Opening up Ownership - sharing practice, building systems: Sessions day 1

Workshop 1: Hidden ownership and illicit financial flows

Workshop 1 on Hidden Ownership and Illicit Financial Flows was very well attended, with circa 70 participants. The session was facilitated by Kathleen Kao, Tax Policy Analyst at the OECD, with contributions from:

  • Poltak Maruli John Liberty Hutagaol, Director of International Taxation Indonesia, Ministry of Finance
  • Sobirchon Vazirov, Tax Administration Development and Tax Improvements, Tax Committee of Tajikistan
  • Stanley Ford, Assistant Director of Corporate Affairs, Financial Intelligence Unit, Liberia
  • Sofiya Aisagaliyeva, Deputy Chairman of the Committee on Financial Monitoring of the Ministry of Finance of the Republic of Kazakhstan

The overall objective of the session was to focus on how beneficial ownership reporting can help improve tax collection and prevent illicit financial flows from countries with significant extractive resources.

The panel began by discussing the ways that companies and individuals sought to hide their ownership to evade taxes. It was noted that globalisation had increased international trade. Some countries were very dependent on imports, and resource rich countries were particularly dependent on the export of natural resources. This has led to more international trade, and more opportunities to move money offshore to avoid tax. A common practice was to establish a shell company (or multiple companies) in low tax jurisdictions, with nominees so that the beneficial ownership was obscured. Stanley Ford mentioned two cases from Liberia, one from the mining sector and one from the oil and gas sector, highlighting the key role of gatekeepers such a lawyers in establishing (and modifying) complex structures involving local and offshore entities.

The panel then considered common schemes used by companies to disguise the origin, nature, or true amount of profits or gains. Sofiya Aisagaliyeva presented a case in Kazakhstan involving 50 – 60 shell companies, 4 different banks, and a large number of small transactions between related parties to move cash offshore and avoid tax. Stanley Ford highlighted cash intensive businesses in Liberia, where under-reporting of revenues is an issue, and monitoring and verification is extremely challenging. Poltak Maruli John Liberty Hutagaol noted that the complexity of some businesses presented challenges. The advent of cryptocurrencies and digital payment systems presented new challenges for tax authorities.

The panel then considered challenges to getting good quality (accurate and up-to-date) beneficial ownership information. In some countries, there was no clear concept or definition of beneficial ownership, and the focus was on legal ownership. In cases where the concept of beneficial ownership was recognised, a key challenge was the beneficial ownership information was self-reported, and that monitoring and verification was very challenging. In some cases, the penalties for non-reporting or misreporting were trivial. Strengthening and enforcing the reporting obligations of banks had been a key priority. Tax authorities could initiate investigations, particularly if there were concerns about suspect transactions. Poltak Maruli John Liberty Hutagaol highlighted a number of criteria for identifying suspicious transactions. Common “red flags” such as large management or marketing fees, particularly to known tax havens. The group noted that there had been greater collaboration between tax authorities, while noting that some cases could involve several different jurisdictions to render a complete account.

In closing, it was noted that the advent of public beneficial ownership registers could help improve tax collection and prevent illicit financial flows, but that a significant amount of work would be needed to ensure full compliance. Poltak Maruli John Liberty Hutagaol argued that because business and commerce were global and interconnected, the solutions needed to address illicit financial flows also needed to be global.

Workshop 2: Knowing who is awarded oil, gas and mining licenses

Workshop 2 focused on good practices in identifying who is granted the privilege of managing state extractive assets, identifying which beneficial owners are politically exposed persons (PEPs, and discussing how these procedures might be integrated into the licensing process. The session was facilitated by Cari Votava, Senior Financial Sector Specialist working in Financial Market Integrity, World Bank, with contributions from: 

  • Ulanbek Ryskulov, Deputy Head of the State Committee on Industry, Energy and Subsoil, Kyrgyz Republic  

  • Ghazaal HabibyarDeputy Minister of Mines and Petroleum, Afghanistan 

  • Sahr Wonday, Director General, National Minerals Agency, Sierra Leone  

  • Amien SunaryadiChairman, SKK Migas, Indonesia 

Drawing on panellists’ extensive experience, the session drew lessons from the challenges facing governments and awarding agencies around the world. Panellists concluded that greater consideration should be given to the adoption of beneficial ownership (BO) definitions in sector laws, rather than a single definition that cuts across all sectors, in order to account for their differing significance to the overall economy, corruption risks and special circumstances. There was agreement that more work is needed, particularly at the regional level and that donors and development partners need to work more closely with agencies that award licenses to ensure appropriate training is delivered to all officials that need to acquire a deeper understanding of beneficial ownership, its importance for the sector and its implementation in the awarding of licenses. 

The panel reflected on the challenges facing countries that seek to know who are the beneficial owners of licenses they are awarding. In Afghanistan, where PEPs are legally excluded from bidding for licenses, verifying the information provided by companies on their beneficial owners remains a major challenge. In Sierra Leonethe absence of a regulatory framework requiring BO disclosures means that the awarding agency only checks financial and technical qualifications. In Indonesiaconstitutional challenges were raised to the role played by SKK Migas to carry out background checks as part of the licensing regulatory process, while in the Kyrgyz Republic the challenge is in providing the necessary legal backing to defining what beneficial owners de facto exert informal influence or control. 

The panel considered approaches being taken by countries to address these challenges. In Indonesia for example, the regulating agency has adopted a risk-based approach to checking license applicants that was based on a mapping of the corruption risks in the sector. A clear definition of beneficial owners, particularly at the sector level, was sought by members of the audience. Finding better solutions for verification of beneficial owners that took into account the broader legal framework in the country would also be necessary, as in some countries with low capacity it was not possible to follow up the legal requirements for BO disclosure at the licensing level without equivalent requirements at the point when companies were registered. Taking a wholistic approach to company disclosures, including regular audits of companies was seen as a priority in Afghanistan as regulators cannot get credible financial information on licensed companies or those applying for extractive licenses.  

Background: Licensing authorities need reliable beneficial ownership information for their due diligence checks in licensing, to avoid that licenses or contracts are awarded to companies that are unqualified and to prevent potential for conflicts of interest in licensing. 

Workshop 3: Knowing who you do business with - improving the investment climate with ownership transparency

The workshop discussed the importance of governments performing due diligence from the very start of the investment process, including on applicants for extractives licenses, investors in projects and key partners. It was emphasised that the government should assess various aspects of a company including its experience, track record and capacity. Participants heard the experience of companies performing integrity due diligence on their prospective counterparties to assess and minimise risk, relying on publicly-available information, companies’ self-assessments and justifying evidence. The discussion also focused on the impact of corruption scandals in terms of destroying shareholder value, as illustrated by the potential losses faced by Shell and ENI in their involvement with the OPL 245 oil and gas license in Nigeria.

The workshop also debated the importance of beneficial ownership reporting in the mining sector, as one important element among others in companies’ due diligence at various stages of the project development cycle. Discussants highlighted the importance of undertaking due diligence, including on beneficial ownership, during exploration, project development and production. This was seen as particularly the case for smaller companies investing for a short period in exploration in the hope of identifying deposits and attracting larger partners. Larger producers tended to invest in projects for a period of decades.  Participants also discussed the importance of public beneficial ownership disclosure for governments and their investment promotion efforts, particularly in supporting their due diligence on foreign investors. Such information could also help governments identify the parties exerting control over a company in cases where several investors hold equal stakes in companies.

Key challenges identified, proposed solutions and next steps
Challenges: Companies face challenges in performing due diligence on the beneficial ownership of key counterparties (e.g. suppliers, partners, contractors, etc.) at different stages of the mine or oil and gas project development cycle. Governments seeking to promote inward investment are also constrained in their ability to identify the beneficial ownership of investors, particularly those based offshore or those with different investors holding equal shares. While companies, particularly majors, have their own internal processes to assess and minimise risk, the availability of public information on both legal and beneficial owners remains in many cases limited. 

Solutions: Participants agreed that publicly-accessible beneficial ownership information would improve visibility and streamline due diligence for both governments and companies. However, it was emphasised that public beneficial ownership information was only part of the solution to improving the investment climate, ensuring a level playing field and curbing counterparty risk. It was argued that companies performing due diligence on a company should look at all the clues, including a firm’s track record and capacity as well as the valuation of its assets.

Next steps: The workshop proved an important multi-stakeholder dialogue to help identify the gaps in existing legal and beneficial ownership information. Participants agreed that disclosure of companies’ legal ownership was an important first step in helping identify beneficial owners. Participants noted that a holistic approach to ensuring publicly-available beneficial ownership information should be adopted, with close cooperation between governments and companies, to ensure a level playing field for all companies.

Interesting examples, country stories or anecdotes:

  • Cameroon has included beneficial ownership disclosure requirements in its 2016 Mining Code and plans to include similar provisions in the new Petroleum Code, expected to be presented to Parliament by the end of 2017. Participants were told of the importance of government accompanying companies in their due diligence by providing a clear legal and regulatory framework for public beneficial ownership disclosure.
  • Oil and gas company Statoil has established clear internal integrity due diligence procedures to vet all high-risk counterparties such as partners, vendors, contractors, suppliers, investors and recipients of social expenditures. While the company’s due diligence procedures face the challenge of limited publicly-available information on legal owners, questionnaires on beneficial owners are sent to any prospective counterparty as a means of self-reporting.
  • The story of OPL 245 in Nigeria reveals the consequences of oil and gas majors doing business with companies with hidden beneficial ownership. While Shell and ENI acquired the license for an area holding up to 9bn barrels of oil reserves, they now face the potential loss of the license and significant legal liability, with court proceedings ongoing in Italy. Shareholders of these majors faced the potential of significant financial losses due to the conduct of company management.
  • The UK’s former register of company data, which didn’t use to include beneficial ownership data and was not freely accessible to the public, was accessed on average 6m times a year. The new register, which does include beneficial ownership data and is freely and publicly accessible, is now being accessed some 2bn times a year. 

Workshop 4: Identifying corruption risks downstream and in the supply chain

Workshop 4 was well attended, welcoming approximately 45 participants. The session was facilitated by Natalia Soebagjo, International Board Member of Transparency International, with contributions from:

  • Angelo Lay, National Petroleum Authority, Timor-Leste
  • Dian Patria, Director Research and Development, Corruption Eradication Commission, Indonesia
  • Linda Tamakloe, Marketing Department, Ghana National Petroleum Corporation
  • Mele Kyari, Group General Manager, Crude Oil Marketing Division, Nigeria National Petroleum Corporation

The overall objective was to draw from country examples to find common corruption challenges related to procurement and selection of sub-contractors, service providers and commodity traders, where beneficial ownership transparency can be part of the solution. The panellists concluded that requesting BO disclosure of subcontractors and commodity traders from companies is a big challenge without legally binding provisions. They insisted that the financial and societal cost of corruption should be considered at each stage of the value chain, including mid- and downstream.

The panel started by focusing on challenges in addressing corruption risks. Timor-Leste faces challenges in imposing legislation on sub-contractors, because contracts are concluded between contractors and sub-contractors. Transfer pricing and mark-up of services from sub-contractors results in a loss of revenue for the government. In Ghana, discussion on beneficial ownership remains at the top level, with heavy intervention in the industry by the SOE. The practice of sole-sourcing can manipulate the selection process, with no competitive bidding in place for the transportation and import of oil. Corruption risks in Indonesia include deals involving PEPs, as the dismantling of PETRAL showed. Some companies are rent seekers, since they seek licenses without having any assets. In Nigeria, corruption in commodity trading is made possible through various means, such as the pricing of products, the allocation of subsidies, the selection of buyers, the allocation of available oil, the payment of off-take and quality/quantity valuations.

The panel then considered ways to address these corruption risks. Speakers highlighted the need to first address collusion between companies in licensing across countries, before addressing beneficial ownership. They suggested obtaining the tax identification number of sub-contractors and identifying beneficial owners behind the legal owners, including for commodity traders. They discussed expanding the requirement of beneficial ownership data beyond the extractive sector, given how complex the industry can be with regards to sub-contractors. In Ghana for example, solutions include the overseeing of the supplier selection process by the Petroleum Commission and the collection of beneficial ownership data from traders as part of the EITI pilot on commodity trading.

Background: The EITI has tended to focus on upstream activities such as the exploration and production phases of the oil and gas industry. Experiences in EITI countries have however shone a light on corruption risks in other areas related to extractive industry activities. Risks include the allocation of service and sub-contracts and the rights to buy a country’s commodities for trading on the international market.