A SURVEY OF CORRUPTION ISSUES IN THE MINING & MINERAL SECTOR

Ian E. Marshall, 10th IACC, Workshop contribution, Development, Private Sector

EXECUTIVE SUMMARY

Recognising the international nature of the mining and mineral sector and the moral value of consistent examples of principled action, 'corruption' is defined broadly in this paper to include both private and public corruption and matters that are not necessarily unlawful. For the purposes of analysis, a distinction is drawn between 'supply-side' and 'demand-side' corruption.

On the supply-side, the sector has certain characteristics that make it especially susceptible to corruption including: the requirement for large capital expenditures; the high level of Government regulation; lack of choice of location; its sudden wealth and easy money image; the local people's previous experiences with companies from the sector; and the particular sense of entitlement that the local people have with respect to mineral wealth generated in, or near, their community. Also discussed is the significance to supply-side corruption of: the respective motives of the different actors in the sector; corporate controls, including codes of conduct; the 'Global Village'; local partners and agents; the expanding legislative framework; and the effects of the increasing emphasis on sustainable development.

The sector frequently operates in countries that are widely perceived to have high levels of demand-side corruption. While the existence of a large natural resource project can affect the level of demand-side corruption in a country, such corruption is also affected by legal, bureaucratic and political factors such as ministerial and bureaucratic discretion, transparency and freedom of the press.

The sector is facing scrutiny from an increasing number of national and international Non-Governmental Organisations ('NGOs') concerned with sustainable development. In such circles, Mining has a negative reputation that can best be addressed by the sector taking collective action. The International Council on Mining and Metals could form the basis for such collective action by promoting: (i) the development of sector anti-corruption standards or certification procedures; and (ii) the building of working partnerships on a country specific basis with NGOs, Governments and other interested multinational corporations to encourage an increase in transparency and accountability in the Governments of targeted countries.

INTRODUCTION

Much has been written on the subject of corruption generally, but very little on corruption in relation to the mining and minerals sector. The purpose of this paper is to provide a survey of corruption issues as they relate to mineral exploration, development and mining operations (referred collectively as 'Mining'). Given (a) that this is a background paper for a seminar involving participants from both outside and inside the Mining sector, and (b) the wide-ranging subject matter to be covered, this paper will necessarily be focussed on describing issues, rather than definitively exploring and making recommendations for solving them. It is expected that the seminar participants will make their own recommendations after their discussions.

DRAWING THE LINE : DEFINING CORRUPTION

1. General

In order to discuss the significant corruption issues affecting Mining, the meaning of 'corruption' must first be clarified. A dictionary definition of 'corruption' simply states "use of corrupt practices, especially bribery or fraud" (Canadian Oxford 1998, p.317). This rather sparse definition is not very helpful as (with the exception of bribery and fraud) it contains little that will assist the reader to identify corruption when it occurs (see examples of corruption in Appendix 1).

While there are many descriptive definitions of corruption in the literature (see Appendix 2), for the purposes of this paper, 'corruption' will be defined as 'circumventing formally agreed or implicit rules for decision-making (in the public or private sector) by use of personal inducements in order to achieve institutional and/or personal objectives.'

The reader will notice that the definition used in this paper includes (i) private corruption as well as public corruption; and (ii) matters that are not necessarily unlawful, depending on the jurisdiction involved, but which do contravene either the laws of other jurisdictions, or other generally agreed principles of fair behaviour. This definition seems particularly well suited for use by the international Mining sector as it conveys the need for a more consistent standard than may be provided by the domestic laws of the host countries.

In this era of widespread privatisation of Government services and former Government owned monopolies, the issue of corruption involving employees of corporations providing essential services such as telephones, electricity and water, has become more important than ever before. If a Mining company is to have a comprehensive policy for its employees on corruption, it should clearly include the abuse of private office for private gain. This would also cover Mining company employees enriching themselves by use of their corporate positions (e.g. procurement kickbacks, etc.).

The issue of whether a Mining company, or any other corporation operating in different international legal jurisdictions ('Multinational Corporations' or 'MNCs'), should define corruption to include matters not covered by the law is more complex. "The law is a minimalist approach to governing. It provides a floor for Government action and behaviour" (Foster 2001, p.2). The law can also only provide a floor with respect to an international Mining company's operations. This raises the issue of whether Mining companies should be operating at the level of that legal floor or above it. The issue is probably best illustrated by the debate about 'grease payments'.

2. The 'Grease' Debate

The United States' Foreign Corrupt Practices Act ('FCPA') and the OECD's 1997 Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the 'OECD Convention') both draw the legal floor so as to omit what are often referred to as 'grease payments', 'speed money', 'facilitating payments', or 'expediting payments'. These types of payments are made for the purpose of ensuring timely delivery of goods and services to which the public is rightfully entitled, such as permits and licences.

The FCPA provides for an exemption from the general prohibition on bribing foreign officials for any facilitating or expediting payment "the purpose of which is to expedite or secure the performance of a routine governmental action" (15 United States Code Section 78dd-2(b)) by such officials.

Paragraph 1 of the OECD Convention defines the offence of bribery of foreign public officials in such a way as to require the inducement to be offered "in order to obtain or retain business or other improper advantage in the conduct of international business." The official commentaries on the OECD Convention state "Small 'facilitation' payments do not constitute payments made 'to obtain or retain business or other improper advantage' within the meaning of paragraph 1 and, accordingly, are also not an offence."(OECD Commentaries 1997, Article 1, Section 9).

The Corruption of Foreign Public Officials Act (Statutes of Canada 1998, c.34), which was enacted to fulfill Canada's obligations pursuant to the OECD Convention, is instructive by being even more explicit about 'grease' payments.

(4) ... a payment is not a loan, reward, advantage or benefit to obtain or retain an advantage in the course of business, if it is made to expedite or secure the performance by a foreign public official of any act of a routine nature that is part of the foreign public official's duties or functions, including

  1. the issuance of a permit, licence or other document to qualify a person to do business;
  2. the processing of official documents, such as visa's and work permits;
  3. the provision of services normally offered to the public, such as mail pick-up and delivery, telecommunication services and power and water supply; and
  4. the provision of services normally provided as required, such as police protection, loading and unloading of cargo, the protection of perishable products or commodities from deterioration or the scheduling of inspections related to contract performance or transit of goods.

(5) for greater certainty, "an act of a routine nature" does not include a decision to award new business or continue business with a particular party, including a decision on the terms of that business, or encouraging another person to make any such decision. (Ibid, Section 3 (4) and (5)).

These facilitation payments to foreign public officials are permitted by the laws of the home jurisdictions of many Western Mining companies, even though they are generally illegal in the foreign country concerned. Of course, in many of those foreign countries, where lack of enforcement of the domestic law is the norm, facilitation payments are commonplace. But, does this mean that an international Mining company should allow its employees to practice abroad what is clearly illegal if practised on domestic officials at home? Should such employees be allowed to break the law in a foreign country, even if it is not generally enforced there, because such acts are sanctioned in the law of the Mining company's home country? These questions can be answered in a number of different ways.

  1. From a moral point of view, corruption of any kind has a corrosive effect on the public's confidence in the legal process and encourages a lack of accountability which can over time lead to a breakdown of the rule of law. It can be argued that, by participating in facilitation payments, an otherwise respectable foreign corporation can reinforce the local view that this is the way things are done in business around the world. This would appear to be the exact opposite of moral leadership. "When companies adhere to the highest ethical standards across borders, they push local companies to lift standards and in so doing, bring benefits to the lives of many people beyond their immediate sphere of influence."(Morrison 2001, p.70).
  2. Another view is that low level public officials in many developing countries are grossly underpaid and the only way of keeping the system functioning is with 'user pay' facilitation payments. In this view, moral leadership is not then a matter of not paying facilitation payments, but attempting to change the remuneration structure of the system .
  3. A third view is that a foreign company attempting to encourage and assist in reforming the civil service remuneration system will appear to be patronising to the host country. In this view, if it is decided that it is impossible to operate in the country in question without making facilitation and other payments, the company has to decide whether it wants to do business there. A decision not to invest could, in these circumstances, be one of moral leadership.

However, in reality, the decision is often not defined so clearly. Mining companies may face internal disagreement on whether or not one can operate in a particular country without submitting to bribery, including 'grease payments'. Their decision may be made on second hand knowledge that, due to the obfuscating nature of corruption, may not be entirely accurate. The initial visits by company geologists to a country with a prospective mine site may be coloured by the fact that everyone they speak to is attempting to encourage the Mining company to invest in the country. The need for accurate information and informed decision-making at this point in the process, is one that Mining companies must be careful to address.

This last-mentioned caveat is especially true when deciding on partners. In the Mining business, one of the traditional ways of obtaining a property from a private owner is to offer him a joint venture interest in the property. Usually, the major Mining company offers to provide most of the funding, especially during the exploration stage, as an inducement to the property owner to surrender operating control of the property to the major. The amount of funding, and exactly what is to be funded, are points to be negotiated between the parties. Often Governments holding properties are interested in similar arrangements where they obtain a self-funding interest in the property.

In any event, the partner often wishes to play a role in the exploration and development process and, indeed, the international Mining company often wishes to have the local knowledge and connections that a local partner can bring to the table. Obtaining accurate intelligence on the reputation and practices of such a partner before commitments are made is obviously a matter of critical importance to the success of a foreign Mining operation. If the property owner does not have the necessary knowledge, connections and a good reputation, then his role should be limited and an additional qualified local partner should be sought.

Once the decision is made to enter the country and start work on a Mining project, the project gains a momentum that is very hard to stop. Engineers and geologists start becoming engaged and excited by the project and money is often being spent at a very fast rate. Investor Relations personnel pass on this enthusiasm to the investment community. The project can easily be billed as being likely to be the company's 'next great mine'. It is at this time that the real conditions of corruption in the host country may start to manifest themselves. In these circumstances, a decision to pull out of a project, for other than technical reasons, will not be judged favourably by the investment community. It may result in the Mining company having to write down the value of its investment to date. But more significantly to the corporate culture and the investment community, it may be viewed as a result of 'bad management'.

In practice, some companies have taken the route of advising their employees that they are opposed to the making of facilitation payments and instructing them to make every effort to resist or minimise them. However, if there is no reasonable alternative to making them and certain other conditions are met, the employees are permitted to make them. The alternative is to operate above the legal floor and have a complete prohibition on 'grease payments'. Aside from how this may affect the competitive position of the company, there is a potential danger that, despite such a prohibition, an employee may take it on himself or herself to pay the 'grease money' out of his or her own pocket and never advise the company. In this way, such employees may think they can enhance their professional reputation by being the sort of person "that gets things done".

3. The Value of Consistency

Aside from the ethical issues raised by the 'grease' debate, are there any other reasons why a Mining company should operate at a level above the legal floor of the host country?

In today's world, a mine developer's record of operations abroad will become public knowledge and questions will be asked. It is very difficult to explain to citizens of the host country, why a Mining company should operate to a lesser standard in their country than it does in the Mining company's home country and still be considered a good corporate citizen. It may be even more difficult to explain this satisfactorily to the citizens of the Mining company's home country or those of another country with high standards.

Broken Hill Proprietary Co. Ltd ('BHP') experienced this in 1996 at a federal Government environmental hearing for their proposed new diamond mine in Canada's North West Territories. The Dene people in the area communicated with people in Papua New Guinea ('PNG'), and arranged for an indigenous clan leader to come to testify at the hearing in Yellowknife about BHP's environmental record at the Ok Tedi Mine in PNG (Damsell 1996).

As a result of the implementation of the OECD Convention by its member nations, many countries now have legislation on the bribery of foreign public officials that apply extraterritorially to their citizens. Mining companies often have employees of many different countries working on off-shore projects. It would be difficult to administer a system that only required an employee to meet the legal standard of the country of which he or she was a citizen. Ease of administration alone, suggests the desirability of setting a corporate standard that meets the highest standards internationally.

If a Mining company is going to have a corporate code of business conduct ('Code of Conduct') that it can hold out to the world as a demonstration of its good citizenship, then it must have some moral authority. "Moral authority is the product of legitimacy. Legitimacy ... is a reflection of public trust and confidence. Such trust and confidence derives from respect and is best assured by the leadership that comes from setting a consistent example of principled action" (Foster 2001, p. 2). With this in mind, it makes sense to define corruption in relation to the highest common denominator, rather than the lowest.

'SUPPLY-SIDE' CORRUPTION ISSUES IN THE MINING INDUSTRY

A useful way of analysing corruption is to examine the behaviour of 'the payer' or 'the supplier', and the reasons for his behaviour, separately from the behaviour of 'the taker' or 'the demander' and the reasons for his behaviour. The Mining industry, as with most other MNCs, is generally considered to be on 'supply-side' of corruption and bureaucrats or politicians on the 'demand-side'. The nomenclature is not intended to indicate where the initial intention of corruption occurred, but only who supplies the private gain and to whom it passes. Either side can initiate a corrupt act. However, there are certain reasons why the Mining sector is especially vulnerable to finding itself involved in corruption.

1. What Makes the Mining Industry Different?

a. General Characteristics

The Mining sector has a unique combination of characteristics. Mineral resources are buried beneath the earth's surface and finding an economic mineral deposit is difficult. Locating, developing and constructing a modern mine usually requires hundreds of millions of dollars in capital investment. Exploration often lasts five to ten years, with preliminary assessment, feasibility study preparation and ongoing stakeholder consultations leading to the necessary Government approvals, taking an additional two to three years. Construction can take one to three years depending on the size and nature of the mine. There can also be extensive up-front development costs incurred before the mining of any of the ore commences i.e. (i) to remove overburden, in the case of an open pit mine; or (ii) to provide access for testing purposes, in the case of an underground mine. All this occurs before the Mining company sees any payback of external financing and return on its investment.

When operations finally commence, they are finite in nature, often lasting ten to twenty years, although occasionally much longer. At the end of all this, the Mining company has further financial and operational responsibilities which it must discharge. Mine closure can last one to two years and, afterwards, rehabilitation of the mine site can last one to four years with the longer periods being more applicable to open pit mines, as opposed to underground mines. Sometimes responsibilities will continue much longer when ongoing problems, such as neutralisation of acid rock drainage, require long term treatment.

Solely from a technical point of view, Mining is a risky investment. Minerals may be found in every part of the world, but seldom with the two requisites for mining: an economic grade of ore ; and a total volume large enough to repay the investment and allow a profit. Unlike a manufacturing business, a modern mine does not have the option of starting small and, if things go well, expanding. To achieve the economies of scale required, a modern mine must start large with the associated large capital cost.

Although mineral occurrences are numerous, only a few will appear to have economic potential and they must be tested extensively. Although absolute proof of viability

... is impossible to establish beforehand, the mine developer strives to approach this standard by preparing a feasibility report, a theoretical plan which projects all aspects of the potential mine's operation on paper. For instance, a mine should be designed and built to operate in the lower end of the global cost scale. This tends to assure that, over its life the mine's cost structure will be able to absorb cyclical prices since demand and prices will rise and fall without regard to any single supplier. Anything and everything which could influence the proposed mine's costs is measured weighed and estimated. Such diverse considerations as the sources of financing and the most efficient metallurgical processes are also explored in the feasibility report (Placer Dome 1997, p.28)

Given these general characteristics, the following are some of the specific factors that make the Mining industry especially vulnerable to supply-side corruption.

b. Time is Money

A positive feasibility report, showing a clear and reasonable expectation of a satisfactory return on the investment, is the basis on which financing is usually obtained for the construction of the mine. Since mine construction is so capital intensive, some sort of outside financing is usually required or desirable. Such financing must not only cover the cost of building the mine, but provide the initial working capital to allow the mine to operate until cash flow from the sale of minerals is established on a regular basis. The loan should also provide funds to cover initial payments on the interest incurred on borrowings made during the construction period. Often financing involves the giving of guarantees to the lenders that the project will be built by a certain date and will perform in accordance with certain specified standards consistent with the feasibility study.

Consequently, for a company constructing a mine, speed becomes a critical factor.

If construction is financed by loans, interest costs begin to grow immediately [as soon as the] first money is drawn from the lender and will continue through the mine's development and well into the production phase until the loan is repaid. Even if development funds come from the shareholders or joint venture partners, there is a need to bring the investment to production, establish a cash flow and commence dividends as rapidly as possible (Ibid, p.28-9)

This need for speed makes mine developers especially susceptible to underpaid or venal bureaucrats who have the power to prevent, delay or halt the approval or construction process.

c. Government Regulation

The Mining industry is also much more highly regulated by Government than many other industries. There are several reasons for this:

(i) Nationalism - Mineral wealth (especially gold and precious minerals) is considered to be part of the 'National Patrimony' in many countries. The populace consider these minerals as forming part of a national 'treasure chest' that belongs to the people and should be exploited for the benefit of the people. In these circumstances, the people expect that the Government will protect their treasure and ensure that it is developed properly and that benefits will flow to them. Since in most jurisdictions, the minerals are owned by the state, Governments regulate the acquisition of the rights to explore for and develop minerals. Certain metals may also be subject to particular Government control e.g. gold (the central bank may have the right to purchase all or some production) or 'strategic metals' e.g. uranium.

(ii) Financial Impact - Modern mining practice allows the development of low grade mineral deposits by mining large amounts of ore, thereby lowering unit costs . Given the capital intensive nature of Mining, this can mean that the sums of money involved are huge and totally out of proportion to the overall wealth in the countries where the operations are situated (Eigen 1998). Naturally, the host Government wants to obtain its share of this wealth by means of taxes, royalties and perhaps a direct carried interest in the mine.

(iii) Environmental Impact - While the environmental impact of exploration is relatively minor compared to that of an operating mine, the impact does cover an extensive area, some of which may be of a pristine nature or have other values that society wants protected. The environmental effect of a mine can pose a hazard to the environment or to human health in local areas, if adequate precautions are not taken. Government approvals often require baseline studies and ongoing monitoring by both the company and Government to ensure the impact to the ecosystem is as predicted. Some of the areas that are regulated are discharge of effluents, water quality in local waterways, acid rock drainage, air quality, and tailings. impoundment. Reclamation and rehabilitation of all disturbances caused by the mine is another area regulated by Government.

(iv) Social Impact - Mines are often located in remote or rural areas where a traditional way of life prevails. In such circumstances, the impact of bringing in numerous outsiders to work at the mine and paying them at rates much higher than those historically earned by the traditional residents is bound to affect the local community. The following issues need to be decided with adequate consultation from local stakeholders: how new housing and families are to be integrated into the community and its school system; how the health of residents may be affected by the project's operations if there are emissions or ambient dust problems; and whether there would be less disruption by using a 'fly-in fly-out' operation. For political reasons among others, Governments often want to ensure by regulation that adequate consultation has taken place and that the approvals they are being asked to give are consistent with a broad based consensus.

(v) Safety and Unions - Mines, particularly underground mines, are inherently dangerous places. Ground stability and use of explosives and large equipment makes safety a priority. A history of major accidents involving the loss of large numbers of lives, particularly in the coal sector, has resulted in heavy Government regulation governing safety and union representation of the workers. Associated labour relations laws add yet another layer of regulation to the industry.

(vi) Impact on Indigenous Communities - Since mines are often located in remote areas where indigenous people are likely to live and be affected, the Mining industry frequently has to deal with special laws designed to protect these peoples rights.

(vii) Transport Requirements - Mines are heavy users of roads, railways and ports. The development of a mine often involves the development or upgrading of such facilities. Once again, the mine developers must deal with another set of officials that other types of investors may be able to avoid.

(viii) Energy Requirements - Mines are energy intensive and often have to negotiate to secure adequate power from regulated utilities. For the eight reasons mentioned above, Mining has become a heavily regulated industry. Because of the many approvals required from public officials for exploration, development, construction and operation of a mine, the Mining industry has greater potential exposure to corruption involving public officials than many other industries.

d. Lack of Choice of Location

In the manufacturing industry, potential investors can look at a national market and decide whether or not they wish to locate a plant in that country. If they decide to proceed, they have choices about the region or community in which they will construct their plant and the scale of their investment. If they encounter problems with corruption in their planning stage, they can always threaten to locate elsewhere.

In the Mining industry, available economic mineral deposits are so few in number that there are tremendous pressures to proceed to explore and develop them, even if they are located in countries that are very difficult in which to do business. Of 32 leading mining countries listed in Appendix 3 to this paper, only 9 have a score above 5.0 on the 2001 Transparency International ('TI') Corruption Perception Index ('CPI'), where a maximum score is 10. The remaining 23 (72%) have scores of 4.8 or less. Furthermore, the mine must be located where the deposit is found. It is often in a region or near a community that is not optimal for mine development. Consequently, the Mining industry operates not only in some of the most corrupt countries in the world, but often in difficult locations where companies in other industries would not choose to invest. In these circumstances, it would not be surprising to find mining companies being targeted for favours by underpaid or venal public officials.

e. Sudden Wealth and Easy Money Image

Given the capital intensive nature of Mining, the large scale operations of modern mines and the existing poverty in many of the countries in which Mining companies operate, Mining often has a very high profile, especially in underdeveloped countries. Once it is known that a major Mining company is attempting to acquire exploration or mining rights, the local populace has 'dreams of untold wealth'. There is often a feeling that this is a once in a lifetime opportunity to enrich oneself. Since very little is known about the mineral deposit at this stage, there is no limit to the riches that can be conceived by the human imagination. This optimism (known as 'Blue Sky' in the securities business and a 'Gold Rush mentality' in the Mining sector) attracts both legitimate entrepreneurs and others who are prepared to enrich themselves by whatever means are necessary.

This sudden wealth effect is enhanced by the fact that many people consider Mining and oil and gas as 'found' wealth rather than 'created' wealth. Consequently, these people often take the view that the minerals are there for the taking by any one, and not just the foreign company that has acquired the exploration rights, funded the exploration and developed the mine, thereby actually 'creating' the wealth.

f. Previous Experience

Often a major Mining company acquires a mineral prospect from a junior exploration company or obtains the property from Government after the property has been held by a junior exploration company. Many such companies, but certainly not all, are formed to acquire exploration properties with no intention to fully explore and develop them into mines. Instead, they hope to do just enough work on them to pique the interest of a major Mining company. This is a high risk investment since very few such properties are ever developed.

While these companies do have some exploration expertise, many do not have the technical knowledge or financial resources to develop a modern mine. Many are looking for a quick turn-over of the property and not the long-term relationship with local people and Government that necessarily accompanies the operation of a mine. Some of these companies have shown a tendency to take the expedient way and bribe public officials to obtain exploration rights or other approvals to which they would not otherwise be entitled. Others have a more complacent attitude about doing business according to the norms of the local culture.

If a major Mining company acquires a property from such a company or after such a company has dropped the property, the expectations of the local people are often that such activity by foreigners is normal and will continue. The expectation that the major Mining company will make corrupt payments may be very high. Moreover, even if the successor company resists such expectations, its reputation may be tarnished by the actions of the previous owner.

g. Sense of Entitlement

Local peoples in the surrounding community or region around the mine site often feel that they are particularly entitled to something from the project. Their view is often that this is their community or region and if someone is going to make huge sums of money utilising the community's or region's resources, they should benefit. This is the local expression of the 'National Patrimony' described above under GOVERNMENT REGULATION. It may be especially prevalent where the federal or national Government is somewhat alienated from the local community or region. This often occurs in a highly centralised form of national Government, where the local regions do not feel adequately represented or are not receiving their 'fair share' of national revenues from mineral resources in their region. The argument is made that since the local region must bear the brunt of the significant impact that the mine will have on the environment and their traditional way of life, the locals are entitled benefits. If they are not going to be received by some legal mechanism, they argue that it is not morally wrong to obtain them by other means.

2. The State of Knowledge of the Nature and Significance of Corruption

While it appears that the Mining sector is particularly exposed to corruption, what can be said about the amount and nature of corruption in the sector? Due to the obfuscating nature of corruption, most of the information concerning corruption is anecdotal, whether in the Mining sector or any other sector.

How can one measure corruption when corruption, by its nature prefers to operate in darkness and avoid transparency? Since bribery and some other forms of corruption are classified as criminal offences in most countries of the world, participants are loath to admit that they have been actively involved in this form of activity. However, in recent years, surveys have become increasingly useful in throwing light on the probable dimensions of the problem, even though many people are not prepared to admit to this type of conduct in a survey.

There are, however, some categories of people that can be surveyed effectively, those where individuals see themselves as "victims" rather than as willing conspirators, as being exposed to "extortion" rather than participating in consensual corruption. Thus, international business ... has been willing to be polled. So, too, have local businesses, and ordinary people (as customers of government services). However, although these groups of people know something about corruption levels, this knowledge, beyond that based on their immediate experience, is decidedly unreliable and really falls into the area of "perceptions".(Pope 2000, p.288).

In 1995, Transparency International, an international organisation based in Berlin dedicated to fighting corruption in international business, introduced its Corruption Perception Index . This poll of polls has since been released annually. The CPI 2001, released on June 27, 2001, draws on 14 surveys from seven independent institutions reflecting the perceptions of business people, academics and country analysts. This survey ranked 91 countries on a scale of one to ten (ten being the least corrupt) ranging from Finland with a score of 9.9 to Bangladesh at 0.4 (Transparency International 2001a).

A review of the CPI 2001 will quickly reveal that, with the exception of Greece (which received a ranking of 4.2), every country that received a ranking 5.0 or less (55 out of a total of 91), was located in Asia, Africa, South or Central America or the former Soviet Block. This has led to criticism that the TI CPI is biased against the 'South', 'East' and 'less developed' countries as it suggests that the problem is largely confined to those areas. In an article entitled "Business Ethics: East vs. West: Myths and Realities" Khera has argued that:

business corruption is more universal than Westerners are generally willing to accept. The major differences are that corruption in the East is practised so blatantly that it makes major news. Western businesses, on the other hand, have, over time, developed sophisticated techniques whereby corruption becomes almost invisible. (2001, p.29)

In response to this criticism of the one-sided nature of the CPI, in 1999, TI came out with a Bribe Payers Survey which included attempts to measure the supply-side of corruption entitled the 'Bribe Payers Index' or 'BPI'. A copy of the 1999 BPI (the latest available) is attached in Appendix 4.

It surveyed a cross section of elites in a number of emerging markets to ascertain, from those most likely to know (businessmen, bankers, lawyers etc.), from where bribes were most likely to come. This painted a depressing picture of the involvement in corruption of the exporters from many of the world's leading exporting countries. The data from this survey can be regarded as being very reliable since it targeted a specific elite audience, and an audience that is prepared to be surveyed again to measure the extent and pace of any changes (Pope 2000, p.289).

The Bribe Payers Survey also included a survey of business executives and business professionals in leading emerging market economies regarding the business sectors in their countries from which senior public officials would be likely to accept or extort bribes. Unfortunately, 'mining' was not shown separately, but included with 'industry' which was perceived as the fourth most corrupt sector out of a total of 9 sectors (see Appendix 4).

But what is the significance of these surveys in terms of corruption in the mining sector? It appears to confirm that many of the countries in which international mining companies do business are subject to high rates of corruption. Since by its nature, bribery involves a 'payer' and a 'taker', the BPI confirms that corporations from the 'North' and 'developed' countries are involved in the 'supply-side' of corruption.

These indices also have provided information that has and can be used by researchers to further explore the nature of corruption. For example, the TI CPI 2000 has been used in the Economic Freedom of the World: Annual Report 2001 (Gwartney et al.). This report is primarily concerned with updating the Economic Freedom Index ("EFI"). The EFI is comprised of

21 components designed to identify the consistency of institutional arrangements. and policies with economic freedom in seven major areas. The seven major areas covered by the index are as follows: (I) size of government, (II) economic structure and use of markets, (III) monetary policy and price stability, (IV) freedom to use alternative currencies, (V) legal structure and security of private ownership, (VI) freedom to trade with foreigners, and (VII) freedom of exchange in capital markets (Gwartney et al. 2001, p.5).

The EFI contains many of the elements that companies review when deciding whether or not to make a direct investment in a country in which they have not previously done business. While the Report demonstrates that more economic freedom is strongly related to individually higher levels of income and economic growth, the aforementioned Report also finds that more economic freedom correlates with less corruption as measured by the TI CPI 2000 (Ibid, p. 8-9). Since the Report contains individual values for each country for each of the seven major areas of economic freedom, there is also an opportunity for more work to determine the correlation of the CPI to both the size of government and rule of law components of the EFI.

This example suggests that, if surveys specific to the Mining sector and corruption could be initiated, they could provide a useful tool for further research to help the sector better understand the amount, significance of and possible remedies for corruption in the sector. Without data specifically related to the Mining sector (or, perhaps, specific segments of the Mining sector), only generalisations can be made which may or may not be accurate for that sector. If the Mining sector wishes to pursue the measurement of corruption, it may wish to consider consulting with the World Bank which is now offering diagnostic tools to measure and combat corruption in member countries (Wamey 1999).

3. Different Constraints on Different Actors within the Mining Sector

The composition of the Mining sector is commonly described as being composed of 'Senior' and 'Junior' companies. Another description is of 'explorers for minerals' and 'mine developers and operators'. But what do these terms really mean and do they reflect a fundamental difference in their approach to doing business? What significance does this have on their approach to corruption?

The term 'Senior' versus 'Junior' has come to indicate amongst other things, 'large' versus relatively 'small'. It also suggests that the 'Senior' has at least one, and probably more, large operating mines. Most Seniors also have an Exploration Department which does exploration work in the area of its mines and often in many other locations both nationally and internationally. The type of exploration done by a Senior can vary considerably. Some restrict themselves to acquiring mid-term exploration properties from Juniors where the 'grassroots' exploration has located a mineral deposit and some significant work has been completed defining the parameters of the deposit. Others do this in some areas, but run a 'grassroots' or 'greenfield' exploration programmes in other areas. Needless to say, there are many possible permutations when a Senior decides on its exploration philosophy. Seniors often finance their activities by way of 'cash flow' and/or debt financing. They have the financial and technical capability to conduct the advanced exploration, development and operations required for a large modern mine.

Juniors are smaller companies than Seniors, but they too can be operated with vastly different philosophies. Many such companies are public companies formed to raise money in the capital markets to acquire and explore properties with no intention to complete all the exploration and development work necessary to bring a property into production as an operating mine. Instead, their philosophy is to only do sufficient work to attract the interest of a Senior and, at the appropriate time, sell the property (or their shares in the Junior) for cash (or, less desirably, shares in the Senior) and, in the case of a cash property sale, a possible royalty or other carried interest in the property. This desire is based on the belief that the greatest capital gains occur during the exploration phase before a feasibility study quantifies the deposit. It is during this period that the size of the mineral deposit is open to speculation. As mentioned earlier, while this type of Junior may have exploration expertise, many do not have the technical knowledge or financial resources to develop a modern large scale mine. For financing, they must rely on the venture capital market as they do not have adequate cash flow from existing mines to secure debt financing. This type of Junior will be referred to as a 'Type One Junior'.

Within the Type One Junior category of Mining company, there are at least two sub- categories. There are the 'Promotional Juniors' that typically secure their capital on a junior venture capital exchange such as the Canadian Venture Exchange and then appear to focus on promotion and commodity prices rather than in-house geological expertise. In some extreme cases, these companies are not Mining companies at all and have contributed extensively to the bad press associated with Junior Mining companies.

There is also the sub-category of Type One Junior that:

  1. have serious in-house expertise in exploration geology;
  2. raise their capital on a junior venture exchange or a more senior one, such as The Toronto Stock Exchange; and
  3. perform most of the essential, but high risk, grassroots exploration function in the Mining sector. Their small size and relatively informal 'corporate systems' allow them to maintain the necessary flexibility to meet the ever-changing risks of generative exploration. This and their relatively low cost structure gives these 'Exploration Juniors' their competitive advantage in this area over the Seniors. Unfortunately, as we will see later, it can also be a source of weakness.

There are, however, other more ambitious Juniors. These Juniors often take the view that the longer that they can hold onto control of the property during the exploration and development process, the more value will be added. Indeed, their philosophy is to try to hold onto a controlling interest in the operating mine. This is an ambitious goal and very few achieve it. This type of Junior is liable to have more in-house expertise, and often will acquire more such expertise as the process continues. This type of Junior will be referred to this as a 'Type Two Junior'.

The basic difference in approach between a Type One Junior on the one hand and a Senior or Type Two Junior on the other, is one of time. The Type One Junior is involved in the exploration process on a property for the short term and expects to realise relatively quick gains and move on to something else. The Senior and Type Two Junior are both committed to a much longer time horizon with respect to the property.

The implications of this different approach are far reaching. A Type One Junior does not have as much pressure to place a great amount of importance on issues such as long term reputation and long term relationships with the local community, region and national Government. In such circumstances, the intense competition to secure exploration rights and various associated permits and approvals can increase the apparent attractiveness of taking 'short cuts' by using bribes and other corrupt inducements to attain the desired objectives. At the same time, the informality of corporate systems that helps to give the Type One Exploration Junior its competitive advantage, also leaves it more open to the use of corrupt practices.

A Senior or Type Two Junior, intends to be involved with the project for many years or even decades. It cannot afford to have bribery scandals arise in future years if it wishes to maintain the respect of and a successful relationship with the local community, region and national Government. This does not mean that Seniors or Type Two Juniors have not and will not become involved in corruption. While, in recent years, the importance of reputation and long term relationships appears to have been recognised by most CEO's of these type of companies, their organisations have had varying success in conveying this message to their employees. Despite education programs and Codes of Conduct to the contrary, there may always be some 'rogue' employees who think that they are helping the company to achieve its objectives by resorting to corruption or who will do so for personal advantage (i.e. improving one's chances of promotion by becoming known as someone "who can get things done").

Such 'rogue' employees only serve to illustrate the need for ongoing education of employees on the value of ethical practices to ultimate business success. The objective should be to make ethical practices an integral part of the Mining company's corporate culture. Coupled with the appropriate corporate systems, an ethically grounded corporate culture can be very determinative of patterns of employee behaviour, thereby making Mining companies even less subject to individual's foibles.

4. Codes of Conduct and Other Corporate Controls

In recent years, Mining companies have been writing or rewriting their Codes of Conduct for employees. Aside from changes in the law prohibiting the bribery of foreign public officials, mining companies are increasingly recognising that corporate values are vital to competitiveness (Vogel 2001). A corporate Code of Conduct is seen as a key element in a wider corporate integrity management program that will often involve accountability, education, communication and monitoring ('Corporate Integrity Management' or 'CIM').

These Codes of Conduct typically go beyond what is required by the law alone. One major Mining company CEO explained this as follows:

We want to achieve our corporate objectives in a way that complies not only with the laws and regulations of the countries where we do business, but also by observing a spirit of high moral conduct. The responsibility for this lies with every employee. All of our actions should bring lasting benefits to the Company rather than merely the creation of a short-term business advantage. For that reason, integrity is an integral part of our business success. Over the long term, proper business conduct engenders loyalty and trust among employees, customers, communities where we operate, and among stakeholders - including, of course, our shareholders. (Placer Dome Inc. 1998 , p. ii).

Usually, these codes are applied on a world-wide basis by Senior Mining companies so as to represent the corporate values in a consistent manner wherever the company has, or is contemplating, operations. Typically, they deal with topics such as compliance with laws, dealing with public officials, political contributions and activities, giving of gifts or benefits, receiving gifts or benefits, conflicts of interest, confidential and proprietary information, insider trading, information systems, financial controls and records, ore reserves, sustainability, employee harassment or discrimination, occupational health and safety and compliance with the code. They sometimes also include a section on human rights.

One of the unique topics often included in a Mining company's Code of Conduct is a section dealing with ore reserves. Since ore reserves form one of the key bases for valuation of a Mining company's shares, accurate and timely disclosure of ore reserve and mineral resource data is critical to the integrity of the company within the investment community.

But do these codes have any real beneficial effect? Speaking about Codes of Conduct in general Jeremy Pope concludes:

Generally speaking, research on corporate codes of conduct is incomplete. The research suggests that codes have, indeed, had some positive influence, but such a broad conclusion still lacks a firm empirical base. The research indicates that the degree to which the code of conduct becomes "embedded", or a part of the corporate culture, will have some positive effects on employee behaviour. However, determining precisely what "embeddedness" means in terms of organisational structures and managerial leadership, remains elusive. The key determinant in achieving organisational adherence to a code appears to be training, monitoring and enforcement activities - another conclusion more intuitive than scientific (Pope 2000, p.150 - 151).

As mentioned, training, communication, monitoring and enforcement are essential to an effective Code of Conduct. They should be included in any Corporate Integrity Management program adopted by a Mining company. Since new employees are continuously joining the company as part of normal employee turnover, the requirement for communicating the existence of the Code and its contents is, necessarily, an on-going one.

The Internal Audit Department is often responsible for implementing systems to ensure that the Code is being followed by employees, including monitoring. Such systems include having each management employee annually sign a statement that they are not aware of any activities in the past year that have violated the corporate Code of Conduct, or if they are aware of such activities to declare them. Such statements and declarations can be kept at the mine site and would normally be included within the scope of any company internal audit of that site. Any declarations would be followed up with mine site senior management and, if necessary, be referred to legal counsel for the applicable country or region. Usually the Audit Committee or the Corporate Governance Committee of the company's Board of Directors plays the role of overseer with the Internal Audit Department bringing matters to its attention.

There does not appear to be any evidence that companies in the Mining sector are different from those of other sectors when it comes to implementing Codes of Conduct. Some do it more effectively than others.

5. The Effects of the "Global Village" on the Mining Sector

The effect of modern technological improvements in communication and, in particular, the internet has had a significant effect on the way business is carried on by MNC's in the Mining sector. This has introduced a new era of global accountability. As previously mentioned, this was dramatically illustrated when BHP was seeking an approval for a diamond mine in Canada's far north a few years ago. The local Dene people surprised BHP by sponsoring the attendance of a PNG indigenous clan leader to testify as to BHP's mining record at its Ok Tedi Mine in PNG (Damsell 1996). There is no place to hide in the 'Global Village'.

With the end of the cold war, the interest of the world community has become much more focussed on trade and foreign direct investment. A concerted effort has been made to grow the economies of the world by increasing the amount of trade, thereby utilising the benefits of comparative advantage between countries. The main approach taken has been to try and reduce impediments to trade. The GATT has been replaced by the WTO and treaties, such as the North American Free Trade Agreement, have been signed. In order to gain the full advantage of free trade, it is also necessary that the competitors compete on a level playing field .

One of the impediments to more trade and foreign direct investment has been recognised as corruption.

President Bush clearly enunciated the problem in a message sent in May, 2001 to the Second Global Forum on Fighting Corruption , which was held in The Hague. The President stated: "The corruption of governmental institutions threatens the common aspirations of all honest members of the international community. It threatens our common interests in promoting political and economic stability, upholding core democratic values, ending the reign of dictators, and creating a level playing field for lawful business activities." (U.S. Department of State 2001)

Corruption can clearly distort free competition. Led by the U.S., whose Foreign Corrupt Practices Act has been in place since 1977, the Governments of the Americas, the OECD countries and others have, in the last few years, entered into treaties designed to make a co-ordinated attack on corruption. However, this increased awareness of corruption has extended much further than Governments.

NGOs have taken advantage of the internet and other technological improvements in communications to keep a close eye on the record of business from a wider perspective than the law. They have often focussed on a corporation's social or moral responsibility. They have coupled their increased ability to perform a watchdog function around the world with their increased ability to co-ordinate protests, and have become potentially formidable opponents to any corporation seeking public approval for any aspect of their business. Poll conscious politicians have also taken note, giving these NGOs political weight as well.

This increased accountability provided by NGOs has meant that MNC's in the Mining sector must have global standards of conduct to avoid inappropriate activity in one part of the world causing problems in another part of the world.

Without universal standards that are rigidly enforced, multinational companies risk jeopardizing their reputations in their home countries, and other markets that are important to them. As well, individual leaders risk derailing their careers when they engage in activities that would be unacceptable on a multi- country basis. They may lead in Country A where their conduct is accepted, but will never lead in Country B, or Country C (Morrison 2001, p. 68).

This applies to all aspects of a corporation's activities that may be judged on the basis of whether the corporation is meeting its social responsibilities. But is especially true in the area of corruption. The increased power of NGOs to report to the court of public opinion through improved communications and, consequently, more international contacts and political power, is a new reality that a modern Mining company can only ignore at its peril. Indeed, since one Mining company's failure to meet its social responsibilities can often affect people's views of the whole industry, this new reality places increased pressure on the Mining industry to develop and agree on minimum international standards for its members.

6. Local Knowledge, Partners and Lack of 'Intelligence'

A Mining company from the developed world proposing to do business in a country in which it has little knowledge, often seeks a local partner who has the contacts necessary "to get things done" in that country. We have seen how important speed can be to a Mining company, so having a partner or consultant who can lead one through the bureaucratic (and sometimes political) maze of this highly regulated industry, can be extremely beneficial.

This, however, can raise two potential problems. The first is how to find a partner or consultant that is honest, has a good reputation and has the necessary knowledge and contacts to legitimately guide the project through the regulatory and/or political jungle. The second is what to do when the seller of the property has retained an interest in the property and says he has the necessary knowledge and contacts. The problem may not be just one's partner, but one's partner's partner or consultant.

While solving the first problem may be difficult, it will probably be easier than solving the second problem. At least, with the first problem one can start with a clean slate. Embassy officials of a corporation's home country may be able to supply information or direct one to where one can get it. Obvious sources of helpful information are representatives of international accounting and legal firms, local Chambers of Commerce or business associations, international banks and other foreign corporations that have done business in the country.

Uncovering information on one's partner, or the person he or she recommends, may be more difficult. Such a person may not be well known in general business circles and be virtually unknown to the people canvassed by the Mining company. He or she may have a reputation for 'settling scores' that makes people loath to speak ill of him or her. Where can a company turn to get the real story? Are those that really know prepared to risk civil legal action for slander or libel if their information turns out to be incorrect? Due to the less than transparent nature of criminal activity, are potential informants liable to have anything more than rumour and unsubstantiated allegations to support a negative assessment?

Should national intelligence organisations assist their MNC's by providing advice on potential partners from their files? These organisations have access to INTERPOL files amongst other things. However, there appear to be good legal reasons why such an organisation would be reluctant to release this information (i.e. potential libel and slander actions where there is no proof of the alleged wrongdoing that would be accepted in court). But, it is not difficult to imagine a scenario where a Mining company in good faith enters into agreement with a partner, who brings in a local partner who is well known to INTERPOL but had never been convicted of anything. Normal due diligence, including a check for a criminal record, reveals nothing. Such a scenario could lead to no end of problems for the legitimate Mining company trying to do the right thing. A prudent company might be forced to assume the worst and attempt to build structures to protect its reputation, its assets and employees against the possible predilections of a corrupt 'quasi-partner'.

7. The Expanding Legislative Framework

In 1977, the United States passed the FCPA that imposed extraterritorial obligations on its citizens and corporations, including foreign corporations listed on U.S. Stock exchanges, with respect to the bribery of foreign public officials. This was ground- breaking legislation. While most countries considered bribery of domestic public officials a serious offence, it does not appear that, prior to this legislation, any had legislation specifically aimed at outlawing bribery of foreign public officials (George, Lacey, & Birmele, The OECD Convention, p.485).

This, naturally led to criticism from U.S. corporations that they were being forced to do business abroad on an 'unlevel playing field'", as they alleged that they were losing contracts to companies from other industrialised countries that had no equivalent legislation to the FCPA. In the 1988 amendments to the FCPA, the legislation required the U.S President to negotiate with OECD members and report back to Congress (George et al. 2000). The OECD members were apparently selected because they were and are the home countries of most of the corporations that compete with U.S. firms. This led to U.S. pressure on other OECD member Governments. Coupled with the end of the Cold War, a gradual realisation of the negative economic effects of corruption, and the increased profile given to corruption by NGOs such as Transparency International, resulted in international action.

In 1994, the OECD Council on Bribery in International Business Transactions passed a non-binding recommendation encouraging member countries to criminalise the making of bribes to foreign public officials in connection with international business transactions. In1996, the OECD adopted a recommendation that members that still permitted corporate tax deductions of bribery payments made by business, reject or abolish such tax deductions (Ibid).

The culmination of this, was the signing of the OECD Convention by the 29 member nations of the OECD. The OECD Convention, as its title suggests, is primarily concerned with bribery, although it also deals with money laundering ( Article 7) and the maintenance of im pdfA SURVEY OF CORRUPTION ISSUES IN THE MINING & MINERAL SECTOR

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