Cari Votava is a Senior Financial Sector Specialist with the World Bank Group, focusing on financial market integrity. Cari participated in EITI's conference on Beneficial Ownership in Jakarta, Indonesia, as both a moderator and a speaker, and EITI commissioned this blog post on beneficial ownership in the extractives sector. The views expressed in this blog are her own.
There is a global consensus that in many countries, extractives sector corruption can deprive the population of resources needed to reduce poverty. At the same time, many good practice options are emerging as models for improving transparency in regulatory governance of these sectors. Among these include systems to verify the ‘fitness and propriety’ of license applicants with thorough beneficial ownership, criminal and conflict of interest background checks conducted prior to granting licenses or concessions. Another is compliance with the Extractive Industries Transparency Initiative’s (EITI’s) Beneficial Ownership Disclosure Requirement which requires publicly disclosing the identity of beneficial owners of companies operating in the extractive sectors.
Countries in which political will, capacity and resources are sufficient will have little difficulty implementing effective systems to improve transparency and meet the EITI Beneficial Ownership Disclosure Requirements. However, countries that face capacity, resource and regulatory governance impediments will have tougher challenges. Undoubtedly, corrupt elites in countries where general integrity and transparency safeguards are weak will find ways to create the illusion of technical compliance with the EITI beneficial ownership disclosure requirements, while ensuring loopholes remain that will enable corruption to go undetected.
Closing Loopholes identified at the EITI Beneficial Ownership Conference
While general beneficial ownership laws that set fixed % ownership thresholds that apply across all sectors can be useful for general corporate registry purposes, such thresholds may not be equally effective in certain sectors to improve transparency or adequately mitigate corruption risks. Thus, general beneficial ownership laws should allow regulators of sectors where corruption risks are high - due to realities of the risk environment - to reduce (but not raise) the general beneficial ownership threshold for licensing and other regulatory purposes.
Another loophole can be overly vague legal definitions of Politically Exposed Persons (PEPs), allowing unchecked discretionary interpretation, which can result in inconsistent interpretation and application that invites corruption. Further, an unclear PEP definition will impede the ability of applicants to determine and declare their PEP status when applying for a license.
Legal provisions that define beneficial ownership thresholds and PEPs should include some clear and objective criteria or baseline standards, and oversight safeguards that reduce the scope of discretionary interpretation and application by regulators. But a balance must be struck – legal provisions should also provide flexibility to regulators to classify certain persons as beneficial owners or PEPs that may fall under the objective criteria where corruption risks are evident.
However, full and effective compliance with the EITI beneficial ownership disclosure requirements alone won’t eradicate extractives corruption. First, officials can still sell licenses or concessions for bribes while disclosing beneficial ownership identity. And secondly, officials may not always be able to identify all beneficial owners, as criminals are experts at concealing their true identity, which is what makes them criminals. However, the transparency benefits of public disclosure will significantly boost incentives for officials to make better licensing decisions, and provide civil society a much stronger role in unveiling concealed identities and holding officials accountable.
Thus, ongoing work to strengthen legal tools for prevention and detection of corruption, as well as improving procedures for cross-border exchange of information are critically important. And as someone once recognized that the most important political office is that of the private citizen, a strong and activist civil society is vital.
The recent EITI Beneficial Ownership Conference in Jakarta, Indonesia was a major event that advanced the global discussion on all of these issues. Participants acknowledged that we still have a lot to learn from each other to make public disclosure of extractive sector beneficial owners a reality.
Much work is underway as international stakeholders and experts are publishing new studies, manuals and other excellent information resources.
A few of these include:
- Twelve Red Flags: Corruption Risks in the Award of Extractive Sector Licenses and Contracts (Natural Resource Governance Initiative, 2017)
- Combatting Corruption in Mining Approvals Global Key Findings (Transparency International, 2017)
- License to Drill: A Manual on Integrity Due Diligence for Extractive Sector Licensing (forthcoming, The World Bank, 2018)