioned by the Congolese government.

Sphynx UK: what is the role in the scheme of a UK-registered company?

54. A third shell company, this time registered in the UK, Sphynx UK, also appears to be related the Gokana scheme, although it appears no transactions actually passed through this company. Sphynx UK, according to the November 2005 Kensington judgement, has "earned no revenues since its establishment but plainly exists for no other purpose than to act as a contact/service company for Sphynx Bermuda" (para 98). However, "Sphynx UK never made any charges to Sphynx Bermuda for its services and its accounts showed loans from Mr Gokana and Sphynx Bermuda" (para 96).

55. According to its articles of incorporation listed in Companies House,[429] Sphynx UK Ltd is a UK-registered company, formed in 2002. Its beneficial owner as listed in its 2004 Annual Return is Litchfield Development, a Bermudan company. It was not possible, because of the offshore ownership structure, for Global Witness to determine who the beneficial owner of Sphynx is.

56. Sphynx UK's annual returns indicate no signs of meaningful business activity. Its annual filing at Companies House indicates that Sphynx UK reported no revenues and costs of £83,480 in the year to January 2004. The financial picture in the preceding year was similar, although costs were higher at £108,627. Because of this, the company has no liability for UK taxation.

57. Global Witness has documentation (a Bill of Lading, which certifies that the cargo described has been shipped) for a 16 June 2004 cargo sold by SNPC to Sphynx UK.[430] Comparison with the quarterly certifications of oil sales shows that shipment to have been sold at a significant discount to the official oil price, or "prix fiscal", demonstrating that below-market value transactions with Sphynx continued into 2004. Following the pattern of other cargos sold by Sphynx, according to the certifications for the second quarter of 2004, SNPC reported to KPMG that it sold the cargo for $23.770/bbl, a huge discount of $6/bbl below the official tax price of $29.706.[431]

58. Furthermore, although the bill of lading first cites Sphynx UK as the consignee of the oil it describes French bank BNP Paribas as the consignee.[432] The same person, Simon Chaffey is listed as the contact for both Sphynx UK and BNP Paribas. Chaffey is described in High Court judgment Kensington as having first worked for SNPC UK, SNPC's London trading arm then for Sphynx UK.

59. Sphynx UK according to the November 2005 judgment, has "earned no revenues since its establishment but plainly exists for no other purpose than to act as a contact/service company for Sphynx Bermuda". However, "Sphynx UK never made any charges to Sphynx Bermuda for its services and its accounts showed loans from Mr Gokana and Sphynx Bermuda".

60. Global Witness believes the UK authorities should investigate the role of Sphynx UK as an apparent front company doing no legitimate business in the UK. Although it appears that transactions did not pass through Sphynx UK, its connection to the wider sales scheme should be investigated.

61. In addition, Africa Oil and Gas, the Gokana vehicle which received the profits from the under-selling of state oil through this scheme, is involved in a joint venture with a UK-AIM registered company, SOCO International.

62. On subsequent cross examination in September 2006, Ike Nwobodo, a Nigerian oil trader at the centre of the operation, gave evidence to the effect that sales of oil through intermediary offshore companies under the control of Gokana, and the receipt of monies upfront in the form of extremely expensive pre-payments, continued despite the finding against Congo in November 2005. All that changed were the names of the shell companies used.[433]

63. Moreover, in further court actions taken by Kensington, Congo's main creditor, Kensington alleged that oil traders were aiding the Congolese to evade the judgment, principally by setting up their own offshore structures to buy the oil from the sham Gokana offshore vehicles.

"Our internal deal-churning factory": active complicity in the offshore marketing scheme by a UK-registered international oil trader?

64. According to estimates by Kensington, a creditor of Congo, since 2002, international oil trader Vitol has purchased nearly US$3 billion of oil from Congo. Evidence and testimony from the Nordic Hawk case and subsequent cross-examination of Ike Nwobodo, the trader at the centre of the Sphynx marketing scheme, suggest that Vitol companies registered in the UK, and top Vitol employees based in London actively assisted Congo, post the November 2005 judgment, to maintain its opaque offshore marketing scam by creating two purpose-built shell vehicles (Vitol Bahrain and Global Oil Trading Mauritius) to buy oil.

65. Kensington took out several court actions against Vitol in Geneva and London in 2006-07 on the basis that it was helping Congo to avoid paying its creditors. On 26 May 2006, a UK High Court judgment found in Kensington's favour: "there is evidence that Vitol Group (that is, Vitol Broking, Vitol Services, Vitol SA and other companies in the Vitol Group) [...] has played a role and a significant role in the dishonest judgment-proofing scheme".[434] The judgment refers to documentary evidence including emails between Vitol employees and Ike Nwobodo referring to the setting up of shell companies by the Vitol Group to buy from a new Gokana offshore vehicle, Phenicia: "[Vitol] agreed to deal with Phenicia without question and promptly changed its own practice by creating a new vehicle through which to buy the Congo's oil, Global Oil Trader Mauritius (`GOTM')".

66. In one particular email of 21 February 2006 to Nwobodo, a Vitol employee, Giles Chautard, refers to routing offshore sales through "our internal deal churning factory here". The judge finds that "structuring the oil sales with the use of new companies to replace earlier entities, Mr Chautard [a Vitol oil trader] and his colleague Mr Lambrosa [Chief financial officer of the Vitol Group], and thus the Vitol UK Companies and the Vitol Group, must have appreciated that the purpose of using these vehicles was in order to prevent detection by the Congo's judgment creditors of the oil sales".

Payments made by Vitol to Congolese officials via offshore vehicles?

67. What is of even greater concern to Global Witness are allegations made by Kensington against Vitol that corrupt payments were made via a Vitol-owned offshore vehicle called Peakville into the Hong Kong bank account of Long Beach Limited, the Anguilla shell company belonging to the President of Congo's son and head of the marketing branch of SNPC, Denis Christel Sassou Nguesso.

68. On 15 January 2007, Don Shwarzkopf, a consultant for Kensington, alleged in an affidavit that:

"[T]here appear to be only two credible alternative explanations for the payments by Peakville and Vitol SA into the Long Beach account. Either these constitute monies paid to and held by Congo for its own convenience, to be hidden from creditors ....; or, put candidly, they are corrupt kickbacks or rake-offs in return for the placing of valuable business with Vitol ...."

69. If Kensington's allegations are correct—this accusation was not finally resolved due to Kensington settling its dispute with Congo—then it raises further disturbing questions regarding the use of offshore sales structures.

70. On 7 November 07 three appeals by Vitol were dismissed in the UK High Court arising out of various proceedings brought by Kensington. Two of the appeals related to restraining orders on oil purchases from Congo or orders to disclose information about specific sales, while the third related to a court order for the UK Vitol companies and Vitol employees "to disclose certain information relating to payments said to have been made in Hong Kong by or on behalf of Vitol S.A. to employees or representatives of the Congo by way of bribes".[435] The Vitol companies and employees had resisted disclosure of information related to these payments by claiming privilege against self-incrimination under the Fraud Act, which applies when "there are real grounds for thinking that the information [the person] is being asked to provide, or the documents he is being asked to disclose, are such as would tend to incriminate him".[436]

71. The Appeal hearing thus upheld the findings of Justice Gross in July 2007, who characterized Vitol's case as follows:

437

72. Kensington has now reached a settlement of its debts with Congo, so the Vitol case has effectively been shelved. However, given the UK courts found that Vitol's UK-registered and headquartered companies, and UK employees, had aided Congo to evade a UK court judgement and move money offshore to avoid seizure by creditors, and given Kensington's allegations of corrupt kickbacks combined with the fact that Vitol and its employees resisted testifying by claiming privilege against self-incrimination on the grounds that "those allegations could, if proved, amount to criminal conduct under the laws of this country", Global Witness believes that this case should be investigated further by the UK authorities.

73. This case again reveals evidence of public officials, with the aid of UK-registered companies, making use of offshore structures to deliberately obscure transactions of state oil, thus evading judgments by UK courts and possibly facilitating the diversion public revenues into private hands.

The President's son uses offshore structures to pay for lavish personal spending from funds derived from Congo's oil money

74. In March 2003, Denis Christel Sassou Nguesso, son of the President of Congo and the official with overall responsibility for marketing Congo's oil, set up an offshore company in Anguilla, a UK Overseas Territory, which was then able to open an account in Hong Kong at Bank of East Asia. This bank account received funds, via other shell companies, that appear to be derived from state oil revenues. Mr Sassou Nguesso's monthly personal credit card expenses, which ran into hundreds of thousands of dollars over a two year period, were paid off from this account. In one month alone, August 2006, Mr Sassou Nguesso spent US$35,000 on designer shopping.[438]

The President's son and other top official set up offshore vehicles in Anguilla

75. Long Beach was incorporated in Anguilla in March 2003, although its business address is stated as being in Hong Kong, the same address as a company services provider called ICS.[439] According to ICS documents, Long Beach's shareholders and directors are Orient Investments Ltd and Pacific Investments Ltd, which are both Anguilla-based companies in the ICS group that provide nominee services.[440] However, a Declaration of Trust document shows that Orient and Pacific were actually holding the shares in trust for Mr Sassou Nguesso, who was the ultimate beneficial owner.[441]

76. An identical offshore structure was set up by ICS in Anguilla on 4 June 2002 for Blaise Elenga, formerly general counsel for SNPC and now deputy head of Cotrade, Elenga Investment Limited (EIL). EIL was also used to pay his personal credit card bills.

Proceeds of Congolese oil cargoes paid into the Long Beach and EIL shell accounts

77. Long Beach opened a bank account at Bank of East Asia in Hong Kong in November 2003, account number 015-514-25-10518-6. Orient Investments, based in Anguilla, acted as the sole signatory on the account.[442] EIL also had an account at the same bank.

78. Two specific cargos of Congolese oil are referenced in transfers to Long Beach's account at Bank of East Asia. A $150,000 payment on 12 April 2005 from Antoine Jadakat, a name unknown to Global Witness, references the Genmar Spartiate cargo, sold by Congo on 17 January 2005; and another cargo shipped on the Tanabe on 21 March 2005 is referenced in a payment of just over $322,000.

79. Bank of East Asia records also show payments into Long Beach and EIL from the offshore companies used to sell Congo's oil opaquely and at a discount, Sphynx Bermuda and Africa Oil and Gas Corporation (AOGC)[443] Long Beach received a payment of $299,967 from AOGC on 10 November 2004 while EIL received similar payments from AOGC. On 22 January 2004, for instance, EIL received just under US$50,000 from AOGC via Banque Belgolaise in Paris.

80. EIL also received payments from a company called Pan Africa during 2002 and 2003. Pan Africa is yet another offshore corporate vehicle operated by the same secretarial services company in Hong Kong that set up EIL and Long Beach. According to an affidavit by its owner, Jean Yves Ollivier, who describes himself as "a friend of President Sassou-Nguesso", Pan Africa "has been involved in organised [sic] oil-collateralised loans for SNPC" since 2002, and has received payments from SNPC as "success fees". In 2003, for instance, Pan Africa received a payment of $1 million into its account at Standard Chartered Bank in Hong Kong.

81. In a first affidavit, Ollivier states that "there are no business transactions involving Long Beach, EIL [...] and Pan Africa" and denies ever having heard of EIL or Long Beach. In subsequent testimony, after evidence of payments into EIL accounts emerged, he says his previous affidavit may be "technically incorrect" and affirms that a payment of $185,000 in 2002 plus "further funds" were a personal loan to Elenga.[444]

Payments from the Long Beach and EIL accounts to settle personal credit card bills

82. Four letters on Long Beach letterhead, between May 2004 and September 2006, request that Bank of East Asia arrange for payment, from the Long Beach Limited account, of Mr Sassou Nguesso's monthly credit card bill.[445] The letters are signed by Orient Investments on behalf of Long Beach.

83. The credit card bills themselves, seen by Global Witness, account numbers 5430 9600 6810 1330 and 5411 2340 4010 1039, are in Mr Sassou Nguesso's name and are addressed to the Hong Kong address of ICS Trust (Asia) Ltd, one of the ICS group companies.

Responsibility of the bank

84. There are questions remaining unanswered relating to the Hong Kong bank, Bank of East Asia, and its policy of "know your customer" due diligence and account monitoring. In order to comply with "know your customer" requirements, the bank should have found out who was behind Long Beach, established whether the beneficial owner was a politically exposed person, and if so, should have performed heightened due diligence. This should have included monitoring ongoing activity on the account including oil-related payments from companies controlled by public officials. Global Witness wrote to Bank of East Asia to ask about its due diligence in this case, but it declined to answer our questions.

Responsibility of the trust and company service providers: how was the President's son, with control over the key source of state revenues, able to set up a shell company no questions asked?

85. However, the purpose of this story for this submission is to illustrate the role of trust and company service providers in a UK Overseas Territory in setting up a company for a politically exposed person, opening a bank account for him that received Congolese oil revenues, and providing instructions to the bank to arrange for payment of his personal credit cards from this account.

86. Global Witness wrote to ask Orient Investments what due diligence it had done on its customer Denis Christel Sassou Nguesso, whether it had established if he was a politically exposed person, and to request copies of its customer due diligence policies, but it did not reply.

87. Orient Investments signed, on behalf of Long Beach, a customer information sheet for Long Beach, which was held by the Bank of East Asia as part of its customer records. It describes Long Beach's main business activities as "Trading crude oil, gas and products (mogas, jet, gasoil, kerosene) in Congo".[446] From this it is reasonable to infer that Orient Investments knew that its client's source of revenue was Congolese oil.

88. Global Witness notes that Republic of Congo was placed 113 out of 133 countries in Transparency International's Corruption Perception Index in 2003, the year in which Long Beach was incorporated and the bank account was opened.[447] As we have outlined earlier in this submission, international financial institutions and many other observers, including Global Witness, had raised in the public domain ongoing and serious concerns regarding the management of public funds and in particular the transparency of oil sector transactions in Congo.

89. Global Witness wrote to ask Orient Investments (as well as Pacific Investments, which held the other share in trust for Mr Sassou Nguesso) if, against the background of Congo's standing with the World Bank, and Congo's public reputation for corruption, enhanced due diligence was warranted on their relationship with Mr Sassou Nguesso and Long Beach Ltd. They did not reply.

90. In December 2005 Global Witness published information alleging that the head of the Congolese state oil company, Denis Gokana, had sold government oil to his own companies at prices below the market rate in order to profit from subsequent sales to independent traders, and that these deals had been overseen by Denis Christel Sassou Nguesso.[448] This information was reported in the media, including by Dow Jones on 13 December 2005.[449] Information was therefore in the public domain raising questions over Mr Sassou Nguesso's role in the dubious sales of Congolese oil.

91. Yet Orient Investments, an Anguilla company, was willing to:

— take Mr Sassou Nguesso on as a customer;

— hold shares in his company;

— open a bank account and act as the signatory;

— declare to the bank that the company traded Congolese oil; and

— arrange for payment of his credit card bills out of the account.

92. Pacific Investments, another Anguilla company that is part of the same group, was willing to:

— take Mr Sassou Nguesso on as a customer; and

— hold shares in his company.

93. The instructions for payment of the credit card, sent on Long Beach letterhead by Orient Investments to Bank of East Asia, mention Mr Sassou Nguesso by name as the owner of the credit card. Therefore Orient Investments clearly knew the name of the person it was dealing with. A quick Google search would have been enough to establish that this was the son of the President of Congo, and head of Cotrade, marketing arm of the state oil company, and therefore potentially a politically exposed person.

94. Global Witness asked Orient Investments if its own due diligence had revealed that some of Mr Sassou Nguesso's transactions from the Long Beach account appeared to be in payment of personal expenditure by Mr Sassou Nguesso himself, and that this personal expenditure appeared to involve extensive and regular purchases of luxury goods; and whether this due diligence, against the backdrop of their knowledge that Long Beach's source of income was Congolese oil, prompted any further investigation into the apparent payment, by a company set up to trade oil and gas products, in respect of luxury personal expenditure by its beneficial owner. It did not reply.

95. Global Witness has written to the Anguillan regulator, the Financial Services Commission, to alert it to these transactions. However, the reason that these offshore structures were revealed in the first place was not because of regulatory action, but only because documentation came into the public domain in mid 2007 through litigation by Kensington over assets in Hong Kong. Global Witness obtained and published the documents because they appeared to show a whole circuit of diversion of public funds all the way from sales of state oil cargoes via shell companies through transfers of part of the proceeds to an offshore vehicle beneficially owned by the President's son, Sassou Nguesso and subsequently to pay for his personal expenditure.

96. In June 2007, Mr Sassou Nguesso attempted to seek an injunction forcing Global Witness to remove this evidence of apparent misappropriation of public funds from its website. A UK High Court judgment in August 2007 dismissed his attempt, saying that "it is an obvious possible inference that [Sassou Nguesso's] expenditure has been financed by secret personal profits made out of dealings in oil sold by Cotrade". Mr Justice Stanley Burnton continued that the documents, "unless explained, frankly suggest" that Mr Sassou Nguesso and his company were "unsavoury and corrupt", and stated that where "there is good reason to doubt the propriety of the financial affairs of a public official, there is a public interest in those affairs being open to public scrutiny." He concluded that "the profits of Cotrade's oil sales should go to the people of the Congo, not to those who rule it or their families".[450]

97. What are offshore financial centres such as Anguilla—and the others discussed in the rest of this case study—doing to ensure that they are not used to divert public revenues from the public purse, as this case so graphically illustrates, and what is the UK doing to ensure that one of its Overseas Territories is not facilitating corrupt activity? Regulation of the Anguillan financial services industry is the direct responsibility of the UK-appointed Governor, and thus is also the responsibility of the UK. As the Committee will be aware, last year's National Audit Office report, Managing risk in the Overseas Territories, noted significant concerns about Anguilla's regulatory capacity, along with that of other Overseas Territories.[451]

98. By failing to ensure that Anguilla is enforcing appropriate anti-money laundering regulations, the UK bears some responsibility for Mr Sassou Nguesso's spending of Congo's oil money on designer shopping sprees.

99. Internationally, company service providers have been covered by the Financial Action Task Force (FATF) regulations since 2003. This means that they should be required to do due diligence on their customers, and apply enhanced measures if they are Politically Exposed Persons—which Denis Christel Sassou Nguesso clearly is. However, implementation varies considerably in practice. One international money laundering expert told Global Witness, "outside the EU, there is considerable ambivalence about their inclusion". This seems to be an extraordinary gap, and one which the UK should tackle.

100. This case study has also shown that there are third parties, companies and individuals, operating in the UK itself (not even the UK Overseas Territories), as in the case of Sphynx UK and the Vitol case outlined above, who appear to be actively complicit with Congolese officials' use of offshore structures to obscure transactions involving public funds, at best depriving the Congolese Treasury of desperately needed funds for development through mismanagement, and at worst facilitating their misappropriation.

RECOMMENDATIONS TO THE UK GOVERNMENT

101. The UK has made strong commitments to ending corruption by signing the UN Convention on Corruption and the OECD Anti-Bribery Convention. It has also signalled its commitment to strengthening the global anti-money laundering framework through its membership and, this year, chairing, of the Financial Action Task Force (FATF), which sets the global standard. Most crucially, it is committed to ending poverty, with the UK spending £7,487 million a year on development assistance.[452]

102. But these commitments are meaningless, and the money being spent on development wasted, if the reality in practice is that offshore financial centres can be used to structure financial arrangements that permit countries such as Congo to hide lending from international financial institutions, disguise ownership of assets, evade creditor judgments, and divert public revenues into private hands.

103. The UK government should:

— Conduct its own examinations to ensure that its Overseas Territories are both fully compliant with FATF recommendations, and are implementing and enforcing them effectively. If Overseas Territories persist in failing to meet the regulatory standards and enforce them, they should not be allowed to function as financial centres.

— Ensure that the UK itself is fully compliant with all FATF recommendations (the 2007 FATF mutual evaluation found the UK to be less than fully compliant on a number of issues), so that when putting pressure on its Overseas Territories, it cannot be accused of double standards.

— Use its influence within FATF to push for the following to be added to anti-money laundering framework: if a government cannot account transparently for its receipt and disbursement of natural resource revenues, and be independently audited as doing so, then financial service providers should be required to exercise extreme caution in doing any business with that government, its state owned companies, or its officials in their private capacity, and should be required to explain exactly how their due diligence has ensured that the money that they are taking, or loaning, is not coming from, or going to, corruption.

104. The appropriate UK authorities should take immediate action to investigate the activities of these corporate actors and individuals registered and/or operating in the UK who may be complicit with facilitating the mismanagement and misappropriation of public revenues through offshore structures.

105. We would like to thank the Treasury Select Committee for this opportunity to make this submission, which we would be happy to discuss further with you.

June 2008

393 Republic of Congo: Staff-Monitored Program, July 16 2007,
http://www.imf.org/external/pubs/cat/longres.cfm?sk=21190.0; Table 2, p 20. A recent Sunday Times article estimates that at today's prices, with a production of 250,000 barrels a day, Congo must be earning around £5.8 billion annually. See "`Vultures' expose corruption" Sunday Times, June 15, 2008. Back

394 See World Bank Congo Country Brief, April 2005. External debt stood pre-debt relief at $9.24 billion (end 2004). See IMF, Article IV Consultation with the Republic of Congo, June 2007, Table 9, p 32;
http://www.imf.org/external/pubs/ft/scr/2007/cr07205.pdf. Oil accounts for around 65-70% of Congo's income and in 2006 government oil revenues reached around $3 billion (1531 billion FCFA). Ibid, Table 2, p 23. Back

395 See Global Witness, Time for Transparency, March 2004, pp18-24. Back

396 SNPC website includes a history of the company at www.snpc-group.com. See also November 2005 Kensington judgment, paras 44-49 and section on "Société Nationale des Pétroles du Congo", Congo Chapter in Global Witness, Time for Transparency, March 2004, which quotes from an interview with Bruno Itoua in Géopolitique Africaine. 8 May 2003, "Le pétrole, une chance pour le Congo". Back

397 IMF, "Republic of Congo Reaches Decision Point Under the Enhanced HIPC Debt Relief Initiative", Press Release No. 06/46 March 9, 2006,
http://www.imf.org/external/np/sec/pr/2006/pr0646.htm Back

398 See http://www.mefb-cg.org/petrole/gouv_transp.htm. This includes independent audits of SNPC; quarterly certifications of oil revenues by an independent auditor, including data on SNPC's marketing of oil; annual summaries of financial transactions undertaken on behalf of the government; data on financial operations produced by the Ministry of Finance and "reconciliations" of the huge discrepancies between the amounts of revenue transferred to the Treasury from SNPC, according to the certifications and the Ministry of Finance's own figure. Back

399 In 2005 the Publish What You Pay campaign highlighted its concerns to the IMF, in particular the apparent US$300 million shortfall in oil revenue for 2004 received by the Treasury compared to the income SNPC reported which ought to have transferred according to KPMG's audits. In short, around one third of Congo's 2004 oil income appeared to be unaccounted for in the budget. "Has the IMF dropped the ball on transparency reforms in the Republic of Congo?" and "Republic of Congo Transparency Scorecard", 15 August 2005 available at
http://www.globalwitness.org/press_releases/display2.php?id=303; Back

400 FG Hemisphere, holder of Congolese debt presented these findings to the IMF in June 2005. For example, analysis provided to the IMF by a US creditor of Congo highlighted that approximately $140 million in proceeds from short term loans was not even captured by KPMG's certifications in 2003 and 2004. The IMF in 2005 admitted that part of the revenue from loans reported by SNPC was in fact unaccounted for; see Republic of Congo: First Review Under the Poverty Reduction and Growth Facility, 25 August 2005, p 69. Back

401 KMPG report on SNPC consolidated accounts 31 March 2005;
http://www.mefb-cg.net/petrole/dpf/SNPC_2005_Rapport_sign_.pdf Back

402 See IMF Republic of Congo: Report on Progress Toward Meeting the Completion Point Triggers Under the Enhanced Heavily Indebted Poor Countries Initiative June 2007;
http://www.imf.org/external/pubs/ft/scr/2007/cr07215.pdf; and
Country Report on Republic of Congo, June 2008,
http://www.imf.org/external/pubs/ft/scr/2008/cr08173.pdf; Box 1, "Performance under the 2007 Staff Monitored Programme", p 5. Also See IMF Executive Board Concludes 2007 Article IV Consultation with the Republic of Congo Public Information Notice (PIN) No. 07/47 April 26, 2007;
http://www.imf.org/external/np/sec/pn/2007/pn0747.htm Back

403 Country Report on Republic of Congo, June 2008,
http://www.imf.org/external/pubs/ft/scr/2008/cr08173.pdf; p. 15, para.24. Overall, the diagnostic found serious lack of controls over marketing operations: for 12 transactions chosen at random for the period 2002-05, there was an almost complete absence of documentation, leading to "a context of risk in terms of internal operational controls and commercial documentation and indeed of highly risk in terms of governance". Most sales are in fact, done over the phone, 2:3:B, p 22. Back