Challenge three: Revealing who owns the extractive companies

Clare Short reflects on the opportunities and challenges with the new beneficial ownership requirements.

The identity of the real owners – the ‘beneficial owners’ – of the companies that have obtained rights to extract oil, gas and minerals is often unknown, hidden by a chain of unaccountable corporate entities. This problem affects other sectors and often helps to feed corruption and tax evasion.  There has been a series of moves in the G8, G20 and OECD to encourage countries to require the real owners of companies to be made clear. People who live in resource rich countries are at particular risk of losing out as extractive assets are too often misallocated for corrupt reasons.

It has been estimated that developing countries lose USD 1 trillion each year as a result of corrupt or illegal deals, many of which involve anonymous companies[1]. In 2013, the Africa Progress Panel suggested that the Democratic Republic of Congo (DRC) in the period 2010-2012 lost at least USD 1.36 billion from five mining deals hidden behind a structure of complex and secret company ownership[2]. According to DRC’s EITI Reports, this is about the same as the country’s average annual revenue from oil, gas and mining in the same time period. Disclosure of beneficial ownership will help lower the risk of financial misconduct.

In the last three years, the fight against secret company ownership has gained great momentum. The G8 and G20 have made transparency in beneficial ownership a key priority. The EU has required member states to establish registers. Several countries have passed national legislation and are working towards public registers. Yet, to date, there is relatively little beneficial ownership information out in the open. The EITI is one of few organisations that has delivered practical results through annual collection and publication of beneficial information in EITI reports.  So far 27 EITI countries have begun to address beneficial ownership. Of these, 22 countries have already asked the oil, gas and mining companies in their countries to disclose who own them. The results are mixed. Only eight countries having been able to get one or more companies to comply.

While the EITI still has a long way to go to make these disclosures complete and comprehensible, more than a dozen EITI reports have now resulted in clear recommendations to resource rich governments to establish public beneficial ownership registers. The fight against corporate secrecy is thus moving forward in EITI member countries.

The draft of the new 2016 EITI Standard, is proposing that beneficial ownership disclosure will become mandatory for implementing countries. From 1 January 2020, all companies operating in EITI countries will have to disclose the name and identity of the owners of the companies that bid for, invest in, or operate extractive projects. The EITI should thus contribute considerably to the global movement against anonymous companies. While no one doubts the importance of the EITI moving in this direction, we should not underestimate the effort that it will require. As one of our Board members from implementing countries reminded us when we all met in Kiev: “no one doubts the desirability of this reform but collecting and maintaining beneficial ownership information is a significant institutional reform for our government. It will require consultation across government agencies and potential legislative changes, for which the timetable is of course beyond the EITI’s control.” The United Kingdom has set out to provide leadership on beneficial ownership disclosure, but it is almost three years since the government made its first commitment, and yet the public register is still not available. The EITI must be careful not to demand of our members that reforms be implemented more quickly than is practically possible.  Many countries will need support and technical assistance in order to make progress.

Of course, getting the information about who owns the extractive companies out in the open is only half of the job. The EITI and in particular civil society representatives in our implementing countries then need to scrutinise what the data means and  work out how to use it effectively. More transparency in beneficial ownership is likely to reveal past malpractice and make such behaviour less likely in future.  Encouraging action to hold malpractice to account and prevent it in future is not an easy task.  MSG members will have to work hard to reach out to parliamentarians, journalists, academics and others who lead public opinion in their countries so that corrective action is taken.